CNB Financial Corporation — Q3 2022 Form 10-Q
Business context and reporting period. CNB Financial Corporation is a Pennsylvania-based bank holding company, operating through CNB Bank and subsidiaries including Holiday Financial Services. Its banking markets span Pennsylvania, Ohio, Western New York and Southwest Virginia. This unaudited quarterly report covers the three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. Dollar amounts below are rounded to millions.
Financial results and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $49.9m | $40.3m | $138.8m | $117.7m |
| Net income | $16.6m | $14.9m | $47.3m | $43.1m |
| Net income available to common shareholders | $15.5m | $13.8m | $44.1m | $39.9m |
| Diluted EPS | $0.90 | $0.82 | $2.59 | $2.36 |
| Provision for credit losses | $1.1m | $1.1m | $5.6m | $5.2m |
| Non-interest income | $8.0m | $8.4m | $25.8m | $24.5m |
| Non-interest expense | $36.1m | $29.2m | $100.6m | $84.0m |
- Margins and returns: Fully tax-equivalent net interest margin was 4.02% for Q3 (3.30% prior year) and 3.75% year to date (3.37%). Q3 return on average equity was 14.97%; the non-GAAP efficiency ratio was 61.95% (59.47% prior year). Year-to-date efficiency ratio was 60.68% (58.53%).
- Balance sheet at September 30: Total assets were $5.32bn; loans receivable were $4.02bn, up $389.9m from year-end 2021. Excluding PPP and syndicated loans, management reported loan growth of $407.6m, or 11.8%. Deposits were $4.62bn, down 1.9% from year-end. Cash and cash equivalents were $209.8m, versus $732.2m at year-end.
- Credit quality: Allowance for credit losses was $41.3m, or 1.03% of loans. Nonperforming assets were $21.8m, 0.41% of total assets, versus $20.3m and 0.38% at year-end. Net charge-offs were $0.31m in Q3 and $1.3m year to date.
- Debt, liquidity and capital: Subordinated debentures were $20.6m and subordinated notes were $83.9m; there were no FHLB advances or line-of-credit borrowings. FHLB borrowing capacity was approximately $951m, alongside $186.1m of unencumbered securities identified as available to support discount-window borrowing. Regulatory capital ratios exceeded “well-capitalized” levels: total risk-based capital 16.53%, CET1 11.70%, and Tier 1 leverage 10.67%.
- Cash flow: For the first nine months, operating activities provided $38.3m, investing activities used $549.2m, and financing activities used $11.5m. The cash decline principally reflected loan growth and investment purchases.
Material changes and notable items
- Q3 common earnings rose 12.4%; year-to-date common earnings rose 10.6%. Management attributed improvement principally to loan growth, higher interest rates and an asset-sensitive balance sheet. Q3 net interest income rose 23.9%, despite substantially lower PPP processing-fee income.
- Non-interest expense rose 23.6% in Q3 and 19.8% year to date, reflecting expansion-related staffing, incentive compensation and technology spending. Q3 also included about $267,000 of additional accelerated retirement-benefit expense for a pending executive retirement.
- On September 21, CNB issued 4,257,446 common shares at $23.50 per share, generating $94.1m net proceeds for general corporate purposes, growth and potential acquisitions. Total shareholders’ equity increased 16.5% from year-end, while tangible book value per common share declined from $20.22 to $19.61.
- Management transferred AFS securities to HTM and made direct HTM purchases. At quarter-end, HTM securities had $408.2m amortized cost and $39.1m of unrealized losses; AFS securities had $65.3m of unrealized losses. AOCI was a loss of $55.8m, versus a loss of $0.4m at year-end, largely reflecting market-value declines. Management said it did not consider the securities credit-impaired and did not expect to have to sell them before recovery.
- Deposits fell $91.8m from year-end, as interest-bearing deposits declined despite growth in noninterest-bearing balances. The average cost of interest-bearing liabilities rose year over year in Q3; management said targeted deposit-rate increases were expected to affect deposit costs beyond Q3.
Outlook, risks and contingencies
- No specific earnings or margin guidance is provided. Management expected to continue achieving its 2022 loan-growth objectives and said growth strategies were expected to increase earning assets and revenue, more than offsetting higher expenses. Management also expected the syndicated-loan portfolio to remain stable.
- Management cited uncertainty from inflation, supply-chain challenges, economic and geopolitical conditions, interest-rate movements, COVID-19 effects, competition, deposit attrition and credit quality. Its rate-risk model estimated that an immediate +100 basis-point shock would increase one-year net interest income 9.2%, while a -100 basis-point shock would reduce it 3.9%; larger modeled shocks were also disclosed, but actual results may differ.
- Customer loan commitments and unused lines were substantial: variable-rate commitments to make loans were $506.3m and variable-rate unused lines were $710.8m; standby letters of credit totaled $17.7m. Unfunded investment commitments included $6.1m to SBIC and other limited partnerships.
- Management considered the allowance adequate at September 30 and reported no material adverse liquidity event known to it. Routine litigation was not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and higher rates continue to support net interest income as deposit costs rise and PPP fees run off.
- Loan-credit trends, including nonperforming assets, criticized commercial credits, charge-offs and allowance adequacy under inflationary and economic stress.
- Liquidity and deposit stability, including the mix and pricing of deposits and availability of pledged collateral and wholesale funding.
- Impact of the securities portfolio’s unrealized losses and HTM classification on reported equity, tangible book value and future flexibility.
- Whether growth-market and technology investments translate into revenue sufficient to offset expense growth, and how management deploys the $94.1m offering proceeds.