CNB Financial Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet figures are as of March 31, 2017 and are compared with December 31, 2016 unless noted. Dollar amounts are in millions except per-share data. CNB is a regional banking company operating primarily in Pennsylvania, Ohio, and New York.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Interest and dividend income | $25.10 | $22.07 | Up 13.8% |
| Net interest income | $21.20 | $18.94 | Up 11.9% |
| Net interest margin, fully tax-equivalent | 3.67% | 3.67% | Unchanged |
| Provision for loan losses | $1.02 | $1.20 | Lower year over year |
| Non-interest income | $5.77 | $3.78 | Includes $1.38 securities gain |
| Non-interest expense | $17.03 | $14.81 | Up 15.0% |
| Net income | $6.48 | $5.02 | Up 29.1% |
| Diluted earnings per share | $0.43 | $0.35 | Up from prior-year quarter |
| Annualized return on assets / equity | 1.00% / 11.39% | 0.87% / 9.65% | Both improved |
The $1.38 million realized gain arose from selling two pooled trust preferred securities. Excluding securities transactions, management reported non-interest income of $4.2 million versus $3.8 million a year earlier. Wealth and asset management fees rose 20.5% to $871,000. The increase in expenses reflected higher staffing and occupancy costs; Q1 2017 also included $141,000 of one-time occupancy costs from closing two Holiday Financial offices. Q1 2016 included $109,000 of merger and core-processing conversion costs.
Financial position, funding and liquidity
- Total assets were $2.592 billion, up $18.5 million from year-end. Net loans were $1.892 billion, up $35.2 million; management reported loan growth of 1.9% during the quarter.
- Deposits totaled $2.025 billion, up $8.0 million. Certificates of deposit declined 6.8% to $213.7 million, while savings balances increased 2.7% to $976.6 million.
- Cash and cash equivalents were $28.4 million, compared with $29.2 million at year-end. Securities available for sale and trading securities together fell about $20.0 million; management said proceeds were used primarily to fund loan growth.
- Short-term borrowings were $143.6 million, versus $134.1 million; FHLB and other long-term borrowings were $85.5 million, versus $102.9 million. Subordinated debentures were $70.6 million. Management stated that liquidity needs were met by cash, available funding sources, and loans and securities maturing within one year.
- Operating cash flow was $226,000, down from $5.70 million in Q1 2016. Investing activities used $16.80 million, while financing activities provided $15.76 million. The company received $19.3 million net from its February stock offering and repaid $17.5 million of long-term borrowings.
- Regulatory capital ratios improved from year-end: total risk-based capital 15.12%, Tier 1 11.58%, common equity Tier 1 10.51%, and leverage 8.50%. Tangible common equity to tangible assets was 7.56%; tangible book value per share was $12.61.
Credit quality and material changes
- The allowance for loan losses was $16.5 million, or 0.87% of loans net of unearned discount, compared with 0.87% at year-end and 1.04% a year earlier. Q1 net charge-offs were $800,000, or 0.17% of average loans annualized, versus $1.2 million and 0.30% in Q1 2016.
- Nonaccrual loans were $20.0 million, compared with $12.3 million at March 31, 2016. Nonperforming assets were $21.6 million, or 0.83% of assets, versus $13.1 million and 0.57% a year earlier.
- One previously impaired commercial real estate loan was moved to nonaccrual in Q1 following further borrower deterioration; the related additional provision was $553,000. Management considered the allowance adequate. The filing reports no new troubled debt restructurings during the quarter; existing restructured loans were performing under modified terms.
- In February, CNB issued 834,896 shares through an at-the-market offering at a weighted average price of about $23.96, raising approximately $19.3 million net. The proceeds are intended for general corporate purposes, including loan growth, liquidity, and working capital.
Outlook, risks and contingencies
Management expected loan demand to remain solid and loans to grow through the rest of 2017. It anticipated higher non-interest costs as the company grows, but expected growth in earning assets and non-interest income to more than offset those increases, and stated that it believed core earnings could be sustained during 2017. No quantified earnings or revenue guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
Interest-rate risk is a key exposure. The company’s model, using December 31, 2016 data, estimated that a 400-basis-point rate increase would reduce one-year net interest income by 4.9%, while a 100-basis-point increase would raise it by 0.7%; management noted that actual results could differ significantly. Risks also include loan quality and reserve estimates, funding costs and deposit attrition, competition, economic conditions, and regulatory or legal changes. Off-balance-sheet commitments at March 31 included $256.8 million of commitments to make loans, $112.0 million of unused variable-rate lines, and $3.6 million of standby letters of credit; the company said material losses were not anticipated. Legal proceedings were reported as none, and no material changes to previously disclosed risk factors were reported.
The filing also identifies future accounting changes: management was evaluating the expected-credit-loss standard, with the financial impact not yet determined, and anticipated that the lease standard would increase assets and liabilities, though amounts were not yet determined.
Key facts for investors to verify
- Whether loan growth continues and whether the rise in nonaccrual loans and nonperforming assets stabilizes or worsens.
- Whether the $553,000 provision related to the commercial real estate borrower is sufficient and how allowance coverage changes as the portfolio expands.
- How much of earnings growth is repeatable after excluding the $1.38 million securities gain, and whether expense growth moderates.
- Whether deposits and liquidity remain adequate as loan demand grows, and how the company uses the stock-offering proceeds.
- How interest-rate changes affect net interest income, funding costs, and the subordinated debt expense.