CNB Financial Corporation (NASDAQ: CCNE) — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Dollar amounts are in millions unless stated otherwise. CNB is a regional bank holding company operating primarily in Pennsylvania, Ohio, and western New York.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Prior comparable period / December 31, 2018 |
|---|---|---|
| Net income | $9.47; diluted EPS $0.62 | $7.10; diluted EPS $0.46 in Q1 2018 |
| Net interest income | $27.76 | $24.10 in Q1 2018 |
| Net interest margin, fully tax-equivalent | 3.70% | 3.72% in Q1 2018 |
| Non-interest income | $6.15 | $4.75 in Q1 2018 |
| Non-interest expense | $21.18 | $19.00 in Q1 2018 |
| Cash and cash equivalents | $55.28 | $45.56 |
| Total assets | $3,287.32 | $3,221.52 |
| Net loans | $2,505.74 | $2,454.85 |
| Total deposits | $2,657.36 | $2,610.79 |
| Total shareholders’ equity | $274.96 | $262.83 |
| Long-term borrowings and subordinated debt | $310.63; no short-term borrowings outstanding at quarter-end | $315.74; no short-term borrowings outstanding |
- Net income increased 33.5% year over year. Return on average assets was 1.17% versus 1.00%; return on average equity was 14.24% versus 11.61%.
- Net interest income rose 15.2%, supported by loan growth and higher earning-asset yields. The fully tax-equivalent earning-asset yield increased to 4.89% from 4.53%, while the cost of interest-bearing liabilities rose to 1.39% from 0.94%; margin edged down.
- Combined net interest income and non-interest income was $33.91, up from $28.85 in Q1 2018. Non-interest income included $0.80 of net realized and unrealized trading gains and $0.15 of available-for-sale securities gains.
- Non-interest expense increased 11.5%, including a 14.3% rise in salaries and benefits, which management attributed primarily to staffing growth and servicing a larger customer base. The effective tax rate was 17.1%, versus 13.7%.
- Operating cash flow was $1.39, compared with $4.14 in Q1 2018. Investing activities used $30.34 and financing activities provided $38.67; cash increased $9.72 during the quarter.
- Loans, net of unearned discount, grew $51.5, or 2.1%, during the quarter. Deposits grew $46.6; savings balances increased while certificates of deposit declined.
- Capital ratios at March 31 included total risk-based capital of 13.18%, Tier 1 capital of 10.35%, and common equity Tier 1 of 9.54%. Tangible common equity to tangible assets was 7.26%; tangible book value per share was $15.46.
Material changes and credit quality
- Net charge-offs were $0.66, up from $0.57 in Q1 2018. The provision for loan losses was $1.31, down from $1.63; the allowance increased to $20.35 from $19.70, or 0.81% of net loans.
- Nonperforming assets were $18.79, or 0.57% of total assets, compared with $18.55, or 0.58%, at year-end. Nonaccrual loans were $17.45; loans over 90 days past due and still accruing were $0.87.
- Commercial lending is a significant and growing portfolio exposure. Management reported a $0.79 increase in specific reserves during the quarter. Special-mention commercial loans rose to $19.19 from $13.76 at year-end, and substandard balances rose to $29.20 from $27.35.
Outlook, risks, and unusual items
- Management expected solid loan demand and loan growth through the remainder of 2019, and said it believed the company was positioned to sustain core earnings. It expected growth-related non-interest costs to be more than offset by increased earning assets and non-interest income. These are expectations, not guarantees.
- Management cited the flattening yield curve and competitive conditions, and emphasized disciplined loan pricing. Interest-rate risk, funding costs, deposit attrition, competition, economic conditions, portfolio quality, and the adequacy of credit reserves remain key risks.
- Management’s interest-rate model indicated a 9.0% increase in projected net interest income under an immediate 400-basis-point rate increase and a 4.6% decrease under a 200-basis-point decline. The filing cautions that actual results may differ and excludes larger declining-rate scenarios because of the low-rate environment.
- Adoption of the lease accounting standard on January 1, 2019 brought operating lease assets of $16.22 and liabilities of $17.11 onto the balance sheet. Management was evaluating the expected impact of the forthcoming current expected credit losses standard; the financial-statement impact was not yet determined.
- The Pennsylvania Department of Revenue assessed sales tax, interest, and penalties totaling $1.16 for 2013–2016. CNB had accrued $0.096, disputed the remaining assessment, and was awaiting an appeal decision; resolution could result in additional expense.
- The filing reported no material changes to previously disclosed risk factors, no material pending legal proceedings beyond routine matters, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth and core earnings hold up as deposit and borrowing costs rise, and whether net interest margin stabilizes or continues to contract.
- Credit trends, especially commercial loan classifications, specific reserves, nonperforming assets, and losses at Holiday Financial Services.
- How much of the quarter’s non-interest income growth came from securities and trading gains, and whether those gains are repeatable.
- The eventual financial impact of the Pennsylvania sales-tax appeal and the company’s estimate for adopting the expected-credit-loss accounting standard.
- Whether management’s 2019 growth and earnings expectations are realized; the filing provides no quantified full-year earnings or revenue guidance.