CNB Financial(CCNE) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1 – Financial Statements This section presents the unaudited consolidated financial statements for CNB Financial Corporation, including balance sheets, statements of income, comprehensive income, cash flows, and changes in stockholders' equity, along with detailed notes to these financial statements for the periods ended September 30, 2019 and December 31, 2018 Consolidated Balance Sheets This section provides a snapshot of the company's financial position at specific dates, detailing assets, liabilities, and equity | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :--------------------------- | :-------------------------- | :-------------------------- | | Total Assets | $3,541,170 | $3,221,521 | | Total Liabilities | $3,244,137 | $2,958,691 | | Total Shareholders' Equity | $297,033 | $262,830 | | Net Loans | $2,729,295 | $2,454,853 | | Total Deposits | $2,875,595 | $2,610,786 | Consolidated Statements of Income This section details the company's revenues, expenses, and net income over specific periods, reflecting its operational profitability | Metric | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total Interest and Dividend Income | $40,085 | $34,040 | $115,120 | $95,526 | | Total Interest Expense | $10,184 | $7,162 | $28,667 | $18,722 | | Net Interest Income | $29,901 | $26,878 | $86,453 | $76,804 | | Provision for Loan Losses | $2,118 | $1,095 | $5,212 | $4,631 | | Total Non-Interest Income | $6,276 | $5,933 | $19,221 | $16,290 | | Total Non-Interest Expenses | $21,444 | $20,794 | $64,603 | $59,336 | | Net Income | $10,357 | $9,236 | $29,597 | $24,774 | | Basic EPS | $0.68 | $0.60 | $1.94 | $1.62 | | Diluted EPS | $0.68 | $0.60 | $1.94 | $1.62 | Consolidated Statements of Comprehensive Income This section presents the company's total comprehensive income, including net income and other comprehensive income (loss) items | Metric | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net Income | $10,357 | $9,236 | $29,597 | $24,774 | | Other Comprehensive Income (Loss) | $2,432 | $(2,423) | $12,526 | $(7,428) | | Comprehensive Income | $12,789 | $6,813 | $42,123 | $17,346 | Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods | Metric | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net Cash Provided by Operating Activities | $31,482 | $27,485 | | Net Cash Used by Investing Activities | $(283,593) | $(367,858) | | Net Cash Provided by Financing Activities | $258,709 | $341,528 | | Net Increase (Decrease) in Cash and Cash Equivalents | $6,598 | $1,155 | | Cash and Cash Equivalents, Ending | $52,161 | $36,500 | Consolidated Statements of Changes in Stockholders' Equity This section details the changes in the company's equity accounts, including retained earnings and other comprehensive income, over specific periods | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total Shareholders' Equity | $297,033 | $262,830 | | Retained Earnings | $193,612 | $171,780 | | Accumulated Other Comprehensive Income (Loss) | $8,530 | $(3,996) | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements 1. BASIS OF PRESENTATION This note describes the accounting principles and methods used in preparing the financial statements - The financial statements are prepared in accordance with GAAP and SEC rules, condensed for interim reporting, and include normal recurring adjustments. Prior period amounts have been reclassified for comparative presentation[28][29] 2. STOCK COMPENSATION This note details the accounting for stock-based compensation plans, including restricted stock awards and related expenses - The Corporation uses time-based and performance-based restricted stock awards for key employees and directors. The 2009 plan terminated in Feb 2019, replaced by the 2019 Omnibus Incentive Plan[30] | Metric | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Compensation Expense (Restricted Stock) | $242 | $269 | $1,109 | $1,218 | | Income Tax Benefit | $51 | $56 | $233 | $256 | - Unrecognized compensation cost related to unvested restricted stock awards was $640 thousand as of September 30, 2019, down from $775 thousand at December 31, 2018[33] 3. FAIR VALUE This note explains the methodologies and hierarchy used to measure the fair value of financial instruments - Fair value is measured using a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (significant observable inputs), and Level 3 (significant unobservable inputs)[37] - Most trading securities, available-for-sale securities, and derivative instruments (interest rate swaps) are valued using Level 1 or Level 2 inputs. Impaired loans, however, often rely on Level 3 inputs due to significant adjustments to appraisal values[38][39][43] | Asset/Liability | Sep 30, 2019 Fair Value (in thousands) | Dec 31, 2018 Fair Value (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Securities Available For Sale | $529,867 | $516,863 | | Interest Rate Swaps (Asset) | $2,572 | $485 | | Trading Securities | $9,088 | $7,786 | | Interest Rate Swaps (Liability) | $(3,155) | $(686) | 4. SECURITIES This note provides details on the company's investment securities portfolio, including available-for-sale and trading securities | Security Type | Sep 30, 2019 Fair Value (in thousands) | Dec 31, 2018 Fair Value (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Securities Available For Sale | $529,867 | $516,863 | | Trading Securities | $9,088 | $7,786 | - The Corporation evaluates securities for other-than-temporary impairment quarterly and believes impairment of debt securities at September 30, 2019, and December 31, 2018, was temporary, with no intent or requirement to sell before recovery[52][55] | Metric | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Proceeds from AFS Securities Sales | $11,403 | $0 | | Gross Gains on AFS Securities Sales | $152 | $0 | | Gross Losses on AFS Securities Sales | $4 | $0 | 5. LOANS This note provides a detailed breakdown of the loan portfolio, including categories, credit quality, and allowance for loan losses | Loan Category | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | % of Total Loans (Sep 30, 2019) | | :-------------------------------- | :-------------------------- | :-------------------------- | :------------------------------ | | Commercial, industrial, and agricultural | $1,033,631 | $916,297 | 38% | | Commercial mortgages | $788,974 | $697,776 | 29% | | Residential real estate | $802,331 | $771,309 | 29% | | Consumer | $121,598 | $86,035 | 4% | | Credit cards | $7,393 | $7,623 | <1% | | Overdrafts | $642 | $308 | <1% | | Less: Unearned discount | $(5,067) | $(4,791) | | | Less: Allowance for loan losses | $(20,207) | $(19,704) | | | Loans, net | $2,729,295 | $2,454,853 | | - The Corporation's loan portfolio is primarily concentrated in central and northwest Pennsylvania, central and northeast Ohio, and western New York. Lending policies include loan-to-value ratios, FICO scores, and personal guarantees[60][61] | Metric | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Allowance for Loan Losses (Beginning) | $19,704 | $19,693 | | Charge-offs | $(5,087) | $(2,249) | | Recoveries | $378 | $435 | | Provision for Loan Losses | $5,212 | $4,631 | | Allowance for Loan Losses (Ending) | $20,207 | $22,510 | - Impaired loans with specific allowances totaled $6.497 million at September 30, 2019, down from $3.292 million at December 31, 2018[69] - Nonaccrual loans and loans past due over 90 days still accruing interest totaled $14.809 million and $550 thousand, respectively, at September 30, 2019[74] - Troubled debt restructurings (TDRs) decreased in loan balance from $14.626 million at Dec 31, 2018, to $10.199 million at Sep 30, 2019, with specific reserves also decreasing from $4.554 million to $574 thousand[81] - The Corporation classifies commercial loans into risk categories (Special Mention, Substandard, Doubtful, Pass) based on borrower ability to service debt and collateral[86][87][88][89][90] - Holiday Financial Services Corporation, a subsidiary, offers subprime loans with higher risk characteristics, primarily collateralized by automobiles and equipment[95] 6. DEPOSITS This note provides a breakdown of the company's deposit liabilities by type and their changes over time | Deposit Type | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | Percentage Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :---------------- | | Checking, non-interest bearing | $370,761 | $356,797 | +3.9% | | Checking, interest bearing | $593,057 | $600,046 | -1.2% | | Savings accounts | $1,537,672 | $1,258,506 | +22.2% | | Certificates of deposit | $374,105 | $395,437 | -5.4% | | Total Deposits | $2,875,595 | $2,610,786 | +10.1% | 7. EARNINGS PER SHARE This note explains the calculation of basic and diluted earnings per share - Basic and diluted EPS are calculated using the two-class method, considering unvested share-based payment awards as participating securities[98][99] | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.68 | $0.60 | $1.94 | $1.62 | | Diluted EPS | $0.68 | $0.60 | $1.94 | $1.62 | 8. DERIVATIVE INSTRUMENTS This note describes the company's use of derivative instruments for hedging and risk management purposes - The Corporation uses interest rate swap agreements to hedge cash flows associated with subordinated notes, aiming to stabilize interest expense and manage interest rate risk[102][104] - A new 5-year interest rate swap agreement was executed on September 7, 2018, to hedge $10 million of a subordinated note, with a variable rate receipt and fixed-rate payment structure[102] - The Corporation also engages in back-to-back interest rate swaps as an intermediary for customers, which do not impact its results of operations due to offsetting changes in fair value[110] 9. REVENUE FROM CONTRACTS WITH CUSTOMERS This note outlines the company's revenue recognition policies for various income streams, distinguishing between ASC 606 and other standards - Most of the Corporation's revenue from interest and dividends on loans and investment securities, along with certain non-interest revenues, are outside the scope of ASC 606[115] | Non-Interest Income Category | 3 Months Ended Sep 30, 2019 (in thousands) | 3 Months Ended Sep 30, 2018 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Service charges on deposit accounts | $1,676 | $1,584 | $4,726 | $4,102 | | Wealth and asset management fees | $1,238 | $1,031 | $3,482 | $3,151 | | Mortgage banking | $408 | $283 | $1,017 | $801 | | Card processing and interchange income | $1,195 | $1,066 | $3,445 | $3,140 | | Net gains (losses) on sales of securities | $0 | $0 | $148 | $0 | | Other income | $1,759 | $1,969 | $6,403 | $5,096 | | Total Non-Interest Income | $6,276 | $5,933 | $19,221 | $16,290 | - Revenue recognition policies for service charges on deposit accounts, wealth and asset management fees, and card processing and interchange income are detailed, generally recognized at transaction execution or over the service period[117][120][121] 10. LEASES This note describes the company's adoption of new lease accounting standards and the impact on its financial statements - The Corporation adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing right-of-use assets and lease liabilities for all non-short-term leases[123] | Lease Metric | Sep 30, 2019 (in thousands) | | :-------------------------------- | :-------------------------- | | Operating lease assets | $16,837 | | Finance lease assets | $519 | | Total leased assets | $17,356 | | Operating lease liabilities | $17,696 | | Finance lease liabilities | $648 | | Total leased liabilities | $18,344 | - Operating lease cost is recognized on a straight-line basis over the lease term and recorded in net occupancy expense[124] 11. CONTINGENCY This note discloses potential liabilities arising from legal proceedings or other uncertain events - The Corporation received a sales tax assessment of $1.163 million from the Pennsylvania Department of Revenue for 2013-2016. A liability of $246 thousand has been accrued, with the remainder being appealed as improperly assessed[130] 12. RECENT ACCOUNTING PRONOUNCEMENTS This note discusses recently issued accounting standards and their potential impact on the company's financial reporting - The Corporation is evaluating ASU 2016-13 (Credit Losses), effective after December 15, 2019, which will require recognition of all expected credit losses and is expected to significantly impact financial statements[131] - Other pronouncements being evaluated include ASU 2018-14 (Defined Benefit Plans) and ASU 2018-13 (Fair Value Measurement), both effective after December 15, 2019. ASU 2019-01 (Leases) is not expected to have a material impact[132][134][135] ITEM 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Corporation's financial condition, liquidity, and results of operations, highlighting key performance drivers, asset quality, funding sources, capital management, and market risks for the three and nine months ended September 30, 2019, compared to prior periods GENERAL OVERVIEW This section provides a high-level summary of the Corporation's financial performance and strategic outlook - Management measures performance using return on average equity, EPS, and asset quality, and expects non-interest costs to increase with growth, offset by increased earning assets and non-interest income[142][143] - The Corporation is well-positioned to sustain core earnings in 2019, driven by organic growth in diversified markets[143] CASH AND CASH EQUIVALENTS This section discusses the company's cash position and its ability to meet short-term obligations | Metric | Sep 30, 2019 (in millions) | Dec 31, 2018 (in millions) | | :-------------------------------- | :------------------------- | :------------------------- | | Cash and Cash Equivalents | $52.2 | $45.6 | - Management believes current liquidity, customer deposits, FHLB financing, and maturing portfolios are sufficient to meet cash obligations[146] SECURITIES This section provides an overview of the company's investment securities portfolio and its role in liquidity and earnings | Metric | Sep 30, 2019 (in millions) | Dec 31, 2018 (in millions) | | :-------------------------------- | :------------------------- | :------------------------- | | Securities Available for Sale and Trading Securities | $539 | $525 | | Securities Portfolio as % of Total Assets | 15.2% | 16.3% | - The Corporation aims to maintain its securities portfolio between 15% and 20% of total assets to balance earnings and liquidity, and actively manages interest rate risk through its Asset/Liability Committee (ALCO)[147][149] LOANS This section analyzes the growth and composition of the company's loan portfolio - Total loan portfolio, net of unearned discount, increased by $275 million (14.9% annualized) to $2.7 billion during the first nine months of 2019[150] - Loan growth was primarily driven by commercial and industrial loans (up $117 million, 17.1% annualized) and commercial real estate loans (up $91.2 million, 17.5% annualized)[150] - Significant growth was observed in Private Banking (up $63.1 million, 46.1% annualized) and the Buffalo market (up $129 million, 66.9% annualized)[150] ALLOWANCE FOR LOAN LOSSES This section discusses the methodology and adequacy of the allowance for loan losses, a key indicator of asset quality - The allowance for loan losses is determined by management's judgment based on individual loan evaluations, portfolio risk characteristics, historical losses, and economic conditions[151] | Metric | 9 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2018 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Provision for Loan Losses | $5,212 | $4,631 | | Net Charge-offs | $(4,709) | $(1,814) | | Allowance to Net Loans | 0.73% | 0.94% | | Net Charge-offs to Average Loans (annualized) | 0.24% | 0.11% | - The third quarter of 2019 included a $1.4 million provision for one fully reserved commercial real estate loan due to deterioration and communication issues[160] - Management believes the allowance for loan losses is reasonable and adequate as of September 30, 2019[161] DEPOSITS This section analyzes the trends and composition of the company's deposit base, a primary funding source - Total deposits increased by $265 million (13.6% annualized) to $2.9 billion during the first nine months of 2019, driven by targeted customer acquisition strategies[162] - Private Banking deposits increased by $85.8 million (31.2% annualized), and Buffalo market deposits grew by $192 million (102.3% annualized)[162] OTHER FUNDING SOURCES This section describes additional funding avenues beyond deposits, such as borrowings, used to support operations and growth - Short-term borrowings from the FHLB increased to $18.0 million during the first nine months of 2019, serving as a supplemental funding source[163] - The Corporation focuses on maintaining robust short-term and long-term borrowing capacity for liquidity management[165] SHAREHOLDERS' EQUITY AND CAPITAL RATIOS AND METRICS This section reviews the company's equity position and key capital adequacy ratios, reflecting its financial strength and regulatory compliance - Total shareholders' equity increased by $34.2 million (13.0%) to $297 million at September 30, 2019, from December 31, 2018[166] | Capital Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :----------- | :----------- | | Total risk-based capital ratio | 12.61% | 13.21% | | Tier 1 capital ratio | 10.02% | 10.33% | | Common equity tier 1 ratio | 9.28% | 9.50% | | Leverage ratio | 7.95% | 7.87% | | Tangible common equity/tangible assets | 7.37% | 7.02% | | Book value per share | $19.55 | $17.28 | | Tangible book value per share | $16.98 | $14.69 | - The Corporation earned $29.6 million and declared $7.8 million in dividends (26.2% payout ratio) in the first nine months of 2019. Accumulated OCI increased by $12.5 million[166] LIQUIDITY This section assesses the company's ability to meet its financial obligations and fund asset growth - Liquidity is monitored by management and the Board's ALCO, with the current position deemed acceptable[171] - Liquid assets include cash and cash equivalents, maturing loan portfolio portions, and securities with maturities within one year[171] OFF-BALANCE SHEET ACTIVITIES This section describes financial instruments and commitments that are not recognized on the balance sheet but represent potential future obligations or resources - The Corporation issues loan commitments, credit lines, and letters of credit to meet customer financing needs, with credit policies similar to those for evaluating loans[172] | Off-Balance Sheet Instrument | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Commitments to make loans (Fixed Rate) | $32,706 | $46,265 | | Commitments to make loans (Variable Rate) | $175,015 | $191,803 | | Unused lines of credit | $462,308 | $443,846 | | Standby letters of credit | $15,374 | $16,310 | - Unfunded capital commitments for small business investment corporations and low income housing partnerships totaled $7.360 million and $4.252 million, respectively, at September 30, 2019[174] CONSOLIDATED YIELD COMPARISONS This section compares key interest rate metrics, such as net interest margin, yield on earning assets, and cost of liabilities | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Interest Margin (FTE) | 3.72% | 3.81% | 3.75% | 3.77% | | Yield on Earning Assets | 4.97% | 4.81% | 4.98% | 4.68% | | Cost of Interest-Bearing Liabilities | 1.47% | 1.16% | 1.44% | 1.06% | - For the three months ended September 30, 2019, the net interest margin decreased by 9 basis points due to a larger increase in the cost of interest-bearing liabilities (31 bps) compared to the yield on earning assets (16 bps)[183] RESULTS OF OPERATIONS (Three Months Ended September 30, 2019 and 2018) This section analyzes the company's financial performance for the three-month periods ended September 30, 2019 and 2018 OVERVIEW OF THE INCOME STATEMENT This overview summarizes key financial results from the income statement for the three-month period | Metric | 3 Months Ended Sep 30, 2019 (in millions) | 3 Months Ended Sep 30, 2018 (in millions) | YoY Change (in millions) | YoY % Change | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :----------------------- | :----------- | | Net Income | $10.4 | $9.2 | +$1.1 | +12.1% | | Diluted EPS | $0.68 | $0.60 | +$0.08 | +13.3% | | Total Revenue | $36.2 | $32.8 | +$3.4 | +10.3% | | Total Non-Interest Expense | $21.4 | $20.8 | +$0.7 | +3.1% | | Provision Expense | $2.1 | $1.1 | +$1.0 | +93.4% | | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Return on Average Assets | 1.19% | 1.20% | | Return on Average Equity | 14.03% | 14.47% | | Return on Average Tangible Equity | 16.19% | 17.16% | | Efficiency Ratio | 58.31% | 62.46% | NET INTEREST MARGIN This section analyzes the net interest margin for the three-month period, a key profitability metric for financial institutions - Net interest margin (FTE) decreased by 9 basis points to 3.72% in Q3 2019 from 3.81% in Q3 2018[183] - Yield on earning assets increased by 16 basis points to 4.97%, while the cost of interest-bearing liabilities increased by 31 basis points to 1.47%[183] PROVISION FOR LOAN LOSSES This section examines the provision for loan losses for the three-month period, reflecting changes in credit quality and risk assessment - Provision for loan losses increased to $2.1 million in Q3 2019 from $1.1 million in Q3 2018, including a $1.4 million provision for one fully reserved commercial real estate loan[184] - Net charge-offs were $3.3 million in Q3 2019, significantly up from $707 thousand in Q3 2018, primarily due to a $2.6 million charge-off of an impaired commercial mortgage loan at the Bank[184] NON-INTEREST INCOME This section analyzes the various sources of non-interest income for the three-month period - Non-interest income (excluding securities gains) increased by $567 thousand (10.3%) to $6.1 million in Q3 2019[187] - Key drivers of the increase were Wealth and Asset Management fees (up $207 thousand, 20.1%), mortgage banking fees (up $125 thousand, 44.2%), and service charges on deposit accounts (up $92 thousand, 5.8%)[189] NON-INTEREST EXPENSES This section examines the trends in non-interest expenses for the three-month period, including salaries, benefits, and occupancy costs - Total non-interest expenses increased by $0.7 million to $21.4 million in Q3 2019[190] - Salaries and benefits increased by $204 thousand (1.8%) due to staffing expansion in business development, risk management, and customer service[190] - The Corporation serviced 67,623 households at Sep 30, 2019, up 7.6% YoY, reflecting core deposit growth strategies[190] INCOME TAX EXPENSE This section analyzes the income tax expense and effective tax rate for the three-month period | Metric | 3 Months Ended Sep 30, 2019 (in millions) | 3 Months Ended Sep 30, 2018 (in millions) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Income Tax Expense | $2.3 | $1.7 | | Effective Tax Rate | 17.9% | 15.4% | - The increase in effective tax rate is primarily due to growth in taxable activities, with the rate differing from the 21.0% federal statutory rate due to tax-exempt income[191] RESULTS OF OPERATIONS (Nine Months Ended September 30, 2019 and 2018) This section analyzes the company's financial performance for the nine-month periods ended September 30, 2019 and 2018 OVERVIEW OF THE INCOME STATEMENT This overview summarizes key financial results from the income statement for the nine-month period | Metric | 9 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2018 (in millions) | YoY Change (in millions) | YoY % Change | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | :----------------------- | :----------- | | Net Income | $29.6 | $24.8 | +$4.8 | +19.5% | | Diluted EPS | $1.94 | $1.62 | +$0.32 | +19.8% | | Total Revenue | $105.7 | $93.1 | +$12.6 | +13.5% | | Total Non-Interest Expense | $64.6 | $59.3 | +$5.3 | +8.9% | | Provision for Loan Losses | $5.2 | $4.6 | +$0.6 | +12.5% | | Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Return on Average Assets | 1.18% | 1.12% | | Return on Average Equity | 14.14% | 13.35% | | Return on Average Tangible Equity | 16.45% | 15.91% | | Efficiency Ratio | 60.46% | 62.36% | NET INTEREST MARGIN This section analyzes the net interest margin for the nine-month period, a key profitability metric for financial institutions - Net interest margin (FTE) slightly decreased by 2 basis points to 3.75% for the nine months ended September 30, 2019, from 3.77% in the comparable period of 2018[196] - Yield on earning assets increased by 30 basis points to 4.98%, while the cost of interest-bearing liabilities increased by 38 basis points to 1.44%[196] PROVISION FOR LOAN LOSSES This section examines the provision for loan losses for the nine-month period, reflecting changes in credit quality and risk assessment - Provision for loan losses increased to $5.2 million for the nine months ended September 30, 2019, from $4.6 million in the comparable period of 2018[197] - Net charge-offs significantly increased to $4.7 million for the nine months ended September 30, 2019, from $1.8 million in the comparable period of 2018[197] - Bank's net charge-offs were $3.3 million (0.17% of average loans), and Holiday's net charge-offs were $1.4 million for the nine months ended September 30, 2019[197] NON-INTEREST INCOME This section analyzes the various sources of non-interest income for the nine-month period - Net realized gains on available-for-sale securities were $148 thousand for the nine months ended September 30, 2019, compared to zero in the prior year[199] - Net realized and unrealized gains on trading securities increased to $1.7 million, up from $672 thousand, driven by equity market improvements and a $463 thousand gain from the sale of Visa Class B stock[199][200] - Non-interest income (excluding securities gains) increased to $17.4 million, up from $15.6 million, primarily due to increases in service charges on deposit accounts (up $624 thousand, 15.2%), card processing and interchange income (up $305 thousand, 9.7%), and wealth and asset management fees (up $331 thousand, 10.5%)[201][202] NON-INTEREST EXPENSES This section examines the trends in non-interest expenses for the nine-month period, including salaries, benefits, and occupancy costs - Total non-interest expenses increased by $5.3 million to $64.6 million for the nine months ended September 30, 2019[205] - Salaries and benefits expense increased by $2.9 million (9.5%) due to expanded staffing levels in business development, risk management, and customer service[205] INCOME TAX EXPENSE This section analyzes the income tax expense and effective tax rate for the nine-month period | Metric | 9 Months Ended Sep 30, 2019 (in millions) | 9 Months Ended Sep 30, 2018 (in millions) | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Income Tax Expense | $6.3 | $4.4 | | Effective Tax Rate | 17.5% | 14.9% | - The increase in the effective tax rate is primarily due to growth in taxable activities, with the rate differing from the 21.0% federal statutory rate due to tax-exempt income[206] CRITICAL ACCOUNTING POLICIES This section highlights accounting policies that require significant management judgment and estimates, which could materially impact financial results - Key accounting policies involve estimates and significant management judgments, particularly for the allowance for loan losses, fair value of securities, and assets/liabilities from business combinations[207] - The Corporation adopted ASU 2016-02 (Leases) on January 1, 2019, which impacted financial statements by recognizing lease assets and liabilities[207] ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk This section discusses the Corporation's primary market risk, which is interest rate risk, and how it is managed through asset/liability management models and ALCO reviews to maximize net interest income within acceptable risk levels - The primary market risk is interest rate risk, managed to maximize net interest income while maintaining acceptable risk levels[210][211] - Management uses an asset-liability management model and reviews earnings shock scenarios (e.g., immediate 100-400 basis point rate changes) to quantify and monitor interest rate risk[212][214] | Change in Basis Points | % Change in Net Interest Income (1-year period) | | :--------------------- | :---------------------------------------------- | | +400 | 9.7% | | +300 | 6.9% | | +200 | 4.4% | | +100 | 3.3% | | -100 | (7.3%) | | -200 | (8.1%) | ITEM 4 – Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Corporation's disclosure controls and procedures were effective as of September 30, 2019, with no significant changes to internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2019[218] - No significant changes in internal control over financial reporting occurred during the quarter ended September 30, 2019[218] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings against the Corporation or its subsidiaries, other than routine matters incidental to business - No material legal proceedings are pending against the Corporation or its subsidiaries[221] ITEM 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the 2018 Form 10-K - No material changes to risk factors since the 2018 Form 10-K[223] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No shares were purchased under the publicly announced stock repurchase program during the three months ended September 30, 2019. Employees surrendered shares for tax obligations related to restricted stock vesting - No shares were purchased under the stock repurchase program during the quarter ended September 30, 2019[225] - As of September 30, 2019, 249,731 shares remained authorized for repurchase under the program[225] - Employees surrendered shares to satisfy tax obligations related to restricted common stock vesting[226] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported - No defaults upon senior securities[227] ITEM 4. MINE SAFETY DISCLOSURES Not applicable - Mine safety disclosures are not applicable to the registrant[227] ITEM 5. OTHER INFORMATION No other information was reported - No other information was reported[227] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and Inline XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, as well as various Inline XBRL documents[229][231] SIGNATURES The report is duly signed on behalf of CNB Financial Corporation by its President and Chief Executive Officer, Joseph B. Bower, Jr., and its Treasurer, Tito L. Lima, on November 6, 2019 - The report was signed by Joseph B. Bower, Jr., President and CEO, and Tito L. Lima, Treasurer, on November 6, 2019[234]