CNB Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts are in thousands of dollars unless stated otherwise. The filing is unaudited; balance-sheet comparisons are to December 31, 2019.
Business and financial performance
CNB is a regional bank holding company serving markets in Pennsylvania, Ohio and western New York. The quarter was shaped by the COVID-19 downturn, lower interest rates, borrower support programs and credit-loss provisioning.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $29.9 million | $28.8 million | $59.9 million | $56.6 million |
| Provision for loan losses | $5.7 million | $1.8 million | $8.8 million | $3.1 million |
| Non-interest income | $7.9 million | $6.8 million | $13.3 million | $12.9 million |
| Non-interest expense | $22.2 million | $22.0 million | $43.9 million | $43.2 million |
| Net income | $8.2 million | $9.8 million | $17.1 million | $19.2 million |
| Diluted EPS | $0.54 | $0.64 | $1.11 | $1.26 |
- Q2 total revenue was $37.9 million, up 6.5%; first-half revenue was $73.2 million, up 5.4%. Higher revenue did not offset the larger credit provision, and net income declined year over year.
- Net interest margin, fully taxable-equivalent, was 3.14% for Q2 and 3.31% for the first half, versus 3.76% in both 2019 periods. Excluding PPP-related assets, the reported non-GAAP margins were 3.51% and 3.50%, respectively.
- Q2 return on average assets was 0.80% and return on average equity 10.30%, down from 1.18% and 14.05%. The efficiency ratio improved to 57.76% from 60.35%.
- Operating cash flow was $14.6 million for the first half, compared with $18.6 million a year earlier. Investing activities used $224.0 million; financing activities provided $679.9 million. Cash and cash equivalents rose to $663.3 million from $193.0 million.
Balance sheet, credit and liquidity
- Total assets were $4.47 billion, up from $3.76 billion; total loans were $3.03 billion, compared with $2.81 billion. Total deposits rose 15.9% to $3.60 billion. Growth includes substantial PPP-related balances.
- Shareholders’ equity was $330.3 million. Total risk-based capital was 13.11%, Tier 1 capital 10.48%, common equity Tier 1 9.78%, and the leverage ratio 7.55%. Tangible common equity to tangible assets was 6.58% (7.30% excluding PPP and PPPLF effects, a non-GAAP measure).
- Long-term borrowings were $416.3 million, versus $227.9 million at year-end; subordinated debentures were $70.6 million. CNB had $223 million outstanding under the Paycheck Protection Program Lending Facility (PPPLF). Management reported approximately $525 million of FHLB borrowing capacity and considered liquidity adequate.
- The allowance for loan losses increased to $24.5 million from $19.5 million; allowance to loans was 0.81%, or 0.87% excluding PPP loans. First-half net charge-offs were $3.7 million, versus $1.4 million. Nonperforming assets were $30.4 million, or 0.68% of assets (0.80% excluding PPP-related effects).
- Nonaccrual loans increased to $29.3 million from $21.7 million at year-end. Management cited a commercial real estate relationship of approximately $9.7 million placed on nonaccrual after a covenant violation. The allowance included a $909,000 COVID-related qualitative adjustment.
Material changes, outlook and risks
- COVID-19 and the Federal Reserve’s March rate cuts pressured asset yields and margins. Lower funding costs partly offset this. Management attributed the increase in provisioning primarily to economic and unemployment assumptions, COVID-related uncertainty and specific credit factors.
- At June 30, CNB reported 1,463 loans totaling $626 million with payment deferrals of up to six months. It also had approximately $226 million of PPP loans outstanding across 1,898 relationships, with about $8.8 million in deferred processing fees.
- Management identified hospitality, restaurants and acquisition, development and construction lending as areas to monitor. Hotels/motels exposure was $179 million and restaurant/fast-food exposure $26.3 million, excluding PPP; funded ADC exposure was $159 million, with $160 million of unfunded commitments.
- CNB delayed adoption of the current expected credit loss standard under CARES Act relief and continued using the incurred-loss model. Management’s pre-adoption estimate was a 20–30% increase in the allowance, subject to further evaluation.
- The Bank of Akron acquisition closed July 17, 2020, after quarter-end, and is not included in Q2 results. Akron reported $471 million of assets, $329 million of loans and $426 million of deposits as of June 30. Consideration was approximately $40.8 million; purchase-price allocation was still underway. CNB incurred $534,000 of merger expenses in the first half.
- The at-the-market share offering program was terminated during Q2; prior to termination, 168,358 shares had been sold for approximately $5.1 million gross proceeds. The quarterly cash dividend remained $0.17 per share.
- No formal earnings guidance is provided in the supplied filing text. Management said the pandemic’s ultimate financial and operational impact could not be estimated with reasonable certainty. Risks include worsening borrower credit, collateral values, liquidity, cyber and operational disruptions, and uncertainty in economic recovery.
Investor verification points
- Track deferral expirations, PPP forgiveness and fee recognition, and whether borrower performance deteriorates after relief ends.
- Review nonperforming loans, charge-offs, criticized commercial credits and allowance adequacy as economic assumptions evolve.
- Separate core net interest performance from PPP/PPPLF balances and from securities gains; verify margin trends as rates and funding costs change.
- Assess the Akron acquisition’s final purchase accounting, integration costs, dilution and contribution to earnings after closing.
- Confirm liquidity, regulatory capital and tangible capital measures, noting PPP-related effects and that certain adjusted measures are non-GAAP.