CNB Financial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. Comparative income and cash-flow figures are for Q1 2019. Balance-sheet comparisons are against December 31, 2019. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Business context and financial performance
CNB is a regional bank holding company serving markets in Pennsylvania, Ohio and western New York. Its loan portfolio is concentrated in commercial and industrial, commercial real estate, and residential real estate lending. Q1 results were affected by COVID-19, emergency Federal Reserve rate cuts, and additional credit-loss provisioning.
| Metric | Q1 2020 | Comparable / change |
|---|---|---|
| Net interest income | $30.0 million | Up 8.1% from $27.8 million |
| Net interest margin, fully tax-equivalent | 3.49% | Down 27 basis points from 3.76% |
| Non-interest income | $5.4 million | Down 12.8% from $6.2 million |
| Non-interest expense | $21.7 million | Up 2.7% from $21.2 million |
| Provision for loan losses | $3.1 million | Up 135.8% from $1.3 million |
| Net income / diluted EPS | $8.8 million / $0.57 | Down 7.0% / 8.1% from $9.5 million / $0.62 |
| Efficiency ratio | 60.34% | Improved from 60.85% |
| Return on average assets / equity | 0.95% / 11.32% | Down from 1.18% / 14.37% |
Net interest income rose on 15.5% growth in average earning assets, partly offset by lower asset yields and margin following rate cuts. Non-interest income was pressured by $588,000 of trading-securities losses, versus securities and trading gains in Q1 2019. Excluding those securities results, management said non-interest income increased 14.4%, primarily from wealth-management and mortgage-banking fees. The effective tax rate was 16.4%, versus 17.1%.
Financial position, cash flow and liquidity
- Assets and loans: Total assets were $3.779 billion, up from $3.764 billion at year-end. Loans before the allowance and unearned discount were $2.855 billion, up $46.0 million; growth was principally in commercial and industrial and commercial mortgage loans.
- Deposits and funding: Deposits were $3.100 billion, down $2.1 million from year-end. Cash and cash equivalents were $136.3 million, down from $193.0 million. Long-term FHLB and other borrowings were $225.7 million; subordinated debentures were $70.6 million. The company reported no short-term FHLB borrowings.
- Capital: Shareholders’ equity was $324.8 million, compared with $305.0 million. Total risk-based capital was 12.66%, Tier 1 capital 10.15%, common equity Tier 1 9.45%, and leverage 7.85%. Tangible book value per share was $18.58. The quarterly dividend was $0.17 per share.
- Cash flow: Operating activities provided $14.4 million, compared with $1.4 million in Q1 2019; investing activities used $67.2 million and financing activities used $3.9 million. Cash declined by $56.6 million during the quarter.
- Liquidity: Management described liquidity as strong, citing $136 million of cash and approximately $435 million of FHLB borrowing capacity. It also had access to the Federal Reserve discount window. Management increased daily liquidity monitoring in response to pandemic uncertainty.
Material changes, risks and outlook
- Credit quality and reserves: The allowance for loan losses increased to $21.9 million from $19.5 million, or 0.77% of loans net of unearned discount. Q1 provision included approximately $2.5 million for a specific commercial and industrial relationship and an approximately $800,000 COVID-19 qualitative adjustment. Annualized net charge-offs were 0.09% of average loans.
- Nonperforming assets: Nonperforming assets were $33.5 million, or 0.89% of assets, versus $23.4 million, or 0.62%, at year-end. Management attributed much of the increase to a $9.7 million commercial real estate relationship placed on nonaccrual following a covenant violation; it said no specific reserve was then required. Nonaccrual loans totaled $31.9 million at quarter-end.
- COVID-19 borrower assistance: At March 31, 561 loans totaling $264 million had payment deferrals of up to six months: $151 million with principal and interest deferred and $113 million with principal only deferred. These short-term deferrals were not treated as troubled debt restructurings under interagency guidance. The filing identifies hotels and restaurants, as well as funded acquisition, development and construction loans, as areas of heightened concern; oil and gas exposure was $15.7 million.
- PPP and subsequent liquidity actions: As of April 16, CNB had committed approximately $177 million across 1,031 PPP loan relationships, with estimated processing fees of approximately $6 million. It planned to participate in the subsequent PPP funding round and, after quarter-end, began participating in the PPP Liquidity Facility. These are post-period developments, not Q1 reported loan balances.
- Accounting and market risk: CNB elected under the CARES Act to delay adoption of the current expected credit losses standard and used the incurred-loss model for Q1. Before the CARES Act, management estimated adoption could increase the allowance by approximately 20%–30%, subject to further evaluation. Management cautioned that pandemic effects on borrowers, credit losses, asset values, liquidity and operations could not yet be reliably estimated. Interest-rate simulations showed a 2.9% decrease in one-year net interest income under a 100-basis-point increase and a 2.6% decrease under a 100-basis-point decline; management noted actual results could differ.
- Other notable items: After quarter-end, CNB sold $50.9 million of available-for-sale securities and recognized a $2.0 million net gain, citing a desire to reduce portfolio concentrations. CNB’s planned acquisition of Bank of Akron, approved by Akron shareholders in March, was expected to close in Q3 2020 subject to regulatory approval and other conditions; Akron had $388.5 million of assets at year-end 2019. CNB also continued an at-the-market stock offering, having sold approximately $5.1 million of shares cumulatively by March 31.
- Guidance: The filing provides no quantified earnings or full-year financial guidance. Management stated that the pandemic’s ultimate financial and operational effects were uncertain and that Q1 performance was not necessarily indicative of the full year.
Important facts for investors to verify
- Subsequent-quarter trends in loan deferrals, delinquencies, nonaccruals, criticized loans, charge-offs and allowance adequacy.
- PPP loan funding, forgiveness, fee recognition and liquidity-facility borrowing, including the timing and scale of these post-quarter developments.
- Whether the $9.7 million commercial real estate exposure or the specifically reserved commercial and industrial relationship requires further reserves or results in losses.
- Effects of lower interest rates on net interest margin, deposit costs, loan yields and interest-rate sensitivity.
- Regulatory approvals, closing conditions, purchase consideration and integration costs for the proposed Bank of Akron acquisition.
- Performance after the securities sale, and any further changes to securities valuations, capital, liquidity or the company’s stock offering.