UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | --- | --- | |----------------------------------------------------------------------------|--------------------| | | | | Commission File Number 000-13396 | | | CNB FI ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | --- | --- | |----------------------------------------------------------------------------|------------------------------------------| | For the transition period from to | | | Commission File Number ...

PART I. [ITEM 1. Business](index=3&type=section&id=Item%201.%20Business) CNB Financial Corporation is a regulated financial holding company operating CNB Bank and subsidiaries, growing through strategic acquisitions - CNB Financial Corporation is a financial holding company operating CNB Bank and other subsidiaries, with a history of **strategic acquisitions** and planned future growth[8](index=8&type=chunk)[9](index=9&type=chunk) [CNB Financial Corporation Overview](index=3&type=section&id=CNB%20Financial%20Corporation%20Overview) [CNB Bank](index=3&type=section&id=CNB%20Bank) - CNB Bank operates **42 full-service branches** across Pennsylvania, Ohio, and New York, providing comprehensive banking and wealth management services[14](index=14&type=chunk)[15](index=15&type=chunk) [ERIEBANK](index=3&type=section&id=ERIEBANK) - ERIEBANK, a division of CNB Bank, expanded operations in Pennsylvania and Ohio, including the acquisition of Lake National Bank and opening new offices in Cleveland[11](index=11&type=chunk) [FCBank](index=3&type=section&id=FCBank) - FCBank, a division of CNB Bank, operates **seven branches** in central Ohio, following the acquisition of FC Banc Corp. in 2013[12](index=12&type=chunk) [BankOnBuffalo](index=3&type=section&id=BankOnBuffalo) - BankOnBuffalo, a division of CNB Bank, expanded its presence in Western New York with multiple full-service branches opened since 2017[13](index=13&type=chunk) [Holiday Financial Services Corporation](index=4&type=section&id=Holiday%20Financial%20Services%20Corporation) - Holiday Financial Services Corporation, a subsidiary, specializes in small balance unsecured and secured loans for higher-risk borrowers, operating **nine offices** within the Corporation's market area[9](index=9&type=chunk)[17](index=17&type=chunk) [Competition](index=4&type=section&id=Competition) - CNB Financial Corporation operates in a highly competitive financial services industry, competing with various providers primarily on **interest rates** for deposits and loans[18](index=18&type=chunk) [Supervision and Regulation](index=4&type=section&id=Supervision%20and%20Regulation) - CNB Financial Corporation and its subsidiaries are subject to extensive federal and state regulation, including oversight by the Federal Reserve Board, Pennsylvania Department of Banking, and FDIC[19](index=19&type=chunk)[21](index=21&type=chunk)[25](index=25&type=chunk) Capital Requirements (Basel III) | Requirement | Old Minimum Tier 1 | New Minimum Common Equity Tier 1 | New Minimum Tier 1 | Total Capital Ratio | Minimum Leverage Ratio | Capital Conservation Buffer (2019) | | :---------- | :----------------- | :------------------------------- | :----------------- | :------------------ | :--------------------- | :--------------------------------- | | Ratio | 4% | 4.5% | 6% | 8% | 4% | 2.5% | - As of December 31, 2019, CNB Bank qualified as '**well capitalized**' under applicable regulatory capital standards, indicating strong financial health and compliance with PCA regulations[39](index=39&type=chunk) [Employees](index=10&type=section&id=Employees) - The Corporation employed **559 individuals** as of December 31, 2019, comprising 509 full-time and 50 part-time staff[60](index=60&type=chunk) [Available Information](index=10&type=section&id=Available%20Information) - SEC filings, including the Annual Report on Form 10-K, are available free of charge on the Corporation's website (www.cnbbank.bank) and the SEC's website (http://www.sec.gov)[61](index=61&type=chunk)[62](index=62&type=chunk) [ITEM 1A. Risk Factors](index=10&type=section&id=Item%201A.%20Risk%20Factors) The Corporation faces various inherent business risks, including adverse economic conditions, potential inadequacy of loan loss allowances, interest rate volatility, and geographic loan concentrations - The possibility of a return to recessionary conditions and financial market volatility could adversely affect the Corporation's business, financial position, and results of operations[64](index=64&type=chunk)[65](index=65&type=chunk) - The Corporation is subject to extensive government regulation and supervision, with changes in laws or policies potentially increasing costs, limiting services, and negatively impacting financial results[81](index=81&type=chunk)[82](index=82&type=chunk) - The replacement of the LIBOR benchmark interest rate could adversely affect the Corporation's business, financial condition, and results of operations due to changes in interest payments and market risk profiles[127](index=127&type=chunk)[128](index=128&type=chunk) [ITEM 1B. Unresolved Staff Comments](index=17&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The Corporation reported no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments from the SEC[129](index=129&type=chunk) [ITEM 2. Properties](index=17&type=section&id=Item%202.%20Properties) The Corporation's headquarters and the Bank are located in an owned building in Clearfield, Pennsylvania, with 42 full-service offices, 24 owned and 18 leased - The Corporation owns its headquarters and **24 of its 42 full-service bank offices**, with the remaining offices and Holiday Financial Services locations primarily under lease agreements[130](index=130&type=chunk) [ITEM 3. Legal Proceedings](index=18&type=section&id=Item%203.%20Legal%20Proceedings) There are no material pending legal proceedings to which the Corporation or any of its subsidiaries is a party, except for ordinary routine proceedings incidental to the business - No material legal proceedings are pending against the Corporation or its subsidiaries[132](index=132&type=chunk) [ITEM 4. Mine Safety Disclosures](index=18&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The Corporation has no disclosures related to mine safety, as this item is not applicable to its business operations - Mine safety disclosures are not applicable to the Corporation[133](index=133&type=chunk) PART II. [ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=19&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) CNB Financial Corporation's common stock trades on the NASDAQ Global Select Market under 'CCNE', with 4,032 shareholders of record as of December 31, 2019 - CNB Financial Corporation's common stock (CCNE) is traded on the NASDAQ Global Select Market, with **4,032 shareholders of record** as of December 31, 2019[136](index=136&type=chunk) - No shares were repurchased by the Corporation in Q4 2019, with **249,731 shares** remaining under the 500,000-share repurchase program[137](index=137&type=chunk)[138](index=138&type=chunk) Cumulative Return to Stockholders (Index: 12/31/14 = 100.00) | Index | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | | :------------------------ | :------- | :------- | :------- | :------- | :------- | :------- | | CNB Financial Corporation | 100.00 | 101.22 | 155.27 | 156.50 | 140.13 | 204.48 | | NASDAQ Composite | 100.00 | 106.96 | 116.45 | 150.96 | 146.67 | 200.49 | | SNL Bank NASDAQ | 100.00 | 107.95 | 149.68 | 157.58 | 132.82 | 166.75 | [ITEM 6. Selected Financial Data](index=21&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes five-year financial data, highlighting significant growth in net income, EPS, total assets, and deposits from 2015 to 2019 - The Corporation's net income increased from **$22.2 million** in 2015 to **$40.1 million** in 2019, with diluted EPS rising from **$1.54** to **$2.63** over the same period, and total assets grew significantly from **$2.29 billion** to **$3.76 billion**[147](index=147&type=chunk) Selected Financial Data (Years Ended December 31, in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | **Income Statement:** | | | | | | | Total interest and dividend income | $155,728 | $131,870 | $108,874 | $94,315 | $87,178 | | Total interest expense | $39,530 | $26,950 | $17,365 | $13,028 | $12,471 | | Net interest income | $116,198 | $104,920 | $91,509 | $81,287 | $74,707 | | Provision for loan losses | $6,024 | $6,072 | $6,655 | $4,149 | $2,560 | | Non-interest income | $25,975 | $20,723 | $21,435 | $17,691 | $17,094 | | Non-interest expenses | $87,508 | $79,342 | $70,037 | $67,118 | $58,752 | | Income before income taxes | $48,641 | $40,229 | $36,252 | $27,711 | $30,489 | | Income tax expense | $8,560 | $6,510 | $12,392 | $7,171 | $8,292 | | **NET INCOME** | **$40,081** | **$33,719** | **$23,860** | **$20,540** | **$22,197** | | **Per Share Data:** | | | | | | | Basic EPS | $2.63 | $2.21 | $1.57 | $1.42 | $1.54 | | Fully diluted EPS | $2.63 | $2.21 | $1.57 | $1.42 | $1.54 | | Dividends declared | $0.68 | $0.67 | $0.66 | $0.66 | $0.66 | | Book value per share at year end | $20.00 | $17.28 | $15.98 | $14.64 | $14.01 | | **End of Period Balances:** | | | | | | | Total assets | $3,763,659 | $3,221,521 | $2,768,773 | $2,573,821 | $2,285,136 | | Loans, net of unearned discount | $2,804,035 | $2,474,557 | $2,145,959 | $1,873,536 | $1,577,798 | | Deposits | $3,102,327 | $2,610,786 | $2,167,815 | $2,017,522 | $1,815,053 | | Shareholders' equity | $304,966 | $262,830 | $243,910 | $211,784 | $201,913 | | **Key Ratios:** | | | | | | | Return on average assets | 1.17% | 1.12% | 0.89% | 0.85% | 0.99% | | Return on average equity | 14.05% | 13.46% | 9.97% | 9.69% | 11.23% | | Loan to deposit ratio | 90.38% | 94.78% | 98.99% | 92.86% | 86.93% | | Dividend payout ratio | 25.82% | 30.35% | 42.31% | 46.48% | 42.86% | | Average equity to average assets ratio | 8.36% | 8.33% | 8.93% | 8.76% | 8.86% | [ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's assessment of the Corporation's financial performance, focusing on key measures like return on average equity, earnings per share, and asset quality - Management focuses on return on average equity, EPS, and asset quality as key performance indicators, aiming for **disciplined loan pricing** to maintain a strong net interest margin despite a flattening yield curve and competitive environment[159](index=159&type=chunk) - The Corporation anticipates increased non-interest costs due to growth but expects earning asset growth and enhanced non-interest income to offset these expenses in 2020 and beyond, positioning for **sustained core earnings**[160](index=160&type=chunk) [Forward-Looking Statements](index=24&type=section&id=Forward-Looking%20Statements) [General Overview](index=24&type=section&id=General%20Overview) [Financial Condition](index=24&type=section&id=Financial%20Condition) Financial Condition Growth (Dollars in millions) | Metric | 2019 Balance | Change vs. prior year | % Change vs. prior year | 2018 Balance | Change vs. prior year | % Change vs. prior year | 2017 Balance | | :------------------------- | :----------- | :-------------------- | :---------------------- | :----------- | :-------------------- | :---------------------- | :----------- | | Total assets | $3,763.7 | $542.1 | 16.8% | $3,221.5 | $452.7 | 16.4% | $2,768.8 | | Total loans, net | $2,784.6 | $329.7 | 13.4% | $2,454.9 | $328.6 | 15.5% | $2,126.3 | | Total securities | $552.1 | $107.7 | 25.8% | $524.6 | $107.8 | 25.9% | $416.9 | | Total deposits | $3,102.3 | $491.5 | 18.8% | $2,610.8 | $443.0 | 20.4% | $2,167.8 | | Total shareholders' equity | $305.0 | $42.1 | 7.7% | $262.8 | $18.9 | 7.8% | $243.9 | - Cash and cash equivalents significantly increased to **$193.0 million** at December 31, 2019, from $45.6 million in 2018, primarily due to deposit growth[171](index=171&type=chunk) Securities Available-for-Sale (Year-End Carrying Value, in thousands) | Category | 2019 Market Value | 2018 Market Value | 2017 Market Value | | :-------------------------------------- | :---------------- | :---------------- | :---------------- | | U.S. Government Sponsored Entities | $127,094 | $132,694 | $108,148 | | State and Political Subdivisions | $104,363 | $136,031 | $137,723 | | Residential and Multi-family Mortgage | $276,636 | $206,053 | $109,636 | | Corporate Notes and Bonds | $8,082 | $11,777 | $17,200 | | Pooled SBA | $25,174 | $29,374 | $36,040 | | Other | $964 | $934 | $962 | | **Total Securities Available for Sale** | **$542,313** | **$516,863** | **$409,709** | Gross Loans by Category (Year-End, in thousands) | Category | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Commercial, industrial and agricultural | $1,046,665 | $916,297 | $704,606 | $567,800 | $475,364 | | Commercial mortgages | $814,002 | $697,776 | $644,597 | $574,826 | $448,179 | | Residential real estate | $814,030 | $771,309 | $713,347 | $652,883 | $574,225 | | Consumer | $124,785 | $86,035 | $80,193 | $74,816 | $78,345 | | Credit cards | $7,569 | $7,623 | $6,753 | $6,046 | $5,201 | | Overdrafts | $2,146 | $308 | $352 | $595 | $1,040 | | **Gross loans** | **$2,809,197** | **$2,479,348** | **$2,149,848** | **$1,876,966** | **$1,582,354** | Nonperforming Assets (Year-End, in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :----------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Nonaccrual loans | $21,736 | $14,262 | $15,653 | $12,510 | $12,159 | | Accrual loans > 90 days past due | $61 | $887 | $616 | $172 | $105 | | **Total nonperforming loans** | **$21,797** | **$15,149** | **$16,269** | **$12,682** | **$12,264** | | Other real estate owned | $1,633 | $418 | $710 | $1,015 | $654 | | **Total nonperforming assets** | **$23,430** | **$15,567** | **$20,606** | **$16,354** | **$12,918** | | Nonperforming loans as % of loans | 0.78% | 0.61% | 0.76% | 0.68% | 0.78% | | Nonperforming assets as % of assets | 0.62% | 0.48% | 0.74% | 0.64% | 0.57% | Allowance for Loan Losses Activity (Years Ended December 31, in thousands) | Metric | 2019 | 2018 | 2017 | | :------------------------------------ | :---------- | :---------- | :---------- | | Balance at beginning of period | $19,704 | $19,693 | $16,330 | | Total Charge-offs | $(6,751) | $(6,593) | $(4,077) | | Total Recoveries | $496 | $532 | $785 | | Net charge-offs | $(6,255) | $(6,061) | $(3,292) | | Provision for loan losses | $6,024 | $6,072 | $6,655 |\ | **Balance at end of period** | **$19,473** | **$19,704** | **$19,693** | | Allowance to net loans | 0.70% | 0.80% | 0.92% | | Net charge-offs to average loans | 0.24% | 0.26% | 0.16% | Deposits (Year-End, in thousands) | Category | 2019 | % change 2019 vs. 2018 | 2018 | % change 2018 vs. 2017 | 2017 | | :-------------------------- | :---------- | :--------------------- | :---------- | :--------------------- | :---------- | | Demand, Non-interest bearing | $382,259 | 7.1% | $356,797 | 10.9% | $321,858 | | Demand, Interest bearing | $628,579 | 4.8% | $600,046 | 6.1% | $565,399 | | Savings deposits | $1,663,673 | 32.2% | $1,258,506 | 37.5% | $915,587 | | Time deposits | $427,816 | 8.2% | $395,437 | 8.3% | $364,971 | | **Total** | **$3,102,327** | **18.8%** | **$2,610,786** | **20.4%** | **$2,167,815** | Capital Ratios and Book Value Per Share (December 31) | Metric | 2019 | 2018 | | :--------------------------------------- | :---------- | :---------- | | Total risk-based capital ratio | 12.51% | 13.21% | | Tier 1 capital ratio | 10.03% | 10.33% | | Common equity tier 1 ratio | 9.32% | 9.50% | | Leverage ratio | 7.86% | 7.87% | | Tangible common equity/tangible assets | 7.14% | 7.02% | | Book value per share | $20.00 | $17.28 | | Tangible book value per share | $17.45 | $14.69 | [Results of Operations](index=36&type=section&id=Results%20of%20Operations) - Net income increased by **18.9% to $40.1 million** in 2019, driven by a 10.7% rise in net interest income and a 25.3% increase in non-interest income[228](index=228&type=chunk) - Net interest margin (fully tax equivalent) decreased slightly to **3.69%** in 2019 from 3.77% in 2018, as the cost of interest-bearing liabilities (up 33 bps to 1.45%) outpaced the yield on earning assets (up 20 bps to 4.93%)[229](index=229&type=chunk) - Total non-interest income increased by **$5.3 million (25.3%) to $26.0 million** in 2019, significantly boosted by $2.5 million in gains from securities sales and trading, compared to a $451 thousand loss in 2018[232](index=232&type=chunk) - Total non-interest expenses rose by **$8.2 million (10.3%) to $87.5 million** in 2019, primarily due to a $4.5 million (10.9%) increase in salaries and benefits, including a $2.2 million rise in incentive compensation[234](index=234&type=chunk) [Income Tax Expense](index=38&type=section&id=Income%20Tax%20Expense) - Income tax expense was **$8.6 million** in 2019, up from $6.5 million in 2018, with effective tax rates of **17.6%** and 16.2% respectively, primarily influenced by tax-exempt income and BOLI earnings[244](index=244&type=chunk) - The 2017 tax expense of **$12.4 million** included a $3.0 million adjustment due to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act[244](index=244&type=chunk) [Contractual Obligations and Commitments](index=38&type=section&id=Contractual%20Obligations%20and%20Commitments) Contractual Obligations and Commitments (December 31, 2019, in thousands) | Obligation | Year or Less | One to Three Years | Three to Five Years | Over Five Years | Total | | :------------------------------- | :----------- | :----------------- | :------------------ | :-------------- | :---------- | | Deposits without a stated maturity | $2,674,511 | $0 | $0 | $0 | $2,674,511 | | Certificates of deposit | $118,695 | $286,063 | $13,395 | $9,663 | $427,816 | | FHLB and other borrowings | $37,505 | $106,671 | $82,500 | $1,231 | $227,907 | | Right of use liabilities | $1,638 | $3,426 | $3,215 | $19,582 | $27,861 | | Subordinated debentures | $0 | $0 | $0 | $70,620 | $70,620 | | **Total** | **$2,832,349** | **$396,160** | **$99,110** | **$101,096** | **$3,428,715** | [Off-Balance Sheet Arrangements](index=38&type=section&id=Off-Balance%20Sheet%20Arrangements) [Applications of Critical Accounting Policies](index=38&type=section&id=Applications%20of%20Critical%20Accounting%20Policies) - Critical accounting policies involve significant estimates, particularly for the allowance for loan losses, fair values of debt securities, and fair values of assets/liabilities from business acquisitions[250](index=250&type=chunk)[252](index=252&type=chunk)[253](index=253&type=chunk)[254](index=254&type=chunk) [ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk](index=39&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The Corporation's primary market risk is interest rate risk, managed through asset/liability management policies and systems, with earnings shock scenarios indicating all risk levels were within policy tolerance limits - The Corporation's primary market risk is **interest rate risk**, managed through asset/liability modeling and simulation, with earnings shock scenarios showing minimal impact on net interest income over a one-year period[255](index=255&type=chunk)[257](index=257&type=chunk)[259](index=259&type=chunk) Change in Net Interest Income from Interest Rate Changes (December 31) | Change in Basis Points | 2019 % Change in Net Interest Income | 2018 % Change in Net Interest Income | | :--------------------- | :----------------------------------- | :----------------------------------- | | 400 | (0.9)% | 7.6% | | 300 | (1.0)% | 6.0% | | 200 | (0.3)% | 4.9% | | 100 | (0.6)% | 5.2% | | (100) | (2.9)% | (2.0)% | | (200) | (2.6)% | (3.6)% | [ITEM 8. Financial Statements and Supplementary Data](index=41&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item presents the Corporation's audited consolidated financial statements and extensive notes, along with an unqualified opinion from the independent registered public accounting firm - The consolidated financial statements for 2019 and 2018, along with the three-year period ended December 31, 2019, are presented in conformity with **GAAP**, as audited by Crowe LLP[265](index=265&type=chunk)[519](index=519&type=chunk)[520](index=520&type=chunk) - Crowe LLP provided an **unqualified opinion** on the Corporation's financial statements for 2019 and 2018, confirming fair presentation in all material respects according to GAAP[520](index=520&type=chunk) - The firm also affirmed the effectiveness of the Corporation's **internal control over financial reporting** as of December 31, 2019, based on COSO criteria[520](index=520&type=chunk) [Consolidated Balance Sheets](index=41&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (December 31, in thousands) | Asset/Liability/Equity | 2019 | 2018 | Change (2019 vs 2018) | % Change (2019 vs 2018) | | :--------------------------------- | :---------- | :---------- | :-------------------- | :---------------------- | | Cash and due from banks | $187,748 | $43,327 | $144,421 | 333.3% | | Total cash and cash equivalents | $192,974 | $45,563 | $147,411 | 323.5% | | Securities available for sale | $542,313 | $516,863 | $25,450 | 4.9% | | Net loans | $2,784,562 | $2,454,853 | $329,709 | 13.4% | | Total Assets | $3,763,659 | $3,221,521 | $542,138 | 16.8% | | Non-interest bearing deposits | $382,259 | $356,797 | $25,462 | 7.1% | | Interest bearing deposits | $2,720,068 | $2,253,989 | $466,079 | 20.7% | | Total deposits | $3,102,327 | $2,610,786 | $491,541 | 18.8% | | Total liabilities | $3,458,693 | $2,958,691 | $500,002 | 16.9% | | Total shareholders' equity | $304,966 | $262,830 | $42,136 | 16.0% | [Consolidated Statements of Income and Comprehensive Income](index=42&type=section&id=Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) - Net income increased by **18.9% to $40.1 million** in 2019, from $33.7 million in 2018, and by 41.3% from $23.9 million in 2017[268](index=268&type=chunk) Consolidated Statements of Income Highlights (Years Ended December 31, in thousands) | Income/Expense Item | 2019 | 2018 | 2017 | | :---------------------------------- | :---------- | :---------- | :---------- | | Total interest and dividend income | $155,728 | $131,870 | $108,874 | | Total interest expense | $39,530 | $26,950 | $17,365 | | **NET INTEREST INCOME** | **$116,198** | **$104,920** | **$91,509** | | Provision for loan losses | $6,024 | $6,072 | $6,655 | | Non-interest income | $25,975 | $20,723 | $21,435 | | Non-interest expenses | $87,508 | $79,342 | $70,037 | | Income before income taxes | $48,641 | $40,229 | $36,252 | | Income tax expense | $8,560 | $6,510 | $12,392 | | **NET INCOME** | **$40,081** | **$33,719** | **$23,860** | | Basic Earnings Per Share | $2.63 | $2.21 | $1.57 | | Diluted Earnings Per Share | $2.63 | $2.21 | $1.57 | [Consolidated Statements of Changes in Shareholders' Equity](index=44&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) - Total shareholders' equity increased by **$42.1 million to $305.0 million** in 2019, primarily driven by net income of $40.1 million and other comprehensive income of $10.9 million, partially offset by cash dividends[271](index=271&type=chunk) Shareholders' Equity Changes (Years Ended December 31, in thousands) | Metric | 2019 | 2018 | 2017 | | :----------------------------------------- | :---------- | :---------- | :---------- | | Balance, January 1 | $262,830 | $243,910 | $211,784 | | Net income | $40,081 | $33,719 | $23,860 | | Other comprehensive income (loss) | $10,935 | $(3,653) | $15 | | Issuance of common stock, net | $1,423 | $0 | $19,294 | | Purchase of treasury stock | $(1,291) | $(2,454) | $(1,877) | | Cash dividends declared | $(10,358) | $(10,237) | $(10,094) |\ | **Balance, December 31** | **$304,966** | **$262,830** | **$243,910** | [Consolidated Statements of Cash Flows](index=45&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) - Net cash provided by operating activities increased to **$51.9 million** in 2019 from $43.8 million in 2018[273](index=273&type=chunk) - Net cash used in investing activities was **$368.6 million** in 2019, primarily due to net loan originations and purchases of available-for-sale securities[273](index=273&type=chunk) Consolidated Statements of Cash Flows Highlights (Years Ended December 31, in thousands) | Cash Flow Category | 2019 | 2018 | 2017 | | :-------------------------------------- | :---------- | :---------- | :---------- | | Net Cash Provided By Operating Activities | $51,907 | $43,768 | $30,763 | | Net Cash Used In Investing Activities | $(368,601)$ | $(451,588)$ | $(203,651)$ | | Net Cash Provided By Financing Activities | $464,105 | $418,038 | $179,050 | | Net Increase in Cash and Cash Equivalents | $147,411 | $10,218 | $6,162 | | Cash and Cash Equivalents, Ending | $192,974 | $45,563 | $35,345 | [Notes to Consolidated Financial Statements](index=47&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [1. Summary of Significant Accounting Policies](index=47&type=section&id=1.%20Summary%20of%20Significant%20Accounting%20Policies) - The Corporation's financial statements are consolidated and prepared in conformity with GAAP, relying on estimates and assumptions that can affect reported amounts[279](index=279&type=chunk)[280](index=280&type=chunk) - The Corporation adopted new accounting standards for leases (Topic 842), premium amortization on callable debt securities (ASU 2017-08), and hedging activities (ASU 2017-12) effective January 1, 2019, with immaterial effects on financial statements, except for lease recognition[339](index=339&type=chunk)[340](index=340&type=chunk)[341](index=341&type=chunk) - The Corporation anticipates an increase of approximately **20-30%** to its allowance for credit losses upon adoption of ASU 2016-13 (CECL) effective January 1, 2020, based on its fourth-quarter parallel run and assessment of loan portfolio characteristics[344](index=344&type=chunk) [2. Business Combinations](index=56&type=section&id=2.%20Business%20Combinations) - CNB Financial Corporation agreed to acquire Bank of Akron, with the merger anticipated in Q3 2020, adding **$388.9 million in assets** and **$339.7 million in deposits**[351](index=351&type=chunk) [3. Securities](index=56&type=section&id=3.%20Securities) - Securities available-for-sale totaled **$542.3 million** in 2019, up from $516.9 million in 2018, with residential and multi-family mortgage securities being the largest component[352](index=352&type=chunk) - The Corporation recorded net realized gains of **$152 thousand** from available-for-sale securities sales in 2019, compared to $0 in 2018 and $1.6 million in 2017[360](index=360&type=chunk) - Management concluded that securities in an unrealized loss position were not other-than-temporarily impaired as of December 31, 2019, due to no significant creditworthiness deterioration and intent to hold until recovery[358](index=358&type=chunk)[359](index=359&type=chunk) [4. Loans](index=60&type=section&id=4.%20Loans) - Total net loans increased to **$2.78 billion** in 2019 from $2.45 billion in 2018, with commercial, industrial, and agricultural loans comprising **37%** of the portfolio[363](index=363&type=chunk)[366](index=366&type=chunk) - The allowance for loan losses decreased to **$19.47 million** in 2019 from $19.70 million in 2018, with a provision for loan losses of $6.02 million in 2019[369](index=369&type=chunk) - Nonperforming loans, including those individually evaluated for impairment, totaled **$21.8 million** in 2019, up from $15.1 million in 2018, with a significant portion being commercial, industrial, and agricultural loans[372](index=372&type=chunk)[380](index=380&type=chunk) [5. Foreclosed Assets](index=69&type=section&id=5.%20Foreclosed%20Assets) - Foreclosed assets increased to **$1.63 million** in 2019 from $418 thousand in 2018, with additions of $2.07 million and sales of $851 thousand[411](index=411&type=chunk) - Net expenses related to foreclosed real estate were **$(61) thousand** in 2019, compared to $(27) thousand in 2018 and $158 thousand in 2017[411](index=411&type=chunk) [6. Fair Value](index=69&type=section&id=6.%20Fair%20Value) - Fair value measurements for most trading and available-for-sale securities use Level 1 or Level 2 inputs, while impaired loans often rely on **Level 3 inputs** from third-party appraisals with management adjustments[414](index=414&type=chunk)[416](index=416&type=chunk) - As of December 31, 2019, total securities available for sale were valued at **$542.3 million**, with **$2.8 million** classified as Level 3 due to unobservable inputs[418](index=418&type=chunk) [7. Secondary Market Mortgage Activities](index=74&type=section&id=7.%20Secondary%20Market%20Mortgage%20Activities) - Loans originated for resale increased to **$43.46 million** in 2019 from $22.99 million in 2018, generating net gains on sales of **$990 thousand** in 2019[428](index=428&type=chunk) - Capitalized mortgage servicing rights increased to **$1.57 million** in 2019 from $1.49 million in 2018, with additions of $292 thousand and amortization of $214 thousand[429](index=429&type=chunk) [8. Premises and Equipment](index=74&type=section&id=8.%20Premises%20and%20Equipment) - Premises and equipment, net, increased to **$54.87 million** in 2019 from $49.92 million in 2018, with depreciation expense of **$4.10 million** in 2019[430](index=430&type=chunk) [9. Leases](index=74&type=section&id=9.%20Leases) - Upon adoption of Topic 842 on January 1, 2019, the Corporation recognized **$18.42 million** in operating lease assets and **$19.36 million** in operating lease liabilities[434](index=434&type=chunk) - Total lease payments for operating and finance leases amount to **$27.86 million**, with **$1.64 million** due in 2020[435](index=435&type=chunk) [10. Goodwill and Intangible Assets](index=76&type=section&id=10.%20Goodwill%20and%20Intangible%20Assets) - Goodwill remained stable at **$38.73 million** in 2019 and 2018, with no impairment identified[438](index=438&type=chunk) - Core deposit intangible assets from acquisitions are amortized, with estimated remaining amortization of **$160 thousand** in 2020[439](index=439&type=chunk)[440](index=440&type=chunk) [11. Deposits](index=77&type=section&id=11.%20Deposits) - Time deposits maturing in 2020 total **$118.70 million**, part of the $427.82 million in total time deposits[442](index=442&type=chunk) - Reciprocal brokered deposits were **$8.10 million** in 2019, up from $3.22 million in 2018[442](index=442&type=chunk) [12. Borrowings](index=77&type=section&id=12.%20Borrowings) - FHLB borrowings totaled **$227.91 million** in 2019, secured by $900.13 million in pledged loans, with remaining borrowing capacity of $422.49 million[444](index=444&type=chunk) - Subordinated debentures, including $50 million in fixed-to-floating rate notes issued in 2016, totaled **$70.62 million**, maturing in 2037 and 2026 respectively[446](index=446&type=chunk)[448](index=448&type=chunk) Maturity Schedule of All Borrowed Funds (December 31, 2019, in thousands) | Year | Amount | | :----------- | :---------- | | 2020 | $37,505 | | 2021 | $33,740 | | 2022 | $72,931 | | 2023 | $51,244 | | 2024 | $31,256 | | Thereafter | $71,851 | | **Total** | **$298,527** | [13. Employee Benefit Plans](index=78&type=section&id=13.%20Employee%20Benefit%20Plans) - The Corporation's 401(k) plan includes matching and profit-sharing contributions, with total expenses of **$2.86 million** in 2019[450](index=450&type=chunk) - The unfunded post-retirement health care plan's benefit obligation decreased to **$2.03 million** in 2019 from $2.43 million in 2018, primarily due to an actuarial gain[454](index=454&type=chunk) [14. Deferred Compensation Plans](index=79&type=section&id=14.%20Deferred%20Compensation%20Plans) - The deferred compensation plan liability increased to **$3.23 million** in 2019 from $2.41 million in 2018, reflecting deferrals, dividends, and fair value changes[460](index=460&type=chunk) [15. Contingency](index=80&type=section&id=15.%20Contingency) - A sales tax assessment from the Pennsylvania Department of Revenue for $1.16 million was settled in December 2019 for **$65 thousand**, leading to a reversal of $181 thousand in previously recognized expense[462](index=462&type=chunk) [16. Income Taxes](index=80&type=section&id=16.%20Income%20Taxes) - Income tax expense was **$8.56 million** in 2019, with an effective tax rate of **17.6%**, influenced by tax-exempt income and BOLI earnings[464](index=464&type=chunk) - The net deferred tax asset decreased to **$3.59 million** in 2019 from $6.30 million in 2018, reflecting changes in various deferred tax assets and liabilities[469](index=469&type=chunk) [17. Related Party Transactions](index=81&type=section&id=17.%20Related%20Party%20Transactions) - Loans and credit cards with related parties totaled **$16.34 million** in 2019, up from $8.60 million in 2018, while deposits from related parties were **$40.93 million** in 2019[473](index=473&type=chunk)[474](index=474&type=chunk) [18. Stock-Based Compensation](index=82&type=section&id=18.%20Stock-Based%20Compensation) - Total compensation expense for restricted stock awards was **$1.35 million** in 2019, with 40,978 shares granted, and estimated unearned compensation for PBRSAs was **$285 thousand** at year-end[476](index=476&type=chunk)[477](index=477&type=chunk) [19. Capital Requirements and Restrictions on Retained Earnings](index=82&type=section&id=19.%20Capital%20Requirements%20and%20Restrictions%20on%20Retained%20Earnings) - Both the Corporation and the Bank met all capital adequacy requirements as of December 31, 2019, and the Bank was categorized as '**well capitalized**' under PCA[478](index=478&type=chunk)[479](index=479&type=chunk) Capital Ratios (December 31, 2019) | Ratio | Consolidated Actual | Bank Actual | | :------------------------------------ | :------------------ | :---------- | | Total Capital to Risk Weighted Assets | 12.51% | 11.87% | | Tier 1 (Core) Capital to Risk Weighted Assets | 10.03% | 11.24% | | Common equity Tier 1 to Risk Weighted Assets | 9.32% | 10.97% | | Tier 1 (Core) Capital to Average Assets | 7.86% | 8.79% | [20. Interest Rate Swaps](index=83&type=section&id=20.%20Interest%20Rate%20Swaps) - The Corporation uses interest rate swaps to hedge cash flows on subordinated notes, with one **5-year swap** executed in 2018 for $10 million, designated as a cash flow hedge[483](index=483&type=chunk) - The Corporation also engages in back-to-back interest rate swaps for customers, where changes in fair value offset and do not impact results of operations[490](index=490&type=chunk) [21. Off-Balance Sheet Activities](index=85&type=section&id=21.%20Off-Balance%20Sheet%20Activities) - Off-balance sheet commitments to make loans and unused lines of credit totaled **$205.48 million** and **$461.04 million**, respectively, at December 31, 2019[495](index=495&type=chunk) - Unfunded capital commitments to small business investment corporations and low-income housing partnerships totaled **$5.83 million** and **$4.19 million**, respectively, in 2019[496](index=496&type=chunk) [22. Parent Company Only Financial Information](index=86&type=section&id=22.%20Parent%20Company%20Only%20Financial%20Information) - The parent company's total assets were **$378.40 million** in 2019, with investment in bank subsidiary at $349.31 million[499](index=499&type=chunk) - Net income for the parent company was **$40.08 million** in 2019, primarily from equity in undistributed net income of subsidiaries and dividends from the bank subsidiary[499](index=499&type=chunk) [23. Earnings Per Share](index=87&type=section&id=23.%20Earnings%20Per%20Share) - Basic and diluted earnings per common share were **$2.63** for 2019, **$2.21** for 2018, and **$1.57** for 2017, with no anti-dilutive stock options[502](index=502&type=chunk) [24. Other Comprehensive Income](index=89&type=section&id=24.%20Other%20Comprehensive%20Income) - Total other comprehensive income was **$10.94 million** in 2019, a significant increase from a loss of $3.65 million in 2018, primarily due to unrealized holding gains on available-for-sale securities[504](index=504&type=chunk)[505](index=505&type=chunk) [25. Quarterly Financial Data (Unaudited)](index=90&type=section&id=25.%20Quarterly%20Financial%20Data%20(Unaudited)) - Net income showed a consistent upward trend throughout 2019, increasing from **$9.47 million** in Q1 to **$10.48 million** in Q4[509](index=509&type=chunk) Quarterly Financial Data (in thousands, except per share data) | Metric | Mar. 31, 2019 | June 30, 2019 | Sept. 30, 2019 | Dec. 31, 2019 | Mar. 31, 2018 | June 30, 2018 | Sept. 30, 2018 | Dec. 31, 2018 | | :------------------------- | :------------ | :------------ | :------------- | :------------ | :------------ | :------------ | :------------- | :------------ | | Total interest and dividend income | $36,753 | $38,282 | $40,085 | $40,608 | $29,387 | $32,099 | $34,040 | $36,344 | | Net interest income | $27,758 | $28,794 | $29,901 | $29,745 | $24,100 | $25,826 | $26,878 | $28,116 | | Net income | $9,473 | $9,767 | $10,357 | $10,484 | $7,097 | $8,441 | $9,236 | $8,945 | | Net income per share, basic | $0.62 | $0.64 | $0.68 | $0.69 | $0.46 | $0.55 | $0.60 | $0.59 | [26. Revenue from Contracts with Customers](index=90&type=section&id=26.%20Revenue%20from%20Contracts%20with%20Customers) Non-interest Income (Years Ended December 31, in thousands) | Non-interest Income Category | 2019 | 2018 | 2017 | | :--------------------------- | :---------- | :---------- | :---------- | | Service charges on deposit accounts | $6,402 | $5,759 | $4,809 | | Wealth and asset management fees | $4,627 | $4,172 | $3,724 | | Mortgage banking | $1,412 | $1,019 | $906 | | Card processing and interchange income | $4,641 | $4,261 | $3,763 | | Net realized gains on available-for-sale securities | $148 | $0 | $1,543 | | Other income | $8,745 | $5,512 | $6,690 | | **Total non-interest income** | **$25,975** | **$20,723** | **$21,435** | - Revenue from contracts with customers, including service charges, wealth management fees, and card processing income, is recognized over time or at a point in time based on performance obligation fulfillment[513](index=513&type=chunk)[514](index=514&type=chunk)[515](index=515&type=chunk)[516](index=516&type=chunk) [Report of Independent Registered Public Accounting Firm](index=92&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) [ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=94&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The Corporation reported no changes in or disagreements with its independent accountants on accounting and financial disclosure matters during the period - No changes in or disagreements with accountants on accounting and financial disclosure matters were reported[528](index=528&type=chunk) [ITEM 9A. Controls and Procedures](index=94&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2019, with no significant changes in internal control over financial reporting during Q4 2019 - Management concluded that disclosure controls and procedures were effective as of December 31, 2019, providing reasonable assurance for material information reporting[529](index=529&type=chunk) - No significant changes in internal control over financial reporting occurred during the fourth quarter of 2019[529](index=529&type=chunk) [ITEM 9B. Other Information](index=94&type=section&id=Item%209B.%20Other%20Information) This item indicates that no other information is required to be reported - No other information was reported in this item[533](index=533&type=chunk) PART III. [ITEM 10. Directors, Executive Officers and Corporate Governance](index=95&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding the Corporation's directors, executive officers, and corporate governance practices, including the Code of Ethics, is incorporated by reference from the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement, and the Corporation maintains a Code of Ethics for Officers and Directors[536](index=536&type=chunk) [ITEM 11. Executive Compensation](index=95&type=section&id=Item%2011.%20Executive%20Compensation) Details concerning executive compensation are incorporated by reference from the 2020 Proxy Statement - Executive compensation details are incorporated by reference from the 2020 Proxy Statement[537](index=537&type=chunk) [ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=95&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership of certain beneficial owners and management, as well as related stockholder matters, is incorporated by reference from the 2020 Proxy Statement - Security ownership information for beneficial owners and management is incorporated by reference from the 2020 Proxy Statement[537](index=537&type=chunk) [ITEM 13. Certain Relationships and Related Transactions, and Director Independence](index=95&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Information pertaining to certain relationships and related transactions, along with director independence, is incorporated by reference from the 2020 Proxy Statement - Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2020 Proxy Statement[538](index=538&type=chunk) [ITEM 14. Principal Accountant Fees and Services](index=95&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding the fees and services provided by the principal accountant is incorporated by reference from the 2020 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2020 Proxy Statement[538](index=538&type=chunk) PART IV. [ITEM 15. Exhibits and Financial Statement Schedules](index=96&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This item lists the consolidated financial statements, confirms non-applicability of separate schedules, and provides a comprehensive list of exhibits filed as part of this report - Item 15 includes a list of consolidated financial statements, confirms the non-applicability of separate financial statement schedules, and provides a comprehensive list of exhibits filed with the report[541](index=541&type=chunk) [ITEM 16. Form 10-K Summary](index=98&type=section&id=Item%2016.%20Form%2010-K%20Summary) This section explicitly states that no Form 10-K Summary is provided within this annual report - No Form 10-K Summary is provided in this report[544](index=544&type=chunk) [SIGNATURES](index=99&type=section&id=SIGNATURES) The report is formally signed by the registrant, CNB Financial Corporation, through its President & Chief Executive Officer, Joseph B. Bower, Jr., and Treasurer & Principal Financial Officer, Tito L. Lima, along with other directors, affirming compliance with Securities Exchange Act requirements as of March 5, 2020 - The report is signed by the President & CEO, Joseph B. Bower, Jr., and Treasurer & Principal Financial Officer, Tito L. Lima, confirming its submission on March 5, 2020[547](index=547&type=chunk)[548](index=548&type=chunk)[549](index=549&type=chunk)

[PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [ITEM 1 – Financial Statements](index=2&type=section&id=ITEM%201%20%E2%80%93%20Financial%20Statements) 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](index=4&type=section&id=Consolidated%20Balance%20Sheets) 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](index=5&type=section&id=Consolidated%20Statements%20of%20Income) 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](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) 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](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) 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](index=10&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) 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](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information supporting the consolidated financial statements [1. BASIS OF PRESENTATION](index=12&type=section&id=1.%20BASIS%20OF%20PRESENTATION) 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](index=28&type=chunk)[29](index=29&type=chunk) [2. STOCK COMPENSATION](index=12&type=section&id=2.%20STOCK%20COMPENSATION) 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](index=30&type=chunk) | 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](index=33&type=chunk) [3. FAIR VALUE](index=13&type=section&id=3.%20FAIR%20VALUE) 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](index=37&type=chunk) - 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](index=38&type=chunk)[39](index=39&type=chunk)[43](index=43&type=chunk) | 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](index=18&type=section&id=4.%20SECURITIES) 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](index=52&type=chunk)[55](index=55&type=chunk) | 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](index=20&type=section&id=5.%20LOANS) 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](index=60&type=chunk)[61](index=61&type=chunk) | 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](index=69&type=chunk) - 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](index=74&type=chunk) - 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](index=81&type=chunk) - The Corporation classifies commercial loans into risk categories (Special Mention, Substandard, Doubtful, Pass) based on borrower ability to service debt and collateral[86](index=86&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk) - Holiday Financial Services Corporation, a subsidiary, offers subprime loans with higher risk characteristics, primarily collateralized by automobiles and equipment[95](index=95&type=chunk) [6. DEPOSITS](index=29&type=section&id=6.%20DEPOSITS) 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](index=29&type=section&id=7.%20EARNINGS%20PER%20SHARE) 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](index=98&type=chunk)[99](index=99&type=chunk) | 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](index=30&type=section&id=8.%20DERIVATIVE%20INSTRUMENTS) 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](index=102&type=chunk)[104](index=104&type=chunk) - 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](index=102&type=chunk) - 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](index=110&type=chunk) [9. REVENUE FROM CONTRACTS WITH CUSTOMERS](index=32&type=section&id=9.%20REVENUE%20FROM%20CONTRACTS%20WITH%20CUSTOMERS) 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](index=115&type=chunk) | 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](index=117&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk) [10. LEASES](index=33&type=section&id=10.%20LEASES) 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](index=123&type=chunk) | 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](index=124&type=chunk) [11. CONTINGENCY](index=35&type=section&id=11.%20CONTINGENCY) 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](index=130&type=chunk) [12. RECENT ACCOUNTING PRONOUNCEMENTS](index=35&type=section&id=12.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) 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](index=131&type=chunk) - 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](index=132&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk) [ITEM 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=37&type=section&id=ITEM%202%20%E2%80%93%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) 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](index=37&type=section&id=GENERAL%20OVERVIEW) 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](index=142&type=chunk)[143](index=143&type=chunk) - The Corporation is well-positioned to sustain core earnings in 2019, driven by organic growth in diversified markets[143](index=143&type=chunk) [CASH AND CASH EQUIVALENTS](index=37&type=section&id=CASH%20AND%20CASH%20EQUIVALENTS) 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](index=146&type=chunk) [SECURITIES](index=38&type=section&id=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](index=147&type=chunk)[149](index=149&type=chunk) [LOANS](index=38&type=section&id=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](index=150&type=chunk) - 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](index=150&type=chunk) - 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](index=150&type=chunk) [ALLOWANCE FOR LOAN LOSSES](index=38&type=section&id=ALLOWANCE%20FOR%20LOAN%20LOSSES) 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](index=151&type=chunk) | 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](index=160&type=chunk) - Management believes the allowance for loan losses is reasonable and adequate as of September 30, 2019[161](index=161&type=chunk) [DEPOSITS](index=40&type=section&id=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](index=162&type=chunk) - Private Banking deposits increased by **$85.8 million** (**31.2%** annualized), and Buffalo market deposits grew by **$192 million** (**102.3%** annualized)[162](index=162&type=chunk) [OTHER FUNDING SOURCES](index=40&type=section&id=OTHER%20FUNDING%20SOURCES) 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](index=163&type=chunk) - The Corporation focuses on maintaining robust short-term and long-term borrowing capacity for liquidity management[165](index=165&type=chunk) [SHAREHOLDERS' EQUITY AND CAPITAL RATIOS AND METRICS](index=41&type=section&id=SHAREHOLDERS'%20EQUITY%20AND%20CAPITAL%20RATIOS%20AND%20METRICS) 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](index=166&type=chunk) | 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](index=166&type=chunk) [LIQUIDITY](index=42&type=section&id=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](index=171&type=chunk) - Liquid assets include cash and cash equivalents, maturing loan portfolio portions, and securities with maturities within one year[171](index=171&type=chunk) [OFF-BALANCE SHEET ACTIVITIES](index=42&type=section&id=OFF-BALANCE%20SHEET%20ACTIVITIES) 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](index=172&type=chunk) | 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](index=174&type=chunk) [CONSOLIDATED YIELD COMPARISONS](index=43&type=section&id=CONSOLIDATED%20YIELD%20COMPARISONS) 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](index=183&type=chunk) [RESULTS OF OPERATIONS (Three Months Ended September 30, 2019 and 2018)](index=47&type=section&id=RESULTS%20OF%20OPERATIONS%20(Three%20Months%20Ended%20September%2030,%202019%20and%202018)) This section analyzes the company's financial performance for the three-month periods ended September 30, 2019 and 2018 [OVERVIEW OF THE INCOME STATEMENT](index=47&type=section&id=OVERVIEW%20OF%20THE%20INCOME%20STATEMENT%20(Three%20Months)) 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](index=47&type=section&id=NET%20INTEREST%20MARGIN%20(Three%20Months)) 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](index=183&type=chunk) - 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](index=183&type=chunk) [PROVISION FOR LOAN LOSSES](index=47&type=section&id=PROVISION%20FOR%20LOAN%20LOSSES%20(Three%20Months)) 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](index=184&type=chunk) - 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](index=184&type=chunk) [NON-INTEREST INCOME](index=47&type=section&id=NON-INTEREST%20INCOME%20(Three%20Months)) 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](index=187&type=chunk) - 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](index=189&type=chunk) [NON-INTEREST EXPENSES](index=48&type=section&id=NON-INTEREST%20EXPENSES%20(Three%20Months)) 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](index=190&type=chunk) - Salaries and benefits increased by **$204 thousand** (**1.8%**) due to staffing expansion in business development, risk management, and customer service[190](index=190&type=chunk) - The Corporation serviced **67,623** households at Sep 30, 2019, up **7.6%** YoY, reflecting core deposit growth strategies[190](index=190&type=chunk) [INCOME TAX EXPENSE](index=48&type=section&id=INCOME%20TAX%20EXPENSE%20(Three%20Months)) 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](index=191&type=chunk) [RESULTS OF OPERATIONS (Nine Months Ended September 30, 2019 and 2018)](index=49&type=section&id=RESULTS%20OF%20OPERATIONS%20(Nine%20Months%20Ended%20September%2030,%202019%20and%202018)) This section analyzes the company's financial performance for the nine-month periods ended September 30, 2019 and 2018 [OVERVIEW OF THE INCOME STATEMENT](index=49&type=section&id=OVERVIEW%20OF%20THE%20INCOME%20STATEMENT%20(Nine%20Months)) 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](index=49&type=section&id=NET%20INTEREST%20MARGIN%20(Nine%20Months)) 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](index=196&type=chunk) - 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](index=196&type=chunk) [PROVISION FOR LOAN LOSSES](index=49&type=section&id=PROVISION%20FOR%20LOAN%20LOSSES%20(Nine%20Months)) 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](index=197&type=chunk) - 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](index=197&type=chunk) - 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](index=197&type=chunk) [NON-INTEREST INCOME](index=49&type=section&id=NON-INTEREST%20INCOME%20(Nine%20Months)) 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](index=199&type=chunk) - 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](index=199&type=chunk)[200](index=200&type=chunk) - 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](index=201&type=chunk)[202](index=202&type=chunk) [NON-INTEREST EXPENSES](index=50&type=section&id=NON-INTEREST%20EXPENSES%20(Nine%20Months)) 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](index=205&type=chunk) - 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](index=205&type=chunk) [INCOME TAX EXPENSE](index=50&type=section&id=INCOME%20TAX%20EXPENSE%20(Nine%20Months)) 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](index=206&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=50&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) 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](index=207&type=chunk) - The Corporation adopted ASU 2016-02 (Leases) on January 1, 2019, which impacted financial statements by recognizing lease assets and liabilities[207](index=207&type=chunk) [ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk](index=51&type=section&id=ITEM%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) 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](index=210&type=chunk)[211](index=211&type=chunk) - 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](index=212&type=chunk)[214](index=214&type=chunk) | 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](index=52&type=section&id=ITEM%204%20%E2%80%93%20Controls%20and%20Procedures) 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](index=218&type=chunk) - No significant changes in internal control over financial reporting occurred during the quarter ended September 30, 2019[218](index=218&type=chunk) [PART II. OTHER INFORMATION](index=53&type=section&id=PART%20II.%20OTHER%20INFORMATION) [ITEM 1. LEGAL PROCEEDINGS](index=53&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) 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](index=221&type=chunk) [ITEM 1A. RISK FACTORS](index=53&type=page&id=ITEM%201A.%20RISK%20FACTORS) 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](index=223&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=53&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) 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](index=225&type=chunk) - As of September 30, 2019, **249,731** shares remained authorized for repurchase under the program[225](index=225&type=chunk) - Employees surrendered shares to satisfy tax obligations related to restricted common stock vesting[226](index=226&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=53&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) No defaults upon senior securities were reported - No defaults upon senior securities[227](index=227&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=53&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Not applicable - Mine safety disclosures are not applicable to the registrant[227](index=227&type=chunk) [ITEM 5. OTHER INFORMATION](index=53&type=section&id=ITEM%205.%20OTHER%20INFORMATION) No other information was reported - No other information was reported[227](index=227&type=chunk) [ITEM 6. EXHIBITS](index=54&type=section&id=ITEM%206.%20EXHIBITS) 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](index=229&type=chunk)[231](index=231&type=chunk) [SIGNATURES](index=55&type=section&id=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](index=234&type=chunk)

[Forward-Looking Statements](index=3&type=section&id=Forward-Looking%20Statements) This section outlines forward-looking statements, emphasizing their inherent risks and uncertainties under the Private Securities Litigation Reform Act of 1995 - Forward-looking statements are covered by the safe harbor for 'forward-looking statements' provided by the Private Securities Litigation Reform Act of 1995[8](index=8&type=chunk) - Significant risks and uncertainties that could cause actual results to differ materially include changes in general business, industry or economic conditions, changes in applicable law or regulations, adverse changes in capital and financial markets, changes in interest rates, higher than expected integration costs, increased competition, and rapidly changing technology[8](index=8&type=chunk) - The Corporation undertakes no obligation to publicly update any forward-looking statement, except as may be required by law[9](index=9&type=chunk) [PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [ITEM 1 – Financial Statements](index=2&type=section&id=ITEM%201%20%E2%80%93%20Financial%20Statements) This section presents CNB Financial Corporation's unaudited consolidated financial statements and notes, detailing interim financial performance [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) The Consolidated Balance Sheets detail the Corporation's financial position, showing total assets increased by **$179.5 million** | Metric | June 30, 2019 (Unaudited) | December 31, 2018 (Audited) | | :--------------------------- | :------------------------ | :-------------------------- | | Total Assets | $3,400,974 | $3,221,521 | | Net Loans | $2,600,921 | $2,454,853 | | Total Deposits | $2,734,762 | $2,610,786 | | Total Liabilities | $3,114,359 | $2,958,691 | | Total Shareholders' Equity | $286,615 | $262,830 | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Net income and EPS increased for the three and six months ended June 30, 2019, driven by higher net interest and non-interest income | Metric (Dollars in thousands, except per share) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :---------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Interest and Dividend Income | $38,282 | $32,099 | $75,035 | $61,486 | | Total Interest Expense | $9,488 | $6,273 | $18,483 | $11,560 | | Net Interest Income | $28,794 | $25,826 | $56,552 | $49,926 | | Provision for Loan Losses | $1,788 | $1,905 | $3,094 | $3,536 | | Total Non-Interest Income | $6,792 | $5,606 | $12,945 | $10,357 | | Total Non-Interest Expenses | $21,984 | $19,543 | $43,159 | $38,542 | | Net Income | $9,767 | $8,441 | $19,240 | $15,538 | | Basic EPS | $0.64 | $0.55 | $1.26 | $1.02 | | Diluted EPS | $0.64 | $0.55 | $1.26 | $1.02 | | Cash Dividends per Share | $0.170 | $0.165 | $0.340 | $0.330 | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Total comprehensive income significantly increased for both periods ended June 30, 2019, driven by unrealized gains on securities | Metric (Dollars in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------------------------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | $9,767 | $8,441 | $19,240 | $15,538 | | Other comprehensive income (loss), net of tax | $5,238 | ($1,103) | $10,094 | ($5,005) | | Net change in fair value of interest rate swap agreements (net of tax) | ($162) | $37 | ($257) | $99 | | Net change in unrealized gains on securities available for sale (net of tax) | $5,400 | ($1,140) | $10,351 | ($5,104) | | Comprehensive Income | $15,005 | $7,338 | $29,334 | $10,533 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities remained stable, while investing and financing activities saw decreased cash usage and provision, respectively | Metric (Dollars in thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :-------------------------------------------------- | :--------------------------- | :--------------------------- | | Net Cash Provided by Operating Activities | $18,615 | $17,936 | | Net Cash Used by Investing Activities | ($156,475) | ($239,657) | | Net Cash Provided by Financing Activities | $130,227 | $228,703 | | Net Increase (Decrease) in Cash and Cash Equivalents| ($7,633) | $6,982 | | Cash and Cash Equivalents, Ending | $37,930 | $42,327 | - Cash paid for interest increased from **$11,406 thousand** for the six months ended June 30, 2018, to **$18,356 thousand** for the same period in 2019[19](index=19&type=chunk) [Consolidated Statements of Changes in Shareholders' Equity](index=10&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) Total shareholders' equity increased to **$286.6 million** at June 30, 2019, driven by net income and other comprehensive income | Metric (Dollars in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :---------------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Balance, April 1 / January 1 | $274,959 | $244,811 | $262,830 | $243,910 | | Net income | $9,767 | $8,441 | $19,240 | $15,538 | | Other comprehensive income (loss) | $5,238 | ($1,103) | $10,094 | ($5,005) | | Stock-based compensation expense | $275 | $272 | $867 | $949 | | Purchase of treasury stock | ($994) | ($2) | ($994) | ($286) | | Cash dividends declared | ($2,591) | ($2,523) | ($5,182) | ($5,046) | | Balance, June 30 | $286,615 | $249,893 | $286,615 | $249,893 | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed disclosures for the consolidated financial statements, covering accounting policies, fair value, securities, loans, and other key financial areas [1. BASIS OF PRESENTATION](index=11&type=section&id=1.%20BASIS%20OF%20PRESENTATION) The consolidated financial statements are unaudited, prepared under GAAP and SEC rules, and include all necessary adjustments for fair presentation - The consolidated financial statements are unaudited and include only normal recurring adjustments necessary for fair presentation[26](index=26&type=chunk) - Financial performance for the interim period ended June 30, 2019, is not necessarily indicative of results to be expected for the full year[26](index=26&type=chunk) - All dollar amounts are stated in thousands, except share and per share data[26](index=26&type=chunk) [2. STOCK COMPENSATION](index=11&type=section&id=2.%20STOCK%20COMPENSATION) The Corporation's stock incentive plans provide time-based and performance-based restricted stock awards, with **$867 thousand** in compensation expense for H1 2019 - The Corporation maintains the CNB Financial Corporation 2019 Omnibus Incentive Plan for stock-based compensation to key employees, directors, and consultants[27](index=27&type=chunk) - Time-based restricted stock for key employees vests over three to five years, while stock compensation for non-employee directors vests immediately since 2018[28](index=28&type=chunk) | Metric (Dollars in thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30

[Forward-Looking Statements](index=3&type=section&id=Forward-Looking%20Statements) This section outlines forward-looking statements concerning the Corporation's financial condition, liquidity, operations, and future performance, emphasizing potential material differences due to economic, regulatory, interest rate, and integration risks - Forward-looking statements are subject to **significant risks and uncertainties**, including changes in economic conditions, regulations, interest rates, and integration difficulties from business combinations[9](index=9&type=chunk) [PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [ITEM 1 – Financial Statements](index=2&type=section&id=ITEM%201%20%E2%80%93%20Financial%20Statements) This section presents CNB Financial Corporation's unaudited consolidated financial statements, including balance sheets, income, comprehensive income, cash flows, and equity changes, with detailed accounting policy notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) | Metric | March 31, 2019 (unaudited) | December 31, 2018 (audited) | Change | | :------------------------------------- | :------------------------- | :-------------------------- | :----- | | Total Assets | $3,287.3 million | $3,221.5 million | +$65.8 million | | Total Liabilities | $3,012.4 million | $2,958.7 million | +$53.7 million | | Total Shareholders' Equity | $275.0 million | $262.8 million | +$12.1 million | | Cash and cash equivalents | $55.3 million | $45.6 million | +$9.7 million | | Net Loans | $2,505.7 million | $2,454.9 million | +$50.9 million | | Total Deposits | $2,657.4 million | $2,610.8 million | +$46.6 million | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) | Metric | Three months ended March 31, 2019 (unaudited) | Three months ended March 31, 2018 (unaudited) | Change | | :------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :----- | | Total interest and dividend income | $36.8 million | $29.4 million | +$7.4 million | | Total interest expense | $9.0 million | $5.3 million | +$3.7 million | | Net interest income | $27.8 million | $24.1 million | +$3.7 million | | Provision for loan losses | $1.3 million | $1.6 million | ($0.3 million) | | Net interest income after provision for loan losses | $26.5 million | $22.5 million | +$4.0 million | | Total non-interest income | $6.2 million | $4.8 million | +$1.4 million | | Total non-interest expenses | $21.2 million | $19.0 million | +$2.2 million | | Income before income taxes | $11.4 million | $8.2 million | +$3.2 million | | Income tax expense | $2.0 million | $1.1 million | +$0.8 million | | Net income | $9.5 million | $7.1 million | +$2.4 million | | Basic EPS | $0.62 | $0.46 | +$0.16 | | Diluted EPS | $0.62 | $0.46 | +$0.16 | | Cash dividends per share | $0.170 | $0.165 | +$0.005 | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) | Metric | Three months ended March 31, 2019 (unaudited) | Three months ended March 31, 2018 (unaudited) | Change | | :------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :----- | | Net income | $9.5 million | $7.1 million | +$2.4 million | | Other comprehensive income (loss) | $4.9 million | ($3.9 million) | +$8.8 million | | Comprehensive income | $14.3 million | $3.2 million | +$11.1 million | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) | Metric | Three months ended March 31, 2019 (unaudited) | Three months ended March 31, 2018 (unaudited) | Change | | :------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :----- | | Net cash provided by operating activities | $1.4 million | $4.1 million | ($2.7 million) | | Net cash used by investing activities | ($30.3 million) | ($149.2 million) | +$118.8 million | | Net cash provided by financing activities | $38.7 million | $138.3 million | ($99.6 million) | | Net increase (decrease) in cash and cash equivalents | $9.7 million | ($6.7 million) | +$16.5 million | | Cash and cash equivalents, beginning | $45.6 million | $35.3 million | +$10.2 million | | Cash and cash equivalents, ending | $55.3 million | $28.6 million | +$26.7 million | [Consolidated Statements of Changes in Stockholders' Equity](index=10&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) | Metric | Balance, January 1, 2019 | Net Income | Other Comprehensive Income | Cash Dividends Declared | Balance, March 31, 2019 | | :------------------------------------- | :----------------------- | :--------- | :------------------------- | :---------------------- | :---------------------- | | Total Shareholders' Equity | $262.8 million | $9.5 million | $4.9 million | ($2.6 million) | $275.0 million | | **Components:** | | | | | | | Additional Paid-In Capital | $97.6 million | | | | $97.1 million | | Retained Earnings | $171.8 million | $9.5 million | | ($2.6 million) | $178.7 million | | Treasury Stock | ($2.6 million) | | | | ($1.7 million) | | Accumulated Other Comprehensive Income (Loss) | ($4.0 million) | | $4.9 million | | $0.9 million | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section details disclosures for consolidated financial statements, covering presentation basis, stock compensation, fair value, securities, loans, deposits, EPS, derivatives, revenue recognition, leases, contingencies, and recent accounting pronouncements [1. BASIS OF PRESENTATION](index=11&type=section&id=1.%20BASIS%20OF%20PRESENTATION) - The financial statements are prepared in accordance with GAAP and SEC rules, with certain interim period condensations. Financial performance for Q1 2019 is not indicative of the full year[25](index=25&type=chunk)[26](index=26&type=chunk) [2. STOCK COMPENSATION](index=11&type=section&id=2.%20STOCK%20COMPENSATION) - The Corporation operates a stock incentive plan for key employees, directors, and consultants, offering time-based and performance-based restricted stock. Time-based restricted stock for key employees vests over 3-5 years, while non-employee director awards vest immediately since 2018[27](index=27&type=chunk)[28](index=28&type=chunk) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Compensation expense for restricted stock awards | $0.6 million | $0.7 million | | Total unrecognized compensation cost (as of March 31, 2019) | $1.2 million | N/A | | Fair value of shares vested | $1.2 million | $1.5 million | | Nonvested Restricted Stock Awards (Q1 2019) | Shares | Weighted Average Grant Date Fair Value | | :------------------------------------------ | :----- | :------------------------------------- | | Nonvested at beginning of period | 75,889 | $23.20 | | Granted | 25,940 | $25.27 | | Vested | (34,060) | $21.58 | | Nonvested at end of period | 67,769 | $24.79 | [3. FAIR VALUE](index=12&type=section&id=3.%20FAIR%20VALUE) - Fair value measurements are categorized into a three-level hierarchy (Level 1: quoted prices in active markets, Level 2: significant observable inputs, Level 3: significant unobservable inputs). Most trading securities, available-for-sale securities, and derivative instruments are valued using Level 1 or Level 2 inputs. Impaired loans are generally valued using Level 3 inputs based on real estate appraisals[33](index=33&type=chunk)[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) | Asset/Liability (March 31, 2019) | Total Fair Value | Level 1 | Level 2 | Level 3 | | :------------------------------- | :--------------- | :------ | :------ | :------ | | Securities Available For Sale | $500.6 million | $0.9 million | $499.7 million | $0.0 million | | Interest Rate Swaps (Asset) | $0.9 million | $0.0 million | $0.9 million | $0.0 million | | Trading Securities | $8.6 million | $8.6 million | $0.1 million | $0.0 million | | Interest Rate Swaps (Liability) | ($1.2 million) | $0.0 million | ($1.2 million) | $0.0 million | | Impaired loans (non-recurring, Level 3) | $1.7 million | $0.0 million | $0.0 million | $1.7 million | [4. SECURITIES](index=18&type=section&id=4.%20SECURITIES) | Securities Available For Sale | March 31, 2019 Fair Value | December 31, 2018 Fair Value | | :------------------------------------- | :-------------------------- | :--------------------------- | | U.S. Gov't sponsored entities | $130.4 million | $132.7 million | | State & political subdivisions | $121.1 million | $136.0 million | | Residential & multi-family mortgage | $207.5 million | $206.1 million | | Corporate notes & bonds | $11.9 million | $11.8 million | | Pooled SBA | $28.8 million | $29.4 million | | Other | $0.9 million | $0.9 million | | **Total** | **$500.6 million** | **$516.9 million** | - Management assessed debt securities for other-than-temporary impairment and concluded that impairment was temporary at March 31, 2019, and December 31, 2018, due to no significant deterioration in creditworthiness, timely receipt of contractual interest payments, and no intent or requirement to sell before recovery[55](index=55&type=chunk)[57](index=57&type=chunk)[58](index=58&type=chunk) | Security Sales (Available-for-Sale) | Proceeds | Gross Gains | Gross Losses | | :---------------------------------- | :------- | :---------- | :----------- | | Three months ended March 31, 2019 | $11.4 million | $0.2 million | $0.0 million | | Three months ended March 31, 2018 | $0.0 million | $0.0 million | $0.0 million | [5. LOANS](index=20&type=section&id=5.%20LOANS) | Loan Category | March 31, 2019 | December 31, 2018 | | :------------------------------------- | :------------- | :---------------- | | Commercial, industrial, and agricultural | $950.9 million | $916.3 million | | Commercial mortgages | $709.7 million | $697.8 million | | Residential real estate | $775.6 million | $771.3 million | | Consumer | $86.8 million | $86.0 million | | Credit cards | $7.3 million | $7.6 million | | Overdrafts | $0.5 million | $0.3 million | | Less: unearned discount | ($4.7 million) | ($4.8 million) | | Less: allowance for loan losses | ($20.3 million) | ($19.7 million) | | **Loans, net** | **$2,505.7 million** | **$2,454.9 million** | - The Corporation's loan portfolio is primarily concentrated in central and northwest Pennsylvania, central and northeast Ohio, and western New York. Commercial, industrial, and agricultural loans comprised **38%** of the total loan portfolio at March 31, 2019, and commercial mortgage loans comprised **28%**[64](index=64&type=chunk)[67](index=67&type=chunk) | Allowance for Loan Losses Activity | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $19.7 million | $19.7 million | | Charge-offs | ($0.8 million) | ($0.7 million) | | Recoveries | $0.2 million | $0.2 million | | Provision for loan losses | $1.3 million | $1.6 million | | **Ending balance** | **$20.3 million** | **$20.8 million** | [6. DEPOSITS](index=28&type=section&id=6.%20DEPOSITS) | Deposit Type | March 31, 2019 | December 31, 2018 | Percentage Change | | :------------------------------------- | :------------- | :---------------- | :---------------- | | Checking, non-interest bearing | $345.4 million | $356.8 million | (3.2)% | | Checking, interest bearing | $583.7 million | $600.0 million | (2.7)% | | Savings accounts | $1,374.4 million | $1,258.5 million | 9.2% | | Certificates of deposit | $353.9 million | $395.4 million | (10.5)% | | **Total deposits** | **$2,657.4 million** | **$2,610.8 million** | **1.8%** | [7. EARNINGS PER SHARE](index=29&type=section&id=7.%20EARNINGS%20PER%20SHARE) - Basic and diluted EPS are computed using the two-class method for participating securities (unvested share-based payment awards with nonforfeitable dividend rights). No outstanding stock options were included in diluted EPS calculations for the periods presented[100](index=100&type=chunk)[101](index=101&type=chunk) | EPS Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net earnings allocated to common stock | $9.4 million | $7.1 million | | Weighted average shares (basic) | 15,167 | 15,201 | | Basic earnings per common share | $0.62 | $0.46 | | Diluted earnings per common share | $0.62 | $0.46 | [8. DERIVATIVE INSTRUMENTS](index=29&type=section&id=8.%20DERIVATIVE%20INSTRUMENTS) - 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. A new 5-year swap was executed in September 2018 for **$10 million** of subordinated debt. The Corporation does not use derivatives for trading or speculative purposes[103](index=103&type=chunk)[105](index=105&type=chunk) | Derivative Activity (Cash Flow Hedges) | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Gain or (Loss) Recognized in OCI (net of tax) | ($0.1 million) | $0.1 million | | Gain or (Loss) Reclassified from AOCI into Income (net of tax) | ($0.0 million) | ($0.1 million) | - The Corporation also engages in back-to-back interest rate swaps as an intermediary for customers, where changes in fair value offset each other and do not impact operations[110](index=110&type=chunk) [9. REVENUE FROM CONTRACTS WITH CUSTOMERS](index=31&type=section&id=9.%20REVENUE%20FROM%20CONTRACTS%20WITH%20CUSTOMERS) - All revenue from contracts with customers under ASC 606 is recognized within non-interest income. Primary revenue sources like interest and dividend income, security gains, and loan servicing are outside the scope of ASU 2014-9[114](index=114&type=chunk)[116](index=116&type=chunk) | Non-interest Income | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Service charges on deposit accounts | $1.5 million | $1.2 million | | Wealth and asset management fees | $1.0 million | $1.0 million | | Mortgage banking | $0.2 million | $0.2 million | | Card processing and interchange income | $1.0 million | $1.0 million | | Net gains (losses) on sales of securities | $0.1 million | $0.0 million | | Other income | $2.2 million | $1.3 million | | **Total non-interest income** | **$6.2 million** | **$4.8 million** | [10. LEASES](index=32&type=section&id=10.%20LEASES) - The Corporation adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing approximately **$12.5 million** in right-of-use assets and **$13.3 million** in related lease liabilities. Operating lease assets and liabilities are recognized at lease commencement based on the present value of remaining lease payments[124](index=124&type=chunk)[125](index=125&type=chunk) | Lease Components (March 31, 2019) | Amount | | :------------------------------------- | :----- | | Operating lease assets | $16.2 million | | Finance lease assets | $0.6 million | | Total leased assets | $16.8 million | | Operating lease liabilities | $17.1 million | | Finance lease liabilities | $0.7 million | | Total leased liabilities | $17.8 million | | Lease Cost (Three months ended March 31, 2019) | Amount | | :--------------------------------------------- | :----- | | Operating lease cost | $0.4 million | | Variable lease cost | $0.0 million | | Finance lease cost (Amortization) | $0.0 million | | Finance lease cost (Interest) | $0.0 million | | Sublease income | ($0.0 million) | | **Net lease cost** | **$0.4 million** | [11. CONTINGENCY](index=34&type=section&id=11.%20CONTINGENCY) - The Corporation received a sales tax assessment from the Pennsylvania Department of Revenue for **$1.2 million** (including interest and penalties) covering 2013-2016. A liability of **$96 thousand** has been accrued, representing management's reasonable estimate, while the remaining balance is being appealed as improperly assessed[131](index=131&type=chunk) [12. RECENT ACCOUNTING PRONOUNCEMENTS](index=34&type=section&id=12.%20RECENT%20ACCOUNTING%20PRONOUNCEMENTS) - The Corporation is evaluating the impact of ASU 2018-14 (Defined Benefit Plans) and ASU 2018-13 (Fair Value Measurement Disclosures), effective after December 15, 2020, and December 15, 2019, respectively[132](index=132&type=chunk)[133](index=133&type=chunk) - ASU 2016-13 (Financial Instruments – Credit Losses), effective after December 15, 2019, will require recognition of all expected credit losses for amortized cost assets, and its impact on financial statements is yet to be determined[134](index=134&type=chunk) - ASU 2019-01 (Leases Codification Improvements) was issued in March 2019, and management does not expect it to have a material impact on the financial statements[136](index=136&type=chunk) [ITEM 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=ITEM%202%20%E2%80%93%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of the Corporation's financial condition and operational results for Q1 2019, covering assets, funding, capital, liquidity, off-balance sheet activities, yield comparisons, and critical accounting policies [GENERAL OVERVIEW](index=36&type=section&id=GENERAL%20OVERVIEW) - Management measures performance using return on average equity, earnings per share, and asset quality. The Corporation focuses on disciplined loan pricing to maintain a strong net interest margin in a flattening yield curve and competitive environment[143](index=143&type=chunk) - Non-interest costs are expected to increase with growth, but management's strategies aim to offset this with increased earning assets and non-interest income, positioning the Corporation to sustain core earnings in 2019[144](index=144&type=chunk) [CASH AND CASH EQUIVALENTS](index=36&type=section&id=CASH%20AND%20CASH%20EQUIVALENTS) | Metric | March 31, 2019 | December 31, 2018 | Change | | :------------------------------------- | :------------- | :---------------- | :----- | | Cash and cash equivalents | $55.3 million | $45.6 million | +$9.7 million | - Management believes current cash and cash equivalents, along with access to traditional funding sources, FHLB financing, and maturing portfolios, are sufficient to meet liquidity needs and off-balance sheet commitments[146](index=146&type=chunk) [SECURITIES](index=37&type=section&id=SECURITIES) | Metric | March 31, 2019 | December 31, 2018 | | :------------------------------------- | :------------- | :---------------- | | Securities available for sale and trading securities | $509.3 million | $524.6 million | | Securities portfolio as % of total assets | 15.5% | 16.3% | - The Corporation aims to maintain its securities portfolio between **15% and 20%** of total assets to balance earnings and liquidity, employing a strategy of buying into the market over time to minimize the effect of different rate environments[148](index=148&type=chunk)[149](index=149&type=chunk) [LOANS](index=37&type=section&id=LOANS) | Metric | First three months of 2019 | | :------------------------------------- | :------------------------- | | Increase in loans, net of unearned discount | $51.5 million (2.1%) | - The Corporation's lending efforts focus on commercial and retail lending, with commercial lending identified as a competitive advantage. Management anticipates solid loan demand and continued loan growth throughout 2019[151](index=151&type=chunk) [ALLOWANCE FOR LOAN LOSSES](index=37&type=section&id=ALLOWANCE%20FOR%20LOAN%20LOSSES) - The allowance for loan losses is established through provisions charged against current income, reflecting management's judgment based on individual loan evaluations, portfolio risk characteristics, historical losses, and economic conditions[152](index=152&type=chunk) | Metric | Three months ending March 31, 2019 | Three months ending March 31, 2018 | | :------------------------------------- | :--------------------------------- | :--------------------------------- | | Balance at beginning of period | $19.7 million | $19.7 million | | Net charge-offs | ($0.7 million) | ($0.6 million) | | Provision for loan losses | $1.3 million | $1.6 million | | Balance at end of period | $20.3 million | $20.8 million | | Allowance to net loans | 0.81% | 0.91% | | Net charge-offs to average loans (annualized) | 0.11% | 0.10% | - The provision for loan losses in Q1 2019 was primarily due to a **$786 thousand** increase in specific reserves and **$664 thousand** in net charge-offs. The allowance for loans collectively evaluated for impairment decreased to **0.59%** from **0.61%** YoY, reflecting strong credit quality[161](index=161&type=chunk) [FUNDING SOURCES](index=40&type=section&id=FUNDING%20SOURCES) | Metric | March 31, 2019 | December 31, 2018 | Change | | :------------------------------------- | :------------- | :---------------- | :----- | | Total Deposits | $2.66 billion | $2.61 billion | +$46.6 million | - The Corporation utilizes deposits, short-term borrowings, and term debt, including FHLB borrowings, to meet funding obligations and match fund loan assets, and plans to maintain access to these sources[163](index=163&type=chunk) [SHAREHOLDERS' EQUITY AND CAPITAL RATIOS AND METRICS](index=40&type=section&id=SHAREHOLDERS'%20EQUITY%20AND%20CAPITAL%20RATIOS%20AND%20METRICS) | Metric | March 31, 2019 | December 31, 2018 | | :------------------------------------- | :------------- | :---------------- | | Total shareholders' equity | $275.0 million | $262.8 million | | Net income (Q1 2019) | $9.5 million | N/A | | Dividends declared (Q1 2019) | $2.6 million | N/A | | Dividend payout ratio (Q1 2019) | 27.4% | N/A | | Capital Ratio | March 31, 2019 | December 31, 2018 | | :------------------------------------- | :------------- | :---------------- | | Total risk-based capital ratio | 13.18% | 13.21% | | Tier 1 capital ratio | 10.35% | 10.33% | | Common equity tier 1 ratio | 9.54% | 9.50% | | Leverage ratio | 8.01% | 7.87% | | Tangible common equity/tangible assets | 7.26% | 7.02% | | Book value per share | $18.04 | $17.28 | | Tangible book value per share | $15.46 | $14.69 | [LIQUIDITY](index=41&type=section&id=LIQUIDITY) - Liquidity is managed by both management and the ALCO, with current levels deemed acceptable. Key liquidity sources include cash and cash equivalents, maturing loan and securities portfolios, and access to funding[169](index=169&type=chunk) [OFF-BALANCE SHEET ACTIVITIES](index=41&type=section&id=OFF-BALANCE%20SHEET%20ACTIVITIES) - The Corporation issues financial instruments like loan commitments, credit lines, and letters of credit to meet customer financing needs, which carry off-balance sheet risk but are managed with the same credit policies as loans[170](index=170&type=chunk) | Off-Balance Sheet Commitments | March 31, 2019 | December 31, 2018 | | :------------------------------------- | :------------- | :---------------- | | Commitments to make loans (Fixed Rate) | $47.6 million | $46.3 million | | Commitments to make loans (Variable Rate) | $183.2 million | $191.8 million | | Unused lines of credit | $442.7 million | $443.8 million | | Standby letters of credit | $12.0 million | $16.3 million | | Unfunded Capital Commitments | March 31, 2019 | December 31, 2018 | | :------------------------------------- | :------------- | :---------------- | | Small business investment corporations | $3.4 million | $3.9 million | | Low income housing partnerships | $1.4 million | $1.4 million | [CONSOLIDATED YIELD COMPARISONS](index=43&type=section&id=CONSOLIDATED%20YIELD%20COMPARISONS) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Net interest margin (fully tax equivalent) | 3.70% | 3.72% | | Yield on earning assets | 4.89% | 4.53% | | Cost of interest-bearing liabilities | 1.39% | 0.94% | | Net interest spread | 3.50% | 3.59% | [RESULTS OF OPERATIONS](index=45&type=section&id=RESULTS%20OF%20OPERATIONS) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | Change | | :------------------------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net income | $9.5 million | $7.1 million | +$2.4 million | | Earnings per diluted share | $0.62 | $0.46 | +$0.16 | | Return on average assets (ROAA) | 1.17% | 1.00% | +0.17% | | Return on average equity (ROAE) | 14.24% | 11.61% | +2.63% | - Net interest income increased by **$3.7 million** (**15.2%**), and non-interest income increased by **$1.4 million** (**29.5%**). The provision for loan losses decreased by **$325 thousand** (**19.9%**), while non-interest expenses increased by **$2.2 million** (**11.5%**)[178](index=178&type=chunk) - Non-interest income, excluding securities transactions, was **$5.2 million** in Q1 2019, up from **$4.7 million** in Q1 2018. Service charges on deposit accounts increased by **$234 thousand** (**18.8%**), and net income from Small Business Investment Companies increased significantly[182](index=182&type=chunk)[183](index=183&type=chunk) - Salaries and benefits expense increased by **$1.4 million** (**14.3%**) due to staffing expansion in business development, risk management, and customer service. Total households serviced increased by **9.8%** to **65,081**[184](index=184&type=chunk) | Metric | Three months ended March 31, 2019 | Three months ended March 31, 2018 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | | Income tax expense | $2.0 million | $1.1 million | | Effective tax rate | 17.1% | 13.7% | [CRITICAL ACCOUNTING POLICIES](index=46&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) - Key accounting policies involving significant management judgments and estimates include the allowance for loan losses, fair value of securities, and fair value of assets/liabilities in business combinations. No significant changes in application since December 31, 2018[187](index=187&type=chunk) [ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk](index=47&type=section&id=ITEM%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section details the Corporation's primary market risk, interest rate risk, and its management through ALCO reviews and asset/liability models to optimize net interest income within policy limits - The Corporation's primary market risk is interest rate risk, managed through asset-liability management models and ALCO reviews to maximize net interest income within acceptable risk levels[190](index=190&type=chunk)[191](index=191&type=chunk)[192](index=192&type=chunk) | Change in Basis Points | % Change in Net Interest Income (One-Year Period) | | :--------------------- | :------------------------------------------------ | | +400 | 9.0% | | +300 | 7.0% | | +200 | 5.4% | | +100 | 5.2% | | (100) | (3.1)% | | (200) | (4.6)% | [ITEM 4 – Controls and Procedures](index=48&type=section&id=ITEM%204%20%E2%80%93%20Controls%20and%20Procedures) Management assessed the effectiveness of the Corporation's disclosure controls and procedures as of March 31, 2019, concluding they are effective, with no significant changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed **effective** as of March 31, 2019[198](index=198&type=chunk) - No significant changes in internal control over financial reporting occurred during the quarter ended March 31, 2019[198](index=198&type=chunk) [PART II. OTHER INFORMATION](index=49&type=section&id=PART%20II.%20OTHER%20INFORMATION) [ITEM 1. LEGAL PROCEEDINGS](index=49&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The Corporation reports no material pending legal proceedings beyond routine business matters - No material pending legal proceedings to which the Corporation or its subsidiaries are a party[201](index=201&type=chunk) [ITEM 1A. RISK FACTORS](index=49&type=section&id=ITEM%201A.%20RISK%20FACTORS) No material changes to the risk factors previously disclosed in the 2018 Form 10-K - No material changes to risk factors disclosed in the 2018 Form 10-K[203](index=203&type=chunk) [ITEM 2. ISSUER PURCHASES OF EQUITY SECURITIES](index=49&type=section&id=ITEM%202.%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) This section details the Corporation's common stock repurchase activities and shares surrendered by employees for tax obligations related to restricted stock vesting during Q1 2019, with no purchases under publicly announced plans | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares Yet to Be Purchased Under Plans or Programs | | :--------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------- | :------------------------------------------------------------------- | | January 1 – 31, 2019 | 0 | $0 | 0 | 289,731 | | February 1 – 28, 2019 | 0 | $0 | 0 | 289,731 | | March 1 – 31, 2019 | 0 | $0 | 0 | 289,731 | - Employees surrendered shares of common stock to satisfy statutory minimum tax obligations related to restricted stock vesting during Q1 2019[207](index=207&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=49&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) The Corporation reports no defaults upon senior securities - None[208](index=208&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=49&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the Corporation - Not applicable[208](index=208&type=chunk) [ITEM 5. OTHER INFORMATION](index=49&type=section&id=ITEM%205.%20OTHER%20INFORMATION) The Corporation reports no other information for this period - None[208](index=208&type=chunk) [ITEM 6. EXHIBITS](index=50&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, incentive plans, certifications, and XBRL documents - The report includes exhibits such as Second Amended and Restated Articles of Incorporation and Bylaws, the 2019 Omnibus Incentive Plan, CEO/CFO certifications (Sections 302 and 906), and XBRL documents[211](index=211&type=chunk) [SIGNATURES](index=51&type=section&id=SIGNATURES) This section contains the official signatures of Joseph B. Bower, Jr., President and CEO, and Brian W. Wingard, Treasurer, certifying the report on May 9, 2019 - Report signed by Joseph B. Bower, Jr. (President and CEO) and Brian W. Wingard (Treasurer) on May 9, 2019[213](index=213&type=chunk)

PART I. [ITEM 1. Business](index=3&type=section&id=ITEM%201.%20Business) 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](index=6&type=chunk) - 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](index=7&type=chunk) - **CNB Bank** operates **42 full-service branches** across Pennsylvania, Ohio, and New York, providing comprehensive banking, wealth, and asset management services[12](index=12&type=chunk)[13](index=13&type=chunk) - 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](index=17&type=chunk)[26](index=26&type=chunk)[32](index=32&type=chunk)[39](index=39&type=chunk)[49](index=49&type=chunk)[50](index=50&type=chunk) Employee Count as of December 31, 2018 | Category | Count | | :------- | :---- | | Total Employees | 556 | | Full-time | 505 | | Part-time | 51 | [ITEM 1A. Risk Factors](index=10&type=section&id=ITEM%201A.%20Risk%20Factors) 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](index=62&type=chunk)[63](index=63&type=chunk) - 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](index=64&type=chunk)[66](index=66&type=chunk) - **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](index=69&type=chunk)[70](index=70&type=chunk) - 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](index=72&type=chunk)[73](index=73&type=chunk) - Extensive **government regulation** means changes in laws or policies could increase costs, limit business opportunities, and negatively impact financial results[79](index=79&type=chunk)[80](index=80&type=chunk) - **Operational and security system failures**, including cyber attacks, could disrupt business, lead to confidential data disclosure, damage reputation, and incur significant costs[88](index=88&type=chunk)[89](index=89&type=chunk) - 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](index=124&type=chunk)[125](index=125&type=chunk) [ITEM 1B. Unresolved Staff Comments](index=17&type=section&id=ITEM%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report - The Corporation has no unresolved staff comments[126](index=126&type=chunk) [ITEM 2. Properties](index=17&type=section&id=ITEM%202.%20Properties) 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](index=127&type=chunk) - The Bank operates 42 full-service offices: 24 are owned, 17 are leased from independent owners, and one is leased from the Corporation[127](index=127&type=chunk) - Holiday Financial Services Corporation has nine full-service offices: eight are leased from independent owners, and one is leased from the Corporation[127](index=127&type=chunk) [ITEM 3. Legal Proceedings](index=17&type=section&id=ITEM%203.%20Legal%20Proceedings) 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](index=128&type=chunk) [ITEM 4. Mine Safety Disclosures](index=17&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) There are no mine safety disclosures to report - The Corporation has no mine safety disclosures[129](index=129&type=chunk) PART II. [ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=18&type=section&id=ITEM%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) 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](index=132&type=chunk) - As of December 31, 2018, the Corporation had **4,097 shareholders** of record[132](index=132&type=chunk) 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 | $23.61 | 42,299 | 289,731 | - A stock repurchase program, announced November 12, 2014, authorizes the repurchase of up to **500,000 shares**. As of December 31, 2018, **289,731 shares** remained in the program[134](index=134&type=chunk) Share Return Performance (2013-2018) | Index | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | | :------------------------ | :------- | :------- | :------- | :------- | :------- | :------- | | CNB Financial Corporation | 100.00 | 101.10 | 102.34 | 156.99 | 158.23 | 141.68 | | NASDAQ Composite | 100.00 | 114.75 | 122.74 | 133.62 | 173.22 | 168.30 | | SNL Bank NASDAQ | 100.00 | 103.57 | 111.80 | 155.02 | 163.20 | 137.56 | [ITEM 6. Selected Financial Data](index=20&type=section&id=ITEM%206.%20Selected%20Financial%20Data) This section provides a five-year summary of selected financial data, including key income statement, balance sheet, and per-share metrics, highlighting trends from 2014 to 2018 Selected Financial Data (2014-2018) | (Dollars in thousands, except per share data) | 2018 ($ 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 | $2,189,213 | | Securities | 524,649 | 416,859 | 500,693 | 550,619 | 690,225 | | Loans, net of unearned discount | 2,474,557 | 2,145,959 | 1,873,536 | 1,577,798 | 1,355,289 | | Allowance for loan losses | 19,704 | 19,693 | 16,330 | 16,737 | 17,373 | | Deposits | 2,610,786 | 2,167,815 | 2,017,522 | 1,815,053 | 1,847,079 | | FHLB and other borrowings | 245,117 | 257,359 | 237,004 | 104,243 | 75,715 | | Subordinated debentures | 70,620 | 70,620 | 70,620 | 20,620 | 20,620 | | Shareholders' equity | 262,830 | 243,910 | 211,784 | 201,913 | 188,548 | | **KEY RATIOS:** | | | | | | | Return on average assets | 1.12% | 0.89% | 0.85% | 0.99% | 1.07% | | Return on average equity | 13.46% | 9.97% | 9.69% | 11.23% | 12.76% | | Loan to deposit ratio | 94.78% | 98.99% | 92.86% | 86.93% | 73.37% | | Dividend payout ratio | 30.35% | 42.31% | 46.48% | 42.86% | 41.26% | | Average equity to average assets ratio | 8.33% | 8.93% | 8.76% | 8.86% | 8.37% | [ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=ITEM%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance and condition, covering asset/liability growth, net interest income, loan loss provisions, non-interest income, expenses, and risk management strategies - Management measures performance using metrics like **return on average equity**, **earnings per share**, and **asset quality**, with a focus on **disciplined loan pricing** to maintain **net interest margin**[155](index=155&type=chunk) - The Corporation manages various risks, including interest rate, credit, and liquidity risk, through established policies and procedures, such as asset/liability management and disciplined credit evaluation[148](index=148&type=chunk)[149](index=149&type=chunk)[150](index=150&type=chunk)[151](index=151&type=chunk) Financial Condition Highlights (2016-2018) | | 2018 Balance ($ 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% | $2,573.8 | | Total loans, net | 2,454.9 | 328.6 | 15.5% | 2,126.3 | 269.1 | 14.5% | 1,857.2 | | Total securities | 524.6 | 107.7 | 25.8% | 416.9 | (83.8) | (16.7)% | 500.7 | | Total deposits | 2,610.8 | 443.0 | 20.4% | 2,167.8 | 150.3 | 7.4% | 2,017.5 | | Total shareholders' equity | 262.8 | 18.9 | 7.7% | 243.9 | 32.1 | 15.2% | 211.8 | [General Overview](index=23&type=section&id=General%20Overview) Management focuses on return on average equity, earnings per share, and asset quality, emphasizing disciplined loan pricing and anticipating growth to offset rising non-interest costs - Management focuses on **return on average equity**, **earnings per share**, and **asset quality**, emphasizing **disciplined loan pricing** to maintain a strong **net interest margin** amidst a flattening yield curve and competitive environment[155](index=155&type=chunk) - **Non-interest costs** are expected to rise with corporate growth, but management anticipates increased **earning assets** and **non-interest income** to more than offset these expenses in 2019 and beyond[156](index=156&type=chunk) [Financial Condition](index=23&type=section&id=Financial%20Condition) The Corporation's financial condition reflects growth in total assets, loans, and deposits, alongside changes in securities and shareholders' equity, impacting net interest margin Financial Condition Summary (2016-2018) | | 2018 Balance ($ 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% | $84,365 | [Cash and Cash Equivalents](index=26&type=section&id=Cash%20and%20Cash%20Equivalents) Cash and cash equivalents increased, with management confident in current liquidity from cash, traditional funding, FHLB financing, and short-term maturing assets Cash and Cash Equivalents (2017-2018) | Metric | 2018 ($ millions) | 2017 ($ millions) | | :---------------------- | :---------------- | :---------------- | | Cash and Cash Equivalents | $45.6 | $35.3 | - Management believes current liquidity needs are met by cash, traditional funding sources, FHLB financing, and short-term maturing securities and loans[166](index=166&type=chunk) [Securities](index=27&type=section&id=Securities) The securities portfolio is managed between 15% and 20% of total assets to balance earnings and liquidity, with ALCO monitoring performance and interest rate risk Securities Portfolio (2017-2018) | Metric | 2018 ($ 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](index=168&type=chunk) - The Asset/Liability Committee (ALCO) regularly monitors the securities portfolio's earnings performance and liquidity, and manages interest rate risk[173](index=173&type=chunk) [Loans](index=28&type=section&id=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 $2.5 billion at December 31, 2018**, compared to December 31, 2017[175](index=175&type=chunk) - The Corporation anticipates **strong loan growth in 2019**, driven by expansion in the **Buffalo, New York market** and increased **commercial lending in Pennsylvania and Ohio**[177](index=177&type=chunk) [Loan Quality](index=28&type=section&id=Loan%20Quality) The Corporation maintains rigorous lending policies and credit reviews, actively monitoring nonperforming loans, which remain favorable compared to peer institutions - The Corporation maintains **written lending policies and procedures**, including underwriting standards, loan documentation, and credit analysis, with ongoing credit reviews performed annually on approximately **65% of the commercial loan portfolio** by an outsourced firm[181](index=181&type=chunk) Loan Delinquency and Nonperforming Assets (2014-2018) | Category | 2018 ($ 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 | $10,209 | | Nonperforming loans as a percentage of loans, net | 0.73% | 0.93% | 0.82% | 0.78% | 0.69% | | Nonperforming assets as a percentage of total assets | 0.58% | 0.72% | 0.64% | 0.57% | 0.47% | - Management actively monitors nonperforming loans, and the Corporation's **nonperforming loans to total loans ratio remains favorable** compared to peer institutions[184](index=184&type=chunk) [Allowance for Loan Losses](index=29&type=section&id=Allowance%20for%20Loan%20Losses) The allowance for loan losses is determined through formal analysis considering individual loans, portfolio risk, historical losses, and economic conditions, with a notable provision for an impaired commercial real estate loan - The **allowance for loan losses** is determined through a **formal analysis by the Credit Administration and Finance Departments**, considering individual loans, portfolio risk characteristics, historical losses, economic conditions, and other factors[185](index=185&type=chunk)[186](index=186&type=chunk) Allowance for Loan Losses Activity (2014-2018) | Category | 2018 ($ 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](index=196&type=chunk) - 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](index=198&type=chunk) [Premises and Equipment](index=32&type=section&id=Premises%20and%20Equipment) 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