CNB Financial(CCNE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section covers the Corporation's unaudited condensed consolidated financial statements, management's analysis, market risk, and internal controls Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flows, and detailed accounting notes Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $5,663,600 | $5,475,179 | | Net Loans Receivable | $4,419,293 | $4,231,742 | | Total Deposits | $4,933,075 | $4,622,437 | | Total Liabilities | $5,113,966 | $4,944,417 | | Total Shareholders' Equity | $549,634 | $530,762 | Condensed Consolidated Statements of Income Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $47,260 | $46,301 | $94,899 | $88,918 | | Provision for Credit Loss Expense | $2,405 | $2,905 | $3,695 | $4,548 | | Non-Interest Income | $8,293 | $8,146 | $16,335 | $17,800 | | Non-Interest Expenses | $35,988 | $32,609 | $69,978 | $64,501 | | Net Income | $13,827 | $15,438 | $30,316 | $30,683 | Note 1. Summary of Significant Accounting Policies This note outlines the basis of presentation for condensed consolidated financial statements under U.S. GAAP and SEC regulations, confirming a single reportable segment - The financial statements are prepared in accordance with U.S. GAAP, and certain disclosures have been condensed as permitted for interim reports[389] - The Corporation's management considers all financial services operations to be aggregated into one reportable operating segment[392] Note 2. Recent Accounting Pronouncements This note discusses the adoption of new accounting standards, including ASU 2022-02, none of which had a material impact on the financial statements - Effective January 1, 2023, the Corporation adopted ASU 2022-02, which eliminated the separate recognition and measurement guidance for Troubled Debt Restructurings (TDRs), with the adoption having no material impact[424] - During the six months ended June 30, 2023, a qualitative assessment of goodwill was performed due to a decrease in the Corporation's stock price, indicating no impairment[393] Note 3. Securities This note details the securities portfolio, comprising AFS and HTM debt securities, with no credit-related impairment identified as of June 30, 2023 Securities Portfolio Summary (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Available-for-Sale (Fair Value) | $353,136 | $371,409 | | Amortized Cost | $412,536 | $432,992 | | Gross Unrealized Losses | ($59,417) | ($61,607) | | Held-to-Maturity (Amortized Cost) | $394,238 | $404,765 | | Fair Value | $358,806 | $367,388 | | Gross Unrealized Losses | ($35,432) | ($37,377) | - Management performed an assessment and believes there is no credit-related impairment of its debt securities at June 30, 2023, and December 31, 2022[22] Note 4. Loans Receivable and Allowance for Credit Losses This note provides a comprehensive overview of the loan portfolio, which grew to $4.46 billion, and the allowance for credit losses, which increased to $45.5 million Loan Portfolio Composition (in thousands) | Loan Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Commercial & Industrial | $778,704 | $791,911 | | Non-owner occupied, nonfarm nonresidential | $881,550 | $795,315 | | Residential Mortgages (first liens) | $967,807 | $942,531 | | Other construction loans | $451,043 | $446,685 | | Other | $1,385,730 | $1,298,796 | | Total Loans Receivable | $4,464,834 | $4,275,178 | Allowance for Credit Losses Roll-Forward - Six Months Ended June 30, 2023 (in thousands) | | Amount | | :--- | :--- | | Beginning Allowance (Dec 31, 2022) | $43,436 | | Charge-offs | ($1,820) | | Recoveries | $345 | | Provision for Credit Losses | $3,580 | | Ending Allowance (June 30, 2023) | $45,541 | - As of June 30, 2023, nonaccrual loans totaled $21.2 million, and loans past due 90+ days and still accruing were $1.4 million[474] Note 5. Leases This note details the Corporation's lease costs, weighted-average remaining lease terms, and discount rates for operating and finance leases Lease Metrics | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Weighted-average remaining lease term (years) | | | | Operating leases | 23.3 | 23.9 | | Finance leases | 3.5 | 4.0 | | Weighted-average discount rate | | | | Operating leases | 4.05% | 3.83% | | Finance leases | 4.49% | 4.49% | Note 6. Deposits This note details the Corporation's deposit base, highlighting significant increases in brokered and reciprocal deposits as of June 30, 2023 - Brokered deposits increased significantly to $179.4 million as of June 30, 2023, from $24.1 million at December 31, 2022, while reciprocal deposits also grew substantially to $463.4 million from $4.6 million over the same period[83] Note 7. Borrowings This note details the Corporation's borrowing facilities, including significant available capacity from FHLB and the Federal Reserve's Borrower-in-Custody program - The Bank has access to significant liquidity sources, including a $250.0 million line-of-credit with the FHLB and a borrowing capacity of $169.3 million through the Federal Reserve's Borrower-in-Custody program as of June 30, 2023[52][86] Note 8. Related Party Transactions This note discloses related party loans to officers, directors, and affiliates, totaling $40.5 million at June 30, 2023, made on ordinary business terms Loans to Related Parties - Six Months Ended June 30, 2023 (in thousands) | | Amount | | :--- | :--- | | Beginning Balance | $44,998 | | New loans and advances | $2,706 | | Repayments | ($6,694) | | Ending Balance | $40,519 | Note 9. Off-Balance Sheet Commitments and Contingencies This note details off-balance sheet commitments, including credit extensions and standby letters of credit, with an allowance for credit losses of $718 thousand Allowance for Credit Losses on Unfunded Loan Commitments (in thousands) | Period | Beginning Balance | Provision | Ending Balance | | :--- | :--- | :--- | :--- | | Three Months Ended June 30, 2023 | $662 | $56 | $718 | | Six Months Ended June 30, 2023 | $603 | $115 | $718 | Note 10. Stock Compensation This note describes stock-based compensation plans, with $961 thousand expense for restricted stock awards and $2.8 million unrecognized cost for unvested awards Changes in Time-Based Unvested Restricted Stock Awards (Six Months Ended June 30, 2023) | Category | Shares | Weighted Avg. Grant Date Fair Value | | :--- | :--- | :--- | | Unvested at beginning of period | 69,746 | $25.21 | | Granted | 90,675 | $23.63 | | Forfeited | (2,803) | $24.28 | | Vested | (24,646) | $25.37 | | Unvested at end of period | 132,972 | $24.12 | Note 11. Earnings Per Common Share This note provides the detailed computation of basic and diluted earnings per common share, with $1.34 basic EPS and $1.33 diluted EPS for the six months ended June 30, 2023 Earnings Per Common Share (EPS) | Metric | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Basic EPS | $0.61 | $1.34 | | Diluted EPS | $0.61 | $1.33 | Note 12. Derivative Instruments This note details the Corporation's use of derivative instruments, primarily interest rate swaps, for managing interest rate risk and customer loan conversions, not for speculation - The Corporation uses interest rate swaps as cash flow hedges to add stability to interest expense and manage exposure to interest rate risk[544] - Back-to-back interest rate swaps are used to allow customers to effectively convert a variable-rate loan to a fixed rate, with offsetting contracts that do not impact the Corporation's results of operations[117] Note 13. Fair Value This note explains the fair value hierarchy and details assets and liabilities measured at fair value, including $353.1 million in AFS securities using Level 2 inputs Assets Measured at Fair Value on a Recurring Basis (June 30, 2023, in thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total Fair Value | | :--- | :--- | :--- | :--- | :--- | | Securities Available-For-Sale | $0 | $353,136 | $0 | $353,136 | | Equity Securities | $8,567 | $699 | $0 | $9,266 | | Interest Rate Swaps | $0 | $1,458 | $0 | $1,458 | Note 14. Revenue from Contracts with Customers This note disaggregates non-interest income, with key revenue streams including service charges, wealth management fees, and card processing, totaling $16.3 million Non-Interest Income Breakdown (in thousands) | Revenue Stream | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Service charges on deposit accounts | $3,708 | $3,528 | | Wealth and asset management fees | $3,734 | $3,586 | | Card processing and interchange income | $4,121 | $3,801 | | Other income | $4,772 | $6,885 | | Total non-interest income | $16,335 | $17,800 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's analysis of the Corporation's financial condition and operating results, covering balance sheet, credit quality, liquidity, capital, and interest rate impacts Financial Condition Total assets grew to $5.7 billion, with loans increasing by $200.8 million and deposits by $310.6 million, while nonperforming assets remained stable at 0.43% - Loans (excluding PPP and syndicated loans) grew by $200.8 million, or 9.8% annualized, since December 31, 2022, primarily in the Cleveland, Roanoke, and Buffalo expansion markets[176] - Total deposits increased by $310.6 million, or 6.7%, from December 31, 2022, driven by growth in treasury management, municipal, and institutional deposits[194] Nonperforming Assets (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Nonaccrual loans | $21,176 | $20,986 | | Total nonperforming assets | $24,124 | $23,546 | | Nonperforming assets as a % of total assets | 0.43% | 0.43% | | Allowance for credit losses / Nonaccrual loans | 215.06% | 206.98% | Liquidity and Capital Resources The Corporation maintains strong liquidity of $2.3 billion and capital resources, with all regulatory capital ratios significantly exceeding well-capitalized minimums - Total available liquidity sources, including cash, FHLB, and Federal Reserve borrowing capacity, amounted to approximately $2.3 billion, which is 2.4 times the estimated adjusted uninsured deposit balance[202][230] Regulatory Capital Ratios | Ratio | June 30, 2023 | Well-Capitalized Minimum | | :--- | :--- | :--- | | Total Risk-Based Capital | 15.73% | 10.00% | | Tier 1 Risk-Based Capital | 12.93% | 8.00% | | Common Equity Tier 1 | 11.20% | 6.50% | | Tier 1 Leverage | 10.44% | 5.00% | Results of Operations - Three Months Ended June 30, 2023 vs 2022 Q2 2023 net income to common shareholders was $12.8 million, with diluted EPS of $0.61, reflecting higher deposit costs and a compressed net interest margin of 3.62% Q2 Performance Comparison | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Net Income to Common Shareholders | $12.8M | $14.4M | | Diluted EPS | $0.61 | $0.85 | | Net Interest Income | $47.3M | $46.3M | | Net Interest Margin | 3.62% | 3.74% | | Return on Average Equity | 10.07% | 14.55% | Results of Operations - Six Months Ended June 30, 2023 vs 2022 H1 2023 net income to common shareholders was $28.2 million, with diluted EPS of $1.33, driven by loan growth and higher rates despite increased deposit costs H1 Performance Comparison | Metric | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Net Income to Common Shareholders | $28.2M | $28.5M | | Diluted EPS | $1.33 | $1.69 | | Net Interest Income | $94.9M | $88.9M | | Net Interest Margin | 3.71% | 3.60% | | Return on Average Equity | 11.26% | 14.26% | Non-GAAP Financial Measures This section reconciles non-GAAP financial measures, including tangible book value per share and tangible common equity, to provide further insight into operations Tangible Book Value Per Common Share (Non-GAAP) Reconciliation | Metric (in thousands, except per share) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Shareholders' Equity | $549,634 | $530,762 | | Less: Preferred Equity | ($57,785) | ($57,785) | | Less: Goodwill & Intangibles | ($44,194) | ($44,113) | | Tangible Common Equity | $447,655 | $428,864 | | Ending Shares Outstanding | 20,997,053 | 21,121,346 | | Tangible Book Value Per Share | $21.32 | $20.30 | Quantitative and Qualitative Disclosures about Market Risk This section details the Corporation's primary market risk, interest rate risk, and its impact on net interest income, with all risk levels within policy limits Net Interest Income Sensitivity Analysis (1-Year Horizon) | Interest Rate Change | % Change in Net Interest Income (as of June 30, 2023) | | :--- | :--- | | +300 basis points | (2.1)% | | +200 basis points | 0.1% | | +100 basis points | 2.0% | | -100 basis points | (4.8)% | | -200 basis points | (7.8)% | | -300 basis points | (14.0)% | Controls and Procedures Management concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2023, with no significant changes in internal control - Management concluded that the Corporation's disclosure controls and procedures are effective to provide reasonable assurance that all material information is recorded and reported within the required time periods[321] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, and other corporate information, including stock repurchases and executive trading plans Legal Proceedings and Risk Factors This section reports no material legal proceedings and introduces a new risk factor concerning the impact of recent bank failures on customer confidence and liquidity - A new risk factor was disclosed regarding the potential adverse effects from recent bank failures in the industry, which have decreased depositor and investor confidence and could impact the Corporation's liquidity and operations[299][324] Other Information This section details the Corporation's stock repurchase plan, including shares repurchased, and confirms no defaults on senior securities or new executive trading plans Share Repurchases for the Three Months Ended June 30, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 54,168 | $18.57 | | May 2023 | 72,291 | $17.98 | | June 2023 | 0 | N/A | - The Board of Directors extended the common stock repurchase plan to May 17, 2024, with 273,541 shares remaining available for repurchase under the program as of June 30, 2023[325]