CNB Financial Corporation (“CNB” of the “Corporation”) (NASDAQ: CCNE), the parent company of CNB Bank, today announced its earnings for the first quarter ended March 31, 2020.
Joseph B. Bower, Jr., President and CEO, stated, “Events like we are living through currently, remind us that people and the communities we live in should always remain a high priority. We also recognize the financial challenges faced by our clients as a result of this unprecedented environment, and we have been proactive in helping them navigate through this period. As a community-minded institution, we immediately took steps to assist our clients through payment relief solutions as soon as the government shutdown started, and we are prepared to help our clients through the process of returning to a more normal time.”
Earnings Performance Highlights
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Net income of $8.8 million, or $0.57 per diluted share, for the quarter ended March 31, 2020, as compared to $9.5 million, or $0.62 per diluted share, for the same period in 2019, reflecting decreases of $660 thousand, or 7.0%, and $0.05 per diluted share, or 8.1%, respectively.
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As discussed in more detail below, the provision expense of $3.1 million as of March 31, 2020 included: (i) a provision expense of approximately $2.5 million related to a specific loan loss reserve for a loan relationship moved to non-accrual last quarter, combined with (ii) a new qualitative factor specifically related to the COVID-19 pandemic of approximately $800 thousand, partially offset by (iii) a lower allowance requirement as a result of lower growth in the commercial and industrial loan portfolio.
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Income before provision expense and income tax of $13.6 million, for the quarter ended March 31, 2020, representing an increase of approximately $880 thousand, or 6.9%, from the same period in 2019.
Balance Sheet and Liquidity Highlights
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Loans totaling $2.9 billion as of March 31, 2020 grew $325 million, or 12.8%, compared to March 31, 2019. Loan growth was driven primarily by commercial and industrial loans, which increased $140 million, or 14.7%, over the same period, while commercial real estate loans contributed an increase of $136 million, or 19.2%, over the same period. When evaluating on a divisional and regional basis, total loan growth was attributable primarily to our Private Banking division and Buffalo market, which increased $48.2 million, or 25.1%, and $162 million, or 60.3%, respectively.
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Compared to the quarter ended December 31, 2019, total loans increased at an annualized rate of 6.7%, reflecting the Corporation’s focus on management of its overall balance sheet, particularly given current circumstances related to the pandemic.
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Deposits totaling $3.1 billion as of March 31, 2020 grew by $443 million, or 16.7%, compared to March 31, 2019. The overall increase in deposits was driven primarily by our Private Banking division, which grew total deposits by $121 million, or 29.3%, while the deposit portfolio in our Buffalo market increased by $209 million, or 69.2%, over the same period.
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Compared to the quarter ended December 31, 2019, total deposits remained relatively stable, which is consistent with total deposit amounts during the same period in prior years.
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At March 31, 2020 the Corporation’s cash position totaled approximately $136 million, reflecting a strong and stable liquidity level. In addition to its cash position, the Corporation’s borrowing capacity with the Federal Home Loan Bank of Pittsburgh at March 31, 2020 totaled approximately $435 million.
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While book value per share was $21.10 as of March 31, 2020, tangible book value per share was $18.58 as of March 31, 2020, reflecting an increase of 20.2% from tangible book value per share of $15.46 as of March 31, 2019.
Customer Support Strategies and Loan Portfolio Profile
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The Corporation is participating in the Paycheck Protection Program (“PPP”) for loans provided under the auspices of the Small Business Administration (“SBA”). Under this program, the Corporation expects to lend money primarily to its existing loan and/or deposit customers, based on a pre-determined SBA-developed formula, intended to incentivize small business owners to retain their employees. The PPP was designed such that a loan originated under this program will be forgiven if the small business retains its employees and level of payroll through the first two months of the loan. These loans carry a customer rate of 1.00% plus a processing fee that varies depending on the balance of the loan at origination and have a two-year maturity. As of April 16, 2020, the Corporation has committed approximately $177 million, or 1,031 PPP loan relationships, under this program, at a rate of 1.00% coupled with processing fees estimated to total approximately $6 million. As of April 16, 2020, the SBA funds allocated in the original PPP authorization were fully utilized.
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In addition to participating in the PPP, in the first quarter of 2020 the Corporation deferred loan payments for several of its commercial and consumer customers for a period up to 6 months, depending on the financial needs of each customer. As of March 31, 2020, the deferred loan payment commitments totaled 561 loans, totaling $264 million, consisting of 150 loans, totaling $151 million, for which principal and interest were deferred, and 411 loans, totaling $113 million, for which principal only was deferred. Loan payment deferrals by loan type were as follows:
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Commercial and industrial loans – 233 loans, totaling $103 million;
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Commercial real estate loans – 69 loans, totaling $132 million;
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Residential mortgage loans – 197 loans, totaling $28 million;
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Consumer loans – 62 loans, totaling $720 thousand.
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The Corporation tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As a result of the COVID-19 pandemic, the Corporation has determined the Hotels/Motels and Restaurants/Fast Foods industries to represent a potential higher level of credit risk, as many of these customers have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders as well as travel limitations. At March 31, 2020, the Corporation had limited loan concentrations for these industries as follows:
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Hotels/Motels – $180 million, or 6.3%, of total loans outstanding, and 91.9% pass-rated;
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Restaurants/Fast Foods - $24.0 million or, 0.8%, of total loans outstanding, and 99.7% pass-rated.
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The Corporation also monitors closely its commercial acquisition, development and construction (“ADC”) portfolio, and as noted previously, the Corporation has determined the funded portion of this portfolio may represent a higher potential level of credit risk as a result of the COVID-19 pandemic. At March 31, 2020, the Corporation had $131.5 million in funded ADC loans (excluding the previously mentioned Hotels/Motels and Restaurants/Fast Foods), or 4.6% of total loans outstanding, and unfunded commitments for ADC loans of $99.7 million. The ADC portfolio by industry classification (excluding the Hotels/Motels and Restaurants/Fast Foods industries) is as follows:
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Multi-family real estate projects – $50.3 million funded with unfunded commitments of $70.9 million;
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Real estate developers – $27.8 million funded with unfunded commitments of $6.9 million;
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Mixed used real estate projects – $14.0 million funded with unfunded commitments of $15.1 million;
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All others – $39.4 million funded with unfunded commitments of $6.8 million.
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Another sector that has been under pressure is Oil and Gas. The Corporation has a negligible exposure to this sector, as loans outstanding totaled $15.7 million, or 0.6%, of total loans at March 31, 2020.
Performance Ratios
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While annualized return on average equity was 11.32% for the three months ended March 31, 2020, annualized return on average tangible equity was 12.92% for the same period, including after-tax merger costs totaling $57 thousand. Excluding merger costs, annualized adjusted return on average tangible equity was 13.01%, for the three months ended March 31, 2020, compared to 16.85% for the three months ended March 31, 2019.
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Annualized return on average assets was 0.95% for the three months ended March 31, 2020, which included after-tax merger costs totaling $57 thousand. Excluding merger costs, annualized adjusted return on average assets was 0.95% for the three months ended March 31, 2020, compared to 1.18% for the three months ended March 31, 2019.
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Efficiency Ratio was 60.34% for the three months ended March 31, 2020. Excluding $72 thousand in pre-tax merger costs incurred in the first quarter of 2020, adjusted efficiency ratio was 60.14%, for the three months ended March 31, 2020, an improvement of 71 basis points from 60.85% for the comparable period in 2019.
Revenue
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Total revenue (comprised of net interest income plus non-interest income) was $35.4 million for the three months ended March 31, 2020, an increase of $1.4 million, or 4.3%, from the three months ended March 31, 2019 due to the following:
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Net interest income for the three months ended March 31, 2020 increased 8.1% to $30.0 million from the three months ended March 31, 2019, driven by an overall growth of $470 million, or 15.5%, in average earning assets, partially offset by a reduction of 27 basis points in net interest margin on a fully tax-equivalent basis.
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Net interest margin on a fully tax-equivalent basis was 3.49% and 3.76% for the three months ended March 31, 2020 and 2019, respectively. The yield on earning assets of 4.65% for the three months ended March 31, 2020 decreased 31 basis points from 4.96% for the three months ended March 31, 2019. The cost of interest-bearing liabilities decreased 6 basis points to 1.35% for the three months ended March 31, 2020 from 1.41% for the three months ended March 31, 2019. During the three months ended March, 31 2020, our net interest margin on a fully tax-equivalent basis was impacted by the cumulative effect of Federal Reserve rate reductions, totaling 175 basis points. In addition, we experienced a higher level of liquidity resulting from strong growth in deposits in the fourth quarter of 2019, which we believe will provide support to our liquidity management strategies.
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Total non-interest income was $5.4 million for the three months ended March 31, 2020 a decrease of $789 thousand, or 12.8%, from the same period in 2019.
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Total non-interest income includes net realized and unrealized losses on trading securities, which combined totaled $588 thousand for the three months ended March 31, 2020 compared to net realized and unrealized gains on trading securities and net realized gains on available for sale securities of $948 thousand for the three months ended March 31, 2019.
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Excluding the items discussed above, non-interest income for the three months ended March 31, 2020 totaled $6.0 million, an increase of $747 thousand, or 14.4%, from the same period in 2019, driven primarily by a $251 thousand increase in Wealth and Asset Management fees and a $98 thousand increase in mortgage banking income.
Non-Interest Expense
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For the three months ended March 31, 2020, total non-interest expense of $21.7 million increased $567 thousand, or 2.7%, from the three months ended March 31, 2019, primarily as a result of expenditures required to support business growth and ongoing customer support.
Income taxes
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Income tax expense of $1.7 million for the three months ended March 31, 2020 decreased $233 thousand, or 11.9%, from the three months ended March 31, 2019. Our effective tax rate was 16.4% for the three months ended March 31, 2020 compared to 17.1% for the three months ended March 31, 2019.
Asset Quality
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Total non-performing assets of $33.5 million, or 0.89%, of total assets as of March 31, 2020 compared to $23.4 million, or 0.62%, of total assets as of December 31, 2019 and $15.7 million, or 0.48%, of total assets as of March 31, 2019. The increase from the three months ended December 31, 2019 is primarily due to one commercial real estate loan relationship totaling approximately $9.7 million. During the three months ended March 31, 2020, this loan was downgraded to substandard and placed on non-accrual, as a result of a covenant violation. Management performed an evaluation of the collateral supporting the loan and concluded no specific loan loss reserve was required at the time.
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The allowance for loan losses measured as a percentage of loans net of unearned income as of March 31, 2020 was 0.77%, compared to 0.69% as of December 31, 2019 and 0.81% as of March 31, 2019. The increase in the allowance for loan losses from the three months ended December 31, 2019 to the three months ended March 31, 2020 resulted primarily from a $2.5 million in specific loan loss reserve related to a secured commercial and industrial loan relationship with a borrower who is now deceased, as discussed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019. In light of new facts that have come to management’s attention, including an evaluation of the borrower’s estate and an updated collateral appraisal, management updated the loss estimate on this loan relationship, including costs of disposal of the collateral.
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In addition to the specific reserve discussed above, the allowance for loan losses at March 31, 2020 reflected a qualitative factor specifically related to the COVID-19 pandemic and the potential impact this pandemic may have on the national and local economies, and our loan portfolio overall. Management recognizes the degree of uncertainty related to the potential spread of COVID-19 and the related impact it will have on the economy. To quantify the potential impact of the pandemic, management evaluated the Corporation’s historical losses, by loan type, looking back to the recession that began in 2008 and the Corporation’s loan portfolio credit quality performance from 2008 to March 31, 2020. A loss assumption commensurate with the highest level of losses by loan type was used to estimate the potential impact on the loan portfolio, specifically loans for which customers were granted payment deferrals, as discussed above. This analysis resulted in a qualitative adjustment of approximately $800 thousand, which was reflected in the Corporation’s provision expense for the three months ended March 31, 2020 and the related allowance for loan losses during the same period. The Corporation will continue to evaluate this factor and update its analysis, as necessary, as developments related to the COVID-19 pandemic and its impact on the economy evolve.
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For the three months ended March 31, 2020, net loan charge-offs were $637 thousand, or 0.09%, of total average loans, compared to $664 thousand, or 0.11%, of total average loans during the comparable period in 2019.
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As part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted in March 2020, financial institutions were given the option to delay the adoption of ASU No. 2016-13, “Financial Instruments – Credit Losses,” until the earlier of December 31, 2020 or until the national emergency related to COVID-19 is terminated. Given the complexity of the processes necessary to properly evaluate, document and implement the current expected credit losses methodology, combined with the extraneous circumstances impacted on its employees, caused by the spread of the coronavirus, the Corporation opted to delay the adoption of ASU No. 2016-13.
Capital
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As of March 31, 2020 CNB’s total shareholders’ equity of $325 million increased $49.8 million, or 18.1%, from March 31, 2019 as a result of an increase in accumulated other comprehensive income combined with organic earnings, partially offset by the payment of common stock dividends to our shareholders during the three months ended March 31, 2020.
About CNB Financial Corporation
CNB Financial Corporation is a financial holding company with consolidated assets of approximately $3.8 billion. CNB Financial Corporation conducts business primarily through its principal subsidiary, CNB Bank. CNB Bank is a full-service bank engaging in a full range of banking activities and services, including trust and wealth management services, for individual, business, governmental, and institutional customers. CNB Bank operations include a private banking division and 42 full-service offices in Pennsylvania, Ohio, and New York. CNB Bank’s divisions include ERIEBANK, based in Erie, Pennsylvania, with offices in northwest Pennsylvania and northeast Ohio; FCBank, based in Worthington, Ohio, with offices in central Ohio; and BankOnBuffalo, based in Buffalo, New York, with offices in northern New York. CNB Bank is headquartered in Clearfield, Pennsylvania, with offices in central and north central Pennsylvania. Additional information about CNB Financial Corporation may be found at www.CNBBank.bank.
Forward-Looking Statements
This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to CNB’s financial condition, liquidity, results of operations, future performance and business. These forward-looking statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond CNB’s control). Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would” and “could.” CNB’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Such known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) the duration and scope of the COVID-19 pandemic and the local, national and global impact of COVID-19, (ii) actions governments, businesses and individuals take in response to the pandemic, (iii) the pace of recovery when the COVID-19 pandemic subsides, (iv) changes in general business, industry or economic conditions or competition; (v) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting principles or otherwise; (vi) adverse changes or conditions in capital and financial markets; (vii) changes in interest rates; (viii) higher than expected costs or other difficulties related to integration of combined or merged businesses; (ix) the effects of business combinations and other acquisition transactions, including the inability to realize our loan and investment portfolios; (x) changes in the quality or composition of our loan and investment portfolios; (xi) adequacy of loan loss reserves; (xii) increased competition; (xiii) loss of certain key officers; (xiv) deposit attrition; (xv) rapidly changing technology; (xvi) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xvii) changes in the cost of funds, demand for loan products or demand for financial services; and (xviii) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Such developments could have an adverse impact on CNB's financial position and results of operations. For more information about factors that could cause actual results to differ from those discussed in the forward-looking statements, please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of and the forward-looking statement disclaimers in CNB’s annual and quarterly reports.
The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this press release. CNB undertakes no obligation to publicly update or revise any forward-looking statements included in this press release or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this press release might not occur and you should not put undue reliance on any forward-looking statements.