CNB Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unless stated otherwise, dollar amounts below are in millions. Comparisons are with Q2 or the first six months of 2020, as applicable. CNB is a regional bank holding company; its reported results include Bank of Akron, acquired in July 2020.
Financial performance
| Metric | Q2 2021 | Comparison |
|---|---|---|
| Net interest income | $38.3 | Up 27.9% from $29.9 |
| Net interest margin, fully tax-equivalent | 3.28% | Up 14 basis points from 3.14% |
| Provision for credit losses | $2.0 | Down from $5.7 |
| Non-interest income | $7.9 | Reported total down 1.2%; excluding prior-year securities gains, up 36.4% |
| Non-interest expense | $27.0 | Up 21.5% |
| Net income | $14.0 | Up 69.7% from $8.2 |
| Net income available to common shareholders; diluted EPS | $12.9; $0.76 | EPS up from $0.54 |
| Efficiency ratio | 57.91% | 57.76% in Q2 2020 |
| Return on average tangible common equity | 16.06% | Up from 11.71% |
For the first six months, net income was $28.2 million and diluted EPS was $1.54, versus $17.1 million and $1.11 in 2020. Net interest income increased 29.2% to $77.4 million; fully tax-equivalent net interest margin rose to 3.42% from 3.31%. Revenue (net interest income plus non-interest income) rose 27.7% to $93.5 million. PPNR, a non-GAAP measure, was $38.8 million, up 32.2%. The six-month efficiency ratio was 58.04%, compared with 59.01%.
Financial position, funding and cash flow
- Total assets were $5.15 billion at June 30, 2021, up from $4.73 billion at year-end 2020. Loans were $3.47 billion, up about $98 million; deposits were $4.50 billion, up 7.7%.
- Cash and cash equivalents totaled $737.7 million, including $682.9 million of excess liquidity at the Federal Reserve. Management attributed the increase largely to stimulus-related and organic deposit growth.
- The allowance for credit losses was $36.9 million, or 1.06% of loans (1.11% excluding PPP loans). Shareholders’ equity was $429.9 million. Total risk-based capital was 16.83%, Tier 1 capital 12.00%, CET1 9.71%, and the leverage ratio 8.16%.
- Tangible common equity to tangible assets was 6.42%, down from 6.70% at year-end; excluding PPP loans and excess Federal Reserve liquidity, it was 7.66%, versus 7.76%. These are non-GAAP measures.
- Subordinated debt and debentures totaled $154.1 million. In June, CNB issued $85 million of 3.25% fixed-to-floating subordinated notes due 2031, receiving approximately $83.5 million net. Management said proceeds were intended in part to redeem $50 million of existing subordinated debt when redeemable after October 15, 2021. CNB had no FHLB advances at quarter-end.
- For the six months, operating cash flow was $20.9 million, investing cash outflow was $214.5 million, and financing cash inflow was $398.5 million. Cash and cash equivalents increased by $205.0 million.
Material changes and drivers
- Q2 earnings benefited from loan and earning-asset growth, a wider net interest margin, lower funding costs, and a lower credit-loss provision. The prior-year quarter included a $2.2 million gain on available-for-sale securities and a specific commercial loan reserve; these affect year-over-year comparisons.
- Lower deposit costs and repayment of FHLB borrowings helped reduce the cost of interest-bearing liabilities, although earning-asset yields declined in the lower-rate environment. Q2 net interest income included $1.6 million of PPP fee recognition; six-month results included $4.4 million.
- Expenses increased with the Bank of Akron acquisition, hiring in Cleveland and Buffalo, technology investment, and—in the six-month period—deferred compensation plan value changes. The acquisition also affects comparability of the periods.
- Common dividends were $0.17 per share for Q2, unchanged from the year-earlier quarter. CNB also paid preferred dividends after none were reported in the 2020 comparison.
Outlook, risks and contingencies
- Management expects expenses to rise with growth, but believes growth strategies should increase earning assets and non-interest income enough to more than offset those costs in 2021 and beyond. No specific earnings or margin guidance is provided.
- COVID-19’s ultimate effects remained uncertain. At quarter-end, $55.6 million of loans had payment deferrals; management expected most to resume regular payments by year-end 2021. PPP loans outstanding were $145.9 million across 1,442 relationships.
- Management identified hotels/motels ($208.7 million) and restaurants/fast food ($31.7 million) as potentially higher-risk industries. It cited loan growth, net charge-offs and economic uncertainty in determining the allowance, and warned that worsening conditions could require additional provisions.
- Credit quality indicators to monitor include nonperforming assets of $33.2 million (0.64% of assets), compared with $31.5 million (0.67%) at year-end 2020; loans more than 89 days past due and still accruing were $0.6 million. The allowance and credit-loss provision comparisons require care because CECL and the prior incurred-loss methodology are not directly comparable.
- Interest-rate risk, deposit attrition, competition, economic conditions, loan portfolio quality and pandemic developments are among the disclosed risks. The company’s model showed estimated net interest income changes of +26.0% for a 400-basis-point rise and −12.1% for a 200-basis-point decline; management cautioned actual outcomes may differ.
- No material changes to previously disclosed risk factors were reported; no material pending legal proceedings were identified beyond routine matters.
Important facts for investors to verify
- Whether PPP fee recognition and loan forgiveness sustain reported net interest income and margin as deferred fees are earned.
- Trends in criticized, nonperforming and deferred loans, especially commercial real estate, hotels/motels and restaurants, and whether the allowance remains adequate.
- Deposit growth, excess liquidity deployment and the effect of future interest-rate changes on asset yields and funding costs.
- Execution and cost benefits of the Bank of Akron acquisition and growth investments, alongside expense growth and efficiency.
- Use of the subordinated-note proceeds, any redemption of existing debt, and subsequent capital and liquidity levels.
- Reconcile non-GAAP measures to GAAP disclosures and review the full filing for definitions and any apparent data inconsistencies.