CNB Financial Corporation — Q3 2023 Form 10-Q
Business context and period. CNB Financial is a Pennsylvania-based bank holding company operating CNB Bank, wealth and asset management services, and consumer lender Holiday Financial Services. This unaudited report covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022.
Financial performance and position
- Q3 earnings: Net income was $13.7 million, down from $16.6 million a year earlier. Net income available to common shareholders was $12.7 million; diluted EPS was $0.60 versus $0.90.
- First nine months: Net income was $44.0 million versus $47.3 million; diluted EPS was $1.94 versus $2.59. The prior-year share offering increased the common share count and diluted per-share results.
- Revenue and margin: Q3 net interest income was $47.2 million, down 5.4% year over year, and noninterest income was $7.9 million. Nine-month net interest income was $142.1 million, up 2.4%, while noninterest income was $24.2 million. Net interest margin was 3.55% for Q3 and 3.66% for nine months, compared with 4.03% and 3.75%, respectively, in 2022. Higher loan yields and loan growth were offset by sharply higher deposit costs.
- Expenses and credit provision: Q3 noninterest expense was $36.9 million versus $36.1 million; nine-month expense was $106.9 million, up 6.3%, primarily from technology, card processing, business-generation and consulting costs. Credit-loss provision was $1.1 million for Q3 and $4.8 million for nine months, versus $1.1 million and $5.6 million, respectively, in 2022.
- Cash flow: For the nine months, operating activities provided $29.3 million, investing activities used $180.0 million, and financing activities provided $227.0 million. Cash and cash equivalents increased $76.3 million to $182.6 million.
- Balance sheet and funding: Total assets were $5.73 billion. Loans receivable were $4.49 billion gross ($4.45 billion net), up 6.1% year to date excluding syndicated and PPP-related loans, according to management. Deposits were $5.00 billion, up 8.2%; savings and time deposits grew while noninterest-bearing and interest-bearing demand balances declined. Brokered deposits rose to $265.8 million from $24.1 million, and reciprocal deposits to $595.7 million from $4.6 million.
- Liquidity and debt: Cash at the Federal Reserve included $117.6 million of excess liquidity. CNB reported approximately $3.59 billion in net available borrowing capacity and total on-hand and contingent liquidity equal to 3.9 times adjusted estimated uninsured deposits. There were no short-term borrowings at quarter-end, versus $132.4 million at year-end 2022. Subordinated debentures and notes totaled approximately $104.8 million.
- Capital: Shareholders’ equity was $549.2 million. Total risk-based capital was 15.68%, common equity tier 1 was 11.21%, and the tier 1 leverage ratio was 10.50%; the company said all capital ratios exceeded regulatory “well-capitalized” levels. Tangible book value per common share, a non-GAAP measure, was $21.40.
Material changes and items to monitor
- Credit quality: Nonperforming assets increased to $29.3 million, or 0.51% of assets, from $23.5 million, or 0.43%, at year-end. Nonaccrual loans rose to $27.1 million from $21.0 million. Management attributed much of the increase to commercial real estate relationships placed on nonaccrual during Q3; it reported specific reserves and stated it did not expect significant additional loss exposure from the cited relationship.
- Commercial office loans totaled $115.7 million across 120 loans. Two nonaccrual office relationships totaled $1.1 million, with approximately $817,000 in specific reserves. Separately, the filing identifies a two-loan commercial real estate relationship totaling $6.9 million placed on nonaccrual in Q3, with approximately $491,000 in specific reserves.
- The allowance for credit losses was $45.8 million, or 1.02% of loans, compared with $43.4 million and 1.02% at year-end. Management cited loan growth and uncertainty from tightening credit, inflation and higher rates as factors in its estimates.
- Interest-rate exposure: AFS and HTM securities had $108.8 million of pretax net unrealized losses, equal to 19.8% of equity, versus $99.0 million at year-end. Management said it did not intend, and did not expect to be required, to sell securities before recovery, and reported that capital ratios would remain above well-capitalized levels if the losses were fully recognized. The investment portfolio remains exposed to rate and market-value changes.
- Adjusted estimated uninsured deposits were approximately $940.4 million, or 18.4% of CNB Bank deposits, after excluding specified affiliate and collateralized deposits. The filing reports substantial contingent funding sources, but availability is subject to conditions, including collateral, internal guidelines and correspondent approvals.
- CNB repurchased 100,000 shares during Q3 at a weighted average $18.39 per share; 173,541 shares remained authorized for repurchase under the plan at quarter-end.
Outlook, commentary and risks
The filing provides no quantified earnings, revenue or margin guidance. Management said growth strategies were expected to increase earning assets and revenue, which it expected to more than offset higher noninterest expenses in 2023 and beyond. It also emphasized that results depend on interest rates, deposit pricing and retention, loan demand and credit quality. The filing highlights banking-industry and market stress, deposit attrition, credit-loss estimation, inflation, higher rates, cybersecurity, competition and regulatory or economic changes as risks. Management reported no material change to previously disclosed risk factors and no known event reasonably likely to materially adversely affect liquidity, capital resources or operations. Routine legal proceedings were not expected by management to have a material adverse effect.
Most important facts for investors to verify
- Whether deposit costs continue to outpace asset-yield improvement and pressure net interest margin and earnings.
- Trends in uninsured, brokered and reciprocal deposits, and the practical availability of reported contingent liquidity.
- Delinquencies, nonaccruals, criticized loans and reserve adequacy, particularly for commercial real estate and office exposures.
- How unrealized securities losses, interest-rate changes and any required asset sales could affect capital and liquidity.
- Whether loan growth and management’s expected revenue contribution offset expense growth, and how share repurchases affect per-share results.