CNB Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless stated otherwise, dollar amounts are in millions. CNB is a Pennsylvania-based bank holding company operating primarily in Pennsylvania and Ohio. Comparisons reflect the fourth-quarter 2013 acquisition of FC Banc Corp., which expanded the business and added eight branches.
Financial results and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $18.44 | $14.65 | $55.16 | $41.93 |
| Non-interest income | $3.50 | $3.25 | $10.22 | $10.09 |
| Net income | $5.55 | $4.70 | $16.33 | $11.95 |
| Diluted EPS | $0.39 | $0.38 | $1.13 | $0.96 |
| Net interest margin, fully tax-equivalent | 3.76% | 3.38% | 3.78% | 3.38% |
- Nine-month net interest income rose 31.6%; management attributed growth largely to the FC Banc acquisition, higher earning assets, and a loan-heavier asset mix. Acquired-loan accretion contributed $1.7 million for the nine months and $0.5 million in Q3.
- Nine-month non-interest expense increased 26.6% to $39.02 million. Growth-related costs included $4.0 million higher salaries and benefits, additional occupancy and operating costs, and $0.91 million of acquired core-deposit intangible amortization. The prior-year period included $1.33 million in merger costs.
- At September 30, total assets were $2.173 billion, up from $2.131 billion at year-end 2013. Net loans were $1.309 billion, up 2.3%; deposits were $1.867 billion, up 1.7%. Non-interest-bearing deposits increased, while certificates of deposit fell 30.2%.
- Cash and cash equivalents were $29.4 million. Nine-month operating cash flow was $19.5 million, investing cash use was $38.4 million, and financing cash flow was $18.7 million.
- FHLB and other borrowings were $83.9 million and subordinated debentures $20.6 million. Shareholders’ equity was $181.6 million, versus $164.9 million at year-end. Total risk-based capital was 14.24%; tangible common equity to tangible assets was 7.04%.
- Return on average assets and equity were 1.02% and 12.10% for Q3, versus 1.03% and 14.45% a year earlier. Nine-month returns were 1.01% and 12.22%, compared with 0.88% and 11.42%.
Material changes and asset quality
- The allowance for loan losses increased to $17.84 million from $16.23 million at year-end; allowance to loans, net of unearned discount, was 1.35%. Nine-month provision was $3.56 million, down from $4.89 million.
- Nine-month net charge-offs were $1.95 million, compared with $1.73 million in 2013. Q3 net charge-offs were $610,000, versus net recoveries of $875,000 a year earlier, which included a significant commercial-mortgage recovery.
- Nonperforming assets were $11.86 million, or 0.55% of total assets, versus $14.49 million, or 0.79%, at September 2013. Nonaccrual loans were $10.41 million. Criticized and classified commercial loans totaled $65.1 million, down from $87.3 million at year-end 2013.
- Commercial lending and acquired-loan growth remain important exposures. Management increased reserves for certain impaired commercial loans and consumer loans, citing delinquency and charge-off trends. The filing reports $11.66 million in troubled debt restructurings at quarter-end; no new TDRs were made in the first nine months of 2014.
Outlook, risks, and unusual items
- Management expected loan balances to continue growing through the rest of 2014 and said it believed the company was positioned to sustain core earnings. It anticipated growth in earning assets and non-interest income would more than offset higher operating costs; these statements are forward-looking, not numerical guidance.
- Management considered liquidity acceptable, citing cash, traditional funding access, and loans and investments maturing within one year. Off-balance-sheet commitments to extend credit were $337.95 million, with $14.36 million of standby letters of credit.
- Interest-rate risk modeling showed estimated one-year net interest income changes of -3.53% for a 100-basis-point decline, +1.02% for a 100-basis-point rise, +0.48% for a 300-basis-point rise, and -0.89% for a 400-basis-point rise. Management cautioned actual results could differ and model assumptions are uncertain.
- The securities portfolio had $11.16 million of gross unrealized losses, including $9.74 million on securities held in a loss position for at least 12 months. Management reported no other-than-temporary impairment; valuation of an $871,000 pooled trust-preferred security relies on Level 3 assumptions and is sensitive to defaults, yield, and prepayments.
- CNB committed approximately $2.7 million to remodel its Clearfield main office; about $535,000 had been spent by quarter-end, with completion expected by the end of Q1 2015. Management also cited regulatory, economic, competitive, credit, funding-cost, and interest-rate risks. No material legal proceedings or changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of earnings and margin improvement is sustainable after separating FC Banc acquisition effects and acquired-loan accretion?
- Whether consumer delinquencies, commercial impaired loans, charge-offs, and reserve adequacy improve or deteriorate.
- Whether the expense base and branch integration support management’s expectation that revenue growth will offset costs.
- Deposit mix and funding costs, liquidity against commitments, and sensitivity to interest-rate changes.
- Assumptions supporting the Level 3 trust-preferred valuation and management’s conclusion that securities losses are not other-than-temporary.