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