CNB Financial Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. CNB is a Pennsylvania-based financial holding company whose main subsidiary, CNB Bank, operates 47 full-service branches across Pennsylvania, Ohio, New York and Virginia, alongside lending, wealth-management and other financial businesses.
Financial performance and condition
- Earnings: Net income was $63.2 million; net income available to common shareholders was $58.9 million, or $3.26 per diluted share, versus $53.4 million, or $3.16 per diluted share, in 2021. Return on average equity was 13.86% (13.39% in 2021).
- Revenue and margins: Net interest income rose 18.7% to $189.7 million. Non-interest income was $34.8 million, up 4.0%. Net interest margin was 3.83%, versus 3.35% in 2021; fully tax-equivalent margin was 3.82%, versus 3.38%.
- Expenses and profitability: Non-interest expense increased 18.2% to $137.6 million, faster than non-interest income. The GAAP efficiency ratio was 61.32%, compared with 60.26% in 2021. Pre-provision net revenue, a non-GAAP measure, increased 13.1% to $86.8 million.
- Loans and credit: Period-end loans were $4.28 billion, up 17.6%; excluding PPP-related and syndicated loans, management reported growth of 18.9%. The allowance for loan losses was $43.4 million, or 1.02% of loans. Nonperforming assets were $23.5 million, or 0.43% of assets, compared with $20.3 million, or 0.38%, a year earlier. Net loan charge-offs were $2.1 million.
- Deposits, liquidity and borrowings: Deposits declined 2.0% to $4.62 billion; non-interest-bearing demand deposits increased 13.4%, while interest-bearing deposits declined. Cash and cash equivalents fell to $106.3 million from $732.2 million, primarily as funds supported loan growth and securities purchases. CNB had $132.4 million of short-term FHLB borrowings at year-end, versus none in 2021; stated FHLB borrowing capacity was approximately $757.8 million. Management cited deposits, loan and securities cash flows, wholesale funding and discount-window access as liquidity sources.
- Capital and equity: Shareholders’ equity increased 19.9% to $530.8 million. Consolidated total risk-based capital was 16.08%, common equity Tier 1 was 11.42%, and the leverage ratio was 10.74%; the Bank was classified as well capitalized. In September 2022, CNB issued 4.26 million common shares at $23.50 per share, receiving $94.1 million net. Tangible book value per share was $20.30 versus $20.22; GAAP book value per share was $22.39 versus $22.85.
- Cash flow: Net cash provided by operating activities was $64.1 million. Investing activities used $804.7 million, including a $630.6 million net increase in loans; financing activities provided $114.7 million. Cash and cash equivalents decreased by $625.9 million during the year.
Material changes versus 2021
- Loan growth and higher yields on variable-rate loans helped raise net interest income; the average yield on earning assets increased to 4.30% from 3.79%. The cost of interest-bearing liabilities rose to 0.62% from 0.52%, and PPP processing-fee income declined to $1.9 million from $8.7 million.
- Loan growth, investment in expansion markets and higher provision expense contributed to increased costs. Technology expense rose to $17.0 million from $11.7 million, while total non-interest expense increased 18.2%.
- CNB transferred securities with $220.8 million amortized cost from available-for-sale to held-to-maturity and ended the year with $404.8 million of HTM securities. AFS securities had $61.6 million of gross unrealized losses; HTM securities had $37.4 million. Management attributed the decline principally to rising interest rates and recorded no credit-loss allowance on those securities.
- Accumulated other comprehensive loss widened to $52.5 million from $0.4 million, primarily reflecting unrealized AFS securities losses. CNB reported a $51.7 million increase in AOCI loss in its discussion of the year-end equity change.
- Net income available to common shareholders grew 10.3%, while diluted EPS increased 3.2%; the September share issuance increased the share count and affected per-share results.
Outlook, risks and unusual items
- CNB provided no specific earnings, revenue or margin guidance in the supplied filing text. Management said the interest-rate environment would remain important and described continued efforts to support growth and manage credit risk. It planned to launch Impressia Bank, a women-focused banking division, in the first quarter of 2023.
- Management highlighted inflation, supply-chain challenges, economic uncertainty and rapid rate increases. Risks include deposit competition and funding costs, interest-rate sensitivity, regional economic and real-estate conditions, loan-loss estimation, securities valuation, cybersecurity and reliance on third-party vendors.
- The filing reports a 2020 cybersecurity incident involving potential unauthorized access to personal information; core systems were not compromised and no material losses were reported. CNB said it continued investing in security and risk controls.
- Other notable items include $883,000 of BOLI death-benefit gains in 2022 and the substantial unrealized securities losses described above. The filing reported no material pending litigation and management considered the allowance for credit losses adequate at year-end.
- The financial-statement auditor issued an unqualified opinion, and both management and the auditor concluded internal control over financial reporting was effective as of December 31, 2022. The auditor identified the loan-loss allowance as a critical audit matter.
Important facts for investors to verify
- How loan growth, borrower performance and commercial real-estate exposure evolve, particularly given higher rates and the rise in nonperforming assets.
- Whether deposit outflows persist, how deposit pricing affects funding costs, and how CNB uses FHLB and other contingent liquidity capacity.
- The effects of unrealized securities losses and the AFS-to-HTM classification on capital, liquidity flexibility and reported equity.
- Whether revenue growth can keep pace with expansion, technology and staffing costs, and whether the higher net interest margin is sustained.
- The use and impact of the 2022 equity-offering proceeds, share dilution, dividends and the authorized repurchase program; the filing also reports purchase of 100,000 shares in February 2023.
- Progress on the Impressia Bank launch and the company’s response to cybersecurity, regulatory and regional economic risks.