CNB FINANCIAL CORP quarterly report, Q1 FY2019

CNB Financial Corporation (NASDAQ: CCNE) — Q1 2019 Form 10-Q

Period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Dollar amounts are in millions unless stated otherwise. CNB is a regional bank holding company operating primarily in Pennsylvania, Ohio, and western New York.

Financial performance and position

MetricQ1 2019 / March 31, 2019Prior comparable period / December 31, 2018
Net income$9.47; diluted EPS $0.62$7.10; diluted EPS $0.46 in Q1 2018
Net interest income$27.76$24.10 in Q1 2018
Net interest margin, fully tax-equivalent3.70%3.72% in Q1 2018
Non-interest income$6.15$4.75 in Q1 2018
Non-interest expense$21.18$19.00 in Q1 2018
Cash and cash equivalents$55.28$45.56
Total assets$3,287.32$3,221.52
Net loans$2,505.74$2,454.85
Total deposits$2,657.36$2,610.79
Total shareholders’ equity$274.96$262.83
Long-term borrowings and subordinated debt$310.63; no short-term borrowings outstanding at quarter-end$315.74; no short-term borrowings outstanding
  • Net income increased 33.5% year over year. Return on average assets was 1.17% versus 1.00%; return on average equity was 14.24% versus 11.61%.
  • Net interest income rose 15.2%, supported by loan growth and higher earning-asset yields. The fully tax-equivalent earning-asset yield increased to 4.89% from 4.53%, while the cost of interest-bearing liabilities rose to 1.39% from 0.94%; margin edged down.
  • Combined net interest income and non-interest income was $33.91, up from $28.85 in Q1 2018. Non-interest income included $0.80 of net realized and unrealized trading gains and $0.15 of available-for-sale securities gains.
  • Non-interest expense increased 11.5%, including a 14.3% rise in salaries and benefits, which management attributed primarily to staffing growth and servicing a larger customer base. The effective tax rate was 17.1%, versus 13.7%.
  • Operating cash flow was $1.39, compared with $4.14 in Q1 2018. Investing activities used $30.34 and financing activities provided $38.67; cash increased $9.72 during the quarter.
  • Loans, net of unearned discount, grew $51.5, or 2.1%, during the quarter. Deposits grew $46.6; savings balances increased while certificates of deposit declined.
  • Capital ratios at March 31 included total risk-based capital of 13.18%, Tier 1 capital of 10.35%, and common equity Tier 1 of 9.54%. Tangible common equity to tangible assets was 7.26%; tangible book value per share was $15.46.

Material changes and credit quality

  • Net charge-offs were $0.66, up from $0.57 in Q1 2018. The provision for loan losses was $1.31, down from $1.63; the allowance increased to $20.35 from $19.70, or 0.81% of net loans.
  • Nonperforming assets were $18.79, or 0.57% of total assets, compared with $18.55, or 0.58%, at year-end. Nonaccrual loans were $17.45; loans over 90 days past due and still accruing were $0.87.
  • Commercial lending is a significant and growing portfolio exposure. Management reported a $0.79 increase in specific reserves during the quarter. Special-mention commercial loans rose to $19.19 from $13.76 at year-end, and substandard balances rose to $29.20 from $27.35.

Outlook, risks, and unusual items

  • Management expected solid loan demand and loan growth through the remainder of 2019, and said it believed the company was positioned to sustain core earnings. It expected growth-related non-interest costs to be more than offset by increased earning assets and non-interest income. These are expectations, not guarantees.
  • Management cited the flattening yield curve and competitive conditions, and emphasized disciplined loan pricing. Interest-rate risk, funding costs, deposit attrition, competition, economic conditions, portfolio quality, and the adequacy of credit reserves remain key risks.
  • Management’s interest-rate model indicated a 9.0% increase in projected net interest income under an immediate 400-basis-point rate increase and a 4.6% decrease under a 200-basis-point decline. The filing cautions that actual results may differ and excludes larger declining-rate scenarios because of the low-rate environment.
  • Adoption of the lease accounting standard on January 1, 2019 brought operating lease assets of $16.22 and liabilities of $17.11 onto the balance sheet. Management was evaluating the expected impact of the forthcoming current expected credit losses standard; the financial-statement impact was not yet determined.
  • The Pennsylvania Department of Revenue assessed sales tax, interest, and penalties totaling $1.16 for 2013–2016. CNB had accrued $0.096, disputed the remaining assessment, and was awaiting an appeal decision; resolution could result in additional expense.
  • The filing reported no material changes to previously disclosed risk factors, no material pending legal proceedings beyond routine matters, and effective disclosure controls.

Important facts for investors to verify

  • Whether loan growth and core earnings hold up as deposit and borrowing costs rise, and whether net interest margin stabilizes or continues to contract.
  • Credit trends, especially commercial loan classifications, specific reserves, nonperforming assets, and losses at Holiday Financial Services.
  • How much of the quarter’s non-interest income growth came from securities and trading gains, and whether those gains are repeatable.
  • The eventual financial impact of the Pennsylvania sales-tax appeal and the company’s estimate for adopting the expected-credit-loss accounting standard.
  • Whether management’s 2019 growth and earnings expectations are realized; the filing provides no quantified full-year earnings or revenue guidance.