CNB Financial Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. CNB Financial is a Pennsylvania-based financial holding company operating primarily through CNB Bank, with banking operations in Pennsylvania, Ohio, and western New York, and a consumer-finance subsidiary, Holiday Financial Services.
Financial performance and position
Unless noted otherwise, amounts are in millions of dollars. The filing reports bank interest income and non-interest income rather than a conventional revenue total.
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Interest and dividend income | $108.9 | $94.3 | Up 15.4% |
| Net interest income | $91.5 | $81.3 | Up 12.6% |
| Fully taxable-equivalent net interest margin | 3.82% | 3.78% | Up 4 basis points |
| Non-interest income | $21.4 | $17.7 | Up 21.2%; includes securities gains and a branch-sale gain |
| Provision for loan losses | $6.7 | $4.1 | Up 60.4% |
| Non-interest expense | $70.0 | $67.1 | Up 4.3% |
| Net income | $23.9 | $20.5 | Up 16.2% |
| Diluted earnings per share | $1.57 | $1.42 | Up from prior year |
| Return on average assets / equity | 0.89% / 9.97% | 0.85% / 9.69% | Both improved |
- Balance sheet: Total assets were $2.769 billion, up 7.6%; net loans were $2.126 billion, up 14.5%; deposits were $2.168 billion, up 7.4%. Securities totaled $416.9 million, down 16.7%.
- Funding and debt: Year-end short-term borrowings were $34.4 million, FHLB and other long-term borrowings were $222.9 million, and subordinated debentures were $70.6 million. The Bank had approximately $532.8 million of remaining FHLB borrowing capacity.
- Liquidity and cash flow: Cash and cash equivalents were $35.3 million, compared with $29.2 million. Operating cash flow was $30.8 million; investing cash flow was negative $203.7 million, largely reflecting loan growth; financing cash flow was positive $179.1 million.
- Capital: Consolidated total risk-based capital ratio was 14.32%, common equity Tier 1 was 10.00%, and leverage ratio was 8.45%. The Bank was categorized as well capitalized. Book value per share was $15.98; the annual dividend was $0.66 per share.
Material changes versus 2016
- Loan growth drove higher interest income and net interest income; average loans increased to $2.023 billion from $1.717 billion. Loan growth was particularly strong in commercial and mortgage lending.
- Credit costs rose: provision increased to $6.7 million, although net charge-offs declined to $3.3 million from $4.6 million. Nonperforming loans increased to $19.7 million from $15.3 million, or 0.92% of loans versus 0.82%.
- Non-interest income rose, including wealth and asset management fees of $3.7 million, securities gains, and a $0.5 million gain on the Mount Hope, Ohio branch sale.
- Non-interest expense increased modestly despite 2016 having $3.7 million of disclosed one-time expenses for core-system conversion, merger costs, and debt prepayment. Salaries and benefits increased with staffing and growth investments.
- CNB issued 834,896 shares in an at-the-market offering, generating $19.3 million net proceeds. Shareholders’ equity increased to $243.9 million.
Outlook, commentary, risks, and unusual items
- Management provided no numerical earnings guidance. It expected strong loan growth in 2018, including expansion in Buffalo and commercial lending in Pennsylvania and Ohio, and said it was positioned to sustain core earnings. Management expected growth in earning assets and non-interest income to more than offset higher operating costs.
- The 2017 effective tax rate was 34.2%, including a $3.009 million deferred-tax remeasurement charge following the reduction in the U.S. federal corporate tax rate to 21%. This was a significant nonrecurring earnings headwind.
- A commercial real estate borrower deterioration led to a $2.9 million additional provision in 2017, including $1.6 million in the fourth quarter. Fourth-quarter net income was $3.45 million and diluted EPS was $0.23.
- Management identified credit and collateral risk, commercial real estate exposure, regional economic concentration, interest-rate and funding risk, competition, regulation, cybersecurity, and acquisition integration as material risks. The filing says the interest-rate position was short-term asset sensitive; its model estimated a 6.4% increase in net interest income under an immediate 400-basis-point rise and a 2.4% decline under a 100-basis-point fall.
- Management considered the allowance adequate. At year-end, allowance for loan losses was $19.7 million, or 0.92% of net loans. Troubled debt restructurings totaled $17.3 million, including $9.0 million classified as nonperforming.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective. The filing reports no material pending legal proceedings.
Important facts for investors to verify
- Whether the increase in nonperforming loans, troubled debt restructurings, and commercial real estate reserves is contained, and whether the allowance remains adequate as the loan book expands.
- Whether 2018 loan growth and new-market expansion deliver expected earnings after associated staffing, technology, and operating costs.
- The quality and sustainability of earnings excluding the $3.009 million tax-rate adjustment, securities gains, and branch-sale gain.
- How deposit pricing, time-deposit growth, borrowing costs, and interest-rate changes affect net interest margin and liquidity.
- Confirm reported borrowing balances and capital ratios in the full statements and regulatory-capital disclosures; the filing presents some borrowing categories differently across tables.