CNB Financial Corporation (CCNE) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the CNB Financial Corporation Third Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Michael Peduzzi, President and Chief Executive Officer. Please go ahead.

Hello, and welcome to the third quarter 2026 earnings call for CNB Financial Corporation. I am Michael Peduzzi, the President and CEO of CNB Financial Corporation and its main operating entity, CNB Bank and joining me today is our Chief Financial Officer, Tito Lima; our Chief Operating Officer, Michael Noah; and our Chief Credit Officer, Greg Dixon. Following the overview and presentation of our financial highlights, we will have time available for questions from those calling into today's presentation. Mike, Tito, Greg, thank you for joining me for today's discussion. We will start with some key highlights regarding our performance through the third quarter of 2026. Tito, as some of our comments may include discussions comparing our 2026 performance to that of similar periods in 2025, would you briefly discuss the financial statement recast we disclosed in our earnings release regarding our prior year results?

Sure, Mike. Good afternoon, everyone. In regards to the prior year recast after we acquired ESSA in July of 2025, we adopted a GAAP standard numbered ASU 2025-08 entitled Financial Services Credit Losses Purchased Financial Assets. My apologies for the formality, but we want to be very clear in disclosing the applicable GAAP. The resulting recast from our adoption of this standard means that for our prior year or third quarter 2025 and 9-month 2025 results, we eliminated the recognition of the Day 1 allowance for loan loss provision expense that had been previously reported after the July 2025 acquisition date. The adoption of this GAAP standard had no impact on the economics or cash flows of the acquired assets, but affected the timing of credit loss expense recognition. This change is not the result of an error, correction or restatement of previously issued financial statements, but rather it ensures GAAP compliance comparability between current year periods and prior year periods. Accordingly, certain comparative amounts for 2025 presented in our earnings release, all of which may be discussed here, may differ from those previously reported for these prior year periods. Thank you for giving me time to explain this, Mike.

Thanks for that, Tito. What is interesting is that our ESSA acquisition closed shortly before this GAAP standard became applicable in 2025, where we would not have had to deal with it. But the good news is it did not change our full year 2025 results as it mostly affects the timing of loan loss provision transactions reported in the third and fourth quarters of last year that effectively fully offset each other to a net zero impact by year-end. And importantly, none of this recast requires any changes to our reported results for any of the 2026 quarters or year-to-date. So let's get to the year-to-date and third quarter 2026 highlights. Adding our third quarter diluted earnings per share of $0.91 to our results for the first half of 2026, our year-to-date earnings of $2.69 per diluted share for the first 9 months of 2026 were a record for the corporation versus comparable first 9-month periods in any prior year. This record performance is anchored in several key elements: a sustained favorable net interest margin, sound levels of year-to-date loan growth with reasonable production across commercial and industrial loans, commercial real estate loans and consumer credits, primarily home equities. We experienced continued growth in our organic deposit base, particularly with our continued trend of new and expanded treasury management relationships, which have increased our noninterest-bearing deposit balances and have contributed to increased account activity fee income. We increased wealth management income as we continue to transition to a new retail investment platform and continue to expand our private banking structure and outreach in our newer markets. Before I turn the conversation over to Michael Noah and Tito Lima for additional commentary and metrics, I want to note that despite the headwinds of yield curve changes contributing to an increased level of temporary after-tax unrealized losses on our available-for-sale investment portfolio, the results for this quarter and all the quarters since our ESSA acquisition reflect sustained earnings even after the payment of dividends to favorably accrete tangible book value. We strive to achieve an acceleration of the post-acquisition earn-back period when compared to our premerger model projections. Additionally, we remain well positioned from an interest rate risk management position to support our net interest income and net interest margin in the current changing interest rate environment. With that, I'd like to turn it over to our Chief Operating Officer, Mike Noah, to provide some insights into our core banking growth and competitive dynamics we are seeing across our 6 banking divisions. Mike?

Thank you, Mike. The third quarter reflected some solid loan growth momentum as we're able to both achieve pull-through from our loan pipelines and see some slowdown in the volume of loan prepayments compared to earlier in the year. Our originated loans, which exclude purchased syndicated credits, grew for the third quarter by over $76 million or an annualized rate of 4.7% compared to our second quarter ending levels. In the first half of 2026, commercial and industrial loan growth led the way. While in this third quarter, we saw more closings in the commercial real estate, consumer residential mortgage and home equity loans. So we have generally experienced loan growth across our 4-state franchise. Activity for this quarter was primarily driven by growth in the Ridge View Bank market in Virginia, our ERIEBANK division, which covers Erie, Pennsylvania across the Greater Cleveland, Ohio area and our BankOnBuffalo market, which covers Western New York. Very notably, our Ridge View Bank division celebrates its 5-year anniversary this year and has grown over $500 million in earning assets. We continue to maintain a healthy pipeline as we enter the fourth quarter with the continued challenges of both strong competition and pricing dynamics given the recent Federal Reserve rate actions. Though total deposits declined by $32.6 million compared to June 30, 2026, the third quarter of 2026 included the strategic exit of higher cost corporate deposits totaling approximately $76.1 million with an average interest cost of 3.69%. Excluding the impact of the corporate deposit exit, total deposits increased approximately $43.5 million or 2.4% annualized compared to the second quarter of 2026. We continue to experience both the benefits of expanded treasury management customer relationships, including an increase in noninterest-bearing deposits for the quarter of $13.5 million or 4.7% annualized and continue to pursue retail deposit growth and pricing strategies that seek to optimize the corporation's branch and market footprint following the ESSA acquisition. Tito, I think that provides a quick summary of some of our key loan and deposit growth measures. So I'll turn it over to you to share more details and insights and other critical financial measures.

Thank you, Michael. I'd like to direct your attention to Slide 4 of our earnings supplement to begin my remarks. Our earnings per common share of $0.91 for the third quarter of this year was consistent with our earnings level for the 2026 second quarter, and as Mike Peduzzi noted, resulting in a record level for the first 9 months earnings of $2.69 per share. In addition to GAAP earnings of $1.81 per share for the first 9 months of 2025, we reported adjusted year-to-date earnings of $2.05 per share for the same period, with adjusted earnings being a non-GAAP measure, which excludes merger transaction-related expenses related to the corporation's acquisition of ESSA in 2025. Our year-to-date earnings for the 9 months ended September 30, 2026, increased $0.64 per diluted share or 31.2% compared to the adjusted year-to-date earnings of $2.05 for 2025. This accretion generally aligns with the post-merger earnings accretion we expected from our modeling. Our return on tangible common equity for the second quarter this year remained favorable at 14.4%, while our return on average assets was a sound 1.33%. These solid returns were primarily driven by our fully tax equivalent net interest margin, which was 3.89% for the third quarter of 2026 compared to the same level of 3.89% for the second quarter and above 3.84% for the first quarter of this year. We appreciate the continued pricing discipline of both loans and deposits demonstrated by Michael Noah and presidents of all the banking divisions in this continued highly competitive environment. As it relates to capital, as a result of our continued sustained lower earnings and profitability, the ratio of CNB's tangible common equity to tangible assets was 8.91% at the end of the third quarter of 2026 compared to 8.81% at the end of the second quarter of 2026. Slide #5, please. As Michael Noah noted, we experienced favorable loan growth for the quarter. Even more impressively, in this price competitive lending environment, we sustained a loan yield over 6.3% for the third quarter of 2026, while supporting our favorable net interest margin by funding our loans with deposits and not borrowings as reflected by our 93.9% loan-to-deposit ratio. Regarding deposit funding, our cost of interest-bearing deposits of 2.4% for the third quarter of 2026 reflected a decrease of 2 basis points compared to the second quarter of 2026 and a very favorable decrease of 35 basis points from the 2.75% cost of interest-bearing deposits for the third quarter 2025. Supported by our effective funding management activities, our available liquidity continues to be strong at 4.7x the level of adjusted uninsured deposits. As another key metric, our overall credit quality profile remains stable and strong with nonperforming assets to total assets of 0.68% as of September 30, 2026, and net charge-offs for the year-to-date being 0.10% annualized. Mike, I am pleased to share these favorable results and wish to thank you and our shareholders for the privilege of being your CFO.

Michael and Tito, thank you so much for this relevant commentary and detail. We appreciate the qualitative operating and financial management the 2 of you, Greg Dixon and your executive management colleagues continue to deliver for the investors of CNB. At this time, we are happy to answer questions that may come in from our investors and listeners on this call.

[Operator Instructions] The first question comes from Adam Kroll with Piper Sandler.

Maybe starting out on the loan growth. You had some nice organic growth during the quarter. I was just curious how pipelines are shaping up today, overall growth expectations for the fourth quarter and heading into '27. And maybe which divisions do you see as the primary drivers of that growth?

Sure. Thanks for the question. This is Mike Noah. We've got pipelines have been steady throughout the last, I'd say, 2 quarters. We've seen about $1 billion pipeline that's remained and held steady for us. Earlier part of the year, we saw more C&I lead the way on our loan growth. And in the last quarter, we saw commercial real estate step up and be a larger part of our growth during the quarter. So at this time, with the visibility we have, we feel pretty good about going into the fourth quarter and where we stand with the pipelines. Obviously, the goal will be to maintain those throughout the course of this year and the next. But we're feeling pretty good about where we stand right now.

Mike, I would suggest that we're seeing momentum really in the second half of the year in the Western New York region and BankOnBuffalo. But really on all our divisions, we've seen pretty steady growth. It was a little accelerated in Ridge View in the second half of the year and in the early half of the year, our legacy divisions in CNB and ERIEBANK, but we're not seeing really any slowdown anywhere, right?

No, I think that's a nice part you point out, Mike, that it has come from different divisions throughout the course of the year. Different quarters, we've had different divisions step up and provide that growth. So it's been pretty broad-based across the 4 states and the 6 divisions. So looking forward to that continuing as well.

Got it. Some great color there. Maybe for Tito on the margin. What's reported being stable, but you had some really nice core NIM expansion when stripping out accretion during the quarter. I would just love to get your updated expectations for the trajectory of the margin into the fourth and into '27 and maybe just unpack some of the potential drivers there.

Sure, sure. First of all, thank you again for joining our call. We appreciate it. You're right. I think on a fully GAAP equivalent basis, 3.89% was stable. But what was nice to see was on a core basis, excluding purchase accounting, we accreted our margin to 3.75%, which is really nice to see. Our expectation, honestly, is I think for us to maintain a stable margin in the fourth quarter and into next year, I think it's a success for us. Of course, we might see some increase in deposit rates into the near future here as rates increase. And as you would expect, Michael can talk about a tremendous amount of competition for deposits and Greg talking up on what our competitors are offering. But also we want to benefit from the accretion in yield not only coming from the new production, Michael can talk about our yield right now. I think third quarter, our new volume yield was somewhere at 6.3%, which is higher than our portfolio yield. But I think we expect that to increase, right? Michael, I think new business coming up right now is higher than that. But also, I think on our investment portfolio right now, we're investing somewhere Mike Peduzzi around 4.5%, 5%. That portfolio is going to continue to accrete for us as well. So I think if you were thinking a stable margin next year, it will be a good place, I think. I think we're expecting that much from our new growth in existing portfolio.

Got it. And Tito, how are you thinking about your interest-bearing deposit beta in this potential hiking cycle? And maybe more broadly, just speak to the competitive environment on the funding side of things?

I think -- honestly, I think we were in prior periods, somewhere in that 40% range is where we were. Honestly, I think right now, there's -- Michael can maybe a little more detail here, Michael, but -- there are some crazy offerings out there right now. Folks are above 4%. We have held our line. It was nice to see again that we grew our portfolio loans grew in deposits without the corporate strategies and still decreased rates. I can't repeat that, but I think honestly, in that 40% range should be our beta, I think.

The next question comes from Emily Lee with KBW.

This is Emily on for Tim Switzer. So would you be able to discuss maybe how the bank is approaching investments in specifically technology and AI? And maybe discuss any plans for the utilization of AI down the road, if that's on the internal side or more client-facing side? Just any specific use cases and potential to improve efficiency within the organization?

Sure. We have an internal task force focused on this, but I'll give you an internal use case we have right now, which went for a really good test for us to understand how to properly have our employee pool access it. We have an internal training AI mechanism we call Harmony that allows our employees to access not only all of our internal policies and procedures, but also protocols and things to follow for disclosures on a very active basis. We have the example of one of our newer teams in ESSA having a customer coming in shortly after systems conversion and it help them walk through how to do the processes and protocols. One person, I think, had it up while the other one used that as guidance. It doesn't speak to them. It provides them the information in a nice sequential way to handle it. And we found it to be very valuable and very well used by our internal footprint. Of course, the external uses are heavily driven by the privacy requirements that we have to maintain. So we're in contact with our core provider, COCC, which is built on a Fiserv platform and some of our other folks to understand how they are managing that process so that when -- as we get to do further testing of how we're utilizing that or want to utilize that, we're prepared to make sure that secure first, functionality second. In the interim, though, Emily, I would suggest that we're using a lot of things, RPAs and other things that are very similar to what AI would probably do on a much faster basis. We use a small business model for scoring and underwriting that's very, very heavily evaluated and has been very successful for us. So we're doing a lot of things on an active basis that aren't yet the full adoption of AI. But we are also investing in a lot of tokens that we are using in what we would call our sandbox or our test environment, where there's, again, no external opportunity, but where our experts inside are using that to evaluate how we can best potentially turn that on when that day comes. So I wouldn't say the investment is heavily material at this point in time, but it is absolutely focused on staying on the leading edge. We're not going to be the alphas or betas. We'll let the JPMorgan and the larger organizations who really have the capacity to do that, but we won't be far behind.

Yes. It sounds great. It sounds like you've got a lot of initiatives on your belt. Really nice to hear.

The next question comes from Jake Civiello with D.A. Davidson.

Mike Noah talked about the loan growth by geography. Can you give us some perspective on deposit dynamics maybe by division in the quarter?

Sure. This is Mike, Jake and again. Divisionally, same thing. We actually liked what we saw divisionally from a noninterest-bearing deposit standpoint. We saw that in a multiple divisional component here, what they provided in most of our divisions throughout the states. That really goes back to really the core relationships that we've talked about and trying to really get the additional treasury management relationship and furthering a robust relationship across the board. So from a divisional standpoint, we're very pleased with approximately 5% annualized growth in the noninterest-bearing side of things. And again, that was for most of our divisions providing that context and clarity there. The focus is really on the savings side. It's on the checking side. It's on the core account side. We'll utilize CDs if needed as well. That's more of a maintenance play, trying to maintain our balances and such and trying to build up the core relationship with the other accounts. But we have the ability to be very granular within our divisions as we need to, to try to respond to competition, whether it's coming from the community bank level or at the upper end regional side of things. So we've got the ability to be nimble and make decisions in real time to be able to react accordingly, which has helped us a lot.

Michael, if I can also add, from a geographical standpoint, it was good and nice to see FCBank. And by the way, FCBank did well for us, Jake, on both loans and deposits, nice pickup...

In the Ohio area.

In the Columbus, Ohio, Mike, in Columbus, Ohio, but also ESSA had a nice deposit growth here this quarter, which was nice to see. So continues to -- we continue to benefit, as you know, Jake, from our diversity in our geographies. And one is not as strong, the others are picking up, which was nice.

Jake, this is Mike Peduzzi. I'll add one final point here. One of the keys to deposit growth is to not have deposit runoff. One of the things we did after the 2023 rapid rise in rates, and we were doing a lot to respond to that is we put a lot of our bigger and longer-term relationships on index deposits so that as rates either go up or down, they do the same. That's why if you look at our shock that we disclosed in our 10-Qs and 10-K, you'll see that whether we go up 100, 200 or 300 basis points or down, we're pretty neutral, slightly -- very slightly asset-sensitive, but pretty neutral. That's really helped us because even with the most recent Fed raise, we didn't have any of those customers coming in asking us to reprice that. And we had just as many assets that are variable rate repriced at the same time to keep that in balance. So as long as we don't have a really rapid increase that will require a lot of interaction, that helps us retain. And that's been really our key with treasury management. Our folks do a great job servicing those relationships. That's why you've seen that noninterest-bearing keep going up -- so again, I think one of the keys to our growth is not losing the relationships that we've worked so hard to gain and then retain. So that's going to be key for us as well.

Great. I just have one additional question. Given where we are with the potential for further interest rate tightening going forward, do you have any particular preference on utilization of borrowings or brokered deposits to kind of fill the gap if the deposit funding is on a short-term basis doesn't come at the same time as loan growth?

No, Jake, that's a great question. I think from my perspective, borrowings actually carry a lower cost of funding. Broker deposits have become very expensive as well because, again, I think a lot of our peers are having a challenge and continue to grow their deposit base and then they begin to pay up, right? So that's also driving the broker deposit costs. You try to go on the broker here for a year, you're paying a lot for it. And also on our borrowing capacity, we have, I don't know, over $2 billion in borrowing capacity at the Federal Home Loan Bank. So a tremendous amount of availability that we have and at a cheaper cost. So if we have to go to one of those sources, we'll probably pick borrowings first, but also continue to look at other opportunities we have within our core deposit strategies, and Michael got a bunch of things that he's working on right now to see that we can continue to grow to fund loan growth.

The next question comes from Tyler Cacciatori with Stephens.

This is Tyler on for Matt Breese. Tito, do you mind repeating what you said you guys were targeting for the interest-bearing beta? And then I was also wondering if you guys maybe have the spot NIM or the spot cost of deposits today or in the month of September?

For the month of September, I'm going from memory, we were somewhere -- our margin was pretty stable throughout the quarter. So I don't think we're too far off in September and cost of deposits came down. Michael, if you want to...

We're 2.48% on the interest-bearing side for the quarter.

Yes, for the quarter. So I think -- I still think that we're somewhere in the maybe 40% on the high side on the beta, I think, for the cost of deposits. And I think for us, I'll pick up on what Mike just said. We have about $1 billion of our deposits are indexed that are going to march along with what happens in interest rates. And the rest of it, I mean, I think we have, what, 84% or so -- or when you take out noninterest-bearing deposits, maybe 60%, 70% of our deposits are managed-rate, right? So we're going to -- I think we've done a nice job in the past at dragging our feet on what happens when rates increase. I think honestly, about what, maybe 65% of our loans are either immediately repricing or they are repricing over a period of time here. So we'll see a nice pickup on that end. We see a nice pickup on the investment portfolio side. So I think the deposit cost for us, we're going to manage it aggressively on balancing growth, but also not sacrificing the rate.

Great. And then, Mike, maybe 1 for you. You guys' capital ratios are starting to build pretty nicely. If you could just update us on deployment strategies there as we head into the back half of the year and into '27.

Sure. Well, we redeemed $50 million of the $85 million of sub debt and with rates going up and it's now past its initial 5-year fixed period being the variable rate period. I would expect, at least in the very near term, even though the Fed didn't raise rates yesterday that there's probably another rate hike in the cards in the next couple of months. And our goal ultimately is to call the remainder of that sub debt. So that would be probably the first use of capital that we would say on a more material basis as our earnings continue to grow. And as we've demonstrated in the past, we've had increases in our common stock dividend, and I would expect there would be some potential for that as well. That's subject to Board approval, but they've shown that propensity when we've had the sustainable continuing earnings. As we look further down the line, we already have approved buyback capabilities from our Board that's available and out there. I would say that would have a lot to do with market dynamics and volatility. We have all our plans that we would typically use those buyback shares fully funded with excess shares right now. So we don't need to do that buying for any planned fulfillment. But it's a lever that we have out there if we need to use it. But I would say our high priority is probably by June of next year. If things continue to roll as they do, our projections would indicate that we would redeem that sub debt first at $35 million and then evaluate other options from there, Tyler.

And we have a follow-up from Adam Kroll with Piper Sandler.

Maybe just a question on the expense run rate for the fourth quarter and generally, how you're thinking about balancing tech investments, other investments needing to potentially cross $10 billion and just overall expense growth in '27?

Sure. I think for the fourth quarter, first of all, one thing that happens a lot for us is we have our final evaluation of incentive comp. So I'm thinking that for the fourth quarter, there could be a bit of an increase because we are performing well here on earnings per share, efficiency ratio. And so I think that could be a little bit of an uptick in the fourth quarter. And for next year, I think we see ourselves kind of a reasonable increase that we've done in the past. So as you think about your model, think about the fourth quarter run rate, maybe increase a little bit as you expect for increases in merits and so forth. And we do have some investments in technology, right, Mike, that we are putting through in 2027. So maybe see if that helps a little bit. What was your other part of your question?

Any necessary investments you're making to prepare to cross $10 billion?

Yes. I think we will anticipate that already, Adam. I'm not saying that, that would not have any impact at all. But I can tell you, especially as we took on ESSA and moved from $6 billion to $8.5 billion, part of that process was to be able to handle what would look like a $10 billion company. Our audit requirements, our internal audit requirements and our structure meets those standards. We have all the liquidity and capital stress testing necessary to do that already. We've invested already in the lending software and stress testing capabilities and not only have invested in it, they're all actively running right now. So they've been subject to evaluation by our regulators and no concerns out there. The bigger issue, Adam, will be the importance of as we continue to look at these RPA and AIs is to make sure that we're keeping up with the ability to not just hire people but maybe deploy them to handle the extra capacity. We are -- we have excess capacity right now to handle $10 billion and beyond. That was one of the commitments we made as we bought ESSA to not just expand enough to handle that, but to do that. So you're already seeing that in our run rate, but there's always going to be new opportunities. And I think that would be balanced out by more opportunities and investments would probably reduce the amount of additional FTEs we have to hire. I don't think it will replace FTEs in terms of existing FTEs, but it will slow our run rate of hiring.

This concludes our question-and-answer session. I would like to turn the conference call back over to Michael Peduzzi for any closing remarks.

Well, thank you, and thank you all for joining us on this call this afternoon. We recognize that your time is valuable. We're hopeful that we provided some helpful perspective on our results and financial conditions. Tito, Mike, Greg, thank you for joining me. We greatly appreciate the financial commitment so many of you as our investors have made, and we remain focused on providing meaningful returns on your valuable investment in our company. So again, thank you all for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.