CNB Financial Corporation — Q3 2019 Form 10-Q
Business context and period. Regional bank holding company operating through CNB Bank and related subsidiaries, serving markets in Pennsylvania, Ohio, and western New York. This unaudited report covers the three and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2019 / Sept. 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $36.2; up 10.3% year over year | $32.8 in Q3 2018 |
| Net interest income | $29.9 | $26.9 in Q3 2018 |
| Net income; diluted EPS | $10.4; $0.68 | $9.2; $0.60 in Q3 2018 |
| Net interest margin, fully taxable equivalent | 3.72% | 3.81% in Q3 2018 |
| Total assets | $3,541.2 | $3,221.5 at Dec. 31, 2018 |
| Loans, net of unearned discount | $2,749.5 | $2,474.6 at Dec. 31, 2018 |
| Total deposits | $2,875.6 | $2,610.8 at Dec. 31, 2018 |
| Cash and cash equivalents | $52.2 | $45.6 at Dec. 31, 2018 |
| Shareholders’ equity | $297.0 | $262.8 at Dec. 31, 2018 |
Nine-month results: Revenue was $105.7, up 13.5%; net income was $29.6, up 19.5%; diluted EPS was $1.94 versus $1.62. Net interest margin was 3.75% versus 3.77%. The efficiency ratio improved to 60.46% from 62.36%. Q3 return on average assets and equity were 1.19% and 14.03%; nine-month figures were 1.18% and 14.14%.
Cash flow and funding: For the first nine months, operating activities provided $31.5; investing activities used $283.6, principally reflecting loan growth; financing activities provided $258.7, including deposit growth and borrowing. Total borrowings, including subordinated debentures, were approximately $318.7 at quarter-end. Management said liquidity was acceptable and supported by cash, deposits, FHLB capacity, and securities and loans maturing within one year.
Credit, capital, and shareholder returns: The allowance for loan losses was $20.2, or 0.73% of loans net of unearned discount. Nine-month net charge-offs were $4.7 versus $1.8 in 2018; nonperforming assets were $16.8, or 0.48% of assets. Regulatory capital ratios at September 30 included total risk-based capital of 12.61%, Tier 1 of 10.02%, and common equity Tier 1 of 9.28%. The quarterly dividend was $0.17 per share; nine-month dividends were $0.51 per share.
Material changes and management commentary
- Loan balances grew approximately $275 million from year-end, with commercial and industrial and commercial mortgage lending driving growth. Deposits increased approximately $265 million, notably savings balances. Private Banking and the Buffalo market were major contributors to reported loan and deposit growth.
- Higher earning-asset yields were outweighed in part by faster funding-cost increases: Q3 interest-bearing liability cost rose to 1.47% from 1.16%, while fully taxable equivalent net interest margin narrowed. Management cited the interest-rate environment.
- Q3 provision expense rose to $2.1 million from $1.1 million. This included $1.4 million for one commercial real estate relationship, which management fully reserved after deterioration in business performance, limited borrower communication, and uncertainty about collateral value. A separate impaired commercial mortgage loan of $2.6 million was charged off during the quarter.
- Management expects strong loan demand through the remainder of 2019 and believes it is positioned to sustain core earnings. It expects growth-related expense increases, while anticipating earning-asset growth and non-interest income to more than offset them. These are forward-looking statements, not guarantees.
- Interest-rate sensitivity modeling estimated one-year net interest income changes of +3.3% to +9.7% for rate increases of 100 to 400 basis points and -7.3% to -8.1% for decreases of 100 to 200 basis points. Management cautioned that actual outcomes may vary and model assumptions are uncertain.
Risks, contingencies, and unusual items
- The Corporation is appealing a Pennsylvania sales-tax assessment covering 2013 through July 2016. It accrued $246,000; the total assessment, including interest and penalties, was $1.163 million, and resolution could result in additional expense up to the total assessed amount.
- Adoption of the expected-credit-loss standard (CECL) was being prepared for its then-scheduled 2020 effective date; management said the financial-statement impact had not yet been determined.
- The company adopted lease accounting in 2019, recording $16.8 million of operating lease assets and $17.7 million of operating lease liabilities at September 30.
- Management identified credit quality and reserve adequacy, commercial lending concentrations, interest rates and funding costs, deposit attrition, competition, and economic conditions among the risks that could affect results. It reported no material change to the risk factors in its 2018 Form 10-K and no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether the fully reserved commercial real estate exposure is recovered, and how credit losses, nonperforming assets, and reserve coverage develop.
- Whether rapid loan growth—particularly in commercial lending and Buffalo—continues without weakening underwriting or asset quality.
- Whether deposit growth remains stable and funding costs moderate enough to support net interest margin.
- The final outcome and potential additional cost of the Pennsylvania tax assessment, and the eventual CECL impact.
- Whether management’s 2019 loan-demand and core-earnings expectations are borne out; interim results are not necessarily indicative of full-year performance.