CNB Financial Corporation — FY2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2021, compared primarily with FY2020. CNB is a Pennsylvania-based financial holding company operating CNB Bank across Pennsylvania, Ohio, New York, and Virginia, as well as Holiday Financial Services. The filing was signed March 3, 2022.
Financial performance and condition
| Metric | FY2021 / year-end | Comparison |
|---|---|---|
| Total assets | $5.329 billion | Up 12.7% from $4.729 billion |
| Loans, net of allowance | $3.597 billion | Up 7.8%; loan growth excluding PPP-related loans was 11.6% |
| Deposits | $4.716 billion | Up 12.8% from $4.182 billion |
| Net interest income | $159.8 million | Up 18.6% from $134.7 million |
| Non-interest income | $33.4 million | Up 19.2% from $28.1 million |
| Net income | $57.7 million; diluted EPS $3.16 | Up 76.2% from $32.7 million; diluted EPS was $1.97 |
| Net interest margin, fully tax-equivalent | 3.38% | 3.34% in FY2020 |
| Provision for credit losses / net charge-offs | $6.0 million / $2.8 million | $15.4 million / $6.4 million in FY2020 |
| Operating cash flow | $58.9 million | $28.8 million in FY2020 |
| Cash and cash equivalents | $732.2 million | $532.7 million at year-end 2020; includes $684.3 million at the Federal Reserve |
| Shareholders’ equity | $442.8 million | Up 6.4% from $416.1 million |
- Earnings and margins: Pre-provision net revenue was $76.8 million, up 38.5%. The efficiency ratio improved to 59.76% from 65.10%. Return on average equity was 13.39%, versus 9.14%.
- Funding and debt: CNB had no FHLB advances at year-end. It issued $85 million of 3.25% fixed-to-floating subordinated notes due 2031 and redeemed all $50 million of its 5.75% notes due 2026. Year-end balance-sheet subordinated notes and debentures totaled approximately $104.3 million.
- Liquidity and capital: Management cited deposits, cash, securities, loan repayments, and wholesale funding access as liquidity sources; available FHLB borrowing capacity was approximately $932.7 million. Consolidated total risk-based capital was 14.92%, CET1 was 9.65%, and the leverage ratio was 8.22%. The Bank was categorized as well-capitalized.
- Credit quality: Nonperforming assets fell to $20.3 million, or 0.38% of assets, from $31.5 million, or 0.67%. The allowance was $37.6 million, 1.03% of loans. The improvement in nonperforming assets reflected resolution of commercial real estate relationships.
Material changes versus FY2020
- Net income increased substantially, reflecting earning-asset growth, $8.7 million of PPP processing-fee income (up from $5.1 million), and lower credit-loss provision. The comparison also benefited because FY2020 included $12.6 million of merger, FHLB prepayment penalty, and branch-closure expenses ($10.2 million after tax); FY2021 had none of these expenses.
- Loans grew, while PPP balances declined to $45.2 million from $155.5 million. Customer deposit growth and government stimulus contributed to increased deposits and excess cash.
- Interest-earning asset yield declined to 3.79% from 4.14%, but the cost of interest-bearing liabilities fell to 0.52% from 0.95%, supporting a modest increase in reported net interest margin.
- Available-for-sale securities increased to $697.2 million from $584.9 million. A $16.0 million after-tax unrealized loss on these securities reduced accumulated other comprehensive income; it did not represent a reported credit-loss allowance on the portfolio.
- Non-interest expense rose 8.5% to $116.4 million, including higher staffing and technology costs and approximately $2.3 million of additional fourth-quarter personnel costs. The prior-year expense base included the unusual charges noted above.
Outlook, commentary, risks, and unusual items
- Management said it expects robust loan growth in 2022, supported by market expansion and customer acquisition, but provided no quantified earnings or revenue guidance.
- Management described continuing uncertainty from COVID-19, including new variants and economic effects, and noted potential consequences for borrower credit, collateral values, operations, and demand. Only five loans totaling $397,000 remained under payment deferral at year-end, compared with $151.0 million across 167 loans at year-end 2020.
- Other principal risks include regional economic and real-estate concentration, interest-rate and securities-value sensitivity, inflation and supply-chain pressures, deposit competition and liquidity, CECL allowance estimation, regulatory requirements, technology and vendor dependence, and LIBOR transition. Approximately $1.8 billion of loans were rate-sensitive over the next 12 months; management’s model showed estimated one-year net-interest-income changes of +6.5% under a 100-basis-point increase and -4.8% under a 100-basis-point decrease.
- The company disclosed a fourth-quarter 2020 cybersecurity incident involving potential unauthorized access to personally identifiable information. It said core systems were not compromised and no material losses had occurred, while security enhancements continued.
- FY2021 investing cash outflow was $409.8 million, largely reflecting securities purchases and net loan funding; financing cash inflow was $550.3 million, chiefly reflecting deposit growth and subordinated-note proceeds. Cash increased $199.5 million during the year.
- The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. The allowance for credit losses was identified as a critical audit matter because of significant assumptions and management judgment. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether reported earnings growth is sustainable after separating PPP fees, the prior-year unusual charges, and continuing staffing and technology investment.
- Loan growth, credit migration, nonperforming assets, charge-offs, and allowance adequacy as COVID-related support fades and economic conditions evolve.
- Deposit mix, deposit pricing, excess cash deployment, and liquidity under stress; note that $1.712 billion of deposits were uninsured at year-end.
- Interest-rate exposure and the effect of rate changes on net interest income, securities values, and funding costs; review assumptions behind the company’s sensitivity model.
- Capital and common-shareholder returns after preferred dividends, subordinated debt refinancing, dividends, and share repurchases.
- Progress on LIBOR-linked contract transition, cybersecurity controls, and the company’s ability to execute its expansion and 2022 loan-growth plans.