Business context and reporting period
CNB Financial Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2019. It is a Pennsylvania-based bank holding company whose CNB Bank and other subsidiaries serve markets in Pennsylvania, Ohio, and western New York. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $28.8 | $25.8 | $56.6 | $49.9 |
| Provision for loan losses | $1.8 | $1.9 | $3.1 | $3.5 |
| Non-interest income | $6.8 | $5.6 | $12.9 | $10.4 |
| Non-interest expense | $22.0 | $19.5 | $43.2 | $38.5 |
| Net income | $9.8 | $8.4 | $19.2 | $15.5 |
| Diluted EPS | $0.64 | $0.55 | $1.26 | $1.02 |
- Growth and returns: Q2 net income rose 15.7%; six-month net income rose 23.8%. Q2 return on average assets/equity was 1.18%/14.05%; six-month results were 1.18%/14.20%.
- Margins: Fully taxable-equivalent net interest margin was 3.77% in both Q2 and the first half, versus 3.81% and 3.78%, respectively, in 2018. The six-month efficiency ratio improved to 61.59% from 62.30%.
- Balance sheet at June 30: Assets were $3,401, up from $3,222 at year-end 2018. Gross loans were $2,627 and net loans $2,601, versus $2,479 and $2,455, respectively. Deposits were $2,735, up 4.7% from year-end; savings balances grew while certificates of deposit declined.
- Credit quality: Allowance for loan losses was $21.4, or 0.82% of loans net of unearned amounts, versus $19.7 and 0.80% at year-end. Six-month net charge-offs were $1.4, or 0.11% of average loans annualized. Nonperforming assets were $15.8, 0.46% of assets, compared with $15.6, 0.48%, at year-end.
- Cash flow and funding: For the first half, operating cash flow was $18.6, investing cash outflow $156.5, and financing cash inflow $130.2; cash and cash equivalents ended at $37.9, down from $45.6 at year-end. Short-term borrowings were $52.9, versus none at year-end; long-term borrowings were $204.9 and subordinated debentures $70.6.
- Capital and distributions: Shareholders’ equity was $286.6. Total risk-based capital was 13.00%, Tier 1 10.23%, common equity Tier 1 9.45%, and leverage 8.00%. The six-month dividend was $0.34 per share; the company repurchased 40,000 shares in Q2.
Material changes versus comparable periods
- Growth in loan and deposit balances, particularly commercial lending and deposits in the Buffalo market, supported higher revenue and earnings. Management reported loan growth of $148 million in the first half and expected strong loan demand through the rest of 2019.
- Funding costs rose: six-month interest expense increased to $18.5 from $11.6, and the cost of interest-bearing liabilities rose to 1.42% from 1.01%. Asset yields also improved, but the margin was nearly unchanged year over year.
- Six-month operating expenses increased 12.0%, including a 13.9% increase in salaries and benefits, as staffing and support expanded. Management attributed expense growth primarily to business growth and investment in business development, risk management, and customer service.
- Trading-security gains increased; Q2 included a $0.463 gain from selling the company’s Visa Class B shares. First-half results also included $0.148 of realized gains on available-for-sale securities.
- Shareholders’ equity increased from year-end, supported by earnings and a $10.1 increase in accumulated other comprehensive income, including unrealized securities gains.
Outlook, risks, contingencies, and unusual items
- Management said it expected continued strong loan demand and believed the company was positioned to sustain core earnings during 2019. It anticipated that growth-related revenue and earning assets would more than offset higher operating costs. These statements are forward-looking, not a quantified earnings forecast.
- Management cited a flattening yield curve and competitive conditions, and emphasized disciplined loan pricing and core-deposit growth. Interest-rate risk, loan quality and reserve adequacy, deposit attrition, funding costs, competition, and economic conditions are among the disclosed risks.
- A Pennsylvania sales-tax assessment covering 2013–2016 totaled $1.163, including interest and penalties. The company estimated its liability at $0.246 and had accrued $0.096; it was appealing the assessment. Resolution could take more than a year and could result in additional expense up to the full assessment.
- The company adopted lease accounting on January 1, 2019, recognizing approximately $12.5 of right-of-use assets and $13.3 of lease liabilities at adoption. At June 30, operating lease liabilities were $17.9.
- The expected-loss accounting standard (CECL) was scheduled to take effect after 2019. Management was developing models and implementation processes; the financial impact had not yet been determined.
- Management reported disclosure controls were effective and no significant change in internal control over financial reporting. It reported no material change in risk factors and no material pending legal proceedings apart from routine matters.
Important facts for investors to verify
- Confirm the trend in deposit costs, net interest margin, and reliance on short-term FHLB borrowings as loan growth continues.
- Review commercial and commercial-real-estate concentration, criticized loan trends, nonperforming assets, charge-offs, and allowance coverage; management noted additional provision on a deteriorated commercial real-estate loan.
- Track the Pennsylvania tax appeal and any potential additional liability beyond the amount accrued.
- Assess the implementation and eventual balance-sheet impact of CECL, which management said was not yet determinable.
- Check the MD&A yield wording: it states an earning-asset yield of “45.00%” for Q2 2019, while the comparative table reports 5.00%; the filing text contains this apparent discrepancy.