8-K: CNB Financial Corporation Reports Mixed Second Quarter Results Amidst Rising Deposit Costs

CNB Financial Corporation announced second quarter earnings of $11.9 million, a slight increase from the previous quarter, but a decrease compared to the same quarter last year due to higher deposit costs.

Summary

• CNB Financial Corporation reported net income available to common shareholders of $11.9 million, or $0.56 per diluted share, for the second quarter of 2024, compared to $11.5 million, or $0.55 per diluted share, in the first quarter of 2024.
• However, earnings decreased from $12.8 million, or $0.61 per diluted share, in the second quarter of 2023, primarily due to increased deposit costs resulting from Federal Reserve rate hikes.
• For the first six months of 2024, earnings were $23.4 million, or $1.11 per diluted share, down from $28.2 million, or $1.33 per diluted share, in the same period of 2023.
• Loans totaled $4.4 billion at June 30, 2024, an increase of $73.0 million from the previous quarter and $106.5 million from the same period last year.
• Total deposits reached $5.1 billion, up $73.3 million from the previous quarter and $177.8 million from the same period last year.
• The company's syndicated loan portfolio decreased to $53.9 million, or 1.20% of total loans, as the company focuses on organic loan growth.
• Uninsured deposits were approximately $1.5 billion, or 29.00% of total deposits, but adjusted to $949.8 million, or 18.22% when excluding affiliate and pledged deposits.
• Nonperforming assets increased to $36.5 million, or 0.62% of total assets, primarily due to two commercial loan relationships.
• Net loan charge-offs were $2.8 million, or 0.25% annualized, for the quarter, up from $1.3 million in the previous quarter.
• Pre-provision net revenue (PPNR) was $18.6 million for the quarter, up from $16.8 million in the previous quarter but down from $19.6 million in the same quarter last year.
• Book value per common share was $25.19 at June 30, 2024, up from $24.77 at March 31, 2024 and $23.42 at June 30, 2023.
• Tangible book value per common share was $23.09, an increase of $0.42 from the previous quarter and $1.77 from the same period last year.
• The company repurchased 23,988 common shares at a weighted average price of $18.38 during the second quarter.
• The company's efficiency ratio was 65.94% for the quarter, compared to 69.08% in the previous quarter and 64.78% in the same quarter last year.
• Net interest margin was 3.36% for the quarter, down from 3.40% in the previous quarter and 3.62% in the same quarter last year.
• Total revenue was $54.6 million for the quarter, compared to $54.2 million in the previous quarter and $55.6 million in the same quarter last year.
• Net interest income was $45.7 million for the quarter, compared to $45.2 million in the previous quarter and $47.3 million in the same quarter last year.
• Total non-interest income was $8.9 million for the quarter, compared to $9.0 million in the previous quarter and $8.3 million in the same quarter last year.
• Total non-interest expense was $36.0 million for the quarter, compared to $37.4 million in the previous quarter and $36.0 million in the same quarter last year.
• The allowance for credit losses was 1.02% of total loans as of June 30, 2024, consistent with previous periods.
• The company's total shareholders' equity was $586.7 million, an increase of $8.1 million from the previous quarter and $37.1 million from the same period last year.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are some positive aspects like loan and deposit growth, the decrease in earnings compared to last year, the compression of net interest margin, and the increase in nonperforming assets are concerning. The company is facing challenges from rising deposit costs and credit quality issues.

Positives

• Net income available to common shareholders increased from the previous quarter.
• Loan growth was strong, driven by commercial and industrial growth in Columbus and new relationships in Cleveland and Roanoke.
• Deposit growth was also strong, with increases in business and retail deposits.
• The company is actively managing its syndicated loan portfolio, focusing on organic growth.
• The efficiency ratio improved due to a decrease in personnel costs and card processing expenses.
• Book value and tangible book value per common share increased.
• The company repurchased shares, indicating confidence in its value.
• The company has significant liquidity resources, with $271.9 million in cash equivalents and $4.5 billion in contingent liquidity.
• The company's capital ratios continue to exceed regulatory well-capitalized levels.

Negatives

• Net income decreased compared to the same quarter last year due to higher deposit costs.
• Net interest margin decreased due to rising deposit interest costs.
• Nonperforming assets increased due to two commercial loan relationships.
• Net loan charge-offs increased significantly compared to the previous quarter and the same quarter last year.
• Pre-provision net revenue (PPNR) decreased compared to the same quarter last year.
• The cost of interest-bearing liabilities increased due to targeted deposit rate increases.
• The company experienced a slight net interest margin compression in the second quarter when compared to the first quarter.

Risks

• The company faces risks from rising deposit costs due to Federal Reserve rate increases.
• There is a risk of further increases in nonperforming assets and loan charge-offs.
• The company is exposed to potential losses from its commercial real estate portfolio, particularly in the office, hospitality, and multifamily sectors.
• The company's unrealized losses on available-for-sale and held-to-maturity securities could impact capital ratios if fully recognized, although the company maintains sufficient liquid funds to cover these losses.
• The company is exposed to risks related to changes in interest rates, economic conditions, and competition.
• The company is exposed to risks related to technology changes and regulatory proceedings.

Future Outlook

The company is confident that yields on new loan production will support a higher spread as deposit rates further stabilize given the Fed's extended pause in rate actions. Management seeks to further leverage the expertise of its leadership team to increase both interest-spread and fee-based revenues, while extensively reviewing back-office support functions and processes to identify even greater efficiencies.

Management Comments

• Our earnings and growth for the second quarter reflect the diligent and disciplined efforts made by our team to achieve sustainable positive operating leverage.
• We have successfully built a loan pipeline that both increased production during the second quarter and established a sound level of opportunities for future loan originations.
• Importantly, we funded this loan growth with steady deposit growth from treasury management activities and in-market household growth, while reducing higher-cost corporate deposit balances.
• Though we experienced some slight net interest margin compression in the second quarter when compared to the first quarter, primarily from a continued rise in deposit interest costs, we are confident that yields on new loan production, when compared to the lower yields on loan payoffs and scheduled amortizations, will support a higher spread as deposit rates further stabilize given the Feds extended pause in rate actions.
• As our loan and deposit growth for the quarter contributed to overall increased operating revenues, noninterest expenses favorably declined as a result of our disciplined overhead management actions, particularly those related to further optimizing staffing levels and controlling personnel costs.
• With our recent announcement of key executive management appointments, we seek to further leverage the expertise of our deeply experienced leadership team to further increase both interest-spread and fee-based revenues, while extensively reviewing back-office support functions and processes to identify even greater efficiencies.
• Importantly, our realization of positive operating leverage and performance momentum is without compromise to CNBs high credit quality standards and exceptional client experiences that are foundational elements to our historical and future success.

Industry Context

The results reflect the challenges faced by regional banks in the current environment of rising interest rates, which have increased deposit costs and compressed net interest margins. The company's focus on organic loan growth and expense management is consistent with industry trends.

Comparison to Industry Standards

• CNB Financial's net interest margin of 3.36% is lower than the average for many regional banks, which have seen margins compress due to rising deposit costs. For example, comparible banks such as F.N.B. Corporation (FNB) and Northwest Bancshares (NWBI) have reported similar margin compression.
• The company's loan growth of 1.68% quarter-over-quarter is in line with some regional banks, but below the growth rates of some larger national banks. For example, JP Morgan Chase (JPM) and Bank of America (BAC) have reported higher loan growth rates.
• CNB's efficiency ratio of 65.94% is comparable to other regional banks, but there is room for improvement compared to the best-in-class banks. For example, some of the larger banks have efficiency ratios below 60%.
• The increase in nonperforming assets to 0.62% of total assets is a concern, as it is higher than the average for many regional banks. However, the company's allowance for credit losses of 1.02% of total loans is in line with industry standards.
• The company's return on average equity of 8.94% is lower than the average for many regional banks, which have seen higher returns due to higher interest rates. For example, some of the larger banks have ROE's above 10%.

Stakeholder Impact

• Shareholders may be concerned about the decrease in earnings and net interest margin.
• Employees may be affected by the company's efforts to optimize staffing levels and control personnel costs.
• Customers may benefit from the company's focus on improving efficiencies and processes.
• Creditors may be concerned about the increase in nonperforming assets and loan charge-offs.

Next Steps

• The company will continue to focus on organic loan growth and expense management.
• The company will seek to leverage the expertise of its leadership team to increase both interest-spread and fee-based revenues.
• The company will extensively review back-office support functions and processes to identify even greater efficiencies.
• The company will monitor its commercial real estate portfolio for potential risks.

Key Dates

Keywords

financial results, bank, earnings, loans, deposits, net interest income, nonperforming assets, credit losses, capital ratios, CNB Financial Corporation, CCNE