CNB Financial Corporation — Q3 2018 Form 10-Q
Business context and period: Regional bank holding company serving markets in Pennsylvania, Ohio, and western New York. This unaudited report covers the three and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $26.9 | $23.5 | $76.8 | $67.7 |
| Provision for loan losses | $1.1 | $1.4 | $4.6 | $3.6 |
| Non-interest income | $5.9 | $5.0 | $16.3 | $15.9 |
| Non-interest expense | $20.8 | $17.6 | $59.3 | $52.4 |
| Net income | $9.2 | $7.2 | $24.8 | $20.4 |
| Diluted earnings per share | $0.60 | $0.47 | $1.62 | $1.34 |
- Q3 net income increased 27%; nine-month net income rose 21%. Annualized Q3 return on assets was 1.20% and return on equity was 14.59%; nine-month returns were 1.12% and 13.28%, respectively.
- Fully tax-equivalent net interest margin was 3.79% in Q3 versus 3.82% a year earlier, and 3.75% for nine months versus 3.80%. Q3 earning-asset yield rose to 4.78%, while the cost of interest-bearing liabilities rose to 1.22%.
- At September 30, total assets were $3.13 billion; net loans $2.36 billion; securities $531.2 million; deposits $2.52 billion; and shareholders’ equity $254.4 million. Since year-end 2017, loans grew 11.2%, deposits 16.4%, and total assets 13.0%.
- Allowance for loan losses was $22.5 million, or 0.94% of loans net of unearned discount, versus $19.7 million and 0.92% at year-end. Nine-month net charge-offs were $1.8 million; nonperforming assets were $21.2 million, or 0.68% of assets.
- Nine-month operating cash flow was $27.5 million; investing cash outflow was $367.9 million, principally reflecting net loan growth and securities purchases; financing cash inflow was $341.5 million, led by deposit growth. Cash and cash equivalents ended at $36.5 million.
- Short-term borrowings were $2.2 million; long-term borrowings $250.2 million; and subordinated debentures $70.6 million. Regulatory capital ratios included total risk-based capital of 13.66% and common equity tier 1 of 9.68%; both were lower than at year-end 2017.
Material changes and management commentary
- Higher loan balances drove much of the increase in interest income and net interest income. Deposit and borrowing costs rose faster than asset yields, contributing to slightly lower net interest margin.
- Expense growth outpaced non-interest income growth: nine-month non-interest expense increased 13%, reflecting higher salaries, staffing, and costs associated with business growth. Staff increased 9% year over year to 534 full-time equivalents.
- The nine-month effective tax rate declined to 14.9% from 26.1%, primarily reflecting the Tax Cuts and Jobs Act and tax-exempt income, including bank-owned life insurance earnings.
- Management said it expected solid loan demand and loan growth for the remainder of 2018 and believed the company was positioned to sustain core earnings. These are management expectations, not quantified earnings guidance; management cautioned that interim results are not necessarily indicative of full-year results.
- Management described liquidity as acceptable, supported by cash, traditional funding access, FHLB financing, and maturing securities and loans. Interest-rate sensitivity modeling showed estimated one-year net interest income changes of +9.5% under a +400-basis-point shock and -2.7% under a -200-basis-point shock; the -300 and -400 scenarios were omitted.
Risks, contingencies, and unusual items
- Credit, concentration, funding-cost, interest-rate, deposit-attrition, competitive, regulatory, and economic risks are highlighted. Commercial and commercial-mortgage lending are significant portfolio components; management notes their sensitivity to borrower and economic conditions.
- Available-for-sale securities had $11.0 million of gross unrealized losses at September 30, up from $4.2 million at year-end 2017. Accumulated other comprehensive loss increased to $7.8 million from $0.3 million, principally reflecting securities valuation changes. Management concluded the securities were not other-than-temporarily impaired and said it did not expect to be required to sell them before recovery.
- A Pennsylvania sales-tax assessment totaled $1.163 million, including interest and penalties. The company accrued $96,000; management said the ultimate resolution could result in additional expense up to the total assessed amount.
- During Q3, a commercial borrower repaid $5.5 million of principal plus $127,000 of interest and fees after selling its business, following a bankruptcy filing earlier in 2018. Management said a separate impaired commercial real-estate loan required an additional $623,000 provision during the first nine months.
- Off-balance-sheet commitments included $233.2 million of commitments to make loans, $475.8 million of unused credit lines, and $16.0 million of standby letters of credit. Actual funding and losses may differ from contractual amounts.
- The company began operating a captive insurance subsidiary in June 2018 and entered a new five-year interest-rate swap on $10 million of subordinated debt. No material legal proceedings were reported; the company said risk factors had not materially changed from its 2017 Form 10-K.
Important facts for investors to verify
- Whether loan growth, particularly commercial lending, can be sustained without further deterioration in asset quality or materially higher credit-loss provisions.
- Whether deposit growth and funding costs support margins as interest rates and competition change.
- The composition, duration, and potential realization effects of the securities portfolio’s unrealized losses, alongside capital-ratio trends.
- The eventual resolution and maximum financial exposure from the Pennsylvania tax assessment.
- Progress toward management’s stated 2018 expectations and implementation of CECL; the filing said CECL’s financial-statement impact had not yet been determined.