CNB Financial(CCNE) - 2018 Q4 - Annual Report

PART I. ITEM 1. Business CNB Financial Corporation is a regulated financial holding company operating CNB Bank and other subsidiaries, offering diverse banking and financial services across three states - CNB Financial Corporation, incorporated in Pennsylvania in 1983, expanded through acquisitions of County National Bank (1984), FC Banc Corp. (2013), and Lake National Bank (2016)[6] - The Corporation operates CNB Securities Corporation, CNB Insurance Agency, CNB Risk Management, Inc., and Holiday Financial Services Corporation for investments, insurance, risk management, and consumer loans respectively[7] - CNB Bank operates 42 full-service branches across Pennsylvania, Ohio, and New York, providing comprehensive banking, wealth, and asset management services[12][13] - The Corporation is extensively regulated by the Federal Reserve Board, Pennsylvania Department of Banking, and FDIC, covering capital requirements, dividend restrictions, consumer protection, and anti-money laundering laws[17][26][32][39][49][50] Employee Count as of December 31, 2018 | Category | Count | | :------- | :---- | | Total Employees | 556 | | Full-time | 505 | | Part-time | 51 | ITEM 1A. Risk Factors The Corporation faces diverse risks including economic recession, loan loss adequacy, interest rate volatility, geographic concentration, regulatory changes, and operational failures - Key risks include potential economic recession, which could adversely affect borrowing capacity, increase loan delinquencies, and impact the securities portfolio[62][63] - The allowance for loan losses may be insufficient to cover actual losses, especially with potential adverse changes in collateral values and borrower financial performance due to economic conditions[64][66] - Interest rate volatility poses a significant risk to profitability, as the net interest margin is sensitive to changes in earning asset yields and funding costs[69][70] - The loan portfolio's concentration in central and northwest Pennsylvania, central and northeast Ohio, and western New York makes the Corporation vulnerable to adverse regional economic conditions[72][73] - Extensive government regulation means changes in laws or policies could increase costs, limit business opportunities, and negatively impact financial results[79][80] - Operational and security system failures, including cyber attacks, could disrupt business, lead to confidential data disclosure, damage reputation, and incur significant costs[88][89] - The potential replacement of the LIBOR benchmark interest rate after 2021 could adversely impact LIBOR-linked financial instruments' market value, create costs, and alter market risk profiles[124][125] ITEM 1B. Unresolved Staff Comments There are no unresolved staff comments to report - The Corporation has no unresolved staff comments[126] ITEM 2. Properties The Corporation's headquarters and the Bank's main office are owned in Clearfield, Pennsylvania, with 42 bank offices (24 owned, 18 leased) and 9 Holiday Financial offices (1 owned, 8 leased) - The Corporation and Bank headquarters are owned and located at 1 South Second Street, Clearfield, Pennsylvania[127] - The Bank operates 42 full-service offices: 24 are owned, 17 are leased from independent owners, and one is leased from the Corporation[127] - Holiday Financial Services Corporation has nine full-service offices: eight are leased from independent owners, and one is leased from the Corporation[127] ITEM 3. Legal Proceedings There are no material pending legal proceedings against the Corporation or its subsidiaries, beyond ordinary routine business matters - There are no material pending legal proceedings against the Corporation or its subsidiaries, except for ordinary routine proceedings incidental to the business[128] ITEM 4. Mine Safety Disclosures There are no mine safety disclosures to report - The Corporation has no mine safety disclosures[129] PART II. ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Corporation's common stock trades on NASDAQ under 'CCNE', with 4,097 shareholders as of December 31, 2018, and active share repurchases under a 500,000-share program - The Corporation's common stock is traded on the NASDAQ Global Select Market LLC under the symbol "CCNE"[132] - As of December 31, 2018, the Corporation had 4,097 shareholders of record[132] Issuer Purchases of Equity Securities (Q4 2018) | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or approximate dollar value) of Shares that May Yet Be Purchased Under the Plans or Programs | | :---------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :----------------------------------------------------------------------------------------------------------- | | October 1 – 31, 2018 | 37,830 | $26.41 | 37,830 | 332,030 | | November 1 – 30, 2018 | 0 | $0 | 0 | 332,030 | | December 1 – 31, 2018 | 42,299 | $23.61 | 42,299 | 289,731 | - A stock repurchase program, announced November 12, 2014, authorizes the repurchase of up to 500,000 shares. As of December 31, 2018, 289,731 shares remained in the program[134] Share Return Performance (2013-2018) | Index | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | | :------------------------ | :------- | :------- | :------- | :------- | :------- | :------- | | CNB Financial Corporation | 100.00 | 101.10 | 102.34 | 156.99 | 158.23 | 141.68 | | NASDAQ Composite | 100.00 | 114.75 | 122.74 | 133.62 | 173.22 | 168.30 | | SNL Bank NASDAQ | 100.00 | 103.57 | 111.80 | 155.02 | 163.20 | 137.56 | ITEM 6. Selected Financial Data This section provides a five-year summary of selected financial data, including key income statement, balance sheet, and per-share metrics, highlighting trends from 2014 to 2018 Selected Financial Data (2014-2018) | (Dollars in thousands, except per share data) | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :-------------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | INTEREST AND DIVIDEND INCOME: | | | | | | | Loans including fees | $118,193 | $97,005 | $81,209 | $71,814 | $69,512 | | Securities: Taxable | 9,921 | 8,165 | 9,134 | 10,977 | 13,257 | | Securities: Tax-exempt | 2,739 | 2,983 | 3,390 | 3,778 | 3,713 | | Dividends | 1,017 | 721 | 582 | 609 | 400 | | Total interest and dividend income | 131,870 | 108,874 | 94,315 | 87,178 | 86,882 | | INTEREST EXPENSE: | | | | | | | Deposits | 17,228 | 9,312 | 8,470 | 8,498 | 8,300 | | Borrowed funds | 5,856 | 4,021 | 2,981 | 3,222 | 3,241 | | Subordinated debentures | 3,866 | 4,032 | 1,577 | 751 | 746 | | Total interest expense | 26,950 | 17,365 | 13,028 | 12,471 | 12,287 | | NET INTEREST INCOME | 104,920 | 91,509 | 81,287 | 74,707 | 74,595 | | PROVISION FOR LOAN LOSSES | 6,072 | 6,655 | 4,149 | 2,560 | 3,840 | | Net interest income after provision for loan losses | 98,848 | 84,854 | 77,138 | 72,147 | 70,755 | | NON-INTEREST INCOME | 20,723 | 21,435 | 17,691 | 14,799 | 14,321 | | NON-INTEREST EXPENSES | 79,342 | 70,037 | 67,118 | 56,457 | 52,688 | | INCOME BEFORE INCOME TAXES | 40,229 | 36,252 | 27,711 | 30,489 | 32,388 | | INCOME TAX EXPENSE | 6,510 | 12,392 | 7,171 | 8,292 | 9,314 | | NET INCOME | $33,719 | $23,860 | $20,540 | $22,197 | $23,074 | | PER SHARE DATA: | | | | | | | Basic | $2.21 | $1.57 | $1.42 | $1.54 | $1.60 | | Fully diluted | 2.21 | 1.57 | 1.42 | 1.54 | 1.60 | | Dividends declared | 0.67 | 0.66 | 0.66 | 0.66 | 0.66 | | Book value per share at year end | 17.28 | 15.98 | 14.64 | 13.87 | 13.09 | | AT END OF PERIOD: | | | | | | | Total assets | $3,221,521 | $2,768,773 | $2,573,821 | $2,285,136 | $2,189,213 | | Securities | 524,649 | 416,859 | 500,693 | 550,619 | 690,225 | | Loans, net of unearned discount | 2,474,557 | 2,145,959 | 1,873,536 | 1,577,798 | 1,355,289 | | Allowance for loan losses | 19,704 | 19,693 | 16,330 | 16,737 | 17,373 | | Deposits | 2,610,786 | 2,167,815 | 2,017,522 | 1,815,053 | 1,847,079 | | FHLB and other borrowings | 245,117 | 257,359 | 237,004 | 104,243 | 75,715 | | Subordinated debentures | 70,620 | 70,620 | 70,620 | 20,620 | 20,620 | | Shareholders' equity | 262,830 | 243,910 | 211,784 | 201,913 | 188,548 | | KEY RATIOS: | | | | | | | Return on average assets | 1.12% | 0.89% | 0.85% | 0.99% | 1.07% | | Return on average equity | 13.46% | 9.97% | 9.69% | 11.23% | 12.76% | | Loan to deposit ratio | 94.78% | 98.99% | 92.86% | 86.93% | 73.37% | | Dividend payout ratio | 30.35% | 42.31% | 46.48% | 42.86% | 41.26% | | Average equity to average assets ratio | 8.33% | 8.93% | 8.76% | 8.86% | 8.37% | ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance and condition, covering asset/liability growth, net interest income, loan loss provisions, non-interest income, expenses, and risk management strategies - Management measures performance using metrics like return on average equity, earnings per share, and asset quality, with a focus on disciplined loan pricing to maintain net interest margin[155] - The Corporation manages various risks, including interest rate, credit, and liquidity risk, through established policies and procedures, such as asset/liability management and disciplined credit evaluation[148][149][150][151] Financial Condition Highlights (2016-2018) | | 2018 Balance ($ millions) | Change vs. prior year ($ millions) | % Change vs. prior year | 2017 Balance ($ millions) | Change vs. prior year ($ millions) | % Change vs. prior year | 2016 Balance ($ millions) | | :------------------------- | :----------- | :-------------------- | :---------------------- | :----------- | :-------------------- | :---------------------- | :----------- | | Total assets | $3,221.5 | $452.7 | 16.4% | $2,768.8 | $195.0 | 7.6% | $2,573.8 | | Total loans, net | 2,454.9 | 328.6 | 15.5% | 2,126.3 | 269.1 | 14.5% | 1,857.2 | | Total securities | 524.6 | 107.7 | 25.8% | 416.9 | (83.8) | (16.7)% | 500.7 | | Total deposits | 2,610.8 | 443.0 | 20.4% | 2,167.8 | 150.3 | 7.4% | 2,017.5 | | Total shareholders' equity | 262.8 | 18.9 | 7.7% | 243.9 | 32.1 | 15.2% | 211.8 | General Overview Management focuses on return on average equity, earnings per share, and asset quality, emphasizing disciplined loan pricing and anticipating growth to offset rising non-interest costs - Management focuses on return on average equity, earnings per share, and asset quality, emphasizing disciplined loan pricing to maintain a strong net interest margin amidst a flattening yield curve and competitive environment[155] - Non-interest costs are expected to rise with corporate growth, but management anticipates increased earning assets and non-interest income to more than offset these expenses in 2019 and beyond[156] Financial Condition The Corporation's financial condition reflects growth in total assets, loans, and deposits, alongside changes in securities and shareholders' equity, impacting net interest margin Financial Condition Summary (2016-2018) | | 2018 Balance ($ millions) | Change vs. prior year ($ millions) | % Change vs. prior year | 2017 Balance ($ millions) | Change vs. prior year ($ millions) | % Change vs. prior year | 2016 Balance ($ millions) | | :------------------------- | :----------- | :-------------------- | :---------------------- | :----------- | :-------------------- | :---------------------- | :----------- | | Total assets | $3,221.5 | $452.7 | 16.4% | $2,768.8 | $195.0 | 7.6% | $2,573.8 | | Total loans, net | 2,454.9 | 328.6 | 15.5% | 2,126.3 | 269.1 | 14.5% | 1,857.2 | | Total securities | 524.6 | 107.7 | 25.8% | 416.9 | (83.8) | (16.7)% | 500.7 | | Total deposits | 2,610.8 | 443.0 | 20.4% | 2,167.8 | 150.3 | 7.4% | 2,017.5 | | Total shareholders' equity | 262.8 | 18.9 | 7.7% | 243.9 | 32.1 | 15.2% | 211.8 | Average Balances and Net Interest Margin (2016-2018) | | Average Balance ($ thousands) | Annual Rate (%) | Interest Inc./Exp. ($ thousands) | Average Balance ($ thousands) | Annual Rate (%) | Interest Inc./Exp. ($ thousands) | Average Balance ($ thousands) | Annual Rate (%) | Interest Inc./Exp. ($ thousands) | | :----------------------------------- | :--------------------- | :----------------- | :------------------------ | :--------------------- | :----------------- | :------------------------ | :--------------------- | :----------------- | :------------------------ | | Total earning assets | $2,819,854 | 4.72% | $133,318 | $2,477,669 | 4.53% | $112,045 | $2,241,395 | 4.37% | $97,393 | | Total interest bearing liabilities | $2,401,254 | 1.12% | $26,950 | $2,109,218 | 0.82% | $17,365 | $1,896,271 | 0.69% | $13,028 | | Net Interest Spread | | 3.60% | $106,368 | | 3.71% | $94,680 | | 3.68% | $84,365 | | Net Interest Margin | | 3.76% | $106,368 | | 3.82% | $94,680 | | 3.78% | $84,365 | Cash and Cash Equivalents Cash and cash equivalents increased, with management confident in current liquidity from cash, traditional funding, FHLB financing, and short-term maturing assets Cash and Cash Equivalents (2017-2018) | Metric | 2018 ($ millions) | 2017 ($ millions) | | :---------------------- | :---------------- | :---------------- | | Cash and Cash Equivalents | $45.6 | $35.3 | - Management believes current liquidity needs are met by cash, traditional funding sources, FHLB financing, and short-term maturing securities and loans[166] Securities The securities portfolio is managed between 15% and 20% of total assets to balance earnings and liquidity, with ALCO monitoring performance and interest rate risk Securities Portfolio (2017-2018) | Metric | 2018 ($ millions) | 2017 ($ millions) | | :-------------------------------- | :---------------- | :---------------- | | Securities available for sale and trading securities | $524.6 | $416.9 | | Securities portfolio as % of total assets | 16.3% | 15.1% | - The Corporation aims to maintain its securities portfolio between 15% and 20% of total assets to balance earnings and liquidity[168] - The Asset/Liability Committee (ALCO) regularly monitors the securities portfolio's earnings performance and liquidity, and manages interest rate risk[173] Loans Total loans outstanding increased by 15% to $2.5 billion, with strong growth anticipated in 2019 driven by expansion in Buffalo, New York, and increased commercial lending Loans Outstanding, Net of Unearned Discount (2014-2018) | Loan Category | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :-------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Commercial, industrial and agricultural | $916,297 | $704,606 | $567,800 | $475,364 | $428,458 | | Commercial mortgages | 697,776 | 644,597 | 574,826 | 448,179 | 352,752 | | Residential real estate | 771,309 | 713,347 | 652,883 | 574,225 | 502,317 | | Consumer | 86,035 | 80,193 | 74,816 | 78,345 | 69,648 | | Credit cards | 7,623 | 6,753 | 6,046 | 5,201 | 5,233 | | Overdrafts | 308 | 352 | 595 | 1,040 | 1,188 | | Gross loans | 2,479,348 | 2,149,848 | 1,876,966 | 1,582,354 | 1,359,596 | | Less: unearned income | (4,791) | (3,889) | (3,430) | (4,556) | (4,307) | | Total loans net of unearned | $2,474,557 | $2,145,959 | $1,873,536 | $1,577,798 | $1,355,289 | - Total loans outstanding, net of unearned discount, increased by $328.6 million (15%) to $2.5 billion at December 31, 2018, compared to December 31, 2017[175] - The Corporation anticipates strong loan growth in 2019, driven by expansion in the Buffalo, New York market and increased commercial lending in Pennsylvania and Ohio[177] Loan Quality The Corporation maintains rigorous lending policies and credit reviews, actively monitoring nonperforming loans, which remain favorable compared to peer institutions - The Corporation maintains written lending policies and procedures, including underwriting standards, loan documentation, and credit analysis, with ongoing credit reviews performed annually on approximately 65% of the commercial loan portfolio by an outsourced firm[181] Loan Delinquency and Nonperforming Assets (2014-2018) | Category | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :------------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Nonaccrual loans | $17,239 | $19,232 | $15,329 | $12,159 | $9,190 | | Accrual loans greater than 90 days past due | 890 | 664 | 10 | 105 | 213 | | Total nonperforming loans | 18,129 | 19,896 | 15,339 | 12,264 | 9,403 | | Other real estate owned | 418 | 710 | 1,015 | 654 | 806 | | Total nonperforming assets | $18,547 | $20,606 | $16,354 | $12,918 | $10,209 | | Nonperforming loans as a percentage of loans, net | 0.73% | 0.93% | 0.82% | 0.78% | 0.69% | | Nonperforming assets as a percentage of total assets | 0.58% | 0.72% | 0.64% | 0.57% | 0.47% | - Management actively monitors nonperforming loans, and the Corporation's nonperforming loans to total loans ratio remains favorable compared to peer institutions[184] Allowance for Loan Losses The allowance for loan losses is determined through formal analysis considering individual loans, portfolio risk, historical losses, and economic conditions, with a notable provision for an impaired commercial real estate loan - The allowance for loan losses is determined through a formal analysis by the Credit Administration and Finance Departments, considering individual loans, portfolio risk characteristics, historical losses, economic conditions, and other factors[185][186] Allowance for Loan Losses Activity (2014-2018) | Category | 2018 ($ thousands) | 2017 ($ thousands) | 2016 ($ thousands) | 2015 ($ thousands) | 2014 ($ thousands) | | :------------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Balance at beginning of period | $19,693 | $16,330 | $16,737 | $17,373 | $16,234 | | Net charge-offs | (6,061) | (3,292) | (4,556) | (3,196) | (2,701) | | Provision for loan losses | 6,072 | 6,655 | 4,149 | 2,560 | 3,840 | | Balance at end of period | $19,704 | $19,693 | $16,330 | $16,737 | $17,373 | | Allowance to net loans | 0.80% | 0.92% | 0.87% | 1.06% | 1.28% | | Percentage of net charge-offs to average loans outstanding | 0.26% | 0.16% | 0.27% | 0.22% | 0.21% | - In 2018, the Corporation recorded a provision for loan losses of $6.1 million, a decrease from $6.7 million in 2017. Net charge-offs increased to $6.1 million in 2018 from $3.3 million in 2017, with the ratio of net charge-offs to average loans rising to 0.26% from 0.16%[196] - A significant portion of 2018's provision and charge-offs was due to further deterioration of an impaired commercial real estate loan, leading to an additional $1.9 million provision and a $3.3 million partial charge-off[198] Premises and Equipment The Corporation invested in physical infrastructure, including new banking facilities in Buffalo and Niagara Falls, New York, and additional office space for ERIEBANK - The Corporation invested $3.1 million in 2018 and $5.2 million in 2017 in its physical infrastructure, including leasehold improvements for new banking facilities in Buffalo and Niagara Falls, New York, and additional