CNB Financial Corporation — 2018 Form 10-K Summary
Business context and reporting period
CNB Financial Corporation is a Pennsylvania-based financial holding company operating primarily through CNB Bank, with consumer lending subsidiary Holiday and other financial subsidiaries. The filing covers the fiscal year ended December 31, 2018, with comparisons principally to 2017. The Bank operated 42 full-service branches across Pennsylvania, Ohio, and New York; a new BankOnBuffalo branch opened in Niagara Falls during 2018.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net income | $33.7 million | $23.9 million |
| Diluted EPS | $2.21 | $1.57 |
| Net interest income | $104.9 million | $91.5 million |
| Net interest margin, fully taxable-equivalent | 3.76% | 3.82% |
| Provision for loan losses | $6.1 million | $6.7 million |
| Non-interest income | $20.7 million | $21.4 million |
| Non-interest expense | $79.3 million | $70.0 million |
| Return on average assets / equity | 1.12% / 13.46% | 0.89% / 9.97% |
Net income rose about 41%, reflecting higher net interest income and a substantially lower effective tax rate. The 2018 effective tax rate was 16.2%, versus 34.2% in 2017; 2017 included $3.0 million of tax expense from remeasurement of deferred taxes after the federal corporate rate reduction. Net interest income increased 14.7%, while non-interest expense rose 13.3%. The margin narrowed as the cost of interest-bearing liabilities increased 30 basis points to 1.12%, faster than the 19-basis-point rise in earning-asset yield to 4.72%.
At year-end, total assets were $3.22 billion, up 16.4%; net loans were $2.455 billion, up 15.5%; and deposits were $2.611 billion, up 20.4%. Securities totaled $524.6 million, or 16.3% of assets. Cash and cash equivalents were $45.6 million. The loan-to-deposit ratio was 94.78%, compared with 98.99% in 2017.
Operating cash flow was $43.8 million; investing activities used $451.6 million, primarily reflecting net loan growth and securities purchases; financing activities provided $418.0 million, mainly from deposit growth. The allowance for loan losses was $19.7 million, 0.80% of net loans. Net charge-offs increased to $6.1 million from $3.3 million, or 0.26% versus 0.16% of average loans. Nonperforming loans improved to $18.1 million, 0.73% of loans, from $19.9 million, or 0.93%.
Total shareholders’ equity was $262.8 million. Consolidated regulatory ratios were 13.21% total risk-based capital, 10.33% Tier 1, 9.50% common equity Tier 1, and 7.87% leverage. The Bank was classified as well capitalized. Borrowings comprised $245.1 million of FHLB and other long-term borrowings and $70.6 million of subordinated debentures; approximately $317.6 million of FHLB borrowing capacity remained available. The Bank also had a $10 million unsecured line of credit, undrawn at year-end.
Material changes versus the prior comparable period
- Loans grew 15.5% and deposits grew 20.4%; savings deposits increased $342.9 million as management prioritized core deposit gathering.
- Net interest income increased $13.4 million, but the net interest margin declined six basis points to 3.76% as funding costs rose.
- Non-interest income decreased 3.3%, mainly because 2017 included securities-sale gains and a branch-sale gain. Excluding those items, 2018 non-interest income increased from $19.4 million to $20.7 million.
- Non-interest expense rose $9.3 million, including higher salaries and benefits and $2.2 million more incentive compensation. Management attributed the remaining increase primarily to business growth.
- Available-for-sale securities had $7.3 million of gross unrealized losses at year-end, versus $4.2 million in 2017; the resulting 2018 after-tax change in unrealized securities losses contributed to a $3.7 million other comprehensive loss.
- Capital ratios declined year over year, while book value per share increased to $17.28 from $15.98. The company declared $0.67 per share in dividends, versus $0.66.
Outlook, risks, contingencies, and unusual items
- Management expected strong 2019 loan growth, including continued Buffalo-market expansion and commercial lending growth in Pennsylvania and Ohio. It expected growth in earning assets and non-interest income to more than offset rising expenses, and said the Corporation was positioned to sustain core earnings. No numeric earnings or margin guidance was provided.
- Management identified interest-rate sensitivity, credit quality, local economic conditions, competition, liquidity and funding costs, regulatory change, cybersecurity, and execution of growth plans as important risks. The balance sheet was described as short-term asset-sensitive. Model scenarios showed net interest income increasing 4.9% with a 200-basis-point rise and decreasing 3.6% with a 200-basis-point decline; management cautioned actual results could differ.
- A commercial real estate loan experienced further deterioration: the Bank recorded a $1.9 million additional provision and a $3.3 million partial charge-off in 2018. The loan’s year-end book balance was $2.7 million with a $2.4 million specific allowance. Net charge-offs overall rose despite lower total provision expense.
- A Pennsylvania sales-tax assessment sought $1.163 million, including interest and penalties. The Corporation accrued $96,000, appealed the assessment, and stated that resolution could result in additional expense up to the full assessed amount.
- The Corporation adopted new revenue and financial-instrument guidance in 2018 without material financial-statement impact. It expected CECL, then scheduled for 2020 adoption, to affect credit-loss estimation; the impact had not yet been determined. Lease accounting adoption in 2019 was expected to add about $12.5 million of right-of-use assets and $13.3 million of lease liabilities, with no material net-income impact expected.
- The company disclosed significant LIBOR-linked loans, derivatives, and borrowings and warned that the announced post-2021 transition could affect valuation, pricing, models, and customer relationships.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective. No material pending legal proceedings were disclosed apart from ordinary-course matters and the tax assessment.
Important facts for investors to verify
- Whether the reported loan growth and 2019 expansion translate into durable earnings without further margin compression or disproportionate expense growth.
- Developments in the impaired commercial real estate credit, charge-offs, nonperforming loans, and the adequacy of the allowance.
- Deposit mix, deposit pricing, use of wholesale funding, and available liquidity as funding costs and loan demand change.
- The eventual outcome and potential financial exposure from the Pennsylvania sales-tax appeal.
- Management’s progress in implementing CECL and transitioning LIBOR-linked contracts, including quantified impacts when available.
- Changes in securities values and capital ratios, particularly given the increase in unrealized losses and year-over-year capital-ratio declines.