CNB Financial Corporation (NASDAQ: CCNE) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unless noted, financial amounts are in millions of dollars. CNB is a regional financial holding company whose businesses include banking, wealth management and consumer lending.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $46.3 | $38.3 | $88.9 | $77.4 |
| Provision for credit losses | $2.9 | $2.0 | $4.5 | $4.1 |
| Non-interest income | $8.1 | $7.9 | $17.8 | $16.1 |
| Non-interest expense | $32.6 | $27.0 | $64.5 | $54.8 |
| Net income | $15.4 | $14.0 | $30.7 | $28.2 |
| Net income available to common shareholders | $14.4 | $12.9 | $28.5 | $26.0 |
| Diluted EPS | $0.85 | $0.76 | $1.69 | $1.54 |
Q2 net interest margin was 3.73% on a fully tax-equivalent basis, versus 3.28% a year earlier; the six-month margin was 3.61%, versus 3.42%. Q2 annualized return on average equity was 14.55% (13.22% prior year), while the efficiency ratio was 59.47% (57.91%). The six-month efficiency ratio was 59.99%, up from 58.04%.
For the six months, operating cash flow was $21.8 million, investing cash flow was negative $446.3 million, and financing cash flow was negative $23.5 million. Cash and cash equivalents declined $448.0 million to $284.2 million, primarily as CNB deployed excess cash into loan growth and investments.
Balance sheet, liquidity and capital
- Total assets were $5.30 billion at June 30, 2022, compared with $5.33 billion at year-end 2021. Total loans were $3.91 billion, up $275.0 million; excluding PPP-related loans and syndicated loans, management reported growth of $290.5 million, or 8.4%.
- Deposits totaled $4.70 billion, down $13.8 million, or 0.3%, from year-end. Noninterest-bearing deposits rose 7.5% to $851.2 million, while certificates of deposit declined 21.3% to $304.3 million. Non-maturity deposits were 93.5% of deposits.
- CNB reported $217.8 million in Federal Reserve deposits and approximately $1.0 billion of potential FHLB borrowing capacity; it had no FHLB advances outstanding. Management considered liquidity adequate.
- Subordinated debentures were $20.6 million and subordinated notes were $83.8 million. No line-of-credit or other overnight borrowings were outstanding.
- Shareholders’ equity was $423.6 million, down 4.3% from year-end, primarily reflecting accumulated other comprehensive losses on securities. The total risk-based capital ratio was 14.23%, CET1 was 9.30%, and the tier 1 leverage ratio was 8.53%; CNB said all capital ratios exceeded regulatory well-capitalized levels.
Material changes and notable items
- Net income available to common shareholders rose 11.2% in Q2 and 9.7% for the first half. Management attributed stronger earnings primarily to loan growth, securities growth, stable credit quality and the benefit of higher rates on an asset-sensitive balance sheet.
- Q2 non-interest expense increased 20.9%, including approximately $1.3 million in accelerated retirement benefit expense related to a pending executive retirement, higher incentive compensation, additional staffing in growth markets and technology investment.
- Q2 non-interest income included an $830,000 bank-owned life insurance death-benefit gain. First-half non-interest income included $651,000 of realized gains on available-for-sale securities. Equity securities generated net unrealized losses of $641,000 in Q2 and $1.0 million in the first half.
- CNB reclassified securities from available-for-sale to held-to-maturity and added HTM purchases. At June 30, HTM securities had $413.3 million amortized cost and $389.9 million fair value. The AFS portfolio had $46.8 million of unrealized losses; management attributed losses to market interest-rate movements and stated it did not intend, and was not more likely than not required, to sell before recovery.
- Accumulated other comprehensive loss was $41.4 million at quarter-end, compared with $0.4 million at year-end. Tangible book value per common share declined to $19.08 from $20.22.
- The allowance for credit losses was $40.5 million, or 1.04% of loans, versus $37.6 million, or 1.03%, at year-end. Nonperforming assets were $20.7 million, or 0.39% of assets; nonaccrual loans were 0.48% of total loans. Management cited loan growth and uncertainty around inflation, supply-chain challenges, the economy and the pandemic as factors in its credit-loss estimates.
Outlook, risks and contingencies
CNB did not provide numerical earnings guidance. Management expected to continue pursuing loan-growth objectives in 2022, supported by core-customer acquisition and diversified markets. It expected growth strategies to expand earning assets and revenue sufficiently to more than offset higher expenses, while expecting the syndicated-loan portfolio to remain stable or decrease. Management also noted that the interest-rate environment will remain important to earnings.
Key risks identified include economic and competitive conditions, interest-rate changes, funding costs and deposit attrition, loan and securities quality, allowance adequacy, COVID-19 effects, regulation, technology and acquisition integration. CNB’s modeled one-year net interest income sensitivity at June 30 was +16.5% for a 400-basis-point rate increase and -11.8% for a 200-basis-point decrease; management cautioned actual outcomes may differ. It reported no material change in risk factors from its 2021 Form 10-K. Ordinary-course litigation was not expected by management to have a material adverse effect. Off-balance-sheet commitments included $456.5 million of commitments to make loans, $697.5 million of unused lines and $17.4 million of standby letters of credit.
Important facts for investors to verify
- Whether loan growth continues and whether credit quality, delinquencies and the allowance remain resilient as economic conditions change.
- How deposit balances and funding costs respond to higher rates, and whether reported liquidity and available borrowing capacity remain sufficient.
- Whether net interest margin benefits persist as asset yields and deposit costs reprice.
- How securities marks, accumulated other comprehensive losses and the AFS-to-HTM strategy affect capital and future flexibility.
- Whether expense growth, including the retirement charge and expansion/technology costs, moderates relative to revenue growth.
- Whether CNB uses its authorization to repurchase up to 500,000 shares, subject to a $15 million aggregate limit, through May 17, 2023; no program purchases were reported in Q2.