CNB Financial Corporation — Q2 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. CNB Financial is a regional banking company operating through CNB Bank and other financial-services subsidiaries, primarily in Pennsylvania, Ohio, and western New York. Unless noted, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $22.99 | $19.40 | $44.19 | $38.35 |
| Provision for loan losses | $1.13 | $0.22 | $2.15 | $1.42 |
| Non-interest income | $5.09 | $4.82 | $10.86 | $8.60 |
| Non-interest expense | $17.80 | $18.75 | $34.83 | $33.57 |
| Net income | $6.68 | $4.07 | $13.16 | $9.08 |
| Diluted earnings per share | $0.44 | $0.28 | $0.87 | $0.63 |
| Fully tax-equivalent net interest margin | 3.87% | 3.73% | 3.77% | 3.70% |
- Q2 annualized return on assets was 1.01% and return on equity was 11.17%, versus 0.70% and 7.72%, respectively, a year earlier. For the first half, the corresponding figures were 1.00% and 11.28%, versus 0.79% and 8.68%.
- Q2 net income increased 64% year over year; first-half net income increased 45%. Results included a $0.54 million branch-sale gain and securities gains of $0.16 million in Q2 and $1.54 million for the first half.
Financial position, cash flow, and credit
- At June 30, total assets were $2.679 billion, up from $2.574 billion at December 31, 2016. Net loans were $2.004 billion, up $146.4 million; total deposits were $2.077 billion, up $59.3 million. Available-for-sale securities declined to $453.1 million from $495.8 million, with proceeds used primarily to fund loan growth.
- Cash and cash equivalents were $33.0 million, versus $29.2 million at year-end. First-half operating cash flow was $11.7 million; investing activities used $107.0 million, chiefly reflecting $148.1 million of net loan originations and payments; financing activities provided $99.2 million. Cash increased $3.9 million.
- Borrowings at June 30 included $45.0 million short-term, $218.0 million FHLB and other long-term, and $70.6 million subordinated debt. In June, $140 million of short-term advances were converted into FHLB advances with a 3.7-year weighted-average maturity and 1.87% weighted-average rate. Management said this would raise near-term funding costs but improve duration matching and reduce rate risk.
- Shareholders’ equity was $240.3 million, compared with $211.8 million at year-end. Total risk-based capital was 14.71%; Tier 1 capital 11.29%; common equity Tier 1 10.27%; and leverage 8.45%. The company raised $19.3 million net through an at-the-market stock issuance in February. First-half dividends were $0.33 per share; the payout ratio was 37.9%.
- The allowance for loan losses was $17.3 million, or 0.85% of loans net of unearned discount, versus $16.3 million and 0.87% at year-end. First-half net charge-offs were $1.21 million, down from $2.17 million in the first half of 2016. Nonperforming assets were $21.2 million, or 0.79% of assets, versus $16.4 million and 0.64% at year-end.
- Nonaccrual loans were $20.0 million at June 30, including $11.6 million of commercial mortgages, versus $15.3 million at year-end. One commercial real estate loan was placed on nonaccrual after deterioration in the borrower’s financial condition; related 2017 provision was approximately $1.2 million.
Material changes and unusual items
- Loan growth was 7.9% in the first half. Commercial, industrial, and agricultural loans rose to $636.8 million from $567.8 million at year-end; commercial mortgages rose to $618.3 million from $574.8 million.
- Q2 2017 non-interest expense was lower than the prior-year quarter, which included $1.5 million of borrowing prepayment penalties, $1.5 million of core-processing conversion costs, and $0.17 million of merger costs. First-half 2016 included $3.3 million of these nonrecurring costs. In 2017, salaries and benefits increased with staffing and growth, while occupancy costs rose with acquired and newly opened locations.
- CNB sold its Mt. Hope, Ohio branch on May 19, transferring $7.8 million of loans and $7.4 million of deposits and recognizing a $0.54 million gain. It also closed two branches in June; related premises and equipment write-downs were $0.11 million. The filing says closure expenses were otherwise not significant.
- The company sold two structured pooled trust preferred securities during the first half, generating $1.4 million of the $1.54 million securities gains. Available-for-sale securities declined by $42.8 million from year-end.
Outlook, risks, and contingencies
- Management expected solid loan demand and loan growth for the remainder of 2017, and believed the company was positioned to sustain core earnings. It expected growth in earning assets and non-interest income to more than offset higher non-interest costs. These are forward-looking expectations, not firm guidance.
- Management stated that current liquidity was acceptable and supported by cash, traditional funding sources, FHLB access, and securities and loans maturing within one year. The filing does not provide a formal earnings or revenue forecast.
- Key stated risks include economic and competitive conditions, interest-rate changes and funding costs, loan and investment portfolio quality, allowance adequacy, deposit attrition, regulatory or legal developments, and acquisition integration or benefits. Management noted that commercial lending growth carries greater sensitivity to borrowers’ operating environments.
- Off-balance-sheet commitments at June 30 included $283.9 million of commitments to make loans, $113.0 million of unused variable-rate lines, and $13.8 million of standby letters of credit. The company had committed $8.0 million to two SBIC funds and invested $3.05 million by June 30.
- Management is evaluating the expected-credit-loss standard (ASU 2016-13), which it expects to increase the allowance upon adoption; the financial impact was not yet determined. Legal proceedings were reported as none, and the company reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the increase in nonaccrual commercial mortgages and nonperforming assets remains contained, and whether the allowance adequately reflects credit risk, especially the impaired commercial real estate exposure.
- How loan growth, credit quality, and funding costs evolve after the $140 million shift to longer-term FHLB advances and the $19.3 million equity raise.
- How much of reported earnings growth is recurring, given the branch-sale and securities gains and the unusually high prior-year comparison costs.
- Whether management’s loan-growth and core-earnings expectations are realized, and how rising rates affect margins, deposits, and borrowing expenses.
- The eventual allowance and capital effects of the expected-credit-loss accounting standard, plus potential funding needs from loan commitments, credit lines, and SBIC commitments.