CNB Financial Corporation — Q3 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. CNB is a Pennsylvania-based financial holding company whose businesses include community banking, consumer lending, securities, insurance, and wealth management. Unless noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $23.5 | $21.9 | $67.7 | $60.3 |
| Provision for loan losses | $1.4 | $0.6 | $3.6 | $2.0 |
| Non-interest income | $5.0 | $4.5 | $15.9 | $13.1 |
| Non-interest expense | $17.6 | $17.1 | $52.4 | $50.7 |
| Net income | $7.2 | $6.4 | $20.4 | $15.5 |
| Diluted EPS | $0.47 | $0.44 | $1.34 | $1.07 |
- Q3 net income increased about 13%; nine-month net income rose about 32%. Nine-month diluted EPS increased about 25%.
- Fully tax-equivalent net interest margin was 3.82% in Q3 2017 versus 3.88% a year earlier; for the nine-month period it was 3.80% versus 3.76%. Nine-month net interest spread rose to 3.69% from 3.66%.
- Nine-month annualized return on assets was 1.02% and return on equity 11.48%, compared with 0.87% and 9.78%, respectively, in 2016. Q3 figures were 1.06% and 11.88%, versus 1.01% and 11.92%.
- At September 30, assets were $2.745 billion, net loans $2.081 billion, deposits $2.061 billion, and shareholders’ equity $244.4 million. Since year-end 2016, assets increased 6.7%, net loans 12.0%, and deposits 2.1%.
- Cash and cash equivalents were $35.7 million, up from $29.2 million at year-end. Nine-month operating cash flow was $19.9 million (versus cash used of $21.1 million in 2016); investing used $173.1 million, while financing provided $159.7 million.
- Borrowings at quarter-end included $141.7 million short-term borrowings, $200.4 million FHLB and other long-term borrowings, and $70.6 million subordinated debentures. Long-term borrowings increased from $102.9 million at year-end, including a June conversion of $140 million of short-term funding into FHLB advances with a 3.7-year weighted average maturity and 1.87% weighted average rate.
- Capital ratios improved from year-end 2016: total risk-based capital 14.45% (14.05%), Tier 1 11.12% (10.49%), common equity Tier 1 10.14% (9.41%), and leverage 8.44% (7.85%). Tangible common equity to tangible assets was 7.54%; tangible book value per share was $13.34. Cash dividends were $0.165 per share for Q3 and $0.495 for nine months, unchanged year over year.
Material changes and notable items
- Loan growth was funded in part by securities portfolio reduction: available-for-sale and trading securities together declined $70.0 million from year-end. Management reported $225.0 million, or 12.0%, growth in loans net of unearned discount.
- The nine-month results included $1.543 million of realized gains on available-for-sale securities, including $1.4 million from selling two pooled trust preferred securities, and a $536,000 gain on the Mt. Hope, Ohio branch sale. Q3 included $301,000 of bank-owned life insurance death-benefit proceeds above cash surrender value.
- 2016 nine-month results included $1.5 million of long-term debt prepayment penalties, $1.6 million of core-processing conversion costs, and $481,000 of merger costs. These items did not recur in 2017. Q3 2016 also included $308,000 of merger and conversion costs.
- In February, CNB issued 834,896 shares at a weighted average price of about $23.96, raising approximately $19.3 million net. The company said proceeds were for general purposes, including loan growth, liquidity, and working capital.
- CNB sold its Mt. Hope branch in May, transferring $7.8 million of loans and $7.4 million of deposits. It also closed two branches in June; related premises and equipment write-downs were $108,000 in Q2.
Outlook, risks, and contingencies
- Management expected solid loan demand and continued loan growth through the remainder of 2017, and believed the company was positioned to sustain core earnings. It expected growth-related non-interest costs to be more than offset by increased earning assets and non-interest income. No quantified earnings guidance was provided.
- Credit quality bears monitoring: nonperforming assets were $20.6 million, or 0.75% of assets, versus $16.4 million, or 0.64%, at year-end 2016. Nonaccrual loans totaled $19.8 million, compared with $15.3 million at year-end. The allowance for loan losses was $17.8 million, or 0.85% of loans net of unearned discount; nine-month net charge-offs were $2.0 million.
- A commercial real estate loan moved to nonaccrual in Q1 after further borrower deterioration. The related 2017 provision was approximately $1.3 million. Management said the allowance was adequate. Troubled debt restructurings totaled $17.5 million across 18 loans, up from $11.8 million across 15 loans at year-end.
- Interest-rate risk is a key exposure. The company’s model estimated one-year net interest income changes of -5.0% for a 400-basis-point increase, -3.3% for +300, -0.7% for +100, and -1.6% for -100. Management cautioned that actual results could vary and model assumptions are uncertain.
- Off-balance-sheet credit commitments included $56.3 million fixed-rate and $228.4 million variable-rate loan commitments, $114.5 million of unused variable-rate lines, and $14.2 million of standby letters of credit. Management did not anticipate material losses, but commitments create potential credit exposure. The company had also committed $8.0 million to two investment funds and had invested $4.0 million by quarter-end.
- Management cited economic and competitive conditions, interest rates, loan quality and reserve adequacy, deposit attrition, funding costs, regulatory changes, and execution of acquisition and growth strategies among forward-looking risks. It stated liquidity was acceptable and supported by cash, funding access, and maturing securities and loans. Legal proceedings: none reported; no material risk-factor changes from the 2016 Form 10-K.
- The expected credit-loss accounting standard (ASU 2016-13) was still under evaluation; management expected adoption to increase the allowance, but the impact was not yet determined. Management said adoption of several other pending accounting standards was not expected to have a material effect, except lease accounting was expected to increase assets and liabilities, with amounts undetermined.
Most important facts for investors to verify
- Whether loan growth and management’s core-earnings outlook persist, and how much reported earnings depend on securities gains, branch-sale proceeds, and BOLI income.
- Trends in nonperforming assets, troubled restructurings, charge-offs, the commercial real estate exposure, and allowance adequacy as the portfolio expands.
- Funding costs and net interest margin following the shift to longer-term FHLB advances and in changing interest-rate conditions.
- Capital and liquidity needs relative to continued loan growth, off-balance-sheet commitments, and the eventual impact of the expected-credit-loss standard.
- Share dilution and use of equity-offering proceeds; the filing reported 15,283,647 shares outstanding as of November 6, 2017.