CNB Financial Corporation — 2019 Form 10-K
Business context and reporting period. CNB Financial Corporation is a Pennsylvania financial holding company operating primarily through CNB Bank, with banking markets in Pennsylvania, Ohio and western New York; it also operates Holiday Financial Services, an indirect consumer lender, and other financial subsidiaries. This annual report covers the fiscal year ended December 31, 2019, with comparisons to 2018. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total interest and dividend income | $155.7 | $131.9 |
| Net interest income | $116.2 | $104.9 |
| Provision for loan losses | $6.0 | $6.1 |
| Non-interest income | $26.0 | $20.7 |
| Non-interest expense | $87.5 | $79.3 |
| Net income | $40.1 | $33.7 |
| Diluted earnings per share | $2.63 | $2.21 |
| Return on average assets / equity | 1.17% / 14.05% | 1.12% / 13.46% |
| Net interest margin, fully tax-equivalent | 3.69% | 3.77% |
Net income increased 18.9%. Net interest income rose 10.7%, while non-interest income grew 25.3%; higher non-interest expense partly offset these gains. The efficiency ratio improved to 60.19% from 61.37%. Interest expense increased to $39.5 million from $27.0 million, with deposit costs rising as the cost of interest-bearing liabilities increased to 1.45% from 1.12%.
- Balance sheet: Assets were $3.764 billion, up 16.8%. Net loans were $2.785 billion, up approximately 13.4%; deposits were $3.102 billion, up 18.8%; shareholders’ equity was $305.0 million.
- Credit: Nonperforming loans rose to $21.8 million from $15.1 million; nonperforming assets increased to 0.62% of assets from 0.48%. The allowance was $19.5 million, or 0.70% of net loans, compared with 0.80% a year earlier. Net charge-offs were $6.3 million, or 0.24% of average loans.
- Cash flow and liquidity: Operating cash flow was $51.9 million; investing cash outflow was $368.6 million; financing cash inflow was $464.1 million. Cash and cash equivalents increased by $147.4 million to $193.0 million. CNB reported approximately $422.5 million of remaining FHLB borrowing capacity and no short-term borrowings at year-end.
- Debt and capital: FHLB and other borrowings totaled $227.9 million and subordinated debentures $70.6 million. Consolidated total risk-based capital was 12.51%, common equity Tier 1 was 9.32%, and leverage was 7.86%. The Bank was classified as well capitalized by regulators.
- Dividends and shares: Dividends declared were $0.68 per share; the payout ratio was 25.8%. The company sold 52,568 shares for approximately $1.63 million through a new at-the-market offering during 2019.
Material changes versus 2018
- Asset growth was supported by loan growth and strong deposit gathering, especially savings deposits, which increased 32.2%.
- Non-interest income included $2.5 million from securities gains, trading-security gains and the sale of Visa Class B shares, compared with a $0.45 million combined loss in 2018. Management reported underlying non-interest income growth of 10.9% excluding those items.
- Non-interest expenses increased 10.3%, including higher compensation and incentive costs, staffing and costs to serve a larger customer base.
- Cash and cash equivalents rose substantially, from $45.6 million to $193.0 million. Net interest margin, however, declined by 8 basis points.
- Nonperforming assets increased, primarily due to a commercial and industrial borrower relationship classified as nonaccrual amid uncertainty following the borrower’s death. The loan was current at year-end, and management stated that no loss was expected based on information then available.
Outlook, risks and unusual items
- Management expected robust loan growth in 2020 and believed the company was positioned to sustain core earnings. It also anticipated higher non-interest costs as the business grew, while expecting growth in earning assets and non-interest income to more than offset those costs. These statements are forward-looking, not guaranteed results.
- In December 2019, CNB agreed to acquire Bank of Akron, which had $388.9 million in assets and $339.7 million in deposits at September 30, 2019. The transaction, subject to shareholder and regulatory approvals, was expected to close in the third quarter of 2020. At least 75% of Akron shares are to be exchanged for CNB stock, subject to the agreement’s election and proration terms.
- CNB adopted the expected-credit-loss standard (CECL) effective January 1, 2020. Based on its fourth-quarter parallel run, management estimated an initial increase of approximately 20%–30% in the allowance for credit losses; the actual adjustment could differ with economic forecasts and portfolio composition.
- Key risks include regional economic and real-estate weakness, commercial credit exposure, loan-loss-estimate uncertainty, interest-rate and funding-cost changes, deposit competition, securities valuation, regulation, cybersecurity, and the transition away from LIBOR. Management described the balance sheet as asset-sensitive in the short term; modeled rate scenarios showed varying effects on net interest income.
- A Pennsylvania sales-tax assessment was settled in December 2019 for $60,000 plus $5,000 interest. After payments and reversal of previously recognized expense, the filing reports no material pending legal proceedings apart from routine matters.
- Auditors issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of year-end.
Important facts for investors to verify
- Whether the Bank of Akron acquisition closed as planned, its final consideration and share issuance, and realized integration costs or benefits.
- The actual CECL adoption adjustment compared with management’s estimated 20%–30% allowance increase.
- Subsequent credit performance of the nonaccrual borrower relationship, commercial real-estate exposures, and trends in nonperforming assets, charge-offs and reserve coverage.
- Whether deposit growth can be sustained at acceptable cost and how funding costs affect net interest margin and earnings.
- The use and dilution impact of the $40 million at-the-market stock offering, which had generated approximately $1.63 million by year-end 2019.
- CNB’s progress in managing LIBOR-linked loans, derivatives and borrowings ahead of benchmark replacement.