CNB Financial Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited Q4 results. Amounts below are in U.S. dollars.
Business context
CNB is a Pennsylvania-based financial holding company operating through CNB Bank and several nonbank subsidiaries. Its banking markets span Pennsylvania, Ohio and western New York. On July 17, 2020, CNB acquired Bank of Akron for approximately $40.8 million; its offices now operate as BankOnBuffalo. Results include the acquired bank from the closing date.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Interest and dividend income | $167.2 million | $155.7 million |
| Net interest income | $134.7 million | $116.2 million |
| Net interest margin, fully tax-equivalent | 3.34% | 3.69% |
| Provision for credit losses | $15.4 million | $6.0 million |
| Non-interest income | $28.1 million | $26.0 million |
| Non-interest expense | $107.3 million | $87.5 million |
| Net income | $32.7 million | $40.1 million |
| Net income available to common shareholders | $31.6 million | $40.1 million |
| Diluted earnings per common share | $1.97 | $2.63 |
| Total assets at year-end | $4.73 billion | $3.76 billion |
| Total loans at year-end | $3.37 billion | $2.80 billion |
| Total deposits at year-end | $4.18 billion | $3.10 billion |
- Reported net income fell about 18%; common EPS declined about 25%. Results included $12.6 million of pretax merger, FHLB prepayment-penalty and branch-closure costs. Excluding these items, management reported adjusted diluted EPS of $2.60 versus $2.64 in 2019.
- Net interest income increased 15.9%, supported by asset growth, the acquisition and PPP activity. The net interest margin declined; excluding PPP-related assets and fees, management reported a 3.50% margin.
- Full-year operating cash flow was $28.8 million; investing cash outflow was $168.7 million and financing cash inflow was $479.6 million. Year-end cash and cash equivalents were $532.7 million, up from $193.0 million.
- CNB recorded $15.4 million of credit-loss provision versus $6.0 million in 2019; net charge-offs were $6.4 million, compared with $6.3 million. The allowance was $34.3 million, or 1.02% of loans (1.07% excluding PPP loans). Nonperforming assets were $31.5 million, 0.67% of assets.
- Year-end shareholders’ equity was $416.1 million. Regulatory capital ratios rose year over year: total risk-based capital 14.32%, Tier 1 11.91%, common equity Tier 1 9.50%, and leverage 8.11%. The Bank was classified as well capitalized.
- Deposits grew 34.8%, including acquired deposits, PPP-related balances and organic growth. CNB prepaid its FHLB advances; no FHLB or other long-term borrowings remained at year-end. Subordinated debentures were $70.6 million.
- Q4 2020 net income was $7.9 million and diluted EPS was $0.40, compared with $10.5 million and $0.69 in Q4 2019. Q4 2020 non-interest expense was $35.0 million, including costs associated with the acquisition, prepayment penalties and branch closures.
Changes, outlook and risks
- Loan growth was 20% year over year, reflecting $319.1 million of acquired loans, $155.5 million of PPP loans and $92.7 million of organic growth. Management said it expected robust loan growth in 2021, based on market diversification and customer-acquisition strategies; this is not quantified guidance.
- Management said growth strategies should increase earning assets and non-interest income, potentially more than offsetting higher operating costs in 2021 and beyond. It also cautioned that the pandemic’s ultimate financial and operational effects could not be estimated reliably.
- COVID-19-related payment deferrals totaled $151.0 million at year-end. Hotels/motels exposure was $206.6 million and restaurants/fast-food exposure $30.1 million, excluding PPP loans. Management identified these industries as higher-risk exposures.
- CNB adopted CECL on January 1, 2020. Adoption increased the allowance by approximately $5.0 million and reduced retained earnings by $3.4 million after tax; prior-period figures were not restated, limiting comparability.
- CNB reported a fourth-quarter 2020 phishing incident involving unauthorized access limited to one employee’s email. Core systems were unaffected; the company was assessing potentially compromised personal information, notifying potentially impacted customers and providing monitoring services.
- Key risks include pandemic-driven credit deterioration, concentrated regional lending, commercial real estate and hospitality exposure, interest-rate sensitivity, liquidity and funding costs, acquisition integration, cybersecurity, and the transition away from LIBOR. The filing’s model estimated that a 200-basis-point rate decline could reduce one-year net interest income by 11.4%; actual outcomes may differ.
- The filing reports no material pending legal proceedings. Auditors gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective; the allowance for credit losses was identified as a critical audit matter.
Important facts for investors to verify
- How acquired Bank of Akron balances, integration costs and expected synergies develop after the first partial year of consolidation.
- Whether credit quality, payment-deferral performance and the allowance remain adequate as pandemic effects and CECL forecasts evolve.
- How much reported earnings and margin depend on PPP fees, excess liquidity and other temporary or unusual items.
- Whether deposit growth is durable and how the company deploys excess cash while managing interest-rate and funding risks.
- The final scope, customer impact and costs of the email incident, and progress in managing the LIBOR transition.