CNB Financial Corporation — Q1 2023 Form 10-Q
Business context and reporting period. CNB Financial Corporation is a Pennsylvania-based bank holding company whose subsidiaries provide banking, wealth management, and consumer finance services across Pennsylvania, Ohio, New York, and Virginia. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless stated otherwise.
Key financial results and position
| Metric | Q1 2023 | Comparison |
|---|---|---|
| Net interest income | $47.6 | Up 11.8% from $42.6 in Q1 2022 |
| Net interest margin | 3.81% GAAP; 3.79% fully tax-equivalent | 3.47% GAAP; 3.48% fully tax-equivalent in Q1 2022 |
| Net income | $16.5 | Up from $15.2 in Q1 2022 |
| Net income available to common shareholders | $15.4 | Up from $14.2 in Q1 2022 |
| Diluted earnings per share | $0.73 | Down from $0.84 in Q1 2022 |
| Provision for credit losses | $1.3 | Down from $1.6 in Q1 2022 |
| Non-interest income / expense | $8.0 / $34.0 | Income down 16.7%; expense up 6.6% year over year |
| Total assets | $5,583.3 | Up from $5,475.2 at year-end 2022 |
| Loans, net of allowance | $4,257.3 | Up from $4,231.7 at year-end 2022 |
| Total deposits | $4,754.1 | Up 2.8% from $4,622.4 at year-end 2022 |
| Cash and cash equivalents | $188.6 | Up from $106.3 at year-end 2022 |
| Shareholders’ equity | $546.4 | Up 3.0% from $530.8 at year-end 2022 |
Operating cash flow was $4.8 million, compared with $3.8 million in Q1 2022. Investing activities used $16.6 million, versus $300.6 million used in Q1 2022; financing activities provided $94.1 million, versus $30.5 million used. Cash increased by $82.3 million during the quarter.
The allowance for credit losses was $44.0 million, or 1.02% of loans, versus $43.4 million and 1.02% at year-end. Nonperforming loans were $22.1 million and nonperforming assets were $23.7 million, or 0.42% of total assets. The allowance equaled 209.54% of nonaccrual loans.
At March 31, total risk-based capital was 15.97%, common equity Tier 1 was 11.35%, and the Tier 1 leverage ratio was 10.66%; the company reported that all capital ratios exceeded regulatory “well-capitalized” levels. Tangible common equity to tangible assets was 8.02% (non-GAAP). Outstanding short-term FHLB borrowings were $102.1 million; subordinated notes and debentures totaled approximately $104.7 million.
Material changes versus comparable periods
- Net interest income grew as loan balances and yields increased with higher interest rates. The fully tax-equivalent net interest margin increased to 3.79% from 3.48%.
- Common earnings rose, but diluted EPS fell because the September 2022 stock offering increased the share count; the offering issued 4.26 million shares at $23.50 per share.
- Non-interest income declined primarily due to lower pass-through income from SBIC investments. Non-interest expense increased, primarily reflecting technology investment.
- Deposits increased overall, with growth in savings and certificates of deposit. Noninterest-bearing demand deposits declined 9.8% from year-end, partly reflecting repayment of $61.4 million in cash-secured short-term bridge loans.
- Loans excluding syndicated and PPP-related balances increased $34.7 million year to date, or 0.8%; management cited growth in Columbus, Buffalo, Southwest Virginia, and private banking. Syndicated loans declined $8.6 million.
- Accumulated other comprehensive loss improved to $46.7 million from $52.5 million, primarily reflecting a period gain in available-for-sale securities. Reported net unrealized losses on available-for-sale and held-to-maturity securities were approximately $84.9 million, down from $99.0 million at year-end.
Outlook, management commentary, and risks
- Management provided no quantitative earnings or revenue guidance. It expects expenses to rise with growth, while stating that growth strategies are expected to increase earning assets and revenue enough to more than offset expense increases in 2023 and beyond.
- Management cites rising rates, competition for deposits, economic uncertainty, persistent inflation, supply-chain challenges, and potential recessionary conditions as factors affecting funding costs, credit quality, and performance. It says it will continue monitoring expected credit losses.
- Management reported $188.6 million of cash and cash equivalents, including $132.7 million at the Federal Reserve, and approximately $2.057 billion of net available borrowing capacity. It estimated on-hand and contingent liquidity at 2.1 times adjusted estimated uninsured deposits. Estimated uninsured deposits were approximately $1.1 billion, or 22% of deposits, after excluding affiliate and pledged-collateralized balances; the unadjusted estimate was $1.6 billion, or 33%.
- Available-for-sale securities had $54.4 million of unrealized losses and held-to-maturity securities had $30.6 million. Management attributed losses to market interest-rate movements, stated that it did not intend to sell and was not more likely than not to be required to sell before recovery, and reported no credit-related impairment. Management also stated regulatory capital ratios would remain above well-capitalized levels if unrealized losses were fully recognized.
- Management disclosed an added risk factor: banking-industry failures and confidence concerns could prompt deposit outflows, raise funding costs, constrain liquidity or lending, affect capital and earnings, or lead to increased regulation. It also noted potential impacts from changing credit quality, interest rates, deposit attrition, competition, and economic conditions.
- Credit metrics were broadly stable, but non-pass commercial loans increased to $105.4 million from $91.4 million at year-end, including growth in substandard commercial and industrial balances. Q1 net charge-offs were $686,000, or 0.07% annualized of average loans, versus $528,000, or 0.06%, a year earlier.
- Off-balance-sheet commitments included $598.2 million of commitments to extend credit at variable rates, $781.7 million of unused variable-rate lines, and $19.9 million of standby letters of credit in total across fixed and variable rates. These amounts are contractual maximums and are not necessarily expected cash requirements. Management said ordinary-course litigation is not expected to have a material adverse effect.
- The company repurchased 100,000 shares in February under its authorization. Subsequent to quarter-end, it repurchased 54,168 shares in April at an average price of $18.62.
Important facts for investors to verify
- Deposit stability and costs: track uninsured deposit levels, brokered and reciprocal deposits, the mix of interest-bearing funding, and deposit pricing.
- Liquidity and securities exposure: verify available borrowing capacity, collateral availability, and whether unrealized securities losses could become realized under funding stress.
- Credit trends: monitor commercial and industrial risk-rating migration, criticized loans, nonperforming assets, modifications to borrowers in financial difficulty, and allowance adequacy.
- Earnings quality and dilution: assess the sustainability of margin improvement, lower SBIC-related income, technology and other expense growth, and the effect of the larger share base on EPS.
- Capital and funding: review regulatory capital, subordinated debt terms, share repurchases, and the sensitivity of results to further rate changes or deposit competition.