EDGAR 10-K Filing

Company CIK: 736772
Filing Year: 2021
Filename: 736772_10-K_2021_0000736772-21-000017.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
CNB Financial Corporation (the "Corporation") is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). It was incorporated under the laws of the Commonwealth of Pennsylvania in 1983 for the purpose of engaging in the business of a financial holding company. On April 26, 1984, the Corporation acquired all of the outstanding capital stock of County National Bank, a national banking chartered institution. In December 2006, County National Bank changed its name to CNB Bank (the "Bank"), and became a state bank chartered in Pennsylvania and subject to regulation by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. In October 2013, the Corporation acquired FC Banc Corp. and its subsidiary, The Farmers Citizens Bank. In July 2016, the Corporation acquired Lake National Bank.
On July 17, 2020, the Corporation completed its previously announced acquisition of Bank of Akron, pursuant to that certain Agreement and Plan of Merger, dated as of December 18, 2019 (the "Merger Agreement"), by and among the Corporation, CNB Bank and Bank of Akron. Under the terms of the Merger Agreement, Bank of Akron merged with and into CNB Bank (the "Merger"), with CNB Bank continuing as the surviving entity. Banking offices of Bank of Akron operate under the trade name BankOnBuffalo, a division of CNB Bank.
Pursuant to the Merger Agreement, for each share of Bank of Akron common stock, Bank of Akron shareholders were entitled to elect to receive either (x) $215.00 in cash or (y) 6.6729 shares of the Corporation's common stock and received cash in lieu of fractional shares. Elections were subject to proration procedures whereby at least 75% of the shares of Bank of Akron common stock were exchanged for shares of the Corporation's common stock. Based on the elections and proration procedures, the total consideration payable to Bank of Akron shareholders was approximately $40.8 million, comprised of approximately $16.1 million in cash and 1,501,321 shares of the Corporation's common stock, net of fractional shares, valued at approximately $24.7 million based on the July 17, 2020 closing price of $16.43 per share of the Corporation's common stock.
In addition to the Bank, the Corporation has four other subsidiaries. CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. CNB Risk Management, Inc. is a Delaware-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. Holiday Financial Services Corporation, incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.
CNB Bank
The Bank was originally chartered as a national bank in 1934 and is now a Pennsylvania-chartered bank. The CNB Bank franchise operates 18 full-service branch locations in Pennsylvania.
ERIEBANK, a division of the Bank, began operations in 2005. In July 2016, the Corporation acquired Lake National Bank, which operated two full-service branches in Mentor, Ohio, approximately 20 miles east of Cleveland, Ohio. The Bank is continues to operate one of these branch locations within its ERIEBANK franchise, with the other location ceasing operations in August 2020. In January 2020, the Corporation established a loan production office ("LPO") in Cleveland, Ohio. This LPO operates within the ERIEBANK division. The Bank currently operates ten full-service branch locations and one LPO as ERIEBANK, a division of the Bank, with its headquarters in Erie, Pennsylvania.
In October 2013, the Corporation acquired FC Banc Corp. and its subsidiary, Farmers Citizens Bank. The Bank currently operates seven full-service branch locations as FCBank, a division of the Bank, with its headquarters in Worthington, Ohio.
In 2016, the Bank received regulatory approval to conduct business in the state of New York as BankOnBuffalo, a division of the Bank. In July 2020, the Corporation acquired Bank of Akron, with its branch locations operating with BankOnBuffalo. The Bank currently operates nine branch locations and one drive-up office as BankOnBuffalo, a division of the Bank, with its headquarters in Buffalo, New York.
The Bank has 44 full-service branch offices located in various communities in its market area. The Bank’s primary market area includes the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson, and McKean. ERIEBANK, a division of the Bank, operates in the Pennsylvania counties of Crawford, Erie, and Warren and the Ohio counties of Ashtabula, Cuyahoga, and Lake. FCBank, a division of the Bank, operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware, and Franklin. BankOnBuffalo, a division of the Bank, operates in Erie and Niagara counties, New York.
The Bank is a full-service bank engaging in a full range of banking activities and services for individual, business, governmental and institutional customers. These activities and services principally include checking, savings, and time deposit accounts; real estate, commercial, industrial, residential and consumer loans; and a variety of other specialized financial services. The Bank’s Private Client Solutions division offers a full range of client services, including private banking and wealth and asset management.
Holiday Financial Services Corporation
In 2005, the Corporation entered the consumer discount loan and finance business, which is conducted through a wholly-owned subsidiary, Holiday Financial Services Corporation ("Holiday"). Holiday currently has nine offices within the Corporation’s market area.
2020 Cybersecurity Incident
In the fourth quarter of 2020, we experienced a cybersecurity incident following the receipt by one employee of a malicious "phishing" email. Once the activity was identified as potential unauthorized access, the Corporation acted to stop the intrusion and deployed its Information Security team to conduct an investigation and determine the scope of the unauthorized access, including the specific information impacted. Based on our investigation, the unauthorized access occurred from the end of November 2020 through the beginning of December 2020. The Corporation’s core systems were unaffected, as the unauthorized access was limited to the employee’s email. The Corporation engaged a third-party cybersecurity response firm to review the compromised emails for personally identifiable information ("PII"), and to determine which of our customers were impacted by this cybersecurity incident. The Corporation will notify all customers with potentially compromised PII.
The Corporation has taken actions to provide individuals with tools to protect their PII. The Company has devoted substantial resources to notify impacted individuals of the incident and to provide free services to assist these individuals in monitoring their identity information. Although the Corporation’s core systems were not compromised, the Corporation continues to enhance its data security systems, technology platforms, employee education and risk management processes, in an effort to underpin its business strategy.
Competition
The financial services industry in the Corporation’s service area continues to be extremely competitive, both among commercial banks and with other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds and credit unions. The increased competition has resulted from changes in the legal and regulatory guidelines as well as from economic conditions. Mortgage banking firms, leasing companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms, and even government agencies provide additional competition for loans and other financial services. Some of the financial service providers operating in the Corporation’s market area operate on a large-scale regional or national basis and possess resources greater than those of the Corporation. The Corporation is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.
Supervision and Regulation
The Corporation is a bank holding company that has elected financial holding company status, and the Bank is a Pennsylvania state-chartered bank that is not a member of the Federal Reserve System. Accordingly, the Corporation is subject to the oversight of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the Pennsylvania Department of Banking and is regulated under the BHC Act, and the Bank is subject to the oversight of the Pennsylvania Department of Banking and Federal Deposit Insurance Corporation ("FDIC"), as its primary federal regulator. The Corporation and the Bank are also subject to various requirements and restrictions under federal and state law, such as requirements to maintain reserves against deposits, restrictions on the types, amounts and terms and conditions of loans that may be granted, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer financial protection laws and regulations also affect the operation of the Bank and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Consumer Financial Protection Bureau ("CFPB") is authorized to write rules on consumer financial products and services which could affect the operations of the Bank and Holiday. In addition to the impact of regulation, commercial banks are significantly affected by the actions of the Federal Reserve Board, including actions taken with respect to interest rates, as the Federal Reserve Board attempts to control the money supply and credit availability in the U.S. in order to influence the economy.
The following summary sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information about us and our subsidiaries. It does not describe all of the provisions of the statutes, regulations and policies that are identified. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.
In addition to the summary below, as a result of the COVID-19 pandemic, the U.S. bank regulators issued several letters and other guidance during the course of 2020 to bank holding companies and banks regarding expectations for supporting the community and certain related temporary regulatory changes or accommodations, including, for example, temporary relief for banks that may exceed certain regulatory asset thresholds due in large part to their participation in government programs established in response to the COVID-19 pandemic. The Corporation continues to monitor guidance and developments related to COVID-19.
Bank Holding Company Regulation
As a bank holding company that controls a Pennsylvania state-chartered bank, the Corporation is subject to regulation and examination by the Pennsylvania Department of Banking and the Federal Reserve Board. We are required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the BHC Act, and applicable regulations. For instance, the BHC Act requires each bank holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of any class of voting shares of such bank. Such a transaction may also require approval of the Pennsylvania Department of Banking.
Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, the Corporation may only engage in, or own companies that engage in, activities deemed by the Federal Reserve Board to be permissible for bank holding companies or financial holding companies. Activities permissible for bank holding companies are those that are so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. Permissible activities for financial holding companies include those "so closely related to banking as to be a proper incident thereto" as well as certain additional activities deemed "financial in nature or incidental to such financial activity" or complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of the depository institution or the financial system.
The Corporation must obtain permission from or provide notice to the Federal Reserve Board prior to engaging in most new business activities.
Regulation of CNB Bank
Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, the loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and acquisitions, the establishment of branches, management practices, and numerous other aspects of banking operations.
Source of Strength Doctrine
Under Section 616 of the Dodd-Frank Act, a bank holding company is required to serve as a source of financial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board’s policy that in serving as a source of financial and managerial strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility, and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice, a violation of the Federal Reserve Board regulations, or both. This doctrine is commonly known as the "source of strength" doctrine.
Identity Theft
The Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission (together with the SEC, the "Commissions") jointly issued final rules and guidelines to require certain regulated entities to establish programs to address risks of identity theft. The rules and guidelines implement provisions of the Dodd-Frank Act. These provisions amend Section 615(e) of the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions’ jurisdiction to address identity theft in two ways. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and debit card issuers that are subject to the Commissions’ jurisdiction to assess the validity of notifications of changes of address under certain circumstances.
Capital Adequacy
The Capital Rules adopted in 2013 by the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency, generally implement the Basel Committee on Banking Supervision’s capital framework, referred to as Basel III, for strengthening international capital standards. The Capital Rules revise the definitions and components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of assets.
The Capital Rules, among other things:
•revise minimum capital requirements and adjust prompt corrective action thresholds;
•revise the components of regulatory capital, including adding a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets and increasing the minimum Tier 1 capital ratio requirement from 4% to 6%;
•retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;
•permit most banking organizations to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income;
•implement the capital conservation buffer beginning January 1, 2016, which was phased in incrementally until it reached 2.5% of risk-weighted assets, in addition to the minimum common equity Tier 1, Tier 1 and total capital ratios, on January 1, 2019;
•require a minimum leverage ratio of 4%;
•require a total capital ratio of 8%;
•increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;
•require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of common equity Tier 1 capital in the aggregate; and
•remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures.
Compliance with the Capital Rules was required beginning January 1, 2015, for most banking organizations including the Corporation, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. The Corporation implemented the Capital Rules on January 1, 2015, and continues to exceed all estimated well-capitalized regulatory requirements on a fully phased-in basis.
In July 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC adopted a final rule intended to simply the Capital Rules described above for non-advanced approaches institutions. Institutions could implement the simplification rule beginning on January 1, 2020 and were required to implement them by April 1, 2020. The transition provisions to the Capital Rules issued by these agencies in November 2017 will cease to apply to an institution in the quarter in which it adopted the simplification rule.
In September 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC adopted a final rule that is intended to further simply the Capital Rules for depository institutions and their holding companies that have less than $10 billion in total consolidated assets, such as us, if such institutions meet certain qualifying criteria. This final rule became effective on January 1, 2020. Under this final rule, if we meet the qualifying criteria, including having a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of f a certain size ( greater than 8 percent through 2020, 8.5 percent through 2021 and 9 percent thereafter), we will be eligible to opt into the community bank leverage ratio framework. If we opt into this framework, we will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the Capital Rules (as modified pursuant to the simplification rule) and will be considered to have met the well-capitalized ratio requirements for PCA purposes. To date, we have not opted in to this community bank leverage ratio framework.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from the Bank. Declaration and payment of cash dividends depends upon cash dividend payments to the Corporation by the Bank, which is our primary source of revenue and cash flow. Accordingly, the right of the Corporation, and consequently the right of our creditors and shareholders, to participate in any distribution of the assets or earnings of any subsidiary is necessarily subject to the prior claims of creditors of the Bank, except to the extent that claims of the Corporation in its capacity as a creditor may be recognized.
As a Pennsylvania state-chartered bank, the Bank is subject to regulatory restrictions on the payment and amounts of dividends under the Pennsylvania Banking Code. Further, the ability of banking subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements.
The payment of dividends by the Bank and the Corporation may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory requirements. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. A depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal banking agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. Federal banking regulators have the authority to prohibit banks and bank holding companies from paying a dividend if the regulators deem such payment to be an unsafe or unsound practice.
Prompt Corrective Action and Safety and Soundness
Under applicable "prompt corrective action" ("PCA") statutes and regulations, depository institutions are placed into one of five capital categories, ranging from "well capitalized" to "critically undercapitalized." The PCA statute and regulations provide for progressively more stringent supervisory measures as an insured depository institution’s capital category declines. An institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. An undercapitalized depository institution must submit an acceptable restoration plan to the appropriate federal banking agency. One requisite element of such a plan is that the institution’s parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations.
At December 31, 2020, the Bank qualified as "well capitalized" under applicable regulatory capital standards. Bank holding companies and insured depository institutions may also be subject to potential enforcement actions of varying levels of severity by the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation, condition imposed in writing by the agency, or term of a written agreement with the agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors, and other institution affiliated parties; the termination of the insured depository institution’s deposit insurance; the appointment of a conservator or receiver for the insured depository institution; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the FDIC, as receiver, would be harmed if such equitable relief was not granted.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977 ("CRA"), the FDIC is required to assess the record of all financial institutions it supervises to determine if these institutions are meeting the credit needs of the community (including low and moderate income neighborhoods) which they serve. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. The Bank received a CRA rating of "Satisfactory" at its most recent CRA exam.
Restrictions on Transactions with Affiliates and Insiders
The Bank is subject to the restrictions of Sections 23A and 23B of the Federal Reserve Act and the implementing Regulation W. The Bank's "affiliates" for purposes of these sections include, among other potential entities, the Corporation and its direct subsidiaries. Section 23A requires that loans or extensions of credit by the Bank to an affiliate, purchases by the Bank of securities issued by an affiliate, purchases by the Bank of assets from an affiliate (except as may be exempted by order or regulation), the Bank’s acceptance of securities or debt obligations issued by an affiliate as collateral for a loan or extension of the credit to a third party, the Bank’s acceptance of a guarantee or letter of credit on behalf of an affiliate, a transaction with an affiliate involving the borrowing or lending of securities to the extent the transaction causes the Bank to have credit exposure to the affiliate, and a derivative transaction with an affiliate, to the extent the Bank will have credit exposure to the affiliate (collectively, "Covered Transactions") be on terms and conditions consistent with safe and sound banking practices. Section 23A also imposes quantitative restrictions on the amount of and collateralization requirements on such transactions. Section 23B requires that all Covered Transactions and certain other transactions, including the sale of securities or other assets by the Bank to an affiliate and the payment of money or the furnishing of services by the Bank to an affiliate, be on terms comparable to those prevailing for similar transactions with nonaffiliates.
The Bank is also subject to Sections 22(g) and 22(h) of the Federal Reserve Act, and the implementation of Regulation O issued by the Federal Reserve Board. These provisions impose limitations on loans and extensions of credit by the Bank to its and its affiliates' executive officers, directors and principal shareholders and their related interests. The limitations restrict the terms and aggregate amount of such transactions. Regulation O also imposes certain recordkeeping and reporting requirements.
Deposit Insurance and Premiums
The deposits of the Bank are insured up to applicable limits per insured depositor by the FDIC. The standard maximum deposit insurance amount is $250,000 per depositor, per insured depository institution, per ownership category, in accordance with applicable FDIC regulations.
The FDIC uses a risk-based assessment system that imposes insurance premiums based on a risk matrix that takes into account the bank’s capital level and supervisory rating. The base for insurance assessments is the average consolidated total assets less tangible equity capital of a financial institution. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. The FDIC adopted a final rule effective June 26, 2020, and applied as of April 1, 2020, to mitigate the effect on deposit insurance assessments of a bank’s participation in the Paycheck Protection Program, the Paycheck Protection Program Liquidity Facility and the Money Market Mutual Fund Liquidity Facility in connection with the COVID-19 pandemic.
Financial Privacy and Data Security
The Corporation is subject to federal laws, including the Gramm-Leach-Bliley Act and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated financial institutions. These provisions require notice of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain nonpublic personal information to affiliates or non-affiliated third parties by means of opt-out or opt-in authorizations.
The Gramm-Leach-Bliley Act requires that financial institutions implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information. Federal banking agencies have also adopted guidelines for establishing information security standards and programs to protect such information. Further, pursuant to interpretive guidance issued under the Gramm-Leach-Bliley Act and certain state laws, financial institutions are required to notify customers of security breaches that result in unauthorized access to their nonpublic personal information.
Incentive Compensation
The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the Corporation and the Bank, with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured.
The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called "golden parachute" payments in connection with approvals of mergers and acquisitions.
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign "shell banks" and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. The Bank has in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engages in very few transactions of any kind with foreign financial institutions or foreign persons.
Office of Foreign Assets Control Regulation
The United States government has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the "OFAC" rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control. The Office of Foreign Assets Control-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from the Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences.
Other Federal Laws and Regulations
State usury and other credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. The Bank is also subject to lending limits on loans to one borrower and regulatory guidance on concentrations of credit. The Bank’s loans and other products and services are also subject to numerous federal and state consumer financial protection laws, including, but not limited to, the following:
•Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
•Truth-in-Savings Act, which governs disclosures of the terms of deposit accounts to consumers;
•Home Mortgage Disclosure Act, requiring financial institutions to provide information to regulators to enable determinations as to whether financial institutions are fulfilling their obligations to meet the home lending needs of the communities they serve and not discriminating in their lending practices;
•Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, sex or other prohibited factors in extending credit;
•Real Estate Settlement Procedures Act, which imposes requirements relating to real estate settlements, including requiring lenders to disclose certain information regarding the nature and cost of real estate settlement services;
•Fair Credit Reporting Act, covering numerous areas relating to certain types of consumer information and identity theft;
•Privacy provisions of the Gramm-Leach-Bliley Act and related regulations, which require that financial institutions provide privacy policies to consumers, to allow customers to "opt out" of certain sharing of their nonpublic personal information, and to safeguard sensitive and confidential customer information;
•Electronic Funds Transfer Act, which is a consumer protection law regarding electronic fund transfers; and
•Numerous other federal and state laws and regulations, including those related to consumer protection and bank operations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934, as amended, including publicly-held financial holding companies such as the Corporation. In particular, the Sarbanes-Oxley Act establishes: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws.
Governmental Policies
Our earnings are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on our business and earnings.
Other Legislative Initiatives
Proposals may be introduced in the United States Congress, in the Pennsylvania Legislature, and/or by various bank regulatory authorities that could alter the powers of, and restrictions on, different types of banking organizations and which could restructure part or all of the existing regulatory framework for banks, bank and financial holding companies and other providers of financial services. Moreover, other bills may be introduced in Congress which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the regulatory framework. It is not possible to predict whether any such proposals will be enacted into law or, even if enacted, what effect such action may have on our business and earnings.
Human Capital
As of December 31, 2020, the Corporation had a total of 651 employees, of which 601 were full time and 50 were part time. The Corporation respects, values, and invites diversity in our employees, customers and communities. We seek to recognize the unique contribution each individual brings to our Corporation, and we are fully committed to supporting a diverse workplace that understands, accepts and values the similarities and differences between individuals.
The Corporation’s key human capital management objectives are to attract, recruit, hire, develop and promote a deep and diverse bench of talent that translates into a strong and successful workforce. To support these objectives, the Corporation’s Employee Experience programs are designed to develop talent to prepare them for critical roles and leadership positions for the future; reward and support employees through competitive pay and benefit programs; enhance the Corporation’s culture through efforts to foster, promote, and preserve a culture of diversity and inclusion; and evolve and invest in technology, tools, and resources to better support employees at work.
The Corporation's employees actively participate in their communities through volunteer activities in education, economic development, human and health services, and community reinvestment. During 2020, employees donated 3,800 hours in support of more than 310 organizations. Even through a pandemic, the Corporation's employees found creative ways to give back to their communities. Employee volunteers are recognized for their efforts by public recognition on social media and reward points to be redeemed for gift cards, company branded gifts and prizes.
Available Information
The Corporation makes available free of charge on its website (www.cnbbank.bank) its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission, the SEC. Information on the Corporation’s website is not incorporated by reference into this report.
Shareholders may obtain a copy of the Corporation’s Annual Report on Form 10-K free of charge by writing to: CNB Financial Corporation, 1 South Second Street, PO Box 42, Clearfield, PA 16830, Attn: Shareholder Relations.
The SEC maintains an internet site that contains reports, proxy statements and other information about electronic filers such as the Corporation. The site is available at http://www.sec.gov.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The Corporation’s financial condition and results of operations are subject to various risks inherent in its business. The material risks and uncertainties that management believes affect the Corporation are described below. If any of these risks actually occur, the Corporation’s business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. The following risks together with all of the other information in this Annual Report on Form 10-K should be considered.
Economic Risks
The ongoing COVID-19 pandemic and measures intended to prevent its spread have had, and another pandemic or public health crisis in the future could have a material adverse effect on our business, results of operations and financial condition. Such effects will depend on future developments, that are highly uncertain and difficult to predict.
Since first being reported in December 2019, the novel strain of coronavirus (COVID-19) has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
Global health concerns relating to the COVID-19 pandemic outbreak and related government actions taken to reduce the spread of the virus have significantly and adversely affected the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.
The COVID-19 pandemic continues to adversely impact our business, workforce, as well as the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:
•credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy and restaurant industries, but across other industries as well;
•declines in collateral values;
•third party disruptions, including outages at network providers and other suppliers;
•increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and
•operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.
These factors may persist for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 pandemic has subsided.
The COVID-19 pandemic has caused us to modify our business practices (including restricting employee travel and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic or will otherwise be satisfactory to government authorities.
The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, each of which is highly uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the various responsive measures, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the pandemic, including the availability of and access to credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.
The ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Nevertheless, any of the negative effects of the COVID-19 pandemic, including those described above, alone or in combination with others, have had and may continue to have a material adverse effect on our results of operations, financial condition and cash flows. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed in this Part I, "Item 1A. Risk Factors".
The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on the Corporation’s business, financial position and results of operations.
The Corporation continues to face risks resulting from the aftermath of the severe recession generally and the moderate pace of the current recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on the Corporation and on others in the financial services industry. In particular, the Corporation may face the following risks in connection with the economic or market environment:
•The Corporation’s and the Bank’s ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
•The Corporation faces increased regulation of the banking and financial services industry. Compliance with such regulation may increase its costs and limit its ability to pursue business opportunities.
•Market developments may affect customer confidence levels and may cause increases in loan delinquencies and default rates, which management expects would adversely impact the Bank’s charge-offs and provision for loan losses.
•Market developments may adversely affect the Bank’s securities portfolio by causing other-than-temporary-impairments, prompting write-downs and securities losses.
•Competition in banking and financial services industry could intensify as a result of the consolidation of financial services companies in connection with current market conditions.
The Corporation may not be able to meet its cash flow needs on a timely basis at a reasonable cost, and the Corporation’s cost of funds for banking operations may significantly increase as a result of general economic conditions, interest rates and competitive pressures.
Liquidity is the ability to meet cash flow obligations as they come due and cash flow needs on a timely basis and at a reasonable cost. The liquidity of the Bank is used to make loans and to repay deposit and borrowing liabilities as they become due, or are demanded by customers and creditors. Many factors affect the Bank’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and standing in the marketplace, and general economic conditions.
The Bank’s primary source of funding is retail deposits, gathered throughout its network of banking offices. Periodically, the Corporation utilizes term borrowings from the Federal Home Loan Bank (the "FHLB") of Pittsburgh, of which the Bank is a member, and other lenders to meet funding obligations. The Bank’s securities and loan portfolios provide a source of contingent liquidity that could be accessed in a reasonable time period through sales.
Significant changes in general economic conditions, market interest rates, competitive pressures or otherwise, could cause the Bank’s deposits to decrease relative to overall banking operations, and it would have to rely more heavily on brokered funds and borrowings in the future, which are typically more expensive than deposits.
Management and the Corporation's Board of Directors, through the Asset-Liability Committee ("the ALCO"), monitor liquidity and the ALCO establishes and monitors acceptable liquidity ranges. The Bank actively manages its liquidity position through target ratios. Continual monitoring of these ratios, both historical and through forecasts under multiple rate scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity.
Changes in economic conditions, including consumer savings habits and availability of or access to capital, could potentially have a significant impact on the Bank’s liquidity position, which in turn could materially impact the Corporation’s financial condition, results of operations and cash flows.
Credit and Interest Rate Risks
The Bank’s allowance for credit losses may not be adequate to cover loan losses which could have a material adverse effect on the Corporation’s business, financial condition and results of operations.
A significant source of risk for the Corporation arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Bank are secured, but some loans are unsecured based upon management’s evaluation of the creditworthiness of the borrowers. With respect to secured loans, the collateral securing the repayment of these loans principally includes a wide variety of real estate, and to a lesser extent personal property, either of which may be insufficient to cover the obligations owed under such loans.
Collateral values and the financial performance of borrowers may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates and debt service levels, changes in oil and gas prices, changes in monetary and fiscal policies of the federal government, widespread disease, terrorist activity, environmental contamination and other external events, which are beyond the control of the Bank. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards might create the impression that a loan is adequately collateralized when in fact it is not. Although the Bank may acquire any real estate or other assets that secure defaulted loans through foreclosures or other similar remedies, the amounts owed under the defaulted loans may exceed the value of the assets acquired.
The allowance for credit losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation. Following the issuance by the Financial Accounting Standards Board (“FASB”) of Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments,” the Corporation adjusted its loan allowance methodology to reflect the new standard, which requires periodic estimates of lifetime expected credit losses on financial assets and categorizes expected credit losses as allowances for credit losses under the current expected credit loss ("CECL") methodology. The Corporation measures expected credit losses of financial assets on a collective (pool) basis, when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the models utilized by the Corporation to estimate expected credit losses include a discounted cash flow ("DCF") model that discounts instrument-level contractual cash flows, adjusted for prepayments and curtailments, incorporating loss expectations, and a weighted average remaining maturity ("WARM") model which contemplates expected losses at a pool-level, utilizing historic loss information. The Corporation's models for estimating the allowance for credit losses consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.
The Bank monitors delinquencies and losses on a monthly basis. The Bank has adopted underwriting and credit monitoring policies and procedures, including the review of borrower financial statements and collateral appraisals, which management believes are appropriate to mitigate the risk of loss by assessing the likelihood of borrower nonperformance and the value of available collateral. The Bank also manages credit risk by diversifying its loan portfolio. An ongoing independent review, subsequent to management’s review, of individual credits is performed by an independent loan review function, which reports to the Loan Committee of the Corporation’s Board of Directors.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Although management believes that the processes in place for assessing the appropriate level of the allowance for loan losses are robust, such policies and procedures have limitations, including judgment errors in management’s risk analysis, and may not prevent unexpected losses in the future. Moreover, management expects that the CECL methodology may create more volatility in the level of our allowance for loan losses from quarter to quarter as changes in the level of allowance for loan losses will be dependent upon, among other things, macroeconomic forecasts and conditions, loan portfolio volumes and credit quality. These factors could have a material adverse effect on the Corporation’s business, financial condition and results of operations.
Interest rate volatility could significantly reduce the Corporation’s profitability.
The Corporation’s earnings largely depend on the relationship between the yield on its earning assets, primarily loans and investment securities, and the cost of funds, primarily deposits and borrowings. This relationship, commonly known as the net interest margin, is susceptible to significant fluctuation and is affected by economic and competitive factors that influence the yields and rates, and the volume and mix of the Bank’s interest earning assets and interest bearing liabilities.
Interest rate risk can be defined as the sensitivity of net interest income and of the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk arises from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. The Corporation is subject to interest rate risk to the degree that its interest bearing liabilities re-price or mature more slowly or more rapidly or on a different basis than its interest earning assets. Changes in interest rates, including those due to federal monetary policy, will affect the levels of income and expense recorded on a large portion of the Bank’s assets and liabilities, and fluctuations in interest rates will impact the market value of all interest sensitive assets. Significant fluctuations in interest rates could have a material adverse impact on the Corporation’s business, financial condition, results of operations, or liquidity.
The Bank’s interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of its balance sheet and off-balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on earnings, is determined through the use of static gap analysis and earnings simulation modeling under multiple interest rate scenarios. Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank’s balance sheet in order to preserve the sensitivity of net interest income to actual or potential changes in interest rates. For further information on risk relating to interest rates, refer to Part I, Item 7a, "Quantitative and Qualitative Disclosures about Market Risk," herein.
The Corporation’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk, and declines in value in its investment securities portfolio may require it to record other-than-temporary impairment charges that could have a material adverse effect on its results of operations and financial condition.
The Corporation’s investment securities portfolio has risks beyond its control that can significantly influence the portfolio’s fair value. These factors include, but are not limited to, rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and continued instability in the credit markets. Recent lack of market activity with respect to certain of the securities has, in certain circumstances, required the Corporation to base its fair market valuation on unobservable inputs. The Corporation has engaged valuation experts to price these certain securities using proprietary models, which incorporate assumptions that market participants would use in pricing the securities, including bid/ask spreads and liquidity and credit premiums. Any change in current accounting principles or interpretations of these principles could impact the Corporation’s assessment of fair value and thus its determination of other-than-temporary impairment of the securities in its investment securities portfolio.
The Bank may be required to record other-than-temporary impairment charges on its investment securities if they suffer declines in value that are considered other-than-temporary. Numerous factors, including collateral deterioration underlying certain private label mortgage-backed securities, lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for certain investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could negatively affect the Bank’s securities portfolio in future periods. An other-than-temporary impairment charge could have a material adverse effect on the Corporation’s results of operations and financial condition.
A substantial decline in the value of the Bank’s FHLB common stock may adversely affect the Corporation’s results of operations, liquidity and financial condition.
As a requirement of membership in the FHLB of Pittsburgh, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. Borrowings from the FHLB represent the Bank’s primary source of short-term and long-term wholesale funding.
In an extreme situation, it is possible that the capitalization of an FHLB, including the FHLB of Pittsburgh, could be substantially diminished or reduced to zero. Consequently, given that there is no trading market for the Bank’s FHLB common stock, the Corporation’s management believes that there is a risk that the Corporation’s investment could be deemed impaired at some time in the future. If this occurs, it may adversely affect the Corporation’s results of operations and financial condition.
In addition, if the capitalization of the FHLB of Pittsburgh is substantially diminished, the Bank’s liquidity may be adversely impacted if it is not able to obtain alternative sources of funding.
There are 11 FHLB banks, including the FHLB of Pittsburgh, in the FHLB system. The 11 FHLB banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB bank cannot meet its obligations to pay its share
of the system’s debt, other FHLB banks can be called upon to make the payment. The Corporation cannot assure you, however, that the FHLB system will be able to meet these obligations.
The Bank could be held responsible for environmental liabilities relating to properties acquired through foreclosure, resulting in significant financial loss.
In the event the Bank forecloses on a defaulted commercial or residential mortgage loan to recover its investment, it may be subject to environmental liabilities in connection with the underlying real property, which could significantly exceed the value of the real property. Although the Bank exercises due diligence to discover potential environmental liabilities prior to acquiring any property through foreclosure, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on properties during its ownership or after a sale to a third party. The Corporation cannot assure you that the Bank would not incur full recourse liability for the entire cost of any removal and cleanup on an acquired property, that the cost of removal and cleanup would not exceed the value of the property, or that the Bank could recover any of the costs from any third party. Losses arising from environmental liabilities could have a material adverse impact on the Corporation’s business, financial condition, results of operations, or liquidity.
Replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.
In 2017, the United Kingdom’s Financial Conduct Authority ("FCA"), which regulates the London Interbank Offered Rate ("LIBOR"), announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC"), which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to LIBOR in derivatives and other financial contracts. The U.S. bank regulators issued a Statement on LIBOR Transition on November 30, 2020 encouraging banks to transition away from U.S. Dollar (USD) LIBOR as soon as practicable and in any event by December 31, 2021 for new contracts. LIBOR is currently anticipated to be fully phased out by June 30, 2023. We are not able to predict with certainty when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If such an increase or decrease were to occur, our interest payments that are higher or lower than if LIBOR were to remain available in its current form.
We have a number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision of LIBOR, could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, could create considerable costs and additional risk and could have an adverse impact on our overall financial condition or results of operations. Since proposed alternative rates (including SOFR) are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to an Investment in the Corporation’s Securities
Some provisions contained in the Corporation’s articles of incorporation and its bylaws and under Pennsylvania law could deter a takeover attempt or delay changes in control or management of the Corporation.
Certain anti-takeover provisions of the Pennsylvania Business Corporation Law of 1988, as amended, apply to Pennsylvania registered corporations (e.g., publicly traded companies) including, but not limited to, those relating to (1) control share acquisitions, (2) disgorgement of profits by certain controlling persons, (3) business combination transactions with interested shareholders, and (4) the rights of shareholders to demand fair value for their stock following a control transaction. Pennsylvania law permits corporations to opt-out of these anti-takeover provisions, but the Corporation has not done so. Such provisions could have the effect of deterring takeovers or delaying changes in control or management of the Corporation. Additionally, such provisions could limit the price that some investors might be willing to pay in the future for shares of the Corporation’s common stock.
For example, the Corporation’s amended and restated articles of incorporation require the affirmative vote of 66% of the outstanding shares entitled to vote to effect a business combination. In addition, the Corporation’s amended and restated articles of incorporation, subject to the limitations prescribed in such articles and subject to limitations prescribed by Pennsylvania law, authorize the Corporation’s Board of Directors, from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation, powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof. As a result of its broad discretion with respect to the creation and issuance of preferred stock without shareholder approval, the Corporation's Board of Directors could adversely affect the voting power and other rights of the holders of common stock and, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights, could discourage any attempt to obtain control of the Corporation.
The Corporation’s bylaws, as amended and restated, provide for the division of the Corporation’s Board of Directors into three classes of directors, with each serving staggered terms. In addition, any amendment to the Corporation’s bylaws must be approved by the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any shareholders are entitled to vote thereon as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class.
Any of the foregoing provisions may have the effect of deterring takeovers or delaying changes in control or management of the Corporation.
The price of the Corporation’s common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.
The price of the Corporation’s common stock on the NASDAQ constantly changes. The Corporation expects that the market price of its common stock will continue to fluctuate, and the Corporation cannot give you any assurances regarding any trends in the market prices for its common stock.
The Corporation’s stock price may fluctuate as a result of a variety of factors, many of which are beyond its control. These factors include the Corporation’s:
•past and future dividend practice;
•financial condition, performance, creditworthiness and prospects;
•quarterly variations in the Corporation’s operating results or the quality of the Corporation’s assets;
•operating results that vary from the expectations of management, securities analysts and investors;
•changes in expectations as to the Corporation’s future financial performance;
•announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by the Corporation or its competitors;
•the operating and securities price performance of other companies that investors believe are comparable to the Corporation;
•future sales of the Corporation’s equity or equity-related securities;
•the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally; and
•instability in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility, budget deficits or sovereign debt level concerns and other geopolitical, regulatory or judicial events.
The Corporation’s ability to pay dividends is limited by law and regulations.
The future declaration of dividends by the Corporation’s Board of Directors will depend on a number of factors, including capital requirements, regulatory limitations, the Corporation’s operating results and financial condition and general economic conditions. The Corporation’s ability to pay dividends depends primarily on the receipt of dividends from the Bank. Dividend payments from the Bank are subject to legal and regulatory limitations, generally based on retained earnings, imposed by bank regulatory agencies. The ability of the Bank to pay dividends is also subject to financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. The Corporation cannot assure you that the Bank will be able to pay dividends to the Corporation in the future. The Corporation may decide to limit the payment of dividends to its stockholders even when the Corporation has the legal ability to pay them in order to retain earnings for use in the Corporation’s business.
Operational and Strategic Risks
The Bank’s loans are principally concentrated in certain areas of Pennsylvania, Ohio and New York, and adverse economic conditions in those markets could adversely affect the Corporation’s business, financial condition and results of operations.
The Corporation’s success is dependent to a significant extent upon general economic conditions in the United States and, in particular, the local economies in central and northwest Pennsylvania, central and northeast Ohio, and western New York - the primary markets served by the Bank. The Bank is particularly exposed to real estate and economic factors in these geographic areas, as most of its loan portfolio is concentrated among borrowers in these markets. Furthermore, because a substantial portion of the Bank’s loan portfolio is secured by real estate in these areas, the value of the associated collateral is also subject to regional real estate market conditions.
The Bank is not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the local real estate markets served by the Bank. While the Bank’s loan portfolio has not shown significant signs of credit quality deterioration despite continued challenges in the U.S. economy, we cannot assure you that no deterioration will occur. An economic recession in the markets served by the Bank, and the nation as a whole, could negatively impact household and corporate incomes. This impact could lead to decreased loan demand and increase the number of borrowers who fail to pay the Bank interest or principal on their loans, and accordingly, could have a material adverse effect on the Corporation’s business, financial condition, results of operations, or liquidity.
The preparation of the Corporation’s financial statements requires the use of estimates that could significantly vary from actual results, which could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make significant estimates that affect the financial statements. For example, one of these significant estimates is the allowance for credit losses. Due to the inherent nature of estimates, the Corporation cannot provide absolute assurance that it will not significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the provided allowance, which could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.
The Corporation’s financial results may be subject to the impact of changes in accounting standards or interpretation in new or existing standards.
From time to time the Financial Accounting Standards Board ("FASB"), and the SEC change accounting regulations and reporting standards that govern the preparation of the Corporation’s financial statements. In addition, the FASB, SEC, and bank regulators may revise their previous interpretations regarding existing accounting regulations and the application of these accounting standards. These revisions in their interpretations are out of the Corporation’s control and may have a material impact on its financial statements.
The risks presented by acquisitions could adversely affect our financial condition and results of operations.
Any acquisitions will be accompanied by the risks commonly encountered in acquisitions including, among other things: our ability to realize anticipated cost savings and avoid unanticipated costs relating to the merger, the difficulty of integrating operations and personnel, the potential disruption of our or the acquired company’s ongoing business, the inability of our management to maximize our financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management. These risks may prevent the Corporation from fully realizing the anticipated benefits of an acquisition or cause the realization of such benefits to take longer than expected.
Strong competition within the Corporation’s markets and technological change may have a material adverse impact on its profitability.
The Corporation competes with an ever-increasing array of financial service providers. As noted above, as a financial holding company and state-chartered financial institution, respectively, the Corporation and the Bank are subject to extensive regulation and supervision, including, in many cases, regulations that limit the type and scope of activities. The non-bank financial service providers that compete with the Corporation and the Bank may not be subject to such extensive regulation, supervision, and tax burden. Competition from nationwide banks, as well as local institutions, is strong in the Corporation’s markets.
The financial services industry is undergoing rapid technological change and technological advances are likely to intensify competition. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Accordingly, the Corporation’s future success will depend in part on its ability to address customer needs by using technology. The Corporation cannot assure you that it will be able to successfully take advantage of technological changes or advances or develop and market new technology driven products and services to its customers. Failure to keep pace with technological change affecting the financial services industry could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.
Many regional, national and international competitors have far greater assets and capitalization than the Corporation has and greater resources to invest in technology and access to capital markets and can consequently offer a broader array of financial services than it can. We cannot assure you that we will continue to be able to compete effectively with other financial institutions in the future. Developments increasing the nature or level of competition could have a material adverse effect on the Corporation’s business, financial condition, results of operations, or liquidity. For further information on competition, refer to Part I, Item 1, "Competition," herein.
The unsoundness of other financial institutions with which the Corporation does business could adversely affect the Corporation’s business, financial condition or results of operations.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty, investment or other relationships. The Corporation routinely executes transactions with counterparties in the financial services industry such as commercial banks, brokers and dealers, investment banks and other institutional clients for a range of transactions including loan participations, derivatives and hedging transactions. In addition, the Corporation invests in securities or loans originated or issued by financial institutions or supported by the loans they originate. As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the financial industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or other institutions. Many of these transactions expose the Corporation to credit or investment risk in the event of default by the Corporation’s counterparty. In addition, the Corporation’s credit risk may be exacerbated if the collateral it holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or other exposure to the Corporation. The Corporation could incur losses to its securities portfolio as a result of these issues. These types of losses may have a material adverse effect on the Corporation’s business, financial condition or results of operation.
A failure in or breach of the Corporation’s or any of its subsidiaries’ operational or security systems or infrastructure, or those of third party vendors and other service providers, including as a result of cyber attacks, could disrupt the Corporation’s or any of its subsidiaries’ businesses, result in the disclosure or misuse of confidential or proprietary information, damage its reputation, increase its costs and cause losses.
The Corporation, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, its and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Although the Corporation has business continuity plans and other safeguards in place, disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Corporation’s and its subsidiaries products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Corporation’s results of operations or financial condition.
Although to date the Corporation has not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. For example, in the fourth quarter of 2020, the Corporation experienced a cybersecurity incident following the receipt by an employee of a malicious "phishing" email that resulted in third party access to the employee’s email and the potential compromise of PII. The Corporation’s core systems were unaffected, as the unauthorized access was limited to the employee’s emails. The Corporation continues to enhance its data security systems, technology platforms, employee education and risk management processes, in an effort to underpin its business strategy. In connection with these efforts, we have incurred costs and expect to incur additional costs as we continue to enhance our data security infrastructure and take further steps to prevent unauthorized access to our systems and the data we maintain. While our efforts were able to identify and remediate this specific incident, and we have additional controls in place to further mitigate future occurrences, the risk exists that a similar cyber incident could occur in the future.
The Corporation’s risk and exposure to these matters, including future "phishing" attempts like the 2020 incident, remain heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our Internet banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served. As a result, cybersecurity and the continued development and enhancement of the Corporation’s controls, processes and practices designed to protect its and its subsidiaries systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for the Corporation. As cyber threats continue to evolve, the Corporation may be required to expend further significant resources to continue to modify or enhance its protective measures or to investigate and remediate any future information security vulnerabilities.
Risks Related to Legal and Compliance Matters
The Corporation is subject to extensive government regulation and supervision, which may affect its ability to conduct its business and may negatively impact its financial results.
The Corporation, primarily through the Bank and its non-bank subsidiary, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, the Federal Deposit Insurance Fund and the safety and soundness of the banking system as a whole, not stockholders. These regulations affect the Corporation’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject it to additional costs, limit the types of financial services and products the Corporation may offer, and/or limit the pricing it may charge on certain banking services, among other things.
Failure to comply with laws, including the Bank Secrecy Act and USA Patriot Act, regulations or policies could result in sanctions by regulatory agencies, restrictions, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial condition and results of operations and/or cause the Corporation to lose its financial holding company status. While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned "Supervision and Regulation" in Part I, Item 1 of this report for further information.
Federal and state governments could pass legislation responsive to current credit conditions which could cause the Corporation to experience higher credit losses.
The Corporation could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Corporation could experience higher credit losses because of federal or state legislation or regulatory action that limits the Bank’s ability to foreclose on property or other collateral or makes foreclosure less economically feasible. The Corporation cannot assure you that future legislation will not significantly and adversely impact its ability to collect on its current loans or foreclose on collateral.
General Risks
The Corporation relies on its management and other key personnel, and the loss of any of them may adversely affect its operations.
The Corporation is and will continue to be dependent upon the services of its executive management team. In addition, it will continue to depend on its ability to retain and recruit key client relationship managers. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on its business and financial condition.
The Corporation's risk management framework may not be effective in mitigating risk and loss.
The Corporation maintains an enterprise risk management program that is designed to identify, quantify, monitor, report, and control the risks that it faces. These risks include, but are not limited to: strategic, interest-rate, credit, liquidity, operations, pricing, reputation, compliance, litigation, and cybersecurity. While the Corporation assesses and improves this program on an ongoing basis, there can be no assurance that its approach and framework for risk management and related controls will effectively mitigate all risk and limit losses in its business. If conditions or circumstances arise that expose flaws or gaps in the Corporation's risk-management program, or if its controls break down, the Corporation's results of operations and financial condition may be adversely affected.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
The headquarters of the Corporation and the Bank are located at 1 South Second Street, Clearfield, Pennsylvania, in a building owned by the Corporation. The Bank operates 44 full-service offices. Of these 44 offices, 23 are owned and 20 are leased from independent owners and one is leased from the Corporation. Holiday has nine full-service offices, of which eight are leased from independent owners and one is leased from the Corporation. There are no encumbrances on the offices owned and the rental expense on the leased property is immaterial in relation to operating expenses. The initial lease terms range from three to twenty years.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation or any of its subsidiaries is a party, or of which any of their properties is the subject, except ordinary routine proceedings which are incidental to the business.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Global Select Market of The NASDAQ Stock Market LLC ("NASDAQ") under the symbol "CCNE." As of December 31, 2020, the number of shareholders of record of the Corporation’s common stock was 5,428.
Issuer Purchases of Equity Securities
The following table provides information with respect to any purchase of shares of the Corporation’s common stock made by or on behalf of the Corporation for the quarter ended December 31, 2020.
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, 2020 0 $ 0 0 183,131 (1)
November 1 - 30, 2020 0 $ 0 0 183,131 (1)
December 1 - 31, 2020 0 $ 0 0 183,131 (1)
(1)The Corporation’s stock repurchase program, which was announced on November 12, 2014, authorizes the repurchase of up to 500,000 shares of common stock. The program will remain in effect until fully utilized or until modified, suspended or terminated. As of December 31, 2020, there were 183,131 shares remaining for repurchase under the program.
Additionally, during the quarter ended December 31, 2020, certain employees surrendered shares of common stock owned by them to satisfy their statutory minimum U.S. federal and state tax obligations associated with the vesting of shares of restricted common stock issued under the CNB Financial Corporation 2019 Omnibus Incentive Plan.
Share Return Performance
Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the NASDAQ Composite Index and a peer group index of banking organizations for the five-year period commencing December 31, 2015 and ending December 31, 2020.
CNB Financial Corporation
Period Ending
Index 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20
CNB Financial Corporation 100.00 153.40 154.62 138.44 202.02 136.35
SNL Bank NASDAQ 100.00 138.65 145.97 123.04 154.47 132.56
NASDAQ Composite 100.00 108.87 141.13 137.12 187.44 271.64
Source : S&P Global Market Intelligence
© 2020

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements as of December 31, 2020 and 2019 and for the three years ended December 31, 2020, 2019, and 2018, and the related notes included elsewhere in this Annual Report on Form 10-K.
The selected financial information as of and for the years ended December 31, 2020, 2019, 2018, 2017, and 2016 has been derived from our audited historical financial statements.
Year ended December 31,
(Dollars in thousands, except per share data) 2020 2019 2018 2017 2016
INTEREST AND DIVIDEND INCOME:
Loans including fees $ 152,687 $ 139,867 $ 118,193 $ 97,005 $ 81,209
Securities:
Taxable 12,362 12,472 9,921 8,165 9,134
Tax-exempt 1,441 2,372 2,739 2,983 3,390
Dividends 677 1,017 1,017 721 582
Total interest and dividend income 167,167 155,728 131,870 108,874 94,315
INTEREST EXPENSE:
Deposits 24,142 30,202 17,228 9,312 8,470
Borrowed funds 4,534 5,349 5,856 4,021 2,981
Subordinated debentures 3,780 3,979 3,866 4,032 1,577
Total interest expense 32,456 39,530 26,950 17,365 13,028
NET INTEREST INCOME 134,711 116,198 104,920 91,509 81,287
PROVISION FOR CREDIT LOSS EXPENSE (1)
15,354 6,024 6,072 6,655 4,149
Net interest income after provision for credit losses 119,357 110,174 98,848 84,854 77,138
NON-INTEREST INCOME 28,059 25,975 20,723 21,435 17,691
NON-INTEREST EXPENSES 107,326 87,508 79,342 70,037 67,118
INCOME BEFORE INCOME TAXES 40,090 48,641 40,229 36,252 27,711
INCOME TAX EXPENSE 7,347 8,560 6,510 12,392 7,171
NET INCOME 32,743 40,081 33,719 23,860 20,540
Preferred stock dividends 1,147 0 0 0 0
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 31,596 $ 40,081 $ 33,719 $ 23,860 $ 20,540
PER SHARE DATA:
Basic $ 1.97 $ 2.63 $ 2.21 $ 1.57 $ 1.42
Fully diluted 1.97 2.63 2.21 1.57 1.42
Dividends declared 0.68 0.68 0.67 0.66 0.66
Book value per share at year end 21.29 20.00 17.28 15.98 14.64
AT END OF PERIOD:
Total assets $ 4,729,399 $ 3,763,659 $ 3,221,521 $ 2,768,773 $ 2,573,821
Securities 591,557 552,122 524,649 416,859 500,693
Loans 3,371,789 2,804,035 2,474,557 2,145,959 1,873,536
Allowance for credit losses 34,340 19,473 19,704 19,693 16,330
Deposits 4,181,744 3,102,327 2,610,786 2,167,815 2,017,522
FHLB and other borrowings 0 227,907 245,117 257,359 237,004
Subordinated debentures 70,620 70,620 70,620 70,620 70,620
Deposits held for sale 0 0 0 0 6,456
Shareholders’ equity 416,137 304,966 262,830 243,910 211,784
KEY RATIOS:
Return on average assets 0.75 % 1.17 % 1.12 % 0.89 % 0.85 %
Return on average common equity 9.35 % 14.05 % 13.46 % 9.97 % 9.69 %
Loan to deposit ratio 80.63 % 90.38 % 94.78 % 98.99 % 92.86 %
Dividend payout ratio 34.54 % 25.82 % 30.35 % 42.31 % 46.48 %
Average equity to average assets ratio 8.24 % 8.36 % 8.33 % 8.93 % 8.76 %
(1) Beginning January 1, 2020, the allowance for credit losses was calculated in accordance with Accounting Standards Codification Topic 326, "Financial Instruments - Credit Losses" ("ASC 326").

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of financial results. The Corporation’s subsidiary, the Bank, provides financial services to individuals and businesses primarily within its primary market area of the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson, and McKean. ERIEBANK, a division of the Bank, operates in the Pennsylvania counties of Crawford, Erie, and Warren and in the Ohio counties of Ashtabula, Cuyahoga, and Lake. FCBank, a division of the Bank, operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware, and Franklin. BankOnBuffalo, a division of the Bank, operates in Erie and Niagara counties, New York. The Bank is subject to regulation, supervision and examination by the Pennsylvania State Department of Banking as well as the FDIC.
CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. CNB Risk Management, Inc., incorporated in Delaware, is a captive insurance company that insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. Holiday, incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.
The financial condition and results of operations of the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance. Management’s discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes.
Risk identification and management are essential elements for the successful management of the Corporation. In the normal course of business, the Corporation is subject to various types of risk, including interest rate, credit, and liquidity risk. These risks are controlled through policies and procedures established by the Corporation.
Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of the financial instruments owned by the Corporation. The Corporation uses its asset-liability management policy and systems to control, monitor and manage interest rate risk.
Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans to customers and the purchase of securities. The Corporation manages credit risk by following an established credit policy and using a disciplined evaluation of the adequacy of the allowance for credit losses. Also, the Corporation's investment policy limits the amount of credit risk that may be taken in the securities portfolio.
Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Corporation has established guidelines within its asset-liability management policy to manage liquidity risk. These guidelines include contingent funding alternatives.
Forward-Looking Statements
The information below includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to CNB’s financial condition, liquidity, results of operations, future performance and business. These forward-looking statements are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond CNB’s control). Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future conditional verbs such as "may," "will," "should," "would" and "could." CNB’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Corporation, our customers and the global economy and financial markets. The COVID-19 pandemic has impacted us and our customers significantly, and the extent that it continues to impact us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its impact on demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section entitled "Risk Factors" in our Form 10-K for the year ended December 31, 2020 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
Additional factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) changes in general business, industry or economic conditions or competition; (ii) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting principles or otherwise; (iii) adverse changes or conditions in capital and financial markets; (iv) changes in interest rates; (v) higher than expected costs or other difficulties related to integration of combined or merged businesses; (vi) the effects of business combinations and other acquisition transactions, including the inability to realize our loan and investment portfolios; (vii) changes in the quality or composition of our loan and investment portfolios; (viii) adequacy of loan loss reserves; (ix) increased competition; (x) loss of certain key officers; (xi) deposit attrition; (xii) rapidly changing technology; (xiii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xiv) changes in the cost of funds, demand for loan products or demand for financial services; and (xv) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Such developments could have an adverse impact on CNB's financial position and results of operations.
The forward-looking statements contained herein are based upon management’s beliefs and assumptions. Any forward-looking statement made herein speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. CNB undertakes no obligation to publicly update or revise any forward-looking statements included in this Annual Report on Form 10-K, whether as a result of new information, future events or otherwise, except to the extent required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed might not occur and you should not put undue reliance on any forward-looking statements.
General Overview
This report contains references to financial measures that are not defined in GAAP. Management uses non-GAAP financial information in its analysis of the Corporation’s performance. Management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented. The Corporation’s management believes that investors may use these non-GAAP measures to analyze the Corporation’s financial performance without the impact of unusual items or events that may obscure trends in the Corporation’s underlying performance. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently.
Non-GAAP measures reflected within the discussion below include evaluations on the impact of PPP-related assets, merger costs, branch closure costs and FHLB prepayment penalties on various metrics of the Corporation’s financial performance, including calculations related to:
•Tangible common equity/tangible assets;
•Average loans and average earning assets utilized in the calculation of yield on loans, yield on earning assets and net interest margin;
•Return on average assets, return on average common equity and return on average tangible common equity;
•Efficiency ratio;
•Earnings per share;
•Non-performing assets/total assets and allowance for loan credit/loans.
A reconciliation of these non-GAAP financial measures is provided below in the "Non-GAAP Financial Measures" section.
Management looks to return on average equity, earnings per common share, asset quality, and other metrics to measure the performance of the Corporation. The interest rate environment will continue to play an important role in the future earnings of the Corporation. In order to address the challenging interest rate and competitive environments, the Corporation continues to evaluate, develop and implement strategies necessary to support its ongoing financial performance objectives.
In addition, the global outbreak of COVID-19 and the public health measures that have been undertaken in response have had, and will continue to have, significant repercussions across regional and global economies and financial markets. The COVID-19 pandemic, its associated responsive measures and the resulting economic slowdown have disrupted our business and are expected to continue to have a significant impact on our business, financial performance and operating results. Since we cannot estimate when the COVID-19 pandemic and the associated responsive measures will end, we cannot estimate the ultimate operational and financial impact of COVID-19 on our business. However, management will continue to proactively implement strategies to mitigate the impact of the pandemic on the Corporation’s business, risk profile and financial performance.
To address the challenges arising as a result of the COVID-19 pandemic, and in order to continue to deliver essential services to the communities the Corporation serves while maintaining a high level of safety for customers and employees, the Corporation implemented its Pandemic Response Plan. Among other things, significant actions taken include:
•Implemented communication plans to ensure employees, customers and critical vendors are kept abreast of developments affecting the Corporation's operations;
•Restricted all non-essential travel and instituted a mandatory quarantine period for anyone who has traveled to certain impacted areas;
•Temporarily closed all branch lobbies to non-employees, except for certain limited cases by appointment only. Based on updated governmental guidelines, the Corporation re-opened its branch lobbies, while enforcing safe practices in order to serve its consumer and business customers. In addition, the Corporation continued to offer its customers alternatives through its drive-through capabilities, network of ATMs, internet banking, mobile application and telephone customer service capabilities;
•Expanded remote-access availability for the Corporation's workforce to work from home or other remote locations. The Corporation has taken appropriate efforts to ensure that activities are performed in accordance with the Corporation's compliance and information security policies, which are designed to ensure customer data and other information is properly safeguarded;
•Instituted mandatory social distancing policies for those employees not working remotely. Members of branch and operation teams were split into separate teams to provide a higher level of safety for employees and redundancy for key functions across the Corporation. Based upon updated governmental guidelines, the Corporation has reintegrated its branch teams and the majority of its operation teams, while continuing to require social distancing, wearing of masks and other appropriate safety precautions; and
•To ensure the safety of its customers and employees, the Corporation continues to monitor the COVID-19 pandemic closely and update its response plan accordingly.
Non-interest costs are expected to increase with the growth of the Corporation; however, management’s growth strategies are also expected to result in an increase in earning assets as well as enhanced non-interest income, which is expected to more than offset increases in non-interest expenses in 2021 and beyond. Although the Corporation's discussion regarding its financial performance distinguishes between certain markets and Private Banking, it does not meet the criteria for discrete segment reporting of its operating results. Management's conclusion was based on the limited level of financial information available to segregate operating results, coupled with the fact that no operating results are available for the Corporation's Chief Operating Decision Maker to review on a regular basis.
All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated.
Financial Condition
The following table presents ending balances, growth, and the percentage change of certain measures of our financial condition for specified years (dollars in millions):
Balance $ Change
vs. prior
year % Change
vs. prior
year 2019
Balance $ Change
vs. prior
year % Change
vs. prior
year 2018
Balance
Total assets $ 4,729.4 $ 965.7 25.7 % $ 3,763.7 $ 542.1 16.8 % $ 3,221.5
Total loans, net of allowance for credit losses 3,337.4 552.9 19.9 % 2,784.6 329.7 13.4 % 2,454.9
Total securities 591.6 39.4 7.1 % 552.1 27.5 5.2 % 524.7
Total deposits 4,181.7 1,079.4 34.8 % 3,102.3 491.5 18.8 % 2,610.8
Total shareholders’ equity 416.1 111.2 36.5 % 305.0 42.1 16.0 % 262.8
The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. See Note 1, "Summary of Significant Accounting Policies," and Note 4, "Loans," for more information about pooling of loans for the allowance for credit losses.
The following table presents average balances of certain measures of our financial condition and net interest margin for the specified years.
12/31/2020 12/31/2019 12/31/2018
Average
Balance Annual
Rate Interest
Inc./
Exp. Average
Balance Annual
Rate Interest
Inc./
Exp. Average
Balance Annual
Rate Interest
Inc./
Exp.
Assets
Securities:
Taxable (1)
$ 505,770 2.35 % $ 11,510 $ 436,122 2.77 % $ 11,973 $ 365,790 2.62 % $ 9,733
Tax-Exempt (1) (2)
55,460 3.32 % 1,772 85,802 3.40 % 2,867 97,412 3.42 % 3,326
Equity Securities (1) (2))
12,814 5.89 % 755 18,203 6.17 % 1,123 19,133 5.89 % 1,170
Total Securities 574,044 2.53 % 14,037 540,127 2.99 % 15,963 482,335 2.91 % 14,229
Loans:
Commercial (2)
1,230,615 4.80 % 59,016 987,974 5.35 % 52,868 820,547 4.98 % 40,846
Mortgage (2)
1,783,980 4.76 % 84,857 1,539,208 5.04 % 77,501 1,422,021 4.88 % 69,338
Consumer 100,576 9.71 % 9,766 102,928 10.08 % 10,373 85,776 10.16 % 8,717
Total Loans (3)
3,115,171 4.93 % 153,639 2,630,110 5.35 % 140,742 2,328,344 5.11 % 118,901
Other Earning Assets 402,861 0.21 % 852 24,674 2.02 % 499 4,536 4.14 % 188
Total earning assets 4,092,076 4.14 % $ 168,528 3,194,911 4.93 % $ 157,204 2,815,215 4.73 % $ 133,318
Non-Interest Earning Assets
Cash & Due From Banks 42,001 33,218 31,498
Premises, Equipment and Right of Use Assets 75,516 68,744 49,985
Other Assets 166,511 137,519 133,115
Allowance for Credit Losses (28,962) (20,655) (21,511)
Total Non-Interest Earning Assets 255,066 218,826 193,087
Total Assets $ 4,347,142 $ 3,413,737 $ 3,008,302
Liabilities and Shareholders’ Equity
Interest Bearing Deposits
Demand - interest bearing $ 755,200 0.24 % $ 1,781 $ 580,244 0.42 % $ 2,455 $ 582,289 0.38 % $ 2,209
Savings 1,923,214 0.66 % 12,775 1,450,653 1.39 % 20,138 1,077,210 0.85 % 9,184
Time 445,408 2.15 % 9,586 371,464 2.05 % 7,609 383,531 1.52 % 5,835
Total interest bearing deposits 3,123,822 0.77 % 24,142 2,402,361 1.26 % 30,202 2,043,030 0.84 % 17,228
Short-term borrowings 0 0.00 % 0 16,022 2.65 % 425 37,363 1.91 % 713
Long-term borrowings 221,436 2.05 % 4,534 229,377 2.15 % 4,924 250,242 2.06 % 5,143
Subordinated Debentures 70,620 5.35 % 3,780 70,620 5.63 % 3,979 70,620 5.47 % 3,866
Total interest bearing liabilities 3,415,878 0.95 % $ 32,456 2,718,380 1.45 % $ 39,530 2,401,255 1.12 % $ 26,950
Demand - non-interest bearing 516,724 360,208 327,014
Other liabilities 56,377 49,825 29,537
Total Liabilities 3,988,979 3,128,413 2,757,806
Shareholders’ Equity 358,163 285,324 250,496
Total Liabilities and Shareholders’ Equity $ 4,347,142 $ 3,413,737 $ 3,008,302
Interest Income/Earning Assets 4.14 % $ 168,528 4.93 % $ 157,204 4.73 % $ 133,318
Interest Expense/Interest Bearing Liabilities 0.95 % 32,456 1.45 % 39,530 1.12 % 26,950
Net Interest Spread 3.19 % $ 136,072 3.48 % $ 117,674 3.61 % $ 106,368
Interest Income/Earning Assets 4.14 % $ 168,528 4.93 % $ 157,204 4.73 % $ 133,318
Interest Expense/Earning Assets 0.80 % 32,456 1.24 % 39,530 0.96 % 26,950
Net Interest Margin 3.34 % $ 136,072 3.69 % $ 117,674 3.77 % $ 106,368
(1) Includes unamortized discounts and premiums. Average balance is computed using the amortized cost of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.
(2) Average yields and interest income are stated on a fully taxable equivalent basis using the Corporation’s marginal federal income tax rate of 21% for the years end December 31, 2020, 2019 and 2018. Interest income has been increased by $1.4 million, $1.5 million, and $1.4 million for the years ended December 31, 2020, 2019, and 2018, respectively, as a result of the effect of tax-exempt interest and dividends earned by the Corporation.
(3) Average balance outstanding includes the average balance outstanding of all nonaccrual loans. Loans consist of the average of total loans less average unearned income. Included in loan interest income is loan fees of $10,438, $4,048, and $3,935 for the years ended December 31, 2020, 2019, and 2018, respectively. Loan fees for the year ended December 31, 2020 included $5.1 million in Paycheck Protection Program ("PPP") deferred processing fees.
The following table presents the change in net interest income for the years specified.
Net Interest Income Rate-Volume Variance For Twelve Months Ended December 31, 2020 over (under) 2019 Due to Change In (1)
For Twelve Months Ended December 31, 2019 over (under) 2018 Due to Change In (1)
Volume Rate Net Volume Rate Net
Assets
Securities:
Taxable $ 1,369 $ (1,832) $ (463) $ 1,691 $ 549 $ 2,240
Tax-Exempt (2)
(1,026) (69) (1,095) (440) (19) (459)
Equity Securities (2)
(317) (51) (368) (101) 54 (47)
Total Securities 26 (1,952) (1,926) 1,150 584 1,734
Loans:
Commercial (2)
11,582 (5,434) 6,148 8,986 3,036 12,022
Mortgage (2)
11,666 (4,310) 7,356 5,888 2,275 8,163
Consumer (226) (381) (607) 1,725 (69) 1,656
Total Loans 23,022 (10,125) 12,897 16,599 5,242 21,841
Other Earning Assets 800 (447) 353 407 (96) 311
Total Earning Assets $ 23,848 $ (12,524) $ 11,324 $ 18,156 $ 5,730 $ 23,886
Liabilities and Shareholders’ Equity
Interest Bearing Deposits
Demand - Interest Bearing $ 413 $ (1,087) $ (674) $ (9) $ 255 $ 246
Savings 3,139 (10,502) (7,363) 5,184 5,770 10,954
Time 1,591 386 1,977 (247) 2,021 1,774
Total Interest Bearing Deposits 5,143 (11,203) (6,060) 4,928 8,046 12,974
Short-Term Borrowings 0 (425) (425) (566) 278 (288)
Long-Term Borrowings (163) (227) (390) (448) 229 (219)
Subordinated Debentures 0 (199) (199) 0 113 113
Total Interest Bearing Liabilities $ 4,980 $ (12,054) $ (7,074) $ 3,914 $ 8,666 $ 12,580
Change in Net Interest Income $ 18,868 $ (470) $ 18,398 $ 14,242 $ (2,936) $ 11,306
(1) The change in interest due to both volume and rate have been allocated entirely to volume changes.
(2) Changes in interest income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% for the year ended December 31, 2020 and December 31, 2019.
Cash and Cash Equivalents
Cash and cash equivalents totaled $532.7 million at December 31, 2020, including additional excess liquidity of $483.2 million held at the Federal Reserve. Cash and cash equivalents totaled $193.0 million at December 31, 2019. The significant increase in liquidity is the result of the Corporation's growth in deposits during 2020.
In addition to the Corporation's deposit growth strategies, management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, Federal Home Loan Bank financing availability, and the portions of the securities and loan portfolios that mature within one year. The Corporation expects that these sources of funds will enable it to meet cash obligations and off-balance sheet commitments as they come due.
Securities
Securities available for sale and trading securities totaled $591.6 million and $552.1 million at December 31, 2020 and 2019, respectively. Note 3, "Securities," in the consolidated financial statements provides more detail concerning the composition of the Corporation’s securities portfolio and the process for evaluating securities for impairment.
The following table sets forth the carrying value of our debt securities available-for-sale portfolio at year-end December 31, 2020, 2019, and 2018.
December 31, 2020 December 31, 2019 December 31, 2018
Amortized Unrealized Market Amortized Unrealized Market Amortized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
Securities Available for Sale
U.S. Government Sponsored Entities $ 150,404 $ 6,698 $ (60) $ 157,042 $ 124,189 $ 2,924 $ (19) $ 127,094 $ 134,010 $ 254 $ (1,570) $ 132,694
State and Political Subdivisions 67,819 3,186 (122) 70,883 101,177 3,288 (102) 104,363 134,662 1,942 (573) 136,031
Residential and multi-family mortgage 306,054 9,276 (138) 315,192 273,404 4,117 (885) 276,636 209,126 500 (3,573) 206,053
Corporate notes and bonds 15,221 105 (400) 14,926 8,350 14 (282) 8,082 12,356 22 (601) 11,777
Pooled SBA 24,975 912 (1) 25,886 25,063 274 (163) 25,174 30,163 135 (924) 29,374
Other 1,020 0 (41) 979 1,020 0 (56) 964 1,020 0 (86) 934
$ 565,493 $ 20,177 $ (762) $ 584,908 $ 533,203 $ 10,617 $ (1,507) $ 542,313 $ 521,337 $ 2,853 $ (7,327) $ 516,863
The following table sets forth the maturities of debt securities in our available-for-sale portfolio as of December 31, 2020.
Maturity Distribution of Debt Securities Available-for-Sale
December 31, 2020
Within
One Year After One But Within
Five Years After Five But
Within Ten
Years After Ten
Years Pooled SBA,
Residential and Multi-
Family Mortgage and
Commercial Mortgage
$ Amt. Yield (1)
$ Amt. Yield (1)
$ Amt. Yield (1)
$ Amt. Yield (1)
$ Amt. Yield (1)
Debt Securities Available for Sale (2)
U.S. Government Sponsored Entities $ 38,695 1.82 % $ 89,331 1.58 % $ 29,016 2.96 %
State and Political Subdivisions 12,547 3.47 % 20,153 3.37 % 28,852 3.11 % $ 9,331 3.07 %
Corporate notes and bonds 2,206 0.91 % 2,180 0.59 % 8,875 3.33 % 1,665 5.18 %
Pooled SBA $ 25,886 2.38 %
Residential and multi-family mortgage 315,192 2.69 %
Other 979 1.63 %
Total $ 53,448 2.17 % $ 112,643 1.88 % $ 66,743 3.07 % $ 10,996 3.39 % $ 341,078 2.67 %
(1) The weighted average yields are based on market value and effective yields weighted for the scheduled maturity with tax-exempt securities adjusted to a taxable-equivalent basis using a tax rate of 21%.
(2) The portfolio contains no holdings of a single issuer that exceeds 10% of shareholders’ equity other than the US Treasury and governmental sponsored entities.
The Corporation generally purchases debt securities over time and does not attempt to "time" its transactions, which allows for more efficient management of fluctuations in the interest rate environment.
The Corporation monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through meetings of the ALCO. The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, a sufficient level of liquidity is maintained to satisfy depositor requirements and various credit needs of our customers.
Loans
As detailed in the tables below, at December 31, 2020, the Corporation had $3.4 billion in loans outstanding, an increase of $567.8 million, or 20%, since December 31, 2019, as a result of $319.1 million of acquired loans from Bank of Akron, net of fair value adjustments, $155.5 million in PPP loans, net of PPP deferred processing fees ("PPP-related loans") and $92.7 million, or 3.3%, of organic growth, primarily from our Cleveland and Buffalo regions. Since 2016, the Corporation's loan portfolio has increased approximately $1.5 billion, primarily as a result of management's continued focus on developing and maintaining customer relationships coupled with the impact of PPP loans and the acquisition of Bank of Akron in 2020.
Farmland
$ 23,316
Owner-occupied, nonfarm nonresidential properties
407,924
Agricultural production and other loans to farmers
2,664
Commercial and Industrial
663,550
Obligations (other than securities and leases) of states and political subdivisions
132,818
Other loans
11,961
Other construction loans and all land development and other land loans 205,734
Multifamily (5 or more) residential properties
212,815
Non-owner occupied, nonfarm nonresidential properties
640,945
1-4 Family Construction 27,768
Home equity lines of credit 109,444
Residential Mortgages secured by first liens 777,030
Residential Mortgages secured by junior liens 53,726
Other revolving credit plans 25,507
Automobile 25,344
Other consumer 42,792
Credit cards 8,115
Overdrafts 336
Total loans $ 3,371,789
2019 2018 2017 2016
Commercial, industrial and agricultural $ 1,046,665 $ 916,297 $ 704,606 $ 567,800
Commercial mortgages 814,002 697,776 644,597 574,826
Residential real estate 814,030 771,309 713,347 652,883
Consumer 124,785 86,035 80,193 74,816
Credit cards 7,569 7,623 6,753 6,046
Overdrafts 2,146 308 352 595
Gross loans 2,809,197 2,479,348 2,149,848 1,876,966
Less: unearned income 5,162 4,791 3,889 3,430
Total loans net of unearned $ 2,804,035 $ 2,474,557 $ 2,145,959 $ 1,873,536
The Corporation has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented.
The Corporation expects to continue to achieve robust loan growth in 2021 as a result of its diversified markets and its focus on core customer acquisition strategies.
Customer Support Strategies and Loan Portfolio Profile
The Corporation participated in the PPP provided under the auspices of the Small Business Administration ("SBA"). Under this program, the Corporation lent money primarily to its existing loan and/or deposit customers, based on a predetermined SBA-developed formula, intended to incentivize small business owners to retain their employees. These loans carry a customer rate of 1.00% plus a processing fee that varies depending on the balance of the loan at origination. As of December 31, 2020, the Corporation had outstanding $159.6 million in PPP loans, or 1,528 PPP loans, at a rate of 1.00% together with deferred PPP processing fees of approximately $4.1 million. For the three and twelve months ended December 31, 2020, the Corporation recognized $4.5 million and $5.1 million, respectively, in deferred PPP processing fees ("PPP-related fees").
In addition to participating in the PPP, during the year ended December 31, 2020, the Corporation deferred loan payments for several of its commercial and consumer customers, as determined by the financial needs of each customer. As of December 31, 2020, the COVID-19 related loans with deferred loan payment arrangements, totaled $151.0 million, or 4.5% of total loans outstanding, consisting of 112 loans, totaling $107.2 million, for which principal and interest were deferred, and 55 loans, totaling $43.8 million, for which principal only was deferred. Loan payment deferrals by loan type were as follows:
•Commercial and industrial loans - 44 loans, totaling $39.1 million;
•Commercial real estate loans - 23 loans, totaling $101.8 million;
•Residential mortgage loans - 88 loans, totaling $9.9 million; and
•Consumer loans - 12 loans, totaling $154 thousand.
The Corporation tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As a result of the COVID-19 pandemic, the Corporation has determined the Hotels/Motels and Restaurants/Fast Foods industries represent a potentially higher level of credit risk, as many of these customers have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders as well as travel limitations. At December 31, 2020, the Corporation had loan concentrations for these industries as follows, excluding PPP-related loans:
•Hotels/Motels - $206.6 million, or 6.42% of total loans outstanding, excluding PPP-related loans; and
•Restaurants/Fast Foods - $30.1 million, or 0.94% of total loans outstanding, excluding PPP-related loans.
Maturity Distribution of Loans
A previously mentioned, the loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. Commercial and mortgage loans are the largest classification within earning assets, representing 73.7% at December 31, 2020, compared to 79.1% at December 31, 2019. The following table presents the maturity distribution and rate sensitivity of commercial and mortgage loans at December 31, 2020 and an analysis of these loans that have fixed and variable or floating interest rates.
December 31, 2020
One Year
or Less One Through
Five Years Over
Five Years Total Gross
Loans
Commercial Loans
Loans With Fixed Interest Rate $ 178,005 $ 109,837 $ 147,467 $ 435,309
Loans With Variable or Floating Interest Rates 216,096 140,888 467,948 824,932
$ 394,101 $ 250,725 $ 615,415 $ 1,260,241
Mortgage Loans
Loans With Fixed Interest Rate $ 51,864 $ 168,885 $ 441,179 $ 661,928
Loans With Variable or Floating Interest Rates 134,469 227,535 994,297 1,356,301
$ 186,333 $ 396,420 $ 1,435,476 $ 2,018,229
Loan Concentration
At December 31, 2020, no concentration existed within our commercial or mortgage loan portfolios which exceeded 10% of the total loan portfolio.
Loan Quality
The Corporation has established written lending policies and procedures that require underwriting standards, loan documentation, and credit analysis standards to be met prior to funding a loan. Subsequent to the funding of a loan, ongoing review of credits is required. Credit reviews are performed quarterly by an outsourced loan review firm and cover approximately 65% of the commercial loan portfolio on an annual basis. In addition, the external independent loan review firm reviews classified assets, past due loans and nonaccrual loans quarterly. Note 1, "Summary of Significant Accounting Policies," in the consolidated financial statements provides a discussion of the Corporation's policy for placing loans on nonaccrual status.
The following table presents information concerning loan delinquency and other nonperforming assets at December 31, 2020, 2019, 2018, 2017, and 2016:
2020 2019 2018 2017 2016
Nonaccrual loans $ 30,359 $ 21,736 $ 14,262 $ 15,653 $ 12,510
Accrual loans greater than 90 days past due 325 61 887 616 172
Total nonperforming loans 30,684 21,797 15,149 16,269 12,682
Other real estate owned 862 1,633 418 710 1,015
Total nonperforming assets $ 31,546 $ 23,430 $ 15,567 $ 16,979 $ 13,697
Loans modified in a troubled debt restructuring (TDR):
Performing TDR loans $ 10,457 $ 7,359 $ 8,201 $ 8,344 $ 8,710
Nonperforming TDR loans (1)
4,631 3,592 6,425 8,959 3,120
Total TDR loans $ 15,088 $ 10,951 $ 14,626 $ 17,303 $ 11,830
Total loans $ 3,371,789 $ 2,804,035 $ 2,474,557 $ 2,145,959 $ 1,873,536
Nonperforming loans as a percentage of loans 0.91 % 0.78 % 0.61 % 0.76 % 0.68 %
Total assets $ 4,729,399 $ 3,763,659 $ 3,221,521 $ 2,768,773 $ 2,573,821
Nonperforming assets as a percentage of total assets 0.67 % 0.62 % 0.48 % 0.61 % 0.53 %
Non-performing assets / Total assets, net of PPP-related assets (2)
0.71 % 0.62 % 0.48 % 0.61 % 0.53 %
(1) Nonperforming TDR loans are also included in the balance of nonaccrual loans.
(2) A reconciliation of this non-GAAP financial measures is provided in the "Non-GAAP Financial Measures" section below.
Total non-performing assets were $31.5 million, or 0.67%, of total assets, as of December 31, 2020. Total assets at December 31, 2020 include approximately $315.1 million in PPP-related assets. Excluding the PPP-related assets, the ratio of total non-performing assets to total assets was 0.71% as of December 31, 2020 compared to 0.62% as of December 31, 2019. The increase from December 31, 2019, was primarily due to one commercial real estate loan relationship totaling approximately $8.7 million. During the three months ended March 31, 2020, this loan was downgraded to substandard and placed on non-accrual as a result of a covenant violation. Management performed an evaluation of the collateral supporting the loan and concluded to charge-off $1.0 million in the fourth quarter of 2020.
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of a borrower to continue to comply with repayment terms because of the borrower’s potential operating or financial difficulties. Management monitors these "watchlist" loans on a monthly basis to determine potential losses within the commercial loan portfolio. The "watchlist" is comprised of all credits risk rated special mention, substandard and doubtful.
Allowance for Credit Losses
The allowance for credit losses on loans represents management’s estimate of expected credit losses over the estimated life of our existing portfolio of loans. The allowance for credit losses is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans.
The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses on loans at the amount of expected credit losses inherent within the loan portfolio. Loans are recorded as charge offs against the allowance when management confirms a loan balance is uncollectable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts, and other significant quantitative and qualitative factors.
Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors. For further information on the allowance for credit losses on loans, Note 1, "Summary of Significant Accounting Policies," and Note 4, "Loans," in the consolidated financial statements provides additional disclosure on the allowance for credit losses.
As a result of the adoption of ASC 326 effective January 1, 2020, there is a lack of comparability in both the allowance and provision for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2020 (as reflected in the table below) are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior fiscal years. Note 1, "Summary of Significant Accounting Policies," in the consolidated financial statements provides additional disclosure on the adoption of ASC 326.
Beginning
Allowance
(Before ASC 326 Adoption) Impact of ASC 326 Adoption Initial Allowance on Loans Purchased with Credit Deterioration (Charge-offs) Recoveries Net (Charge-Offs) Recoveries Provision (Benefit) for Credit Loss Expense Ending Allowance (After ASC 326 Adoption)
Farmland
$ 190 $ 61 $ 0 $ 0 $ 0 $ 0 $ (30) $ 221
Owner-occupied, nonfarm nonresidential properties
2,390 (754) 82 (61) 12 (49) 2,031 3,700
Agricultural production and other loans to farmers
25 5 0 0 0 0 (6) 24
Commercial and Industrial
4,105 (631) 216 (2,779) 39 (2,740) 5,283 6,233
Obligations (other than securities and leases) of states and political subdivisions
1,022 (231) 0 0 0 0 207 998
Other loans
41 8 0 0 0 0 19 68
Other construction loans and all land development and other land loans 2,327 780 228 0 125 125 (1,504) 1,956
Multifamily (5 or more) residential properties
1,087 312 24 0 0 0 1,301 2,724
Non-owner occupied, nonfarm nonresidential properties
3,980 2,547 335 (1,522) 52 (1,470) 3,266 8,658
1-4 Family Construction 56 (35) 0 0 0 0 61 82
Home equity lines of credit 180 421 22 (6) 1 (5) 367 985
Residential Mortgages secured by first liens 1,220 1,100 73 (285) 65 (220) 2,366 4,539
Residential Mortgages secured by junior liens 114 135 0 (158) 2 (156) 148 241
Other revolving credit plans 296 378 0 (137) 21 (116) (51) 507
Automobile 156 (96) 0 (29) 2 (27) 99 132
Other consumer 1,960 1,021 0 (1,513) 130 (1,383) 1,364 2,962
Credit cards 84 (58) 0 (153) 14 (139) 179 66
Overdrafts 240 0 0 (435) 185 (250) 254 244
Total loans $ 19,473 $ 4,963 $ 980 $ (7,078) $ 648 $ (6,430) $ 15,354 $ 34,340
Loans $ 3,371,789
Allowance to loans 1.02 %
Allowance to loans, net of PPP-related loans (1)
1.07 %
Percentage of net charge-offs during the period to average loans outstanding 0.21 %
(1) A reconciliation of this non-GAAP financial measures is provided in the "Non-GAAP Financial Measures" section below.
Prior to January 1, 2020, the Corporation calculated the allowance for loan losses using the probable incurred methodology. The activity in our allowance for loan losses was as follows during the years ended December 31, 2019, 2018, 2017, and 2016:
2019 2018 2017 2016
Balance at beginning of period $ 19,704 $ 19,693 $ 16,330 $ 16,737
Charge-offs:
Commercial, industrial, and agricultural (205) (253) (544) (601)
Commercial mortgages (3,391) (3,337) (116) (201)
Residential real estate (386) (315) (466) (499)
Consumer (2,200) (2,279) (2,555) (3,324)
Credit cards (116) (90) (144) (96)
Overdrafts (453) (319) (252) (240)
(6,751) (6,593) (4,077) (4,961)
Recoveries:
Commercial, industrial, and agricultural 17 171 235 89
Commercial mortgages 124 30 197 8
Residential real estate 73 67 78 93
Consumer 154 141 161 122
Credit cards 15 33 27 22
Overdrafts 113 90 87 71
496 532 785 405
Net charge-offs (6,255) (6,061) (3,292) (4,556)
Provision for loan losses 6,024 6,072 6,655 4,149
Balance at end of period $ 19,473 $ 19,704 $ 19,693 $ 16,330
Loans, net of unearned income $ 2,804,035 $ 2,474,557 $ 2,145,959 $ 1,873,536
Allowance to net loans 0.69 % 0.80 % 0.92 % 0.87 %
Percentage of net charge-offs during the period to average loans outstanding 0.24 % 0.26 % 0.16 % 0.27 %
The allowance for credit losses measured as a percentage of loans as of December 31, 2020 was 1.02%. Total loans at December 31, 2020 include approximately $155.5 million in PPP-related loans. Excluding PPP-related loans, the allowance for credit losses measured as a percentage of loans, net of unearned income, was 1.07% as of December 31, 2020 compared to 0.69% as of December 31, 2019. The increase in the allowance for credit losses from December 31, 2019 to December 31, 2020 resulted primarily from the adoption of CECL, coupled with the impact of ongoing trends in CNB’s loan portfolio and the COVID-19 pandemic.
The adequacy of the allowance for credit losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation. Note 1, "Summary of Significant Accounting Policies" in the consolidated financial statements provides additional disclosure on the allowance for credit losses.
As a result of the application of these procedures, the allocation of the allowance for credit losses was as follows at December 31, 2020:
Amount % of Loans in each Category
Farmland
$ 221 0.7 %
Owner-occupied, nonfarm nonresidential properties
3,700 12.1 %
Agricultural production and other loans to farmers
24 0.1 %
Commercial and Industrial
6,233 19.7 %
Obligations (other than securities and leases) of states and political subdivisions
998 3.9 %
Other loans
68 0.4 %
Other construction loans and all land development and other land loans 1,956 6.1 %
Multifamily (5 or more) residential properties
2,724 6.3 %
Non-owner occupied, nonfarm nonresidential properties
8,658 19.0 %
1-4 Family Construction 82 0.8 %
Home equity lines of credit 985 3.2 %
Residential Mortgages secured by first liens 4,539 23.0 %
Residential Mortgages secured by junior liens 241 1.6 %
Other revolving credit plans 507 0.8 %
Automobile 132 0.8 %
Other consumer 2,962 1.3 %
Credit cards 66 0.2 %
Overdrafts 244 0.0 %
Total loans $ 34,340 100.0 %
As a result of the application of these procedures, the allocation of the allowance for loan losses was as follows at December 31, 2019, 2018, 2017 and 2016:
2019 2018 2017 2016
Amount % of Loans in each Category Amount % of Loans in each Category Amount % of Loans in each Category Amount % of Loans in each Category
Commercial, industrial, and agricultural $ 8,287 37.26 % $ 7,341 36.96 % $ 6,160 32.77 % $ 5,428 30.25 %
Commercial mortgages 6,952 28.98 % 7,490 28.14 % 9,007 29.98 % 6,753 30.63 %
Residential real estate 1,499 28.98 % 2,156 31.11 % 2,033 33.18 % 1,653 34.78 %
Consumer 2,411 4.44 % 2,377 3.47 % 2,179 3.73 % 2,215 3.99 %
Credit Cards 84 0.27 % 103 0.31 % 120 0.31 % 93 0.32 %
Overdrafts 240 0.08 % 237 0.01 % 194 0.02 % 188 0.03 %
Total $ 19,473 100.00 % $ 19,704 100.00 % $ 19,693 100.00 % $ 16,330 100.00 %
Throughout 2020, the Corporation evaluated its provision and allowance for credit losses in light of changes in reserves required for loans individually evaluated and the degree of uncertainty related to the COVID-19 pandemic and its potential impact on the economy. The Corporation also included a qualitative factor specifically related to the loans deferred due to the COVID-19 pandemic. As of December 31, 2020, the specific COVID-19 qualitative factor totaled approximately $1.5 million, which was reflected in the Corporation’s provision expense for the twelve months ended December 31, 2020 and the related allowance for credit losses during the same period. The Corporation will continue to evaluate this factor and update its analysis, as necessary, as developments related to the COVID-19 pandemic and its impact on the economy evolve.
Note 4, "Loans," to the consolidated financial statements provides further disclosure of loan balances by portfolio segment as of December 31, 2020 and 2019, as well as the nature and scope of loans modified in a troubled debt restructuring during 2020 and 2019 and the related effect on provision for credit expense and allowance for credit losses.
During the year ended December 31, 2020, the Corporation recorded a provision for credit losses of $15.4 million, as compared to a provision for loan losses of $6.0 million for the year ended December 31, 2019. Net chargeoffs during the year ended December 31, 2020 were $6.4 million, compared to net chargeoffs of $6.3 million during the year ended December 31, 2019. The ratio of net chargeoffs to average loans was 0.21% and 0.24% for the years ended December 31, 2020 and 2019, respectively.
The Bank's net chargeoffs totaled $5.1 million, or 0.17% of average loans, and $4.4 million, or 0.17% of average loans, during the years ended December 31, 2020 and 2019, respectively. Holiday, the Bank's consumer discount company, recorded net chargeoffs totaling $1.3 million and $1.9 million during the years ended December 31, 2020 and 2019, respectively.
During the second quarter of 2020, the Bank recorded a chargeoff of $2.6 million, related to a secured commercial and industrial loan relationship with a borrower who is now deceased, and a $1.0 million charge-off in the fourth quarter of 2020, related to one commercial real estate loan.
During the third quarter of 2019, the Bank recorded a chargeoff of the remaining balance of the commercial real estate loan, which had been previously fully reserved at the time of the charge-off. Additionally, during the fourth quarter of 2019, the Bank recorded a partial charged-off of $739 thousand related to one commercial real estate loan, which had been previously fully reserved. The remaining fully reserved balance on this loan was $681 thousand at December 31, 2019.
Following the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, all of which have a significant impact on the balance of the allowance for credit losses.
Management believes the provision for credit losses recorded during the twelve months ended December 31, 2020 and 2019, in conjunction with the resultant allowance for credit losses at December 31, 2020 and 2019, were sufficient to support credit losses embedded in its loan portfolio at December 31, 2020 and 2019.
Premises and Equipment
During the years ended December 31, 2020 and 2019, the Corporation invested $5.6 million and $9.0 million, respectively, in its physical infrastructure through the purchase of land, buildings, and equipment. The year ended December 31, 2020, includes premises and equipment related to the Bank of Akron acquisition. In 2019, the Corporation primarily invested in the completion of leasehold improvements for a permanent BankOnBuffalo branch in Niagara Falls, New York and infrastructure improvements to the BankOnBuffalo headquarters in Buffalo, New York.
Bank Owned Life Insurance
The Corporation has periodically purchased Bank Owned Life Insurance ("BOLI"). The policies cover executive officers and a select group of other employees with the Bank being named as beneficiary. Earnings from BOLI assist the Corporation in offsetting its benefit costs. The Corporation made no purchases of BOLI during the twelve months ended December 31, 2020, while it purchased $8.8 million of BOLI during the twelve months ended December 31, 2019. The year ended December 31, 2020, includes $8.2 million of BOLI related to the Bank of Akron acquisition.
Funding Sources
The following table sets forth the average balances of and the average rates paid on deposits for the period indicated.
Year Ended December 31,
2020 2019 2018
Average
Amount Annual
Rate Average
Amount Annual
Rate Average
Amount Annual
Rate
Demand - Non-Interest Bearing $ 516,724 $ 360,208 $ 327,014
Demand - Interest Bearing 755,200 0.24 % 580,244 0.42 % 582,289 0.38 %
Savings Deposits 1,923,214 0.66 % 1,450,653 1.39 % 1,077,210 0.85 %
Time Deposits 445,408 2.15 % 371,464 2.05 % 383,531 1.52 %
Total $ 3,640,546 $ 2,762,569 $ 2,370,044
The maturity of certificates of deposits and other time deposits in denominations of $100,000 or more as of December 31, 2020 is as follows:
3 months or less $ 18,854
Over 3 through 6 months 29,524
Over 6 through 12 months 68,040
Over 12 months 148,319
Total $ 264,737
Although the Corporation considers short-term borrowings and long-term debt when evaluating funding sources, traditional deposits continue to be the main source for funding.
2020 Percentage change
2020 vs. 2019 2019 Percentage change
2019 vs. 2018 2018
Demand, Non interest bearing $ 627,114 64.1% $ 382,259 7.1% $ 356,797
Demand, Interest bearing 951,903 51.4% 628,579 4.8% 600,046
Savings deposits 2,126,183 27.8% 1,663,673 32.2% 1,258,506
Time deposits 476,544 11.4% 427,816 8.2% 395,437
Total $ 4,181,744 34.8% $ 3,102,327 18.8% $ 2,610,786
Deposits totaled $4.2 billion at December 31, 2020, a $1.1 billion, or 34.8%, increase from December 31, 2019 as a result of $419.5 million of acquired deposits from Bank of Akron, net of fair value adjustments, an estimated $159.6 million in PPP deposits and $500.3 million, or 16.1%, of organic growth in deposits across all our regions, including our Private Banking division.
Periodically, the Corporation utilizes term borrowings from the FHLB and other lenders to meet funding obligations or match fund certain loan assets. The terms of these borrowings are detailed in Note 12, "Borrowings," to the consolidated financial statements. There were no FHLB or other long-term borrowings as of December 31, 2020, compared to $227.9 million at December 31, 2019. As a result of its strong deposit growth, during the third and fourth quarters of 2020, the Corporation prepaid the entire balance of its borrowings from the FHLB. The combined prepayment penalty associated with these prepayments totaled $7.9 million. The weighted average rate associated with these borrowings was 2.20%.
Shareholders’ Equity, Capital Ratios and Metrics
The Corporation’s capital continues to provide a source of strength for the Corporation's growth, strategies and profitability. As of December 31, 2020, CNB’s total shareholders’ equity was $416.1 million, an increase of $111.2 million, or 36.5%, from December 31, 2019 primarily as a result of an increase in additional paid in capital related to the Bank of Akron acquisition, combined with the issuance of preferred equity, an increase in accumulated other comprehensive income and growth in organic earnings, partially offset by the adoption of CECL and payment of common and preferred stock dividends to our shareholders during the twelve months ended December 31, 2020.
During the second quarter of 2020, the Corporation announced the termination of its "at-the-market" equity offering program (the "ATM Program"), pursuant to which the Corporation could offer and sell up to $40 million of its common stock through Keefe, Bruyette & Woods, Inc., the sales agent. The Corporation elected to terminate the ATM Program due to market conditions and to limit uncertainty and unfavorable dilution for its shareholders during this period of global economic volatility. Prior to termination, the Corporation had sold 168,358 shares of its common stock, raising approximately $5.1 million in gross proceeds.
On July 17, 2020, the Corporation completed its acquisition of Bank of Akron. Under the terms of the Merger Agreement, Bank of Akron merged with and into CNB Bank, with CNB Bank as the surviving entity. Banking offices of Bank of Akron operate under the trade name BankOnBuffalo, a division of CNB Bank. Based on the elections and proration procedures set forth in the Merger Agreement, the total consideration payable to Bank of Akron shareholders was approximately $40.8 million, comprised of approximately $16.1 million in cash and 1,501,402 shares of the Corporation's common stock, net of fractional shares, valued at $24.7 million based on the July 17, 2020 closing price of $16.43 per share of the Corporation's common stock.
During the three months ended September 30, 2020, the Corporation raised $57.8 million, net of issuance costs, from the issuance of depositary shares, each representing a 1/40th ownership interest in a share of the Corporation's 7.125% Series A fixed rate non-cumulative perpetual preferred stock, no par value, with a liquidation preference of $1,000 per share of preferred stock.
As of December 31, 2020 all of the Corporation’s regulatory capital ratios reflected increases from December 31, 2019. The Corporation’s Tier 1 Leverage ratio of 8.06% at December 31, 2020, included the impact of average PPP-related loans, of $203.1 million.
As of December 31, 2020, the Corporation’s ratio of Tangible Common Equity to Tangible Assets reflected the impact of approximately $155.5 million in PPP-related loans. Excluding PPP-related loans, the Corporation’s ratio of Tangible Common Equity to Tangible Assets of 6.93% decreased 21 bps from December 31, 2019, primarily as a result of the impact of the acquisition of Bank of Akron and the adoption of CECL, partially offset by a net increase in earnings, net of common dividends, and an increase in accumulated other comprehensive income.
The Corporation has complied with the standards of capital adequacy mandated by government regulations. Bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios.
The Corporation’s capital ratios and book value per common share at December 31, 2020 and 2019 are as follows:
December 31, 2020 December 31, 2019
Total risk-based capital ratio 14.32 % 12.51 %
Tier 1 capital ratio 11.91 % 10.03 %
Common equity tier 1 ratio 9.50 % 9.32 %
Leverage ratio 8.11 % 7.86 %
Tangible common common equity/tangible assets (1)
6.70 % 7.14 %
Book value per common share $ 21.29 $ 20.00
Tangible book value per common share (1)
$ 18.66 $ 17.45
(1) Tangible common equity, tangible assets and tangible book value per common share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets from the calculation of stockholders’ equity. Tangible assets is calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets. Tangible book value per common share is calculated by dividing tangible common equity by the number of shares outstanding. The Corporation believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. A reconciliation of these non-GAAP financial measures is provided below.
Liquidity
Liquidity measures an organization’s ability to meet its cash obligations as they come due. The consolidated statements of cash flows included in the accompanying financial statements provide analysis of the Corporation’s cash and cash equivalents and the sources and uses of cash. Additionally, the portion of the loan portfolio that matures within one year and securities with maturities within one year in the investment portfolio are considered part of the Corporation’s liquid assets. Liquidity is monitored by both management and the Board’s ALCO, which establishes and monitors ranges of acceptable liquidity. The Bank has a borrowing capacity with the FHLB at December 31, 2020 of approximately $797.4 million.
Results of Operations
Year Ended December 31, 2020 vs. Year Ended December 31, 2019
Overview of the Statements of Income and Comprehensive Income
Net income was $32.7 million, or $1.97 per diluted common share, for the year ended December 31, 2020. Pre-tax pre-provision ("PTPP") income was $55.4 million, for the twelve months ended December 31, 2020. Excluding after-tax merger costs related to CNB's acquisition of Bank of Akron, FHLB prepayment penalties and branch closure costs totaling a combined $10.2 million, net income was $42.9 million, or $2.60 per diluted common share, for the year ended December 31, 2020, compared to $40.2 million, or $2.64 per diluted share, for the year ended December 31, 2019, reflecting an increase of $2.7 million, or 6.7%, and a decrease of $0.04 per diluted common share, or 1.5%. For the year ended December 31, 2020, excluding the impact of merger, prepayment penalties and branch closure costs PTPP income was $68.1 million, representing an increase of approximately $13.3 million, or 24.2%, from the same period in 2019.1
For the twelve months ended December 31, 2020, return on equity was 9.14%, while return on average common equity was 9.35% and return on average tangible common equity was 10.67%. Excluding after-tax merger costs, prepayment penalties and branch closure costs, adjusted return on average tangible common equity was 14.10% for the year ended December 31, 2020, compared to 16.34% for the year ended December 31, 2019. For the twelve months ended December 31, 2020, return on average assets was 0.75%. Excluding after-tax merger costs, prepayment penalties and branch closure costs, adjusted return on average assets was 0.99% for the year ended December 31, 2020, compared to 1.18% for the year ended December 31, 2019.
As a measure of the Corporation’s efficiency in management of its expenses, the efficiency ratio was 65.10% for twelve months ended December 31, 2020. Excluding after-tax merger costs, prepayment penalties and branch closure costs, the adjusted efficiency ratio was 57.41% for the twelve months ended December 31, 2020, compared to 60.07% for the comparable period in 2019. The improvement in efficiency ratio resulted from the impact of PPP-related fees, coupled with an overall lower level of business activity resulting from the pandemic and the Corporation’s internal cost management initiatives focusing on travel restrictions, a hiring freeze, lower marketing expenditures and other expense management initiatives.
Interest Income and Expense
Net interest income for the twelve months ended December 31, 2020 increased 15.9% to $134.7 million from the twelve months ended December 31, 2019, driven by an organic growth of $560.9 million in earning assets, coupled with $336.3 million in PPP-related loans, estimated PPP-related deposits and Paycheck Protection Program Lending Facility ("PPPLF") related assets (collectively the "PPP-related assets"). In addition, the twelve months ended December 31, 2020 included PPP-related fees totaling approximately $5.1 million.
Net interest margin on a fully tax-equivalent basis was 3.34% and 3.69% for the twelve months ended December 31, 2020 and 2019, respectively, Excluding $336.3 million in PPP-related assets, the net interest margin on a fully-tax equivalent basis was 3.50% for the twelve months ended December 31, 2020.
The yield on earning assets of 4.15% for the twelve months ended December 31, 2020 included $336.3 million in PPP-related assets. Excluding PPP-related assets and PPP-related fees, the yield on earning assets was 4.37% for the twelve months ended December 31, 2020, a decrease of 56 basis points from 4.93% for the twelve months ended December 31, 2019, primarily as a result of the lower interest rate environment. The cost of interest-bearing liabilities decreased 50 basis points to 0.95% for the twelve months ended December 31, 2020 from 1.45% for the twelve months ended December 31, 2019 primarily as a result of the Corporation’s targeted deposit rate reductions.
Provision for Credit Losses
The Corporation recorded a provision for credit losses of $15.4 million in 2020 compared to $6.0 million in 2019. Net loan charge-offs were $6.4 million during the year ended December 31, 2020, compared to $6.3 million during the year ended December 31, 2019. As disclosed in "Allowance for Credit Losses" discussion above, Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts, and other significant qualitative and quantitative factors.
Management believes the charges to the provision in 2020 are appropriate and the allowance for credit losses is adequate to absorb losses in the loan portfolio at December 31, 2020.
Non-Interest Income
Total non-interest income was $28.1 million for the twelve months ended December 31, 2020, an increase of $2.1 million, or 8.0%, from the twelve months ended December 31, 2019. Total non-interest income includes net realized and unrealized losses on trading securities, which combined totaled $2.5 million for the twelve months ended December 31, 2020 compared to $2.0 million for the twelve months ended December 31, 2019. The remainder of the $2.1 million increase was primarily due to continued growth in Wealth and Asset Management fees, increased mortgage banking activity coupled with higher card processing and interchange income, partially offset by a decrease in service charges on deposits and other fees resulting from lower business activity and CNB’s response to the pandemic.
Non-Interest Expense
For the twelve months ended December 31, 2020, total non-interest expense was $107.3 million. Excluding merger costs, prepayment penalties and branch closure costs, total non-interest expense was $94.7 million for the twelve months ended December 31, 2020, an increase of $7.3 million, or 8.4%, from the twelve months ended December 31, 2019, including a $1.6 million impact from the acquisition of Bank of Akron. The remaining $5.7 million increase was the result of the Corporation’s ongoing investments in technology and other general expenditures to support long-term growth. The ratio of non-interest expenses to average assets was 2.47% at December 31, 2020. Excluding merger costs, prepayment penalties and branch closure costs and average PPP-related assets, the ratio of non-interest expenses to average assets was 2.36% at December 31, 2020 compared to 2.56% at December 31, 2019.
Year Ended December 31, 2019 vs. Year Ended December 31, 2018
Overview of the Statements of Income and Comprehensive Income
The Corporation had net income of $40.1 million for 2019 compared to $33.7 million for 2018, reflecting an increase of $6.4 million, or 18.9%. Net interest income increased $11.3 million, or 10.7%, and non-interest income increased $5.3 million, or 25.3%. The provision for loan losses remained stable at approximately $6.0 million, while non-interest expenses increased by $8.2 million, or 10.3%. Earnings per diluted share were $2.63 in 2019 and $2.21 in 2018, reflecting an increase of $0.42 per diluted share, or 19.0%, over the same period. For the twelve months ended December 31, 2019, return on average assets and the return on average equity were 1.17% and 14.05%, respectively, compared to 1.12% and 13.46%, respectively for 2018. As a measure of the Corporation’s efficiency in management of its expenses, the efficiency ratio of 60.19% for the twelve months ended December 31, 2019 improved from 61.37% during the same period in 2018.
Interest Income and Expense
Net interest margin on a fully tax equivalent basis was 3.69% and 3.77% for the years ended December 31, 2019 and 2018, respectively. The yield on earning assets increased 20 basis points to 4.93% for the year ended December 31, 2019 from 4.73% for the year ended December 31, 2018. The cost of interest-bearing liabilities increased 33 basis points to 1.45% for the year ended December 31, 2019 from 1.12% for the year ended December 31, 2018.
Provision for Loan Losses
The Corporation recorded a provision for loan losses of $6.0 million in 2019 compared to $6.1 million in 2018. Net loan charge-offs were $6.3 million during the year ended December 31, 2019 compared to $6.1 million during the year ended December 31, 2018. As disclosed in "Allowance for Loan Losses" discussion above, the Corporation recorded the provision for loan losses based on management’s evaluation of impaired loans and consideration of trends in criticized and classified loans and historical loan losses.
Management believes the charges to the provision in 2019 are appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in the loan portfolio at December 31, 2019.
Non-Interest Income
Total non-interest income of $26.0 million, for the twelve months ended December 31, 2019, includes gains associated with the sale of available-for-sale securities, net realized and unrealized gains on trading securities and realized gains on the sale of Visa Class B shares, which combined totaled $2.5 million for the year ended December 31, 2019 compared to a loss of $451 thousand for the year ended December 31, 2018.
Excluding the items discussed above, non-interest income for the twelve months ended December 31, 2019 totaled $23.5 million, reflecting an increase of $2.3 million or 10.9%, from the same period in 2018. As a result of the Corporation’s continued organic growth, it experienced an increase in service charges on deposit accounts of $643 thousand, or 11.2%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. In addition, Wealth and Asset Management fees increased $455 thousand, or 10.9%, over the same period, primarily as a result of growth in assets under management.
Non-Interest Expense
Total non-interest expenses were $87.5 million, for the twelve months ended December 31, 2019, reflecting an increase of $8.2 million, or 10.3%. Salaries and benefits expense increased $4.5 million, or 10.9%, during the year ended December 31, 2019 compared to the year ended December 31, 2018. In addition to compensation increases incurred in the normal course of business, as a result of the Corporation exceeding certain growth and profitability targets used in calculating incentive compensation, incentive compensation expense increased by $2.2 million in the twelve months ended December 31, 2019, when compared to the same period in 2018. The remainder of the increase in non-interest expenses is primarily a result of expansion of staffing levels in several areas including business development, customer service and risk management, as well as other costs required to service a larger customer base. Total households serviced at December 31, 2019 were 68,892, compared to 63,920 households at December 31, 2018, reflecting an organic increase of 7.8%. The ratio of non-interest expenses to average assets was 2.56% and 2.64% during the years ended December 31, 2019 and 2018, respectively.
Income Tax Expense
Income tax expense of $7.3 million in 2020, compared to $8.6 million in 2019 and $6.5 million in 2018. The effective tax rates were 18.3%, 17.6%, and 16.2% for 2020, 2019, and 2018, respectively. The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally as a result of tax-exempt income from securities and loans as well as earnings from bank owned life insurance. The higher effective tax rate in 2020 when compared to 2019 and 2018 is primarily the result of increased revenue from taxable activities in 2020.
Contractual Obligations and Commitments
The Corporation has various financial obligations, including contractual obligations and commitments that may require future cash payments. The following table presents, as of December 31, 2020, significant fixed and determinable contractual obligations to third parties by payment date.
Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
Payments Due In
Note
Reference One
Year or
Less One to
Three Years Three to
Five Years Over
Five Years Total
Deposits without a stated maturity $ 3,705,200 $ 0 $ 0 $ 0 $ 3,705,200
Certificates of deposit 11 212,301 227,575 26,787 9,881 476,544
Right of use liabilities 9 1,560 3,211 3,020 19,281 27,072
Subordinated debentures 12 0 0 0 70,620 70,620
The Corporation also has obligations under its postretirement plan for health care and supplemental executive retirement plan as described in Note 13, "Employee Benefit Plans," to the consolidated financial statements. The postretirement benefit payments represent actuarially determined future benefit payments to eligible plan participants. The supplemental executive retirement plan allocates expenses over the participant’s service period. The Corporation reserves the right to terminate these plans at any time.
Off-Balance Sheet Arrangements
See Note 21,"Off-Balance Sheet Activities," to the consolidated financial statements for information about our off-balance sheet arrangements.
Applications of Critical Accounting Policies
The Corporation’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. and follow general practices within the industries in which the Corporation operates. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
The most significant accounting policies used by the Corporation are presented in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements.
A material estimate that is susceptible to significant change is the determination of the allowance for credit losses. The Corporation’s methodology for determining the allowance for credit losses is described previously in "Management's Discussion and analysis of Financial Condition and Results of Operations." Given the subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions and could therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for credit losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.
Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values from an independent valuation service or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.
Finally, the fair value of assets acquired and liabilities assumed in connection with the acquisition of FC Banc Corp., Lake National Bank and Bank of Akron, including the associated goodwill that was recorded, required the use of material estimates. Specifically, the fair values of loans, the core deposit intangible asset, premises and equipment, and time deposits were susceptible to estimation and management’s judgment about real estate and equipment values, as well as the amount and timing of future cash flows associated with loans and deposits.
Non-GAAP Financial Measures
The following tables reconcile the non-GAAP financial measures to their most directly comparable measures under GAAP.
Non-GAAP Reconciliations:
December 31, 2020 December 31, 2019
Calculation of tangible book value per share and tangible common equity/tangible assets:
Shareholders' equity $ 416,137 $ 304,966
Less: preferred equity 57,785 0
Less: goodwill 43,749 38,730
Less: core deposit intangible 567 160
Tangible common equity $ 314,036 $ 266,076
Total assets $ 4,729,399 $ 3,763,659
Less: goodwill 43,749 38,730
Less: core deposit intangible 567 160
Tangible assets $ 4,685,083 $ 3,724,769
Ending shares outstanding 16,833,008 15,247,985
Tangible book value per common share $ 18.66 $ 17.45
Tangible common equity/Tangible assets 6.70 % 7.14 %
Calculation of tangible common equity/tangible assets, net of PPP-related loans:
Tangible common equity $ 314,036 $ 266,076
Tangible assets $ 4,685,083 $ 3,724,769
Less: PPP-related loans 155,529 0
Adjusted tangible assets $ 4,529,554 $ 3,724,769
Adjusted tangible common equity/tangible assets 6.93 % 7.14 %
December 31, 2020 December 31, 2019
Calculation of non-performing assets / Total assets, net of PPP-related assets:
Non-performing assets $ 31,546 $ 23,430
Total assets $ 4,729,399 $ 3,763,659
Less: PPP-related loans 155,529 0
Less: estimated PPP deposits held at the Federal Reserve 159,584 0
Adjusted total assets, net of PPP-related assets (non-GAAP) $ 4,414,286 $ 3,763,659
Adjusted non-performing assets / total assets, net of PPP-related assets (non-GAAP) 0.71 % 0.62 %
Calculation of allowance / loans, net of PPP-related loans:
Total allowance for credit losses $ 34,340 $ 19,473
Total loans net of unearned income $ 3,371,789 $ 2,804,035
Less: PPP-related loans 155,529 0
Adjusted total loans, net of unearned income, PPP-related loans (non-GAAP) $ 3,216,260 $ 2,804,035
Adjusted allowance / loans, net of PPP-related loans (non-GAAP) 1.07 % 0.69 %
Non-GAAP Reconciliations:
Twelve Months Ended
December 31,
2020 2019
Calculation of average total earning assets, net of PPP-related assets:
Average total earning assets $ 4,092,076 $ 3,194,911
Less: average PPP-related loans 150,075 0
Less: estimated average PPP deposits held at the Federal Reserve 154,124 0
Less: average PPPLF deposits held at the Federal Reserve 32,119 0
Adjusted average total earning assets, net of PPP-related assets (non-GAAP) $ 3,755,758 $ 3,194,911
Calculation of average total assets, net of PPP-related assets:
Average total assets $ 4,347,142 $ 3,413,737
Less: average PPP-related loans 150,075 0
Less: estimated average PPP deposits held at the Federal Reserve 154,124 0
Less: average PPPLF deposits held at the Federal Reserve 32,119 0
Adjusted average total assets, net of PPP-related assets (non-GAAP) $ 4,010,824 $ 3,413,737
Calculation of average yield on earning assets, net of unearned income, PPP-related assets and PPP-related fees:
Investment income (tax equivalent) $ 14,037 $ 15,963
Add: loan income (tax equivalent) 153,639 140,742
Add: other earning asset income (tax equivalent) 852 499
Less: PPP-related fees 5,140 0
Total income related to earning assets (tax equivalent) (non-GAAP) $ 163,388 $ 157,204
Adjusted average total earning assets, net of PPP-related assets (non-GAAP) $ 3,755,758 $ 3,194,911
Less: average mark to market adjustment on investments (non-GAAP) 18,884 5,631
Adjusted average total earning assets, net of market to market, PPP-related assets (non-GAAP) $ 3,736,874 3,189,280
Adjusted average yield on earning assets, net of unearned income, PPP-related assets and PPP-related fees (non-GAAP) (annualized) 4.37 % 4.93 %
Twelve Months Ended
December 31,
2020 2019
Calculation of net interest margin (fully tax equivalent basis):
Interest income (fully tax equivalent basis) (non-GAAP) $ 168,528 $ 157,204
Interest expense (fully tax equivalent basis) (non-GAAP) 32,456 39,530
Net interest income (fully tax equivalent basis) (non-GAAP) $ 136,072 $ 117,674
Average total earning assets $ 4,092,076 $ 3,194,911
Less: average mark to market adjustment on investments 18,884 5,631
Adjusted average total earning assets, net of mark to market (non-GAAP) $ 4,073,192 $ 3,189,280
Net interest margin, fully tax equivalent basis (non-GAAP) (annualized) 3.34 % 3.69 %
Calculation of net interest margin (fully tax equivalent basis), net of PPP-related assets and PPP-related fees:
Net interest income (fully tax equivalent basis) (non-GAAP) $ 136,072 $ 117,674
Less: Recognized PPP-related fees 5,140 0
Adjusted interest income (fully tax equivalent basis), net of PPP-related fees (non-GAAP) $ 130,932 $ 117,674
Adjusted average total earning assets, net of market to market, PPP-related assets (non-GAAP) $ 3,736,874 $ 3,189,280
Net interest margin, fully tax equivalent basis, net of PPP-related assets and PPP-related fees (non-GAAP) (annualized) 3.50 % 3.69 %
Non-GAAP Reconciliations:
Twelve Months Ended
December 31,
2020 2019
Calculation of adjusted earnings per common share, net of merger costs, prepayment penalties and branch closure costs:
Net earnings allocated to common stock $ 31,496 $ 39,934
Add: Merger costs, prepayment penalties and branch closure costs, after-tax allocated to common stock 10,138 134
Adjusted net earnings allocated to common stock (non-GAAP) $ 41,634 $ 40,068
Weighted average common shares outstanding 16,048 15,219
Less: Average participating shares 48 55
Add: Dilutive shares 0 0
Weighted average shares and dilutive potential common shares 16,000 15,164
Adjusted diluted earnings per common share, net of merger costs, prepayment penalties and branch closure costs $ 2.60 $ 2.64
Calculation of PTPP income:
Net income $ 32,743 $ 40,081
Add: Provision expense 15,354 6,024
Add: Income tax expense 7,347 8,560
PTPP income (non-GAAP) $ 55,444 $ 54,665
Calculation of PTPP income before merger costs, prepayment penalties and branch closure costs:
PTPP income (non-GAAP) $ 55,444 $ 54,665
Add: Merger costs, prepayment penalties and branch closure costs 12,642 170
PTPP before merger costs, prepayment penalties and branch closure costs (non-GAAP) $ 68,086 $ 54,835
Calculation of non-interest expenses excluding merger costs, prepayment penalties and branch closure costs:
Non-interest expense $ 107,326 $ 87,508
Less: Merger costs, prepayment penalties and branch closure costs 12,642 170
Non-interest expense excluding merger costs, prepayment penalties and branch closure costs (non-GAAP) $ 94,684 $ 87,338
Calculation of non-interest expenses excluding merger costs, prepayment penalties and branch closure costs to average assets, net of PPP-related assets:
Non-interest expense excluding merger costs, prepayment penalties and branch closure costs (non-GAAP) $ 94,684 $ 87,338
Adjusted average total assets, net of PPP-related assets (non-GAAP) $ 4,010,824 $ 3,413,737
Non-interest expenses excluding merger costs, prepayment penalties and branch closure costs to average assets, net of PPP-related assets (non-GAAP) 2.36 % 2.56 %
Non-GAAP Reconciliations:
Twelve Months Ended
December 31,
2020 2019
Calculation of adjusted efficiency ratio, net of merger costs, prepayment penalties and branch closure costs:
Non-interest expense $ 107,326 $ 87,508
Less: core deposit intangible amortization 206 567
Less: merger costs, prepayment penalties and branch closure costs 12,642 170
Adjusted non-interest expense (non-GAAP) $ 94,478 $ 86,771
Non-interest income $ 28,059 $ 25,975
Net interest income $ 134,711 $ 116,198
Less: tax exempt investment and loan income, net of TEFRA (non-GAAP) 5,703 6,664
Add: tax exempt investment and loan income (non-GAAP) (tax-equivalent) 7,490 8,946
Adjusted net interest income (non-GAAP) 136,498 118,480
Adjusted net revenue (non-GAAP) (tax-equivalent) $ 164,557 $ 144,455
Adjusted efficiency ratio, net of merger costs, prepayment penalties and branch closure costs 57.41 % 60.07 %
Calculation of adjusted return on average total assets, net of merger costs, prepayment penalties, branch closure costs and PPP-related assets:
Net income $ 32,743 $ 40,081
Add: merger costs, prepayment penalties and branch closure costs (net of tax) 10,168 134
Adjusted net income (non-GAAP)(net of tax) $ 42,911 $ 40,215
Average total assets $ 4,347,142 $ 3,413,737
Adjusted return on average total assets, net of merger costs, prepayment penalties, branch closure costs and PPP-related assets (non-GAAP)(annualized) 0.99 % 1.18 %
Calculation of adjusted return on average tangible common equity, net of merger costs, prepayment penalties and branch closure costs:
Net income available to common stockholders $ 31,596 $ 40,081
Add: merger costs, prepayment penalties and branch closure costs (net of tax) 10,168 134
Adjusted net income (non-GAAP)(net of tax) $ 41,764 $ 40,215
Average tangible shareholders' common equity $ 296,142 $ 246,161
Adjusted return on average tangible common equity, net of merger costs, prepayment penalties and branch closure costs (non-GAAP)(annualized) 14.10 % 16.34 %

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the Corporation’s primary source of market risk is interest rate risk, which is the exposure to fluctuations in the Corporation’s future earnings resulting from changes in interest rates. This exposure is correlated to the repricing characteristics of the Corporation’s portfolio of assets and liabilities. Each asset or liability reprices either at maturity or during the life of the instrument.
The principal purpose of asset/liability management is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Net interest income is enhanced by increasing the net interest margin and the growth in earning assets. As a result, the primary goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.
The Corporation uses an asset-liability management model to measure the effect of interest rate changes on its net interest income. The Corporation’s management also reviews asset-liability maturity gap and repricing analyses regularly. The Corporation does not always attempt to achieve a precise match between interest sensitive assets and liabilities because it believes that an actively managed amount of interest rate risk is inherent and appropriate in the management of the Corporation’s profitability.
Asset-liability modeling techniques and simulation involve assumptions and estimates that inherently cannot be measured with precision. Key assumptions in these analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude, and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of the Corporation’s interest rate risk position over time.
Management reviews interest rate risk on a quarterly basis and reports to the ALCO. This review includes earnings shock scenarios whereby interest rates are immediately increased and decreased by 100, 200, 300, and 400 basis points. These scenarios, detailed in the table below, indicate that there would not be a significant variance in net interest income over a one-year period due to interest rate changes; however, actual results could vary significantly. At December 31, 2020 and 2019, all interest rate risk levels according to the model were within the tolerance limits of ALCO-approved policy. In addition, the table does not take into consideration changes that management would make to realign its assets and liabilities in the event of an unexpected changing interest rate environment. Due to the current low interest rate environment, the 300 and 400 basis point declining interest rate scenarios have been excluded the following table.
December 31, 2020 December 31, 2019
Change in
Basis Points % Change in Net
Interest Income Change in
Basis Points % Change in Net
Interest Income
400 5.0% 400 (0.9)%
300 2.8% 300 (1.0)%
200 1.7% 200 (0.3)%
100 (0.2)% 100 (0.6)%
(100) (7.2)% (100) (2.9)%
(200) (11.4)% (200) (2.6)%

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share data
December 31,
2020 2019
ASSETS
Cash and due from banks $ 44,368 $ 42,373
Interest bearing deposits with other banks 488,326 150,601
Total cash and cash equivalents 532,694 192,974
Debt securities available for sale, at fair value (amortized cost of $565,493 and $533,203 as of December 31, 2020 and 2019, respectively)
584,908 542,313
Trading securities 6,649 9,809
Loans held for sale 8,514 930
Loans 3,371,789 2,804,035
Less: allowance for credit losses (34,340) (19,473)
Net loans 3,337,449 2,784,562
FHLB and other equity interests 21,018 27,868
Premises and equipment, net 60,064 54,867
Operating lease right-of-use assets 18,407 18,422
Bank owned life insurance 76,471 66,538
Mortgage servicing rights 1,527 1,573
Goodwill 43,749 38,730
Core deposit intangible 567 160
Accrued interest receivable and other assets 37,382 24,913
Total Assets $ 4,729,399 $ 3,763,659
LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits $ 627,114 $ 382,259
Interest bearing deposits 3,554,630 2,720,068
Total deposits 4,181,744 3,102,327
FHLB and other long-term borrowings 0 227,907
Subordinated debentures 70,620 70,620
Operating lease liabilities 19,449 19,363
Accrued interest payable and other liabilities 41,449 38,476
Total liabilities 4,313,262 3,458,693
Commitments and contingent liabilities
Preferred stock, Series A non-cumulative perpetual, $0 par value; $1,000 liquidation preference; authorized 60,375 shares; issued 60,375 shares at December 31, 2020 and no shares issued at December 31, 2019
57,785 0
Common stock, $0 par value; authorized 50,000,000 shares; issued 16,978,057 shares at December 31, 2020 and 15,360,946 shares at December 31, 2019
0 0
Additional paid in capital 127,518 99,335
Retained earnings 218,727 201,503
Treasury stock, at cost (145,049 and 112,961 shares for 2020 and 2019, respectively)
(2,967) (2,811)
Accumulated other comprehensive income (loss) 15,074 6,939
Total shareholders’ equity 416,137 304,966
Total Liabilities and Shareholders’ Equity $ 4,729,399 $ 3,763,659
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Dollars in thousands, except per share data
Year ended December 31,
2020 2019 2018
Interest and dividend income:
Loans including fees $ 152,687 $ 139,867 $ 118,193
Securities and cash and cash equivalents:
Taxable 12,362 12,472 9,921
Tax-exempt 1,441 2,372 2,739
Dividends 677 1,017 1,017
Total interest and dividend income 167,167 155,728 131,870
Interest Expense:
Deposits 24,142 30,202 17,228
Borrowed funds 4,534 5,349 5,856
Subordinated debentures (includes $224, $63, and $164 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2020, 2019, and 2018, respectively)
3,780 3,979 3,866
Total interest expense 32,456 39,530 26,950
Net Interest Income 134,711 116,198 104,920
Provision for credit loss expense 15,354 6,024 6,072
Net interest income after provision for credit loss expense 119,357 110,174 98,848
Non-interest income:
Service charges on deposit accounts 5,095 6,402 5,759
Other service charges and fees 2,548 2,930 2,833
Wealth and asset management fees 5,497 4,627 4,172
Net realized gains on available-for-sale securities (includes $2,190, $148, and $0 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2020, 2019, and 2018, respectively)
2,190 148 0
Net realized gains on trading securities 75 16 151
Net unrealized gains (losses) on trading securities 253 1,872 (602)
Realized gains on Visa Class B shares 0 463 0
Mortgage banking 3,354 1,412 1,019
Bank owned life insurance 1,747 1,317 1,408
Card processing and interchange income 5,727 4,641 4,261
Other 1,573 2,147 1,722
Total non-interest income 28,059 25,975 20,723
Non-Interest Expenses:
Salaries 36,519 35,212 31,323
Employee benefits (includes $0, $23, and $84 accumulated other comprehensive income reclassifications for net amortization of actuarial losses in 2020, 2019, and 2018, respectively)
12,204 11,193 10,533
Net occupancy expense 12,333 11,221 10,281
Amortization of core deposit intangible 206 567 898
Data processing 5,759 4,994 4,586
State and local taxes 3,340 3,140 3,441
Legal, professional and examination fees 2,990 2,514 1,851
Advertising 1,993 2,113 2,345
FDIC insurance 2,414 1,252 1,396
Directors fees and benefits 538 1,352 885
Merger costs, prepayment penalties and branch closure costs 12,642 170 0
Dues and subscriptions 2,777 1,876 1,319
Card processing and interchange expenses 3,135 2,891 2,834
Other 10,476 9,013 7,650
Total non-interest expenses 107,326 87,508 79,342
Income before income taxes 40,090 48,641 40,229
Income tax expense (includes $413, $13, and $(52) income tax expense reclassification items in 2020, 2019, and 2018, respectively)
7,347 8,560 6,510
Net Income 32,743 40,081 33,719
Preferred stock dividends 1,147 0 0
Net income available to common stockholders 31,596 40,081 33,719
Earnings Per Share:
Basic $ 1.97 $ 2.63 $ 2.21
Diluted $ 1.97 $ 2.63 $ 2.21
Net income $ 32,743 $ 40,081 $ 33,719
Other comprehensive income (loss):
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification and tax $ 8,140 $ 10,732 $ (4,007)
Change in actuarial gain (loss), for post-employment health care plan, net of amortization and tax 219 428 386
Change in fair value of interest rate swap agreements designated as a cash flow hedge, net of interest and tax (224) (225) (32)
Total other comprehensive income (loss) 8,135 10,935 (3,653)
Comprehensive Income $ 40,878 $ 51,016 $ 30,066
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
Dollars in thousands, except share and per share data
Preferred Stock Additional
Paid-In
Capital Retained
Earnings Treasury
Stock Accumulated
Other
Comprehensive
Income (Loss) Total
Share-
holders’
Equity
Balance, January 1, 2018 $ 0 $ 97,042 $ 148,298 $ (1,087) $ (343) $ 243,910
Net income 33,719 33,719
Other comprehensive income (3,653) (3,653)
Forfeiture of restricted stock award grants (361 shares)
11 (11) 0
Restricted stock award grants (40,108 shares)
(996) 996 0
Stock-based compensation expense 1,545 1,545
Purchase of treasury stock (90,898 shares)
(2,284) (2,284)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (6,308)
(170) (170)
Cash dividends declared ($0.67 per share)
(10,237) (10,237)
Balance, December 31, 2018 0 97,602 171,780 (2,556) (3,996) 262,830
Net income 40,081 40,081
Other comprehensive loss 10,935 10,935
Forfeiture of restricted stock award grants (2,699 shares)
71 (71) 0
Restricted stock award grants (40,978 shares)
(1,086) 1,086 0
Performance based restricted stock award grants (798 shares)
(21) 21 0
Stock-based compensation expense 1,346 1,346
Issuance of common stock, net of issuance costs (52,568 shares)
1,423 1,423
Purchase of treasury stock (40,000 shares)
(994) (994)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (10,467)
(289) (289)
Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting (294)
(8) (8)
Cash dividends declared ($0.68 per share)
(10,358) (10,358)
Balance, December 31, 2019 0 99,335 201,503 (2,811) 6,939 304,966
Cumulative-effect adjustment due to the adoption of ASU No. 2016-13 (3,391) (3,391)
Net income 32,743 32,743
Other comprehensive income 8,135 8,135
Restricted stock award grants (36,968 shares)
(934) 934 0
Performance based restricted stock award grants (8,351 shares)
(217) 217 0
Stock-based compensation expense 1,410 1,410
Issuance of common stock, net of issuance costs (115,790 shares)
3,257 3,257
Purchase of treasury stock (66,600 shares)
(981) (981)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (7,349)
(213) (213)
Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting (3,458)
(113) (113)
Issuance of preferred equity, net of issuance costs 57,785 57,785
Acquisition of Bank of Akron 24,667 24,667
Preferred cash dividend declared (1,147) (1,147)
Common cash dividends declared ($0.68 per share)
(10,981) (10,981)
Balance, December 31, 2020 $ 57,785 $ 127,518 $ 218,727 $ (2,967) 15,074 $ 416,137
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Year ended December 31,
2020 2019 2018
Cash Flows From Operating Activities:
Net income $ 32,743 $ 40,081 $ 33,719
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses 15,354 6,024 6,072
Depreciation and amortization of premises and equipment, operating leases assets, core deposit intangible, and mortgage servicing rights 6,082 5,963 4,811
Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income (1,955) (870) (537)
Amortization and accretion of deferred PPP processing fees (5,140) 0 0
Deferred taxes 1,390 (204) (1,076)
Net realized gains on sales of available-for-sale securities (2,190) (148) 0
Net realized and unrealized losses (gains) on trading securities (328) (1,888) 451
Proceeds from sale of Visa Class B shares 0 463 0
Gain on sale of Visa Class B shares 0 (463) 0
Gain on sale of loans (2,961) (990) (624)
Net losses (gains) on dispositions of premises and equipment and foreclosed assets 1,097 (377) 47
Proceeds from sale of loans 82,619 43,198 23,311
Origination of loans held for sale (87,528) (43,458) (22,990)
Income on bank owned life insurance, including death benefit of proceeds in excess of cash surrender value (1,747) (1,317) (1,408)
Stock-based compensation expense 1,410 1,346 1,545
Changes in:
Accrued interest receivable and other assets (6,242) 1,072 (3,079)
Accrued interest payable, lease liabilities, and other liabilities (3,846) 3,610 4,613
Net Cash Provided By Operating Activities 28,758 52,042 44,855
Cash Flows from Investing Activities:
Proceeds from maturities, prepayments and calls of available-for-sale securities 164,488 98,274 76,349
Proceeds from sales of available-for-sale securities 57,185 11,403 0
Proceeds from sale of trading securities 5,935 301 455
Purchase of available-for-sale securities (224,080) (122,358) (189,374)
Purchase of trading securities (2,447) (436) (1,542)
Loan origination and payments, net (244,903) (335,965) (333,552)
Purchase of bank owned life insurance 0 (8,778) 0
Net cash from business combinations 72,852 0 0
Repayment (purchase) of FHLB and other equity interests 7,268 (3,360) (2,991)
Purchase of premises and equipment (5,644) (9,045) (3,068)
Proceeds from the sale of premises and equipment and foreclosed assets 666 1,228 1,048
Net Cash Used In Investing Activities (168,680) (368,736) (452,675)
Cash Flows From Financing Activities:
Net change in:
Checking, money market and savings accounts 702,452 459,162 412,505
Certificates of deposit (42,510) 32,379 30,466
Deposits held for sale 0 0 0
Purchase of treasury stock (1,307) (1,291) (2,454)
Proceeds from stock offering, net of issuance costs 3,257 1,423 0
Proceeds from preferred stock offering, net of issuance costs 57,785 0 0
Cash dividends paid on common stock (10,981) (10,358) (10,237)
Cash dividends paid on preferred stock (1,147) 0 0
Proceeds from long-term borrowings 231,985 30,353 50,000
Repayments on long-term borrowings (459,892) (47,563) (27,826)
Net change in short-term borrowings 0 0 (34,416)
Net Cash Provided By Financing Activities 479,642 464,105 418,038
Net Increase in Cash and Cash Equivalents 339,720 147,411 10,218
Cash and Cash Equivalents, Beginning 192,974 45,563 35,345
Cash and Cash Equivalents, Ending $ 532,694 $ 192,974 $ 45,563
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 32,957 $ 39,282 $ 26,551
Income taxes 9,524 8,006 7,050
Supplemental Noncash Disclosures:
Transfers to other real estate owned $ 241 $ 2,066 $ 228
Grant of restricted stock awards from treasury stock 934 1,086 996
Grant of performance based restricted stock awards from treasury stock 217 21 0
Restricted stock forfeiture 0 71 11
Right of use assets obtained in exchange for lease liabilities 1,386 19,465 0
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Unless otherwise indicated, dollar amounts are in thousands, except per share data.
Business and Organization
CNB Financial Corporation (the "Corporation") is headquartered in Clearfield, Pennsylvania, and provides a full range of banking and related services through its wholly owned subsidiary, CNB Bank (the "Bank"). In addition, the Bank provides trust and asset management services, including the administration of trusts and estates, retirement plans, and other employee benefit plans as well as a full range of wealth management services. The Bank serves individual and corporate customers and is subject to competition from other financial institutions and intermediaries with respect to these services. In addition to the Bank, the Corporation also operates a consumer discount loan and finance business through its wholly owned subsidiary, Holiday Financial Services Corporation ("Holiday"). The Corporation and its other subsidiaries are subject to examination by federal and state regulators. The Corporation’s market area is primarily concentrated in the central and northwest regions of the Commonwealth of Pennsylvania, the central and northeast regions of the state of Ohio and western New York.
Basis of Financial Presentation
The financial statements are consolidated to include the accounts of the Corporation and the Bank, CNB Securities Corporation, Holiday, CNB Risk Management, Inc. and CNB Insurance Agency. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current period presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.
Risks and Uncertainties
The worldwide spread of COVID-19 has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 and the related government actions impact the Corporation’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.
Use of Estimates
To prepare financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and future results could differ.
The Corporation's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain the COVID-19 pandemic requires further restricted measures or is unsuccessful, the Corporation could experience a material adverse effect on its business, financial condition, results of operations and cash flows. Since the extent to which the COVID-19 pandemic impacts its operations will depend on future developments that are highly uncertain, the Corporation cannot estimate the impact on its business, financial condition or near or long-term financial or operational results with reasonable certainty. Accordingly, the Corporation is disclosing potentially material items of which it is aware.
Asset valuation: Currently, the Corporation does not expect the COVID-19 pandemic to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods due to any number of potential impacts from the COVID-19 pandemic.
The COVID-19 pandemic could cause a further and sustained decline in the Corporation's stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test, resulting in an impairment charge being recorded for that period. In the event that the Corporation concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
Credit: The Corporation is working with customers directly affected by the COVID-19 pandemic. The Corporation has offered assistance in accordance with regulator guidelines. As a result of the current economic slowdown related to the COVID-19 pandemic, the Corporation is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise.
Determining the appropriateness of the allowance for credit losses on loans is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses on loans in those future periods. Should economic conditions worsen, the Corporation could experience further increases in its required allowance for credit losses and record additional provision expense. It is possible that the Corporation's asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are prolonged.
Operating Segments
While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis, and operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Corporation defines cash and cash equivalents as cash and due from banks, interest bearing deposits with other banks, and Federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing time deposits with other banks and borrowings with original maturities of 90 days or less.
Restrictions on Cash
Note 20, "Interest Rate Swaps," to the consolidated financial statements discloses the cash collateral balances required to be maintained in connection with the Corporation’s interest rate swaps.
Debt Securities
When purchased, debt securities are classified as held to maturity, trading or available for sale. Debt securities are classified as held to maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Held to maturity securities are carried at amortized cost. Debt securities are classified as trading when purchased principally for the purpose of selling them in the near term, or when the fair value option has been elected. Trading securities are recorded at fair value with changes in fair value included in earnings in non-interest income. Available for sale securities ("AFS") are those securities not classified as held to maturity or trading and are carried at their fair value. Unrealized gains and losses, net of deferred tax, on securities classified as available for sale are recorded as other comprehensive income. Management has not classified any debt securities as held to maturity.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method.
The Corporation has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in accrued interest receivable and other assets in the consolidated balance sheets. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on nonaccrual is reversed against interest income. There was no accrued interest related to debt securities reversed against interest income for the year ended December 31, 2020.
Allowance for Credit Losses (Debt Securities Available-for Sale)
For available-for-sale debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management confirms that an available-for-sale security is uncollectable or when either of the criteria regarding intent or requirement to sell is met. As of December 31, 2020, the Corporation determined that the unrealized loss positions in available-for-sale debt securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note 3, "Debt Securities," and Note 6, "Fair Value Measurements," for more information about available-for-sale debt securities.
Accrued interest receivable on available-for-sale debt securities totaled $2.2 million at December 31, 2020 and is excluded from the estimate of credit losses.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of the mortgage loan sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $15.4 million at December 31, 2020 and was reported in Accrued interest receivable and other assets on the consolidated balance sheets and is excluded from the estimate of credit losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued and placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Consumer loans continue to accrue interest until they are recorded as charge-offs no later than 180 days past due unless the loan is in the process of collection. Past-due status is based on the contractual terms of the loan. Loans, including loans modified in a troubled debt restructuring, are placed on nonaccrual or recorded as charge-offs at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not received on loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. For all portfolio segments, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Purchased Credit Deteriorated ("PCD") Loans
The Corporation has purchased loans, some of which have experienced more than insignificant credit deterioration since origination.
PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
Troubled Debt Restructurings ("TDRs")
Loans are classified as TDRs when a borrower is experiencing financial difficulty and the Corporation has granted a concession that would not have otherwise been made for a borrower with similar credit characteristics. Prior to granting a modification, the borrower's ability to repay the loan is evaluated, including: current income levels and debt to income ratio, credit score, payment history and an evaluation of secondary repayment sources, if any is updated. The Corporation's policy is to modify loans typically through a payment reduction or through an interest rate reduction for a specified period of time, usually six to twelve months. Interest-only payments may also be approved during the modification period. Principal forgiveness is generally not an option for modification. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. When there is a reasonable expectation, at the reporting date, that a TDR will be executed with a borrower the estimated life of the TDR reflects the extension or renewal. Before granting approval to modify a loan in a TDR, the borrower’s ability to repay is evaluated, including: current income levels and debt to income ratio, borrower’s credit score, payment history of the loan and updated evaluation of the secondary repayment source. The Corporation also modifies some loans that are not classified as TDRs as the modification is due to a restructuring where the effective interest rate on the debt is reduced to reflect a decrease in market interest rates. The Corporation's allowance for credit losses reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower.
The Corporation has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the CARES Act, loans to borrowers experiencing financial difficulty related to the COVID-19 pandemic which were granted short-term modifications after March 1, 2020 and which were not more than 30 days past due as of December 31, 2019 are exempt from TDR classification. In addition, for loans modified in response to the COVID-19 pandemic that do not meet the above delinquency criteria (e.g., more than 30 days past due as of December 31, 2019), the Corporation applies the guidance included in an interagency statement issued by the bank regulatory agencies. This guidance states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were less than 30 days past due as of the implementation date of a loan modification program are exempt from TDR classification. For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. Interest income will continue to be recognized over the contractual life of the loan.
Concentration of Credit Risk
Most of the Corporation’s business activity is with customers located within the Commonwealth of Pennsylvania and the states of Ohio and New York. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economies of Pennsylvania, Ohio, and New York.
Allowance for Credit Losses - Loans
The allowance for credit losses on loans represents management’s estimate of expected credit losses over the estimated life of our existing portfolio of loans. The allowance for credit losses is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans.
The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses on loans at the amount of expected credit losses inherent within the loan portfolio. Loans are recorded as charge-offs against the allowance when management confirms a loan balance is uncollectable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts, and other significant qualitative and quantitative factors. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors. For further information on the ACL on loans, see Note 4, "Loans," for additional detail.
The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The Corporation has segregated its portfolio segments based on federal call report codes which classify loans based on the primary collateral supporting the loan. The following are the Corporation's segmented portfolios:
1-4 Family Construction: The Bank originates construction loans to finance 1-4 family residential buildings. Construction loans include not only construction of new structures, but also additions or alterations to existing structures and the demolition of existing structures to make way for new structures. Construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules. Factors that may influence the completion of construction may be customer specific, or related to changes in general economic conditions.
Other construction loans and all land development and other land loans: The Bank originates construction loans to finance land development preparatory to erecting new structures or the on-site construction of industrial, commercial, or multi-family buildings. Construction loans include not only construction of new structures, but also additions or alterations to existing structures and the demolition of existing structures to make way for new structures. Construction loans are generally secured by real estate. The primary risk characteristics are specific to the uncertainty on whether the construction will be completed according to the specifications and schedules. Factors that may influence the completion of construction may be customer specific, such as the quality and depth of property management, or related to changes in general economic conditions.
Farmland (including farm residential and other improvements): The Bank originates loans secured by farmland and improvements thereon, secured by mortgages. Farmland includes all land known to be used or usable for agricultural purposes, such as crop and livestock production. Farmland also includes grazing or pasture land, whether tillable or not and whether wooded or not. The primary risk characteristics are specific to the uncertainty on production, market, financial, environmental and human resources.
Home equity lines of credit: The primary risk characteristics associated with home equity lines of credit typically involve changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as major medical expenses, catastrophic events, divorce and death. Home equity lines of credit are typically originated with variable or floating interest rates, which could expose the borrower to higher payments in a rising interest rate environment. Real estate values could decrease and cause the value of the underlying property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Residential Mortgages secured by first liens: The Bank originates one-to-four family residential mortgage loans primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York. These loans are secured by first liens on a primary residence or investment property. The primary risk characteristics associated with residential mortgage loans typically involve major changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as major medical expenses, catastrophic events, divorce or death. Residential mortgage loans that have adjustable rates could expose the borrower to higher payments in a rising interest rate environment. Real estate values could decrease and cause the value of the underlying property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Residential Mortgages secured by junior liens: The Bank originates loans secured by junior liens against one to four family properties primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York. Loans secured by junior liens are primarily in the form of an amortizing home equity loan. These loans are subordinate to a first mortgage which may be from another lending institution. The primary risk characteristics associated with loans secured by junior liens typically involve major changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death. Real estate values could decrease and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Multifamily (5 or more) residential properties: The Bank originates mortgage loans for multifamily properties primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York. Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and its ability to repay the loan.
Owner-occupied, nonfarm nonresidential properties: The Bank originates mortgage loans to operating companies primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York. Owner-occupied real estate properties primarily include retail buildings, medical buildings and industrial/warehouse space. Owner-occupied loans are typically repaid first by the cash flows generated by the borrower’s business operations. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and positive cash flow. Factors that may influence a borrower's ability to repay their loan include demand for the business’ products or services, the quality and depth of management, the degree of competition, regulatory changes, and general economic conditions.
Non-owner occupied, nonfarm nonresidential properties: The Bank originates mortgage loans for commercial real estate that is managed as an investment property primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York. Commercial real estate properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space. Increases in vacancy rates, interest rates or other changes in general economic conditions can have an impact on the borrower and its ability to repay the loan. Commercial real estate loans are generally considered to have a higher degree of credit risk as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.
Agricultural production and other loans to farmers: The Bank originates loans secured or unsecured to farm owners and operators (including tenants) or to nonfarmers for the purpose of financing agricultural production, including the growing and storing of crops, the marketing or carrying of agricultural products by the growers thereof, and the breeding, raising, fattening, or marketing of livestock, and for purchases of farm machinery, equipment, and implements. The primary risk characteristics are specific to the uncertainty on production, market, financial, environmental and human resources.
Commercial and Industrial: The Bank originates lines of credit and term loans to operating companies for business purposes. The loans are generally secured by business assets such as accounts receivable, inventory, business vehicles and equipment as well as the stock of a company, if privately held. Commercial and Industrial loans are typically repaid first by the cash flows generated by the borrower’s business operations. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and positive cash flow. Factors that may influence a borrower's ability to repay their loan include demand for the business’ products or services, the quality and depth of management, the degree of competition, regulatory changes, and general economic conditions. The ability of the Bank to foreclose and realize sufficient value from business assets securing these loans is often uncertain. To mitigate the risk characteristics of commercial and industrial loans, commercial real estate may be included as a secondary source of collateral. The Bank will often require more frequent reporting requirements from the borrower in order to better monitor its business performance.
Credit cards: The Bank originates credit cards offered to individuals and businesses for household, family, other personal and business expenditures. Credit cards generally are floating rate loans and include both unsecured and secured lines. Credit card loans generally do not have stated maturities and are unconditionally cancellable. The primary risk characteristics associated with credit cards typically involve major changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.
Other revolving credit plans: The Bank originates lines of credit to individuals for household, family, and other personal expenditures. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. The primary risk characteristics associated with other revolving loans typically involve major changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.
Automobile: The Bank originates consumer loans extended for the purpose of purchasing new and used passenger cars and other vehicles such as minivans, vans, sport-utility vehicles, pickup trucks, and similar light trucks for personal use. The primary risk characteristics associated with automobile loans typically involve major changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.
Other consumer: The Bank originates loans to individuals for household, family, and other personal expenditures. This also represents all other loans that cannot be categorized in any of the previous mentioned consumer loan segments. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. The primary risk characteristics associated with automobile loans typically involve major changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.
Obligations (other than securities and leases) of states and political subdivisions: The Bank originates various types of loans made directly to municipalities. These loans are repaid through general cash flows or through specific revenue streams, such as water and sewer fees. The primary risk characteristics associated with municipal loans are the municipalities ability to manage cash flow, balance the fiscal budget, fixed asset and infrastructure requirements. Additional risks include changes in demographics, as well as social and political conditions.
Other loans: The Bank originates other loans, such as loans to nonprofit organizations, including churches, hospitals, educational and charitable institutions, clubs, and similar associations. The primary risk characteristics associated with these types of loans are repayment, demographic, social, political and reputation risks.
Overdrafts: The Bank reports overdrawn customer deposit balances as loans.
Methods utilized by management to estimate expected credit losses include a discounted cash flow ("DCF") model that discounts instrument-level contractual cash flows, adjusted for prepayments and curtailments, incorporating loss expectations, and a weighted average remaining maturity ("WARM") model which contemplates expected losses at a pool-level, utilizing historic loss information.
Under both models, management estimates the allowance for credit losses on loans using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. After the end of the reasonable and supportable forecast period, the loss rates revert to the mean loss rate over a period of eight quarters.
Historical credit loss experience, including examination of loss experience at representative peer institutions when the Corporation’s loss history does not result in estimations that are meaningful to users of the Corporation’s Consolidated Financial Statements, provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors.
The DCF model uses inputs of current and forecasted macroeconomic indicators to predict future loss rates. The current macroeconomic indicator utilized by the Corporation is the Federal unemployment rate and the S&P/Case-Shiller U.S. National Home Price Index for select collective residential related pools. In building the CECL methodology utilized in the DCF model, a correlation between this indicator and historic loss levels was developed, enabling a prediction of future loss rates related to future Federal unemployment rates and S&P/Case-Shiller U.S. National Home Price Index. The portfolio segments utilizing the DCF methodology comprised 90.8% of the amortized cost of loans as of December 31, 2020, and included:
•Farmland
•Home equity lines of credit
•Residential Mortgages secured by first liens
•Residential Mortgages secured by junior liens
•Multifamily (5 or more) residential properties
•Owner-occupied, nonfarm nonresidential properties
•Non-owner occupied, nonfarm nonresidential properties
•Agricultural production and other loans to farmers
•Commercial and Industrial
•Automobile
•Obligations (other than securities and leases) of states and political subdivisions
•Other loans
The WARM model uses combined historic loss rates for the Corporation and peer institutions, if necessary, gathered from call report filings. The selected period for which historic loss rates are used is dependent on management's evaluation of current conditions and expectations of future loss conditions. The portfolio segments utilizing the WARM methodology comprised 9.2% of the amortized cost of loans as of December 31, 2020, and included:
•1-4 Family Construction
•Other construction loans and all land development and other land loans
•Credit cards
•Other revolving credit plans
•Other consumer
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation and typically represent collateral dependent loans but may also include other non-performing loans or TDRs. The Corporation uses the practical expedient to measure individually evaluated loans as collateral dependent and/or when repayment is expected to be provided substantially through the operation or sale of the collateral. Expected credit losses are based on the fair value at the reporting date, adjusted for selling costs as appropriate. For collateral dependent loans, credit loss is measured as the difference between the amortized cost basis in the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.
Allowance for Credit Losses on Off-Balance Sheet ("OBS") Credit Exposures
Management estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Bank and applying the loss factors used in the allowance for credit losses on loans methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan segment. The estimate of credit losses on OBS credit exposures is not material at December 31, 2020.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh, the Corporation is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements. This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par. As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants.
FHLB stock is held as a long-term investment, is valued at its cost basis and is analyzed for impairment based on the ultimate recoverability of the par value. The Company evaluates impairment quarterly. The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:
•its operating performance;
•the severity and duration of declines in the fair value of its net assets related to its capital stock amount;
•its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;
•the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB; and
•its liquidity and funding position.
Both cash and stock dividends are reported as income.
Foreclosed Assets
Foreclosed assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation of premises and equipment is computed principally by the straight line method. In general, useful lives range from 3 to 39 years with lives for furniture, fixtures and equipment ranging from 3 to 10 years and lives of buildings and building improvements ranging from 15 to 39 years. Amortization of leasehold improvements is computed using the straight-line method over useful lives of the leasehold improvements or the term of the lease, whichever is shorter. Maintenance, repairs and minor renewals are charged to expense as incurred.
Bank Owned Life Insurance
The Corporation has purchased life insurance policies on certain key employees. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Goodwill and Other Intangible Assets
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Corporation has no intangible assets with an indefinite useful life.
The Corporation has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Corporation’s balance sheet.
Other intangible assets consist of core deposit intangible assets arising from the acquisition of FC Banc Corp. in 2013, Lake National Bank in 2016 and Bank of Akron in 2020. The core deposit intangible assets from these acquisitions are amortized using an accelerated method over their estimated useful lives, which range from four years to ten years, respectively.
Long-term Assets
Premises and equipment, goodwill and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Derivatives
Derivative financial instruments are recognized as assets or liabilities at fair value. The Corporation has interest rate swap agreements which are used as part of its asset liability management to help manage interest rate risk. The Corporation does not use derivatives for trading purposes.
At the inception of a derivative contract, the Corporation designates the derivative as one of three types based on the Corporation's intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) an instrument with no hedging designation ("stand-alone derivative"). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Corporation formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions, at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Corporation also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Corporation discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
The Corporation is exposed to losses if a counterparty fails to make its payments under a contract in which the Corporation is in the net receiving position. The Corporation anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. All the contracts to which the Corporation is a party settle monthly or quarterly. In addition, the Corporation obtains collateral above certain thresholds of the fair value of its hedges for each counterparty based upon their credit standing and the Corporation has netting agreements with the dealers with which it does business.
Mortgage Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in mortgage banking income. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Corporation compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Corporation later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with mortgage banking income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is reported on the income statement as mortgage banking income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material.
Treasury Stock
The purchase of the Corporation’s common stock is recorded at cost. Purchases of the stock are made in the open market based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on a first-in-first-out basis.
Stock-Based Compensation
Compensation cost is recognized for restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Corporation's accounting policy is to recognize forfeitures as they occur.
Comprehensive Income
The Corporation presents comprehensive income as part of the Consolidated Statements of Income and Comprehensive Income. Other comprehensive income and loss consists of unrealized holding gains and losses on the available for sale securities portfolio, changes in the unrecognized actuarial gain and transition obligation related to the Corporation’s post retirement benefits plans, and changes in the fair value of the Corporation’s interest rate swaps, net of tax.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.
The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Retirement Plans
The Corporation’s expense associated with its 401(k) plan is determined under the provisions of the plan document and includes both matching and profit sharing components. Deferred compensation and supplemental retirement plan expenses allocate the benefits over years of service.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted average number of common shares determined for the basic computation plus the dilutive effect of potential common shares issuable under certain stock compensation plans. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Corporation has determined that its outstanding non-vested stock awards are participating securities.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Adoption of New Accounting Standards
On January 1, 2020, the Corporation adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments. standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Corporation adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. In conjunction with the adoption of CECL, the Corporation has revised its segmentation to align with the methodology applied in determining the ACL for loans under CECL, which is based on federal call report codes which classify loans based on the primary collateral supporting the loan. Segmentation prior to the adoption of CECL was based on product type or purpose.
Upon adoption, the Corporation's total allowance for credit losses increased by $5.0 million, or 25.5%. The increase in the total allowance for credit losses resulted in a $3.4 million decrease to retained earnings, net of deferred taxes. The overall change in total allowance for credit losses upon adoption was primarily due to the move to a life of loan reserve estimate as well as methodology changes required under CECL.
The Corporation adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $670 thousand of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.
The following tables illustrates the impact of ASC 326.
January 1, 2020
Pre-CECL Adoption Reclassification to CECL
Portfolio Segmentation Pre-CECL
Adoption
Portfolio Segmentation Post-CECL
Adoption
Portfolio Segmentation Impact of
CECL
Adoption
Assets:
Loans:
Commercial, industrial and agricultural $ 1,046,665 $ (1,046,665) $ 0 $ 0 $ 0
Farmland
0 27,199 27,199 27,199 0
Owner-occupied, nonfarm nonresidential properties
0 333,117 333,117 333,117 0
Agricultural production and other loans to farmers
0 3,407 3,407 3,407 0
Commercial and Industrial
0 474,614 474,614 474,614 0
Obligations (other than securities and leases) of states and political subdivisions
0 139,052 139,052 139,052 0
Other loans
0 5,740 5,740 5,740 0
Commercial mortgages 814,002 (814,002) 0 0 0
Other construction loans and all land development and other land loans 0 277,412 277,412 277,412 0
Multifamily (5 or more) residential properties
0 124,390 124,390 124,390 0
Non-owner occupied, nonfarm nonresidential properties
0 467,852 467,852 468,522 670
Residential real estate 814,030 (814,030) 0 0 0
1-4 Family Construction 0 22,427 22,427 22,427 0
Home equity lines of credit 0 95,089 95,089 95,089 0
Residential Mortgages secured by first liens 0 646,199 646,199 646,199 0
Residential Mortgages secured by junior liens 0 57,965 57,965 57,965 0
Consumer, net of unearned discount 119,623 (119,623) 0 0 0
Other revolving credit plans 0 52,353 52,353 52,353 0
Automobile 0 27,807 27,807 27,807 0
Other consumer 0 39,697 39,697 39,697 0
Credit cards 7,569 0 7,569 7,569 0
Overdrafts 2,146 0 2,146 2,146 0
Total loans $ 2,804,035 $ 0 $ 2,804,035 $ 2,804,705 $ 670
January 1, 2020
Pre-CECL Adoption Reclassification to CECL
Portfolio Segmentation Pre-CECL
Adoption
Portfolio Segmentation Post-CECL
Adoption
Portfolio Segmentation Impact of
CECL
Adoption
Assets:
Allowance for credit losses on loans:
Commercial, industrial and agricultural $ 8,287 $ (8,287) $ 0 $ 0 $ 0
Farmland
0 190 190 251 61
Owner-occupied, nonfarm nonresidential properties
0 2,390 2,390 1,636 (754)
Agricultural production and other loans to farmers
0 25 25 30 5
Commercial and Industrial
0 4,105 4,105 3,474 (631)
Obligations (other than securities and leases) of states and political subdivisions
0 1,022 1,022 791 (231)
Other loans
0 41 41 49 8
Commercial mortgages 6,952 (6,952) 0 0 0
Other construction loans and all land development and other land loans 0 2,327 2,327 3,107 780
Multifamily (5 or more) residential properties
0 1,087 1,087 1,399 312
Non-owner occupied, nonfarm nonresidential properties
0 3,980 3,980 6,527 2,547
Residential real estate 1,499 (1,499) 0 0 0
1-4 Family Construction 0 56 56 21 (35)
Home equity lines of credit 0 180 180 601 421
Residential Mortgages secured by first liens 0 1,220 1,220 2,320 1,100
Residential Mortgages secured by junior liens 0 114 114 249 135
Consumer 2,411 (2,411) 0 0 0
Other revolving credit plans 0 296 296 674 378
Automobile 0 156 156 60 (96)
Other consumer 0 1,960 1,960 2,981 1,021
Credit cards 84 0 84 26 (58)
Overdrafts 240 0 240 240 0
Total allowance for credit losses on loans $ 19,473 $ 0 $ 19,473 $ 24,436 $ 4,963
Retained earnings:
Total increase in allowance for credit losses on loans $ 4,963
Balance sheet reclassification (670)
Total pre-tax impact 4,293
Tax effect (902)
Decrease in retained earnings $ 3,391
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statement disclosures.
In August 2018, the FASB issued ASU 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 amends ASC 715-20, "Compensation - Retirement Benefits - Defined Benefit Plans - General." The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated Other Comprehensive Income expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. ASU 2018-14 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statement disclosures.
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract" ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statements.
Effects of Newly Issued But Not Yet Effective Accounting Standards
In December 2019, the FASB issued ASU 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." These amendments remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers' application of income tax- related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Corporation is currently evaluating the impact of ASU 2019-12 on the Corporation's consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation is currently evaluating the impact of the reference rate reform on the Corporation's consolidated financial statements.
Reclassifications
Certain amounts appearing in the financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.
2. Business Combinations
On July 17, 2020, the Corporation completed its previously announced acquisition of Bank of Akron, pursuant to the Merger Agreement. Under the terms of the Merger Agreement, Bank of Akron merged with and into CNB Bank (the "Merger"), with CNB Bank continuing as the surviving entity. Banking offices of Bank of Akron will operate under the trade name BankOnBuffalo, a division of CNB Bank.
Pursuant to the Merger Agreement, for each share of Bank of Akron common stock, Bank of Akron shareholders were entitled to elect to receive either (x) $215.00 in cash or (y) 6.6729 shares of the Corporation's common stock and also received cash in lieu of fractional shares. Elections were subject to proration procedures whereby at least 75% of the shares of Bank of Akron common stock were exchanged for shares of the Corporation's common stock. Based on the elections and proration procedures, the total consideration payable to Bank of Akron shareholders was approximately $40.8 million, comprised of approximately $16.1 million in cash and 1,501,321 shares of the Corporation's common stock, net of fractional shares, valued at approximately $24.7 million based on the July 17, 2020 closing price of $16.43 per share of the Corporation's common stock.
Bank of Akron's results of operations were included in the Corporation's results of operations beginning July 17, 2020. The Corporation incurred $4.0 million of merger-related expenses during the year ended December 31, 2020, consisting largely of professional services of attorneys, accountants, investment bankers and other advisors. There were $170 thousand in merger-related expenses incurred during the year ended December 31, 2019.
July 17, 2020
Merger consideration
Value of stock consideration assigned to Bank of Akron common shares exchanged for stock paid to shareholders
$ 24,667
Value of cash consideration for Bank of Akron common stock exchanged for cash
16,126
Total merger consideration $ 40,793
Core deposit intangible ("CDI") of $613 thousand and goodwill of $5.0 million were recognized as a result of the acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.
July 17, 2020
Identifiable net assets acquired, at fair value
Assets acquired
Cash and due from banks $ 78,830
Interest bearing deposits with other banks 10,148
Investment securities 29,407
Loans, net of allowance for credit losses on PCD loans 319,063
Premises and equipment, net 4,265
Core deposit intangible 613
Deferred tax assets 2,777
Bank owned life insurance 8,187
Accrued interest receivable and other assets 5,307
Total assets acquired $ 458,597
Liabilities assumed
Deposits $ 419,475
Accrued interest payable and other liabilities 3,348
Total liabilities assumed 422,823
Total fair value of identifiable net assets 35,774
Total merger consideration 40,793
Goodwill recognized $ 5,019
The Corporation accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed and consideration exchanged to be recorded at their respective estimated fair values at the date of acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the acquisition and other future events that are highly subjective in nature and subject to refinement for up to one year after the closing date of acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier.
The calculation of goodwill is subject to change for up to one year after closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available.
Financial assets acquired in a business combination after January 1, 2020 are recorded in accordance with ASC Topic 326, after which acquired assets are separated into two types. Purchased credit deteriorated ("PCD") assets are acquired assets that, as of the acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. Non-PCD assets are acquired assets that have experienced no or insignificant deterioration in credit quality since origination. To distinguish between the two types of acquired assets, the Corporation evaluates risk characteristics that have been determined to be indicators of deteriorated credit quality. In the case of loans, the determining criteria may involve general characteristics, such as loan payment history or changes in creditworthiness since the loan was originated, while others are relevant to recent economic conditions, such as borrowers in industries impacted by the COVID-19 pandemic.
Securities
The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.
Loans
Bank of Akron’s loan portfolio was recorded at fair value at the date of acquisition. A valuation of Bank of Akron’s loan portfolio was performed as of the acquisition date in accordance with ASC 820 to assess the fair value of the loan portfolio, considering adjustments for market discount rates, credit, and liquidity. The loan portfolio was segmented into two groups: non-PCD loans and PCD loans. The non-PCD loans were pooled based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The PCD loans were valued on a pooled basis and at the loan level with similar characteristics noted above.
Premises and Equipment
Fair values are based upon appraisal values. In addition to owned properties, Bank of Akron operated one property subject to a lease agreement.
Core deposit intangible
The CDI on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates and maintenance costs, fee income and costs of alternative funding using the discounted cash flow approach. The core deposit intangibles represent the costs saved by the Corporation between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base.
Fixed maturity deposits
In determining the fair value of certificates of deposit, the cash flows of the contractual interest payments during the specific period of the certificates of deposit and scheduled principal payout were discounted to present value at market-based interest rates.
Supplemental Pro Forma Financial Information
The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the year ended December 31, 2020 and 2019, respectively, as if Bank of Akron had been acquired on January 1, 2019. This unaudited pro forma information combines the historical results of Bank of Akron with the Corporation’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair value, cost savings or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.
December 31, 2020 December 31, 2019
Net interest income $ 137,097 $ 119,062
Net income $ 34,628 $ 42,343
Basic earnings per common share $ 2.01 $ 2.54
Diluted earnings per common share $ 2.01 $ 2.54
3. Securities
Securities available-for-sale at December 31, 2020 and December 31, 2019 are as follows:
December 31, 2020 December 31, 2019
Amortized Gross Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
U.S. Gov’t sponsored entities $ 150,404 $ 6,698 $ (60) $ 157,042 $ 124,189 $ 2,924 $ (19) $ 127,094
State & political subdivisions 67,819 3,186 (122) 70,883 101,177 3,288 (102) 104,363
Residential & multi-family mortgage 306,054 9,276 (138) 315,192 273,404 4,117 (885) 276,636
Corporate notes & bonds 15,221 105 (400) 14,926 8,350 14 (282) 8,082
Pooled SBA 24,975 912 (1) 25,886 25,063 274 (163) 25,174
Other 1,020 0 (41) 979 1,020 0 (56) 964
Total $ 565,493 $ 20,177 $ (762) $ 584,908 $ 533,203 $ 10,617 $ (1,507) $ 542,313
Information pertaining to security sales is as follows:
Year ended December 31 Proceeds Gross Gains Gross Losses
2020 $ 57,185 $ 2,257 $ 67
2019 11,403 152 4
2018 0 0 0
The tax provision related to these net realized gains at December 31, 2020, 2019 and 2018 was $460, $31, and $0, respectively.
The following is a schedule of the contractual maturity of securities available for sale, excluding other securities, at December 31, 2020:
December 31, 2020
Amortized Cost Fair Value
1 year or less $ 53,144 $ 53,448
1 year - 5 years 109,071 112,643
5 years - 10 years 61,604 66,743
After 10 years 10,645 10,996
234,464 243,830
Residential and multi-family mortgage 306,054 315,192
Pooled SBA 24,975 25,886
Total debt securities $ 565,493 $ 584,908
Mortgage securities and pooled SBA securities are not due at a single date; periodic payments are received based on the payment patterns of the underlying collateral.
On December 31, 2020 and December 31, 2019, securities carried at $453,407 and $405,200, respectively, were pledged to secure public deposits and for other purposes as provided by law.
At December 31, 2020 and December 31, 2019, there were no holdings of securities by any one issuer, other than U.S. Government sponsored entities, in an amount greater than 10% of shareholders’ equity.
Securities with unrealized losses at December 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
December 31, 2020 Less than 12 Months 12 Months or More Total
Description of Securities Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss
U.S. Gov’t sponsored entities $ 24,991 $ (60) 0 0 $ 24,991 $ (60)
State & political subdivisions 3,854 (19) 164 (103) 4,018 (122)
Residential & multi-family mortgage 44,092 (119) 3,277 (19) 47,369 (138)
Corporate notes & bonds 0 0 4,545 (400) 4,545 (400)
Pooled SBA 525 (1) 0 0 525 (1)
Other 0 0 979 (41) 979 (41)
$ 73,462 $ (199) $ 8,965 $ (563) $ 82,427 $ (762)
December 31, 2019 Less than 12 Months 12 Months or More Total
Description of Securities Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss Fair
Value Unrealized
Loss
U.S. Gov’t sponsored entities 7,040 (3) 14,989 (16) 22,029 (19)
State & political subdivisions 826 (5) 684 (97) 1,510 (102)
Residential and multi-family mortgage 41,841 (346) 32,555 (539) 74,396 (885)
Corporate notes & bonds 0 0 4,718 (282) 4,718 (282)
Pooled SBA 8,560 (80) 6,075 (83) 14,635 (163)
Other 0 0 964 (56) 964 (56)
58,267 (434) 59,985 (1,073) 118,252 (1,507)
The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.
At December 31, 2020 and 2019, management performed an assessment for possible other-than-temporary impairment of the Corporation’s debt securities, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. Based on the results of the assessment, management believes impairment of these debt securities at December 31, 2020 and 2019 to be temporary.
For the securities that comprise corporate notes and bonds and the securities that are issued by state and political subdivisions, management monitors publicly available financial information, such as filings with the Securities and Exchange Commission, in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management monitors information from quarterly "call" report filings that are used to generate Uniform Bank Performance Reports. All other securities that were in an unrealized loss position at the balance sheet date were reviewed by management, and issuer-specific documents were reviewed as appropriate given the following considerations; the financial condition and near-term prospects of the issuer and whether downgrades by bond rating agencies have occurred, and whether management does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.
As of December 31, 2020 and 2019, management concluded that the securities described in the previous paragraph were not other-than-temporarily impaired for the following reasons:
•There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.
•All contractual interest payments on the securities have been received as scheduled, and no information has come to management’s attention through the processes previously described which would lead to a conclusion that future contractual payments will not be timely received.
The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.
Trading securities at December 31, 2020 and December 31, 2019 are as follows:
December 31, 2020 December 31, 2019
Corporate equity securities $ 4,343 $ 7,946
Mutual funds 1,283 807
Money market 404 350
Corporate notes and bonds 569 655
U.S. Government sponsored entities 50 51
Total $ 6,649 $ 9,809
During December 31, 2020, December 31, 2019, and December 31, 2018, the Corporation sold trading securities. Proceeds were $5,935 in December 31, 2020, $301 in December 31, 2019 and $455 in December 31, 2018, resulting in net realized gains of $75 in December 31, 2020, $16 in December 31, 2019, and $151 in December 31, 2018. During 2019, the Corporation sold Visa Class B shares. The proceeds and realized gain related to the sale of the Visa Class B shares were $463.
4. Loans
Total net loans at December 31, 2020 and December 31, 2019 are summarized as follows:
2020 Percentage
of Total
Farmland
$ 23,316 0.7 %
Owner-occupied, nonfarm nonresidential properties
407,924 12.1 %
Agricultural production and other loans to farmers
2,664 0.1 %
Commercial and Industrial
663,550 19.7 %
Obligations (other than securities and leases) of states and political subdivisions
132,818 3.9 %
Other loans
11,961 0.4 %
Other construction loans and all land development and other land loans 205,734 6.1 %
Multifamily (5 or more) residential properties
212,815 6.3 %
Non-owner occupied, nonfarm nonresidential properties
640,945 19.0 %
1-4 Family Construction 27,768 0.8 %
Home equity lines of credit 109,444 3.2 %
Residential Mortgages secured by first liens 777,030 23.0 %
Residential Mortgages secured by junior liens 53,726 1.6 %
Other revolving credit plans 25,507 0.8 %
Automobile 25,344 0.8 %
Other consumer 42,792 1.3 %
Credit cards 8,115 0.2 %
Overdrafts 336 0.0 %
Total loans $ 3,371,789 100.0 %
Less: Allowance for credit losses (34,340)
Loans, net $ 3,337,449
Net deferred loan origination fees (costs) and unearned discount included in the above loan table $ 8,789
2019 Percentage
of Total
Commercial, industrial, and agricultural $ 1,046,665 37.3 %
Commercial mortgages 814,002 29.0 %
Residential real estate 814,030 29.0 %
Consumer 124,785 4.5 %
Credit cards 7,569 0.3 %
Overdrafts 2,146 0.1 %
Less: unearned discount (5,162) (0.2) %
Total loans $ 2,804,035 100.0 %
Less: Allowance for loan losses (19,473)
Loans, net $ 2,784,562
Net deferred loan origination fees (costs) included in the above loan table $ 3,092
The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within central and northwest Pennsylvania, central and northeast Ohio, and western New York. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer. The Corporation maintains lending policies to control the quality of the loan portfolio. These policies delegate the authority to extend loans under specific guidelines and underwriting standards. These policies are prepared by the Corporation’s management and reviewed and ratified annually by the Corporation’s Board of Directors.
As a result of the adoption of ASC 326 effective January 1, 2020, there is a lack of comparability in both the allowance and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2020 (as reflected in the table below) are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior fiscal years. See Note 1, "Summary of Significant Accounting Policies," for details regarding the adoption of ASC 326.
At December 31, 2020, the Corporation incorporated the loans acquired through Bank of Akron and evaluated its qualitative factors as a result of the COVID-19 pandemic. As a result, at December 31, 2020, the Corporation added a qualitative factor related to the unfavorable economic environment driven by the COVID-19 pandemic. Management evaluates the factor based upon internal and external expectations of economic activity. Management also included a qualitative factor related to loans with payment deferrals specifically related to the COVID-19 pandemic.
Transactions in the allowance for credit losses for the year ended December 31, 2020 were as follows:
Beginning
Allowance
(Before ASC 326 Adoption) Impact of ASC 326 Adoption Initial Allowance on Loans Purchased with Credit Deterioration (Charge-offs) Recoveries Provision (Benefit) for Credit Loss Expense Ending Allowance (After ASC 326 Adoption)
Farmland
$ 190 $ 61 $ 0 $ 0 $ 0 $ (30) $ 221
Owner-occupied, nonfarm nonresidential properties
2,390 (754) 82 (61) 12 2,031 3,700
Agricultural production and other loans to farmers
25 5 0 0 0 (6) 24
Commercial and Industrial
4,105 (631) 216 (2,779) 39 5,283 6,233
Obligations (other than securities and leases) of states and political subdivisions
1,022 (231) 0 0 0 207 998
Other loans
41 8 0 0 0 19 68
Other construction loans and all land development and other land loans 2,327 780 228 0 125 (1,504) 1,956
Multifamily (5 or more) residential properties
1,087 312 24 0 0 1,301 2,724
Non-owner occupied, nonfarm nonresidential properties
3,980 2,547 335 (1,522) 52 3,266 8,658
1-4 Family Construction 56 (35) 0 0 0 61 82
Home equity lines of credit 180 421 22 (6) 1 367 985
Residential Mortgages secured by first liens 1,220 1,100 73 (285) 65 2,366 4,539
Residential Mortgages secured by junior liens 114 135 0 (158) 2 148 241
Other revolving credit plans 296 378 0 (137) 21 (51) 507
Automobile 156 (96) 0 (29) 2 99 132
Other consumer 1,960 1,021 0 (1,513) 130 1,364 2,962
Credit cards 84 (58) 0 (153) 14 179 66
Overdrafts 240 0 0 (435) 185 254 244
Total loans $ 19,473 $ 4,963 $ 980 $ (7,078) $ 648 $ 15,354 $ 34,340
Transactions in the allowance for loan losses for the year ended December 31, 2019 were as follows:
Commercial,
Industrial, and
Agricultural Commercial
Mortgages Residential
Real
Estate Consumer Credit
Cards Overdrafts Total
Allowance for loan losses, January 1, 2019 $ 7,341 $ 7,490 $ 2,156 $ 2,377 $ 103 $ 237 $ 19,704
Charge-offs (205) (3,391) (386) (2,200) (116) (453) (6,751)
Recoveries 17 124 73 154 15 113 496
Provision for loan losses 1,134 2,729 (344) 2,080 82 343 6,024
Allowance for loan losses, December 31, 2019 $ 8,287 $ 6,952 $ 1,499 $ 2,411 $ 84 $ 240 $ 19,473
Transactions in the allowance for loan losses for the year ended December 31, 2018 were as follows:
Commercial,
Industrial, and
Agricultural Commercial
Mortgages Residential
Real
Estate Consumer Credit
Cards Overdrafts Total
Allowance for loan losses, January 1, 2018 $ 6,160 $ 9,007 $ 2,033 $ 2,179 $ 120 $ 194 $ 19,693
Charge-offs (253) (3,337) (315) (2,279) (90) (319) (6,593)
Recoveries 171 30 67 141 33 90 532
Provision for loan losses 1,263 1,790 371 2,336 40 272 6,072
Allowance for loan losses, December 31, 2018 $ 7,341 $ 7,490 $ 2,156 $ 2,377 $ 103 $ 237 $ 19,704
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on the Corporation’s impairment method as of December 31, 2019. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.
December 31, 2019 Commercial,
Industrial, and
Agricultural Commercial
Mortgages Residential
Real
Estate Consumer Credit
Cards Overdrafts Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 645 $ 1,264 $ 34 $ 0 $ 0 $ 0 $ 1,943
Collectively evaluated for impairment 7,614 5,358 1,465 2,411 84 240 17,172
Acquired with deteriorated credit quality 0 0 0 0 0 0 0
Modified in a troubled debt restructuring 28 330 0 0 0 0 358
Total ending allowance balance $ 8,287 $ 6,952 $ 1,499 $ 2,411 $ 84 $ 240 $ 19,473
Loans:
Individually evaluated for impairment $ 8,078 $ 2,410 $ 465 $ 0 $ 0 $ 0 $ 10,953
Collectively evaluated for impairment 1,035,494 804,360 813,565 124,785 7,569 2,146 2,787,919
Acquired with deteriorated credit quality 0 523 0 0 0 0 523
Modified in a troubled debt restructuring 3,093 6,709 0 0 0 0 9,802
Total ending loans balance $ 1,046,665 $ 814,002 $ 814,030 $ 124,785 $ 7,569 $ 2,146 $ 2,809,197
The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of December 31, 2019 and for the years ended December 31, 2019, and December 31, 2018, respectively.
December 31, 2019 Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural $ 2,657 $ 1,476 $ 673
Commercial mortgage 6,541 4,349 1,594
Residential real estate 485 465 34
With no related allowance recorded:
Commercial, industrial, and agricultural 9,845 9,695 0
Commercial mortgage 4,903 4,770 0
Residential real estate 0 0 0
Total $ 24,431 $ 20,755 $ 2,301
The unpaid principal balance of impaired loans includes the Corporation's recorded investment in the loan and the amount that have been recorded as charge-offs.
Year Ended December 31, 2019
Average
Recorded
Investment Interest
Income
Recognized Cash Basis
Interest
Recognized
With an allowance recorded:
Commercial, industrial, and agricultural $ 1,750 $ 90 $ 90
Commercial mortgage 6,586 119 119
Residential real estate 191 13 13
Overdrafts 0 0 0
With no related allowance recorded:
Commercial, industrial, and agricultural 4,919 208 208
Commercial mortgage 3,985 158 158
Residential real estate 294 11 11
Overdrafts 0 0 0
Total $ 17,725 $ 599 $ 599
Year Ended December 31, 2018
Average
Recorded
Investment Interest
Income
Recognized Cash Basis
Interest
Recognized
With an allowance recorded:
Commercial, industrial, and agricultural $ 2,745 $ 254 $ 249
Commercial mortgage 8,456 338 326
Residential real estate 304 20 19
Overdrafts 2 0 0
With no related allowance recorded:
Commercial, industrial, and agricultural 4,642 157 148
Commercial mortgage 4,566 146 144
Residential real estate 0 0 0
Total $ 20,715 $ 915 $ 886
The following tables present the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of December 31, 2020:
Nonaccrual Nonaccrual With No Allowance for Credit Loss Loans Past Due over 89 Days Still Accruing
Farmland
$ 1,844 $ 51 $ 0
Owner-occupied, nonfarm nonresidential properties
1,781 909 0
Commercial and Industrial
6,657 464 0
Other construction loans and all land development and other land loans 2,349 77 0
Multifamily (5 or more) residential properties
288 0 0
Non-owner occupied, nonfarm nonresidential properties
11,932 394 0
Home equity lines of credit 685 685 0
Residential Mortgages secured by first liens 4,175 3,495 283
Residential Mortgages secured by junior liens 114 114 0
Other revolving credit plans 6 6 0
Automobile 32 32 0
Other consumer 496 496 8
Credit cards 0 0 34
Total loans $ 30,359 $ 6,723 $ 325
The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of December 31, 2019:
December 31, 2019
Nonaccrual Past Due
Over 90 Days
Still on Accrual
Commercial, industrial, and agricultural $ 11,644 0
Commercial mortgages 4,533 0
Residential real estate 4,724 59
Consumer 835 0
Credit cards 0 2
Total $ 21,736 $ 61
Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020:
Real Estate Collateral Non-Real Estate Collateral
Farmland
$ 1,793 $ 0
Owner-occupied, nonfarm nonresidential properties
285 587
Commercial and Industrial
594 5,600
Other construction loans and all land development and other land loans 2,272 0
Multifamily (5 or more) residential properties
288 0
Non-owner occupied, nonfarm nonresidential properties
9,072 880
Residential Mortgages secured by first liens 1,135 0
Total loans $ 15,439 $ 7,067
The following table presents the aging of the amortized cost basis in past-due loans as of December 31, 2020 by class of loans:
30 - 59
Days Past Due 60 - 89
Days Past Due Greater Than 89
Days Past Due Total Past Due Loans Not Past Due Total
Farmland
$ 195 $ 0 $ 1,211 $ 1,406 $ 21,910 $ 23,316
Owner-occupied, nonfarm nonresidential properties
10 885 732 1,627 406,297 407,924
Agricultural production and other loans to farmers
0 0 0 0 2,664 2,664
Commercial and Industrial
476 335 3,887 4,698 658,852 663,550
Obligations (other than securities and leases) of states and political subdivisions
0 0 0 0 132,818 132,818
Other loans
0 0 0 0 11,961 11,961
Other construction loans and all land development and other land loans 0 0 1,917 1,917 203,817 205,734
Multifamily (5 or more) residential properties
0 0 0 0 212,815 212,815
Non-owner occupied, nonfarm nonresidential properties
314 156 10,184 10,654 630,291 640,945
1-4 Family Construction 0 0 0 0 27,768 27,768
Home equity lines of credit 166 235 486 887 108,557 109,444
Residential Mortgages secured by first liens 2,834 629 1,911 5,374 771,656 777,030
Residential Mortgages secured by junior liens 8 0 66 74 53,652 53,726
Other revolving credit plans 36 19 0 55 25,452 25,507
Automobile 73 0 9 82 25,262 25,344
Other consumer 246 132 245 623 42,169 42,792
Credit cards 72 39 34 145 7,970 8,115
Overdrafts 0 0 0 0 336 336
Total loans $ 4,430 $ 2,430 $ 20,682 $ 27,542 $ 3,344,247 $ 3,371,789
The following table presents the aging of the recorded investment in past due loans as of December 31, 2019 by class of loans.
December 31, 2019 30-59 Days
Past Due 60-89 Days
Past Due Greater Than
89 Days
Past Due Total
Past Due Loans Not
Past Due Total
Commercial, industrial, and agricultural $ 1,273 $ 548 $ 3,784 $ 5,605 $ 1,041,060 $ 1,046,665
Commercial mortgages 162 183 2,594 2,939 811,063 814,002
Residential real estate 3,383 1,270 2,714 7,367 806,663 814,030
Consumer 412 311 415 1,138 123,647 124,785
Credit cards 48 54 2 104 7,465 7,569
Overdrafts 0 0 0 0 2,146 2,146
Total $ 5,278 $ 2,366 $ 9,509 $ 17,153 $ 2,792,044 $ 2,809,197
Troubled Debt Restructurings
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. This evaluation is performed using the Corporation’s internal underwriting policies. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring.
During the years ended December 31, 2020 and December 31, 2019, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included either or both of the following: a reduction of the stated interest rate of the loan; or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. The Corporation had an amortized cost in troubled debt restructurings of $15,088 and $10,951 as of December 31, 2020 and 2019, respectively.
The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2020, December 31, 2019, and December 31, 2018:
Year Ended December 31, 2020
Number of
Loans Pre-Modification
Outstanding Recorded
Investment Post-Modification
Outstanding Recorded
Investment
Owner-occupied, nonfarm nonresidential properties
1 $ 260 $ 260
Commercial and Industrial
6 1,140 1,140
Other construction loans and all land development and other land loans 1 46 46
Non-owner occupied, nonfarm nonresidential properties
1 3,684 3,684
Residential Mortgages secured by first liens 2 309 309
Total loans 11 $ 5,439 $ 5,439
Year Ended December 31, 2019
Number of
Loans Pre-Modification
Outstanding Recorded
Investment Post-Modification
Outstanding Recorded
Investment
Commercial, industrial, and agricultural 0 $ 0 $ 0
Commercial mortgages 1 383 383
Residential real estate 0 0 0
Consumer 0 0 0
Credit cards 0 0 0
Total 1 $ 383 $ 383
Year Ended December 31, 2018
Number of
Loans Pre-Modification
Outstanding Recorded
Investment Post-Modification
Outstanding Recorded
Investment
Commercial, industrial, and agricultural 0 $ 0 $ 0
Commercial mortgages 5 1,570 1,570
Residential real estate 0 0 0
Consumer 0 0 0
Credit cards 0 0 0
Total 5 $ 1,570 $ 1,570
The troubled debt restructurings described above increased the allowance for credit losses by $0, $0 and $351 during the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of December 31, 2020 and December 31, 2019 and no principal balances were forgiven in connection with the loan restructurings.
Generally, nonperforming troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Credit Quality Indicators
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually to classify the loans as to credit risk.
The Corporation uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
The following tables detail the amortized cost of loans, by year of origination (for term loans) and by risk grade within each portfolio segment as of December 31, 2020. The current period originations may include modifications, extensions and renewals.
Term Loans Amortized Cost Basis by Origination Year
2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total
Farmland
Risk rating
Pass $ 1,617 $ 4,448 $ 3,767 $ 3,648 $ 894 $ 5,280 $ 662 $ 0 $ 20,316
Special mention 1,156 0 0 0 0 0 0 0 1,156
Substandard 0 0 0 51 582 1,211 0 0 1,844
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 2,773 $ 4,448 $ 3,767 $ 3,699 $ 1,476 $ 6,491 $ 662 $ 0 $ 23,316
Owner-occupied, nonfarm nonresidential properties
Risk rating
Pass $ 86,694 $ 109,228 $ 52,818 $ 56,948 $ 26,119 $ 50,839 $ 9,253 $ 0 $ 391,899
Special mention 0 452 74 541 318 1,310 131 0 2,826
Substandard 1,021 2,449 2,438 938 3,675 2,430 248 0 13,199
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 87,715 $ 112,129 $ 55,330 $ 58,427 $ 30,112 $ 54,579 $ 9,632 $ 0 $ 407,924
Agricultural production and other loans to farmers
Risk rating
Pass $ 267 $ 155 $ 601 $ 0 $ 54 $ 0 $ 1,587 $ 0 $ 2,664
Special mention 0 0 0 0 0 0 0 0 0
Substandard 0 0 0 0 0 0 0 0 0
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 267 $ 155 $ 601 $ 0 $ 54 $ 0 $ 1,587 $ 0 $ 2,664
Commercial and Industrial
Risk rating
Pass $ 318,323 $ 54,620 $ 46,854 $ 32,426 $ 7,197 $ 7,265 $ 170,386 $ 0 $ 637,071
Special mention 127 1,017 3,489 712 300 1,033 4,690 0 11,368
Substandard 801 1,916 1,212 112 37 4,858 6,175 0 15,111
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 319,251 $ 57,553 $ 51,555 $ 33,250 $ 7,534 $ 13,156 $ 181,251 $ 0 $ 663,550
Obligations (other than securities and leases) of states and political subdivisions
Risk rating
Pass $ 10,722 $ 12,279 $ 35,176 $ 20,891 $ 19,365 $ 24,789 $ 8,888 $ 0 $ 132,110
Special mention 0 0 0 0 0 0 0 0 0
Substandard 708 0 0 0 0 0 0 0 708
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 11,430 $ 12,279 $ 35,176 $ 20,891 $ 19,365 $ 24,789 $ 8,888 $ 0 $ 132,818
Other loans
Risk rating
Pass $ 7,268 $ 1,237 $ 386 $ 0 $ 0 $ 0 $ 3,070 $ 0 $ 11,961
Special mention 0 0 0 0 0 0 0 0 0
Substandard 0 0 0 0 0 0 0 0 0
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 7,268 $ 1,237 $ 386 $ 0 $ 0 $ 0 $ 3,070 $ 0 $ 11,961
Term Loans Amortized Cost Basis by Origination Year
2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total
Other construction loans and all land development and other land loans
Risk rating
Pass $ 119,380 $ 52,078 $ 19,977 $ 2,300 $ 28 $ 1,895 $ 2,548 $ 0 $ 198,206
Special mention 1,417 672 29 3,303 0 190 0 0 5,611
Substandard 0 0 0 0 0 1,840 77 0 1,917
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 120,797 $ 52,750 $ 20,006 $ 5,603 $ 28 $ 3,925 $ 2,625 $ 0 $ 205,734
Multifamily (5 or more) residential properties
Risk rating
Pass $ 73,572 $ 39,633 $ 26,230 $ 49,178 $ 4,086 $ 16,957 $ 1,907 $ 0 $ 211,563
Special mention 0 0 0 0 0 0 0 0 0
Substandard 6 753 288 205 0 0 0 0 1,252
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 73,578 $ 40,386 $ 26,518 $ 49,383 $ 4,086 $ 16,957 $ 1,907 $ 0 $ 212,815
Non-owner occupied, nonfarm nonresidential properties
Risk rating
Pass $ 161,045 $ 127,518 $ 89,520 $ 55,966 $ 44,959 $ 105,962 $ 9,633 $ 0 $ 594,603
Special mention 99 895 2,111 3,969 835 4,137 450 0 12,496
Substandard 0 12,325 326 7,584 722 12,289 600 0 33,846
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 161,144 $ 140,738 $ 91,957 $ 67,519 $ 46,516 $ 122,388 $ 10,683 $ 0 $ 640,945
Loans not rated as special mention, substandard, or doubtful are considered to be pass rated loans. All loans included in the following tables have been assigned a risk rating within 12 months of the balance sheet date.
December 31, 2019 Pass Special
Mention Substandard Doubtful Total
Commercial, industrial, and agricultural $ 1,004,445 $ 16,696 $ 25,524 $ 0 $ 1,046,665
Commercial mortgages 780,798 18,837 14,367 0 814,002
Total $ 1,785,243 $ 35,533 $ 39,891 $ 0 $ 1,860,667
The Corporation considers the performance of the loan portfolio and its impact on the allowance for credit losses. For 1-4 family construction, home equity lines of credit, residential mortgages secured by first liens, residential mortgages secured by junior liens, automobile, credit cards, other revolving credit plans and other consumer segments, the Corporation also evaluates credit quality based on the performance status the loan, which was previously presented, and by payment activity. Nonperforming loans include loans on nonaccrual status and loans past due over 90 days and still accruing interest.
The following tables detail the amortized cost of loans, by year of origination (for term loans) and by risk grade within each portfolio segment as of December 31, 2020. The current period originations may include modifications, extensions and renewals.
Term Loans Amortized Cost Basis by Origination Year
2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total
1-4 Family Construction
Payment performance
Performing $ 16,081 $ 11,547 $ 140 $ 0 $ 0 $ 0 $ 0 $ 0 $ 27,768
Nonperforming 0 0 0 0 0 0 0 0 0
Total $ 16,081 $ 11,547 $ 140 $ 0 $ 0 $ 0 $ 0 $ 0 $ 27,768
Home equity lines of credit
Payment performance
Performing $ 19,764 $ 12,823 $ 12,842 $ 8,793 $ 8,182 $ 42,514 $ 3,841 $ 0 $ 108,759
Nonperforming 0 0 0 302 33 350 0 0 685
Total $ 19,764 $ 12,823 $ 12,842 $ 9,095 $ 8,215 $ 42,864 $ 3,841 $ 0 $ 109,444
Residential mortgages secured by first lien
Payment performance
Performing $ 211,910 $ 136,181 $ 93,588 $ 99,520 $ 62,312 $ 163,556 $ 5,505 $ 0 $ 772,572
Nonperforming 0 84 887 143 61 3,261 22 0 4,458
Total $ 211,910 $ 136,265 $ 94,475 $ 99,663 $ 62,373 $ 166,817 $ 5,527 $ 0 $ 777,030
Residential mortgages secured by junior liens
Payment performance
Performing $ 14,552 $ 12,255 $ 7,031 $ 5,660 $ 3,347 $ 10,389 $ 378 $ 0 $ 53,612
Nonperforming 0 0 0 0 19 95 0 0 114
Total $ 14,552 $ 12,255 $ 7,031 $ 5,660 $ 3,366 $ 10,484 $ 378 $ 0 $ 53,726
Other revolving credit plans
Payment performance
Performing $ 4,088 $ 4,516 $ 3,320 $ 3,149 $ 1,301 $ 9,127 $ 0 $ 0 $ 25,501
Nonperforming 0 0 4 0 0 2 0 0 6
Total $ 4,088 $ 4,516 $ 3,324 $ 3,149 $ 1,301 $ 9,129 $ 0 $ 0 $ 25,507
Automobile
Payment performance
Performing $ 8,965 $ 8,595 $ 4,652 $ 1,635 $ 764 $ 701 $ 0 $ 0 $ 25,312
Nonperforming 0 4 0 6 0 22 0 0 32
Total $ 8,965 $ 8,599 $ 4,652 $ 1,641 $ 764 $ 723 $ 0 $ 0 $ 25,344
Other consumer
Payment performance
Performing $ 24,857 $ 11,183 $ 3,579 $ 796 $ 218 1 $ 1,654 $ 0 $ 0 $ 42,288
Nonperforming 82 264 75 13 0 70 0 0 504
Total $ 24,939 $ 11,447 $ 3,654 $ 809 $ 218 $ 1,724 $ 0 $ 0 $ 42,792
December 31, 2020
Consumer
Credit card
Payment performance
Performing $ 8,081
Nonperforming 34
Total $ 8,115
The following table presents the recorded investment in residential, consumer, and credit card loans based on performance status as of December 31, 2019:
December 31, 2019
Residential
Real Estate Consumer Credit
Cards
Performing $ 809,247 $ 123,950 $ 7,567
Nonperforming 4,783 835 2
Total $ 814,030 $ 124,785 $ 7,569
Purchased Credit Deteriorated Loans
The Corporation has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:
July 17, 2020
Purchase price of loans at acquisition $ 21,768
Allowance for credit losses at acquisition 980
Non-credit discount / (premium) at acquisition 1,063
Par value of acquired loans at acquisition $ 23,811
The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation ("Holiday"), a subsidiary that offers small balance unsecured and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics than are typical in the Bank’s consumer loan portfolio, are considered to be subprime loans.
Holiday’s loan portfolio, included in consumer loans above, is summarized as follows at December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
Gross consumer loans $ 27,998 $ 28,122
Less: unearned discounts (5,181) (5,162)
Total consumer loans, net of unearned discounts $ 22,817 $ 22,960
5. Real Estate Owned
Real estate owned is reported net of a valuation allowance and included in accrued interest receivable and other assets in the accompanying consolidated balance sheets. Activity for the years ended December 31, 2020, December 31, 2019, and December 31, 2018 is as follows:
December 31, 2020 December 31, 2019 December 31, 2018
Balance, beginning of year $ 1,633 $ 418 $ 710
Loans transferred to real estate owned 241 2,066 228
Sales of real estate owned (at carrying value) (1,012) (851) (520)
Balance, end of year $ 862 $ 1,633 $ 418
Expenses related to foreclosed real estate include:
December 31, 2020 December 31, 2019 December 31, 2018
Net loss (gain) on sales $ 346 $ (377) $ (310)
Operating expenses, net of rental income 240 316 283
$ 586 $ (61) $ (27)
6. Fair Value
Fair Value Measurement
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following three levels of inputs are used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods and significant assumptions to estimate fair value:
Investment Securities: The fair values of most trading securities and debt securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted securities (Level 2). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities that observable inputs about the specific issuer are not available, fair values are estimated using observable data from other securities presumed to be similar or other market data on other similar securities (Level 3).
Derivatives: The Corporation’s derivative instruments are interest rate swaps that are similar to those that trade in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2).
Individually Evaluated Loans: The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is generally based on recent real estate appraisals prepared by third-parties. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.
Assets and liabilities measured at fair value on a recurring basis are as follows at December 31, 2020 and December 31, 2019:
Fair Value Measurements at December 31, 2020 Using
Description Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities $ 157,042 $ 0 $ 157,042 $ 0
States and political subdivisions 70,883 0 70,819 64
Residential and multi-family mortgage 315,192 15,039 300,153 0
Corporate notes and bonds 14,926 0 14,926 0
Pooled SBA 25,886 0 25,886 0
Other 979 979 0 0
Total Securities Available For Sale $ 584,908 $ 16,018 $ 568,826 $ 64
Interest rate swaps $ 4,017 $ 0 $ 4,017 $ 0
Trading Securities:
Corporate equity securities $ 4,343 $ 4,343 $ 0 $ 0
Mutual funds 1,283 1,283 0 0
Certificates of deposit 404 404 0 0
Corporate notes and bonds 569 569 0 0
U.S. Government sponsored entities 50 0 50 0
Total Trading Securities $ 6,649 $ 6,599 $ 50 $ 0
Liabilities
Interest rate swaps $ (4,785) $ 0 $ (4,785) $ 0
Fair Value Measurements at December 31, 2019 Using
Description Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable
Inputs (Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities $ 127,094 $ 0 $ 127,094 $ 0
States and political subdivisions 104,363 0 104,363 0
Residential and multi-family mortgage 276,636 0 273,841 2,795
Corporate notes and bonds 8,082 0 8,082 0
Pooled SBA 25,174 0 25,174 0
Other 964 964 0 0
Total Securities Available For Sale $ 542,313 $ 964 $ 538,554 $ 2,795
Interest rate swaps $ 1,877 $ 0 $ 1,877 $ 0
Trading Securities:
Corporate equity securities $ 7,946 $ 7,946 $ 0 $ 0
Mutual funds 807 807 0 0
Certificates of deposit 350 350 0 0
Corporate notes and bonds 655 655 0 0
U.S. Government sponsored entities 51 0 51 0
Total Trading Securities $ 9,809 $ 9,758 $ 51 $ 0
Liabilities
Interest rate swaps $ (2,362) $ 0 $ (2,362) $ 0
The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020 and 2019, respectively:
States and Political Subdivisions Residential & Multi-Family Mortgage
Balance, January 1, 2020 $ 0 $ 2,795
Purchases 422 0
Total gains or (losses):
Included in other comprehensive income (loss) 0 0
Transfers out of Level 3 (358) $ (2,795)
Balance, December 31, 2020 $ 64 $ 0
Residential & Multi-Family Mortgage
Balance, January 1, 2019 $ 0
Purchases 2,796
Total gains or (losses):
Included in other comprehensive income (loss) (1)
Balance, December 31, 2019 $ 2,795
Assets and liabilities measured at fair value on a non-recurring basis are as follows at December 31, 2020 and December 31, 2019:
Fair Value Measurements at December 31, 2020 Using
Description Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets:
Collateral-dependent loans:
Farmland $ 659 0 0 $ 659
Owner-occupied, nonfarm nonresidential properties 329 0 0 329
Commercial and industrial 3,680 0 0 3,680
Other construction loans and all land development loans and other land loans 1,790 0 0 1,790
Multifamily (5 or more) residential properties 0 0 0 0
Non-owner occupied, nonfarm nonresidential 9,622 0 0 9,622
Residential mortgages secured by first liens 659 0 0 659
Fair Value Measurements at December 31, 2019 Using
Description Total Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets:
Impaired loans:
Commercial, industrial, and agricultural $ 2,910 0 0 $ 2,910
Commercial mortgages 1,147 0 0 1,147
A loan is considered to be a collateral dependent loan when, based on current information and events, the Corporation expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Corporation has determined that the borrower is experiencing financial difficulty as of the measurement date. The allowance for credit losses is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is determined by third-party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Corporation reviews the third-party appraisal for appropriateness and may adjust the value downward to consider selling and closing costs. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2020:
Fair
value Valuation
Technique Unobservable Inputs Range
(Weighted
Average)
Collateral-dependent loans - Farmland $ 659 Valuation of third party appraisal on underlying collateral Loss severity rates 45%-54% (47%)
Collateral-dependent loans - Owner-occupied, nonfarm nonresidential properties 329 Valuation of third party appraisal on underlying collateral Loss severity rates 60%-90% (80%)
Collateral-dependent loans - Commercial and industrial 3,680 Valuation of third party appraisal on underlying collateral Loss severity rates 0%-100% (39%)
Collateral-dependent loans - Other construction loans and all land development loans and other land loans 1,790 Valuation of third party appraisal on underlying collateral Loss severity rates 25%-41% (28%)
Collateral-dependent loans - Multifamily (5 or more) residential properties 0 Valuation of third party appraisal on underlying collateral Loss severity rates 58% (58%)
Collateral-dependent loans - Non-owner occupied, nonfarm nonresidential 9,622 Valuation of third party appraisal on underlying collateral Loss severity rates 25%-100% (29%)
Collateral-dependent loans - Residential mortgages secured by first liens 659 Valuation of third party appraisal on underlying collateral Loss severity rates 31% (31%)
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2019:
Fair
value Valuation
Technique Unobservable Inputs Range (Weighted
Average)
Impaired loans - commercial, industrial, and agricultural $2,910 Valuation of third party appraisal on underlying collateral Loss severity rates 0%-100% (54%)
Impaired loans - commercial mortgages $1,147 Valuation of third party appraisal on underlying collateral Loss severity rates 25%-100% (52%)
Fair Value of Financial Instruments
The following table presents the carrying amount and fair value of financial instruments at December 31, 2020:
Carrying
Amount Fair Value Measurement Using: Total
Fair Value
Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 532,694 $ 532,694 $ 0 $ 0 $ 532,694
Securities available for sale 584,908 16,018 568,826 64 584,908
Trading securities 6,649 6,599 50 0 6,649
Loans held for sale 8,514 0 8,617 0 8,617
Net loans 3,337,449 0 0 3,339,482 3,339,482
FHLB and other equity interests 21,018 n/a n/a n/a n/a
Interest rate swaps 4,017 0 4,017 0 4,017
Accrued interest receivable 17,659 61 2,152 15,446 17,659
LIABILITIES
Deposits $ (4,181,744) $ (3,705,200) $ (488,000) $ 0 $ (4,193,200)
FHLB and other borrowings 0 0 0 0 0
Subordinated debentures (70,620) 0 (62,583) 0 (62,583)
Interest rate swaps (4,785) 0 (4,785) 0 (4,785)
Accrued interest payable (1,096) 0 (1,096) 0 (1,096)
The following table presents the carrying amount and fair value of financial instruments at December 31, 2019:
Carrying
Amount Fair Value Measurement Using: Total
Fair Value
Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 192,974 $ 192,974 $ 0 $ 0 $ 192,974
Securities available for sale 542,313 964 538,554 2,795 542,313
Trading securities 9,809 9,758 51 0 9,809
Loans held for sale 930 0 933 0 933
Net loans 2,784,562 0 0 2,778,914 2,778,914
FHLB and other equity interests 27,868 n/a n/a n/a n/a
Interest rate swaps 1,877 0 1,877 0 1,877
Accrued interest receivable 11,486 6 3,238 8,242 11,486
LIABILITIES
Deposits $ (3,102,327) $ (2,674,511) $ (432,287) $ 0 $ (3,106,798)
FHLB and other borrowings (227,907) 0 (230,679) 0 (230,679)
Subordinated debentures (70,620) 0 (64,084) 0 (64,084)
Interest rate swaps (2,362) 0 (2,632) 0 (2,632)
Accrued interest payable (1,597) 0 (1,597) 0 (1,597)
While estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates. The fair value of other equity interests is based on the net asset values provided by the underlying investment partnership. ASU 2015-7 removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related disclosures. In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures.
Also, non-financial assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet, may have value but are not included in the fair value disclosures.
7. Secondary Market Mortgage Activities
Total loans serviced for others were $224,296 and $188,648 December 31, 2020 and December 31, 2019, respectively.
The following summarizes secondary market mortgage activities for the years ended December 31, 2020, December 31, 2019, and December 31, 2018:
December 31, 2020 December 31, 2019 December 31, 2018
Loans originated for resale $ 87,528 $ 43,458 $ 22,990
Proceeds from sales of loans held for sale 82,619 43,198 23,311
Net gains on sales of loans held for sale 2,961 990 624
Loan servicing fees 726 634 600
The following summarizes activity for capitalized mortgage servicing rights for the years ended December 31, 2020, December 31, 2019, and December 31, 2018:
December 31, 2020 December 31, 2019 December 31, 2018
Balance, beginning of year $ 1,573 $ 1,495 $ 1,387
Additions 540 292 315
Servicing rights acquired 0 0 0
Amortization (586) (214) (207)
Balance, end of year $ 1,527 $ 1,573 $ 1,495
The fair value of mortgage servicing rights is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The fair value of mortgage servicing rights was not materially different than amortized cost at December 31, 2020 and December 31, 2019, respectively. No valuation allowance was deemed necessary at December 31, 2020, December 31, 2019, and December 31, 2018. The fair value of interest rate lock commitments and forward commitments to sell loans was not material at December 31, 2020 or December 31, 2019.
8. Premises and Equipment
The following summarizes premises and equipment at December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
Land $ 8,016 $ 8,301
Premises and leasehold improvements 68,346 57,131
Furniture and equipment 37,203 30,853
Construction in process 1,556 2,747
115,121 99,032
Less: accumulated depreciation 55,057 44,165
Premises and equipment, net $ 60,064 $ 54,867
Depreciation on premises and equipment amounted to $4,593 in 2020, $4,098 in 2019 and $3,706 in 2018.
9. Leases
Operating lease assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease cost, which is comprised of amortization of the operating lease asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the consolidated statements of income.
The Corporation leases certain full-serve branch offices, land and equipment. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Most leases include one or more options to renew and the exercise of the lease renewal options are at the Corporation's sole discretion. The Corporation includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Corporation will exercise the option. Certain lease agreements of the Corporation include rental payments adjusted periodically for changes in the consumer price index.
Leases Classification December 31, 2020 December 31, 2019
Assets:
Operating lease assets Operating lease assets $ 18,407 $ 18,422
Finance lease assets Premises and equipment, net (1)
429 501
Total leased assets $ 18,836 $ 18,923
Liabilities:
Operating lease liabilities Operating lease liabilities $ 19,449 $ 19,363
Finance lease liabilities Accrued interest payable and other liabilities 550 629
Total leased liabilities $ 19,999 $ 19,992
(1) Finance lease assets are recorded net of accumulated amortization of $787 and $715 as of December 31, 2020 and 2019, respectively.
The components of the Corporation's net lease expense for the year ended December 31, 2020 and December 31, 2019 were as follows:
Lease Cost Classification December 31, 2020 December 31, 2019
Operating lease cost Net occupancy expense $ 1,785 $ 1,666
Variable lease cost Net occupancy expense 87 98
Finance lease cost:
Amortization of leased assets Net occupancy expense 72 72
Interest on lease liabilities Interest expense - borrowed funds 27 30
Sublease income (1)
Net occupancy expense (86) (83)
Net lease cost $ 1,885 $ 1,783
(1) Sublease income excludes rental income from owned properties.
Rental expense, net of rental income, charged to occupancy expense for 2018 was $932.
The following table sets forth future minimum rental payments under noncancelable leases with terms in excess of one year as of December 31, 2020:
Maturity of Lease Liabilities as of December 31, 2020 Operating Leases Finance Leases Total
2021 $ 1,560 $ 105 $ 1,665
2022 1,661 105 1,766
2023 1,550 105 1,655
2024 1,515 105 1,620
2025 1,505 105 1,610
After 2025 19,281 104 19,385
Total lease payments 27,072 629 27,701
Less: Interest 7,623 79 7,702
Present value of lease liabilities $ 19,449 $ 550 $ 19,999
Other information related to the Corporation's lease liabilities as of December 31, 2020 and December 31, 2019 was as follows:
Lease Term and Discount Rate December 31, 2020 December 31, 2019
Weighted-average remaining lease term (years)
Operating leases 19.0 18.7
Finance leases 6.0 7.0
Weighted-average discount rate
Operating leases 3.46 % 3.52 %
Finance leases 4.49 % 4.49 %
Other information related to the Corporation's lease liabilities as of December 31, 2020 and December 31, 2019 as follows:
Other Information December 31, 2020 December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 922 $ 757
10. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended December 31, 2020 and December 31, 2019 is as follows:
December 31, 2020 December 31, 2019
Balance, beginning of year $ 38,730 $ 38,730
Acquired during the year 5,019 0
Balance, end of year $ 43,749 $ 38,730
Impairment exists when a reporting unit's carrying value of goodwill exceeds its fair value. Goodwill is evaluated for impairment on an annual basis as of December 31 of each year, or whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying value. The Corporation engaged a third party to perform a quantitative analysis of its goodwill at June 30, 2020 due to the on-going economic market disruption caused by the COVID-19 pandemic and the resultant impact on the Corporation's stock price. In addition, interim qualitative analyses were performed as of March 31, 2020 and September 30, 2020 as a result of COVID-19 and for the annual impairment analysis at December 31, 2020. The results of the quantitative analysis and the qualitative analyses did not indicate the Corporation's goodwill was impaired.
Intangible Assets
In connection with its acquisition of FC Banc Corp. in 2013, the Corporation recorded a core deposit intangible asset of $4,834. During the years ended December 31, 2020, December 31, 2019, and December 31, 2018, the Corporation recorded amortization expense of $94, $316 and $489, respectively. The net carrying values at December 31, 2020 and December 31, 2019 were $0 and $94, respectively. No other intangible assets were required to be recorded in connection with the acquisition of FC Banc Corp.
In connection with its acquisition of Lake National Bank in 2016, the Corporation recorded a core deposit intangible asset of $1,583. During the year ended December 31, 2020, December 31, 2019, and December 31, 2018, the Corporation recorded amortization expense of $66, $251, and $409, respectively. The net carrying values at December 31, 2020 and December 31, 2019 were $0 and $66, respectively. No other intangible assets were required to be recorded in connection with the acquisition of Lake National Bank.
In connection with its acquisition of Bank of Akron in 2020, the Corporation recorded a core deposit intangible asset of $613. During the year ended December 31, 2020, the Corporation recorded amortization expense of $46. The net carrying value at December 31, 2020 was $567. No other intangible assets were required to be recorded in connection with the acquisition of Bank of Akron.
Estimated amortization expense of core deposit intangible assets for each of the next five years is as follows:
2021 $ 107
2022 96
2023 85
2024 73
2025 62
Thereafter 144
$ 567
11. Deposits
The following table reflects time certificates of deposit accounts included in total deposits and their remaining maturities at December 31, 2020:
Time deposits maturing:
2021 $ 212,301
2022 187,221
2023 40,354
2024 13,163
2025 13,624
Thereafter 9,881
$ 476,544
Certificates of deposit of $250 or more totaled $128,202 and $112,818 at December 31, 2020 and December 31, 2019, respectively.
The Corporation had $23,636 and $8,097 in reciprocal ICS deposits at December 31, 2020 and December 31, 2019.
12. Borrowings
At December 31, 2020 and December 31, 2019, the Corporation had available one $10 million unsecured line of credit with an unaffiliated institution, at a variable interest rate with a floor as defined in the agreement. There were no borrowings on the line of credit at December 31, 2020 and December 31, 2019.
FHLB Borrowings
At December 31, 2020, the Bank had a borrowing capacity with the FHLB of $797,367 secured by a pledge of certain loans with a balance of $1,182,510. At December 31, 2020 and December 31, 2019, advances from the FHLB are as follows:
2020 2019
Maturities range from 6/29/2020 through 2/11/2033; rates fixed at a range of 1.27% to 5.24%; weighted average rate is 2.13% as of December 31, 2019.
$ 0 $ 227,907
Open Repo borrowing at an interest rate of 0.41% at December 31, 2020. The maximum amount of the Open Repo borrowing available is $150,000.
0 0
Total $ 0 $ 227,907
During 2020 CNB prepaid the entire balance of its borrowings from the FHLB, totaling $190,401. The pre-payment penalty associated with these prepayments totaled approximately $7,851.
At December 31, 2020 and 2019, municipal deposit letters of credit issued by the FHLB on behalf of the Bank naming applicable municipalities as beneficiaries were $57,250 and zero, respectively. The letters of credit were utilized in place of securities pledged to the municipalities for their deposits maintained at the Bank.
Other Borrowings
At December 31, 2020 and December 31, 2019, the Bank had no outstanding borrowings from unaffiliated institutions under overnight borrowing agreements.
Subordinated Debentures
In 2007, the Corporation issued two $10,000 floating rate trust preferred securities as part of a pooled offering of such securities. The interest rate on each offering is determined quarterly and floats based on the 3 month LIBOR plus 1.55%. The all-in rate was 1.80% at December 31, 2020 and 3.44% at December 31, 2019. The Corporation issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The subordinated debentures must be redeemed no later than 2037. The Corporation may redeem the debentures, in whole or in part, at face value at any time. The Corporation has the option to defer interest payments from time to time for a period not to exceed five consecutive years. Although the trusts are variable interest entities, the Corporation is not the primary beneficiary. As a result, because the trusts are not consolidated with the Corporation, the Corporation does not report the securities issued by the trusts as liabilities. Instead, the Corporation reports as liabilities the subordinated debentures issued by the Corporation and held by the trusts, since the liabilities are not eliminated in consolidation. The trust preferred securities were designated to qualify as Tier 1 capital under the Federal Reserve’s capital guidelines.
In September 2016, the Corporation completed a private placement of $50,000 in aggregate principal amount of fixed-to-floating rate subordinated notes. The notes will mature in October 2026, and will initially bear interest at a fixed rate of 5.75% per annum, payable semi-annually in arrears, to, but excluding, October 15, 2021, and thereafter to, but excluding, the maturity date or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 4.55%. These subordinated notes were designed to qualify as Tier 2 capital under the Federal Reserve’s capital guidelines and were given an investment grade rating of BBB- by Kroll Bond Rating Agency. The amount of the subordinated notes that qualify for Tier 2 capital will be reduced by $10,000, or 20%, beginning in the third quarter of 2021.
Maturity Schedule of All Borrowed Funds
The following is a schedule of maturities of all borrowed funds as of December 31, 2020:
2021 $ 0
2022 0
2023 0
2024 0
2025 0
Thereafter 70,620
Total borrowed funds $ 70,620
13. Employee Benefit Plans
The Corporation sponsors a contributory defined contribution Section 401(k) plan. The plan permits eligible employees to make pre-tax and Roth contributions up to 70% of salary. Employees 21 years of age or over with a minimum of one-year with 1,000 hours of service are eligible for matching contributions by the Corporation at 100% for every 1% contributed up to 3% then 50% for every 1% contributed up to the next 2% in total of the employee’s compensation. The Corporation’s matching contribution and related expenses were $1,050, $906 and $810 for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively. A profit sharing discretionary non-contributory pension plan component is in place for employees 21 years of age or over with a minimum of one-year with 1,000 hours of service and allows employer contributions in an amount equal to a percentage of eligible compensation plus 5.7% of the compensation in excess of $138, subject to a $285 salary limit. The Corporation recognized profit sharing expense of $1,936, $1,949 and $1,530 for the year ended December 31, 2020, December 31, 2019, and December 31, 2018 respectively.
The Corporation has adopted a non-qualified supplemental executive retirement plan ("SERP") for certain executives to compensate those executive participants in the Corporation’s retirement plan whose benefits are limited by compensation limitations under current tax law. The SERP is considered an unfunded plan for tax and ERISA purposes and all obligations arising under the SERP are payable from the general assets of the Corporation. At December 31, 2020 and December 31, 2019, obligations of $7,007 and $6,333, respectively, were included in other liabilities for this plan. Expenses related to this plan were $992 for the year ended December 31, 2020, $724 for the year ended December 31, 2019 and $776 for the year ended December 31, 2018.
The Corporation has established a Survivor Benefit Plan for the benefit of outside directors. The purpose of the plan is to provide life insurance benefits to beneficiaries of the Corporation’s directors who at the time of their death are participants in the plan. The plan is considered an unfunded plan for tax and ERISA purposes and all obligations arising under the plan are payable from the general assets of the Corporation. At December 31, 2020 and December 31, 2019, obligations of $1,433 and $1,330, respectively, were included in other liabilities for this plan. Expenses (benefits) related to this plan were $253 for the year ended December 31, 2020, $(1) for the year ended December 31, 2019 and $66 for the year ended December 31, 2018.
The Corporation has an unfunded post retirement benefits plan which provides certain health care benefits for retired employees who have reached the age of 60 and retired with 30 years of service. The plan was amended in 2013 to include only employees hired prior to January 1, 2000. Benefits are provided for these retired employees and their qualifying dependents from the age of 60 through the age of 65.
The following table sets forth the change in the benefit obligation of the plan as of and for the years ended December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
Benefit obligation at beginning of year $ 2,030 $ 2,427
Interest cost 51 89
Service cost 61 74
Actual claims (36) (42)
Actuarial gain (277) (518)
Benefit obligation at end of year $ 1,829 $ 2,030
Amounts recognized in accumulated other comprehensive income at December 31, 2020 and December 31, 2019 consist of:
December 31, 2020 December 31, 2019
Net actuarial gain $ 435 $ 158
Tax effect (92) (34)
$ 343 $ 124
The accumulated benefit obligation was $1,828 and $2,030 at December 31, 2020 and December 31, 2019, respectively.
The following table sets forth the components of net periodic benefit cost and other amounts recognized in other comprehensive income:
December 31, 2020 December 31, 2019 December 31, 2018
Service cost $ 61 $ 74 $ 87
Interest cost 51 89 83
Net amortization of transition obligation and actuarial loss 0 23 84
Net periodic benefit cost 112 186 254
Net gain (277) (518) (404)
Amortization 0 (23) (84)
Total recognized in other comprehensive income (277) (541) (488)
Total recognized in net periodic benefit cost and other comprehensive income $ (165) $ (355) $ (234)
The estimated net gain that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is zero.
The weighted average discount rate used to calculate net periodic benefit cost was 2.59% for year ended December 31, 2020, 3.78% for year ended December 31, 2019, and 3.13% for year ended December 31, 2018. The weighted average rate used to calculate accrued benefit obligations was 1.55% for year ended December 31, 2020, 2.59% for year ended December 31, 2019, and 3.78% for year ended December 31, 2018. The health care cost trend rate used to measure the expected costs of benefits is 5.0% for 2021 and thereafter. A one percent increase in the health care trend rates would result in an increase of $136 in the benefit obligation as of December 31, 2020, and would increase the service and interest costs by $8 in future periods. A similar one percent decrease in health care trend rates would result in a decrease of $124 and $9 in the benefit obligation and services and interest costs, respectively, at December 31, 2020.
14. Deferred Compensation Plans
Deferred compensation plans cover all directors and certain officers. Under the plans, the Corporation pays each participant, or their beneficiary, the value of the participant’s account over a maximum period of 10 years, beginning with the individual’s termination of service. A liability is accrued for the obligation under these plans.
A summary of changes in the deferred compensation plan liability follows:
December 31, 2020 December 31, 2019 December 31, 2018
Balance, beginning of year $ 3,234 $ 2,408 $ 2,503
Deferrals, dividends, and changes in fair value (70) 904 64
Deferred compensation payments (79) (78) (159)
Balance, end of year $ 3,085 $ 3,234 $ 2,408
15. Contingency
On March 28, 2018, the Corporation received a notice of assessment from the Pennsylvania Department of Revenue that reported a sales tax assessment amount of $824 plus interest and penalties of $339 resulting in a total assessed balance of $1,163. The notice of assessment covers the period from January 1, 2013 through July 31, 2016. The Corporation has evaluated the specific items on which sales tax has been assessed in conjunction with its legal counsel and has determined that it is probable that the Corporation has some liability based on a review of the Pennsylvania tax laws that apply to the assessed items. The Corporation previously expensed $96, of which $50 was remitted to the Pennsylvania Department of Revenue during the year ended December 31, 2018. The Corporation expensed an additional $150 in the third quarter of 2019. The remainder of the total assessed balance of $1,163 that had not been expensed relates primarily to sales tax assessments associated with data processing and banking equipment maintenance, which the Corporation’s management and legal counsel have concluded were improperly assessed based on current Pennsylvania sales tax law. In December 2019 the Corporation and the Pennsylvania Board of Finance and Revenue reached a agreement whereby the Corporation agreed to pay a total of $60 tax plus $5 interest to settle the notice of assessment. The Corporation remitted the remaining balance due of $15 prior to December 31, 2019 and reversed previously recognized expense of $181.
16. Income Taxes
The following is a summary of income tax expense for the years ended December 31, 2020, December 31, 2019, and December 31, 2018:
December 31, 2020 December 31, 2019 December 31, 2018
Current - federal $ 8,290 $ 8,265 $ 7,520
Current - state 729 499 66
Deferred - federal (1,672) (204) (1,076)
Income tax expense $ 7,347 $ 8,560 $ 6,510
The reconciliation of income tax attributable to pre-tax income at the federal statutory tax rates to income tax expense is as follows:
December 31, 2020 % December 31, 2019 % December 31, 2018 %
Tax at statutory rate $ 8,419 21.0 $ 10,214 21.0 $ 8,448 21.0
Tax exempt income, net (1,223) (3.1) (1,382) (2.8) (1,403) (3.5)
Bank owned life insurance (367) (0.9) (276) (0.6) (296) (0.7)
Effect of state tax 576 1.4 394 0.8 52 0.1
Other (58) (0.1) (390) (0.8) (291) (0.7)
Income tax expense $ 7,347 18.3 $ 8,560 17.6 $ 6,510 16.2
The following table sets forth deferred taxes as of December 31, 2020 and December 31, 2019 based on the U.S. statutory federal income tax rate of 21%.
December 31, 2020 December 31, 2019
Deferred tax assets:
Allowance for credit losses $ 6,751 $ 4,014
Fair value adjustments - business combination 1,685 854
Deferred compensation 2,787 2,405
Net operating loss carryover 346 0
Post-retirement benefits 722 754
Unrealized loss on interest rate swap 161 102
Nonaccrual loan interest 478 557
Accrued expenses 681 1,210
Deferred fees and costs 1,613 472
Operating lease liability 4,214 4,216
Other 300 381
19,738 14,965
Deferred tax liabilities:
Unrealized gain on securities available for sale 4,077 1,913
Premises and equipment 2,997 2,089
Unrealized gain on trading securities 294 340
Intangibles - section 197 2,399 2,305
Mortgage servicing rights 321 330
Operating lease asset 4,079 4,136
Other 293 259
14,460 11,372
Net deferred tax asset $ 5,278 $ 3,593
At December 31, 2020 and December 31, 2019, the Corporation had no unrecognized tax benefits. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.
The Corporation recognizes interest and/or penalties related to income tax matters as part of income tax expense. At December 31, 2020, 2019 and 2018, there were no amounts accrued for interest and/or penalties and no amounts recorded as expense for the years ending December 31, 2020, 2019, and 2018.
The Corporation and its subsidiaries are subject to U.S. federal income tax, as well as various filing various state returns. The Corporation is no longer subject to examination by the taxing authorities for years prior to 2016. Tax years 2017 through 2020 are open to examination.
17. Related Party Transactions
Loans to principal officers, directors, and their affiliates during 2020 were as follows:
Beginning balance $ 35,527
New loans and advances 4,937
Effect of changes in composition of related parties 259
Repayments (3,058)
Ending balance $ 37,665
Deposits from principal officers, directors, and their affiliates were $24,482 and $40,931 at December 31, 2020 and December 31, 2019, respectively.
18. Stock-Based Compensation
The Corporation has a stock incentive plan, which is administered by a committee of the Board of Directors and which permits the Corporation to provide various types of stock-based compensation to its key employees, directors, and/or consultants, including time-based and performance-based shares of restricted stock. The Corporation previously maintained the CNB Financial Corporation 2009 Stock Incentive Plan, which terminated in accordance with its terms on February 10, 2019, and currently maintains the CNB Financial Corporation 2019 Omnibus Incentive Plan (the "2019 Stock Incentive Plan"), which was approved by the Corporation’s shareholders and became effective on April 16, 2019. The 2019 Stock Incentive Plan provides for up to 507,671 shares of common stock to be awarded in the form of nonqualified options or restricted stock. For key employees, the vesting of time-based restricted stock is one-third, one-fourth, or one-fifth of the granted restricted shares per year, beginning one year after the grant date, with 100% vesting on the third, fourth or fifth anniversary of the grant date, respectively. Prior to 2018, for non-employee directors, the vesting schedule was one-third of the granted restricted shares per year, beginning one year after the grant date, with 100% vested on the third anniversary of the grant date. Beginning in 2018, stock compensation received by non-employee directors vests immediately. All stock-based compensation grants during the years ending December 31, 2020, December 31, 2019 and December 31, 2018 and outstanding at December 31, 2020, December 31, 2019 and December 31, 2018 were restricted stock.
During December 31, 2020, December 31, 2019, and December 31, 2018, the Executive Compensation and Personnel Committee of the Corporation's Board of Directors granted a total of 36,968, 40,978 and 40,108 shares, respectively, of restricted common stock to certain key employees and all independent directors of the Corporation. Compensation expense for the restricted stock awards is recognized over the requisite service period based on the fair value of the shares at the date of grant on a straight-line basis. Non-vested restricted stock awards are recorded as a reduction of additional paid-in-capital in shareholders’ equity until earned. Compensation expense resulting from time-based, performance-based and director restricted stock awards was $1,410, $1,346 and $1,545 for the years ended December 31, 2020, December 31, 2019, and December 31, 2018, respectively. The total income tax benefit related to the recognized compensation cost of vested restricted stock awards was $296, $283 and $324 for the years ended December 31, 2020, 2019 and 2018, respectively.
A summary of changes in non-vested restricted stock awards follows:
Shares Weighted-average
Grant Date
Fair Value
Non-vested at January 1, 2020 58,370 $ 24.96
Granted 25,466 28.64
Vested (27,530) 24.11
Non-vested at December 31, 2020 56,306 $ 27.14
The above table excludes 11,502 shares in restricted stock awards that were granted at a weighted average fair value of $29.56 and immediately vested. As of December 31, 2020 and December 31, 2019, there was $1,055 and $1,026, respectively, of total unrecognized compensation cost related to non-vested shares granted under the restricted stock award plan. The fair value of shares vesting during December 31, 2020, December 31, 2019, and December 31, 2018 was $1,123, $1,462 and $1,535, respectively.
In addition to the time-based restricted stock disclosed above, the Corporation’s Board of Directors grants performance-based restricted stock awards ("PBRSAs") to key employees. The number of PBRSAs will depend on certain performance conditions earned over a three year period and are also subject to service-based vesting. In 2020, awards with a maximum of 18,100 shares in aggregate were granted to key employees. In 2019, awards with a maximum of 16,681 shares in aggregate were granted to key employees. In 2018, awards with a maximum of 15,657 shares in aggregate were granted to key employees.
In 2019, the 2017 PBRSAs were fully earned and in 2020, 7,109 shares were fully distributed. The fair value of the 7,109 shares distributed in 2020 was $233. Total compensation expense related to the PBRSAs and included in the above compensation expense total was $384, $221 and $314 for 2020, 2019 and 2018. Estimated unearned compensation related to PBRSAs at December 31, 2020 was $539.
The number of authorized stock-based awards still available for grant as of December 31, 2020 was 457,448.
19. Capital Requirements and Restrictions on Retained Earnings
Banks and financial holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, for the Bank, prompt corrective action ("PCA") regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory enforcement actions. The net unrealized gain or loss on available for sale securities are excluded from computing regulatory capital. Management believes as of December 31, 2020 the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
The PCA regulations provide five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms alone do not represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion; brokered deposits may not be accepted, renewed or rolled over; and capital restoration plans are required. As of December 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the PCA regulatory framework. There are no events or conditions since this notification that management believes have changed the Bank’s capital category.
Actual and required capital amounts and ratios are presented below as of December 31, 2020 and December 31, 2019. The capital adequacy ratio includes the capital conservation buffer.
Actual For Capital
Adequacy Purposes To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 2020
Total Capital to Risk Weighted Assets
Consolidated $ 462,457 14.32 % $ 339,107 10.50 % N/A
Bank $ 434,598 13.52 % $ 337,554 10.50 % $ 321,480 10.00 %
Tier 1 (Core) Capital to Risk Weighted Assets
Consolidated $ 384,650 11.91 % $ 274,516 8.50 % N/A
Bank $ 408,693 12.71 % $ 273,258 8.50 % $ 257,184 8.00 %
Common equity Tier 1 to Risk Weighted Assets
Consolidated $ 306,865 9.50 % $ 226,072 7.00 % N/A
Bank $ 401,314 12.48 % $ 225,036 7.00 % $ 208,962 6.50 %
Tier 1 (Core) Capital to Average Assets
Consolidated $ 384,650 8.11 % $ 189,728 4.00 % N/A
Bank $ 408,693 8.66 % $ 188,690 4.00 % $ 235,863 5.00 %
December 31, 2019
Total Capital to Risk Weighted Assets
Consolidated $ 350,806 12.51 % $ 294,407 10.50 % N/A
Bank $ 330,321 11.87 % $ 292,271 10.50 % $ 278,353 10.00 %
Tier 1 (Core) Capital to Risk Weighted Assets
Consolidated $ 281,333 10.03 % $ 238,330 8.50 % N/A
Bank $ 312,795 11.24 % $ 236,600 8.50 % $ 222,682 8.00 %
Common equity Tier 1 to Risk Weighted Assets
Consolidated $ 261,333 9.32 % $ 196,272 7.00 % N/A
Bank $ 305,416 10.97 % $ 194,847 7.00 % $ 180,929 6.50 %
Tier 1 (Core) Capital to Average Assets
Consolidated $ 281,333 7.86 % $ 143,189 4.00 % N/A
Bank $ 312,795 8.79 % $ 142,301 4.00 % $ 177,876 5.00 %
Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. During 2020, $69,809 of accumulated net earnings of the Bank included in consolidated stockholders’ equity, plus any 2021 net profits retained to the date of the dividend declared, is available for distribution to the Corporation as dividends without prior regulatory approval, subject to regulatory capital requirements described above.
20. Interest Rate Swaps
On September 7, 2018, the Corporation executed an interest rate swap agreement with a 5-year term and an effective date of September 15, 2018 in order to hedge cash flows associated with $10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2018 to September 15, 2023 without the exchange of the underlying notional amount. At December 31, 2020, the variable rate on the subordinated debt was 1.80% (LIBOR plus 155 basis points) and the Corporation was paying 4.53% (2.98% fixed rate plus 155 basis points).
In order to hedge cash flows associated with $10 million of a subordinated note discussed above, on May 3, 2011, the Corporation executed an interest rate swap agreement with a 5-year term and an effective date of September 15, 2013 and expired September 2018. The Corporation’s objective in using this derivative was to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involved the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2013 to September 15, 2018 without exchange of the underlying notional amount.
As of December 31, 2020 and December 31, 2019, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Corporation does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.
The following tables provide information about the amounts and locations of activity related to the interest rate swaps designated as cash flow hedges within the Corporation’s consolidated balance sheet and statement of income as of December 31, 2020 and December 31, 2019 and for the years ended December 31, 2020, December 31, 2019, and December 31, 2018:
As of December 31 Liability Derivative
Balance Sheet Fair value
Location December 31, 2020 December 31, 2019
Interest rate contract Accrued interest payable and other liabilities $(768) $(485)
For the Year Ended December 31, 2020 (a) (b) (c) (d) (e)
Interest rate contract $(224) Interest expense - subordinated debentures $(224) Other
income $0
For the Year Ended December 31, 2019
Interest rate contract $(225) Interest expense - subordinated
debentures $(63) Other
income $0
For the Year Ended December 31, 2018
Interest rate contract $(32) Interest expense - subordinated debentures $(164) Other
income $0
(a)Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax
(b)Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(c)Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(d)Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(e)Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Amounts reported in accumulated other comprehensive loss related to the interest rate swap will be reclassified to interest expense as interest payments are made on the subordinated debentures. Such amounts reclassified from accumulated other comprehensive loss to interest expense in the next twelve months are expected to be $273.
As of December 31, 2020 and December 31, 2019, a cash collateral balance of $1,050 and $750, respectively, was maintained with the counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheets.
The Corporation entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Corporation enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. Concurrently, the Corporation agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Corporation’s customers to effectively convert a variable rate loan to a fixed rate. Because the Corporation acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not impact the Corporation’s results of operations.
The Corporation pledged cash collateral to another financial institution with a balance $4,873 as of December 31, 2020 and $2,000 as of December 31, 2019. This balance is included in interest bearing deposits with other banks on the consolidated balance sheets. The Corporation may require its customers to post cash or securities as collateral on its program of back-to-back swaps depending upon the specific facts and circumstances surrounding each loan and individual swap. In addition, certain language is included in the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Corporation is permitted to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Corporation may be required to post additional collateral to swap counterparties in the future in proportion to potential increases in unrealized loss positions.
The following table provides information about the amounts and locations of activity related to the back-to-back interest rate swaps within the Corporation’s consolidated balance sheet as of December 31, 2020 and December 31, 2019:
Notional
Amount Average
Maturity
(in years) Weighted
Average
Fixed Rate Weighted
Average Variable Rate Fair
Value
December 31, 2020
3rd Party interest rate swaps
$ 34,089 6.7 4.13 % 1 month LIBOR + 2.27%
$ 4,017 (a)
Customer interest rate swaps (34,089) 6.7 4.13 % 1 month LIBOR + 2.27%
(4,017) (b)
December 31, 2019
3rd Party interest rate swaps
$ 35,382 7.7 4.13 % 1 month LIBOR + 2.27%
$ 1,877 (a)
Customer interest rate swaps (35,382) 7.7 4.13 % 1 month LIBOR + 2.27%
(1,877) (b)
(a)Reported in accrued interest receivable and other assets within the consolidated balance sheets
(b)Reported in accrued interest payable and other liabilities within the consolidated balance sheets
21. Off-Balance Sheet Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans $ 52,073 $ 266,336 $ 21,375 $ 184,106
Unused lines of credit 24,328 673,919 14,637 446,407
Standby letters of credit 15,301 1,597 14,503 824
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments at December 31, 2020 have interest rates ranging from 1.24% to 18.00% and maturities ranging from four months to 35 years. The fixed rate loan commitments at December 31, 2019 have interest rates ranging from 2.53% to 18.00% and maturities ranging from one year to 30 years.
The Corporation makes investments in limited partnerships, including certain small business investment corporations and low income housing partnerships. Capital contributions for investments in small business corporations, reported in FHLB and other equity interests on the consolidated balance sheet, as of December 31, 2020 and December 31, 2019 were $11,835 and $9,669, respectively. Unfunded capital commitments in investments in small business corporations totaled $3,665 and $5,831 as of December 31, 2020 and December 31, 2019, respectively.
The carrying value of investments in the low income housing partnerships, reported in FHLB and other equity interests on the consolidated balance sheet, as of December 31, 2020 and December 31, 2019 were $6,015 and 6,649, respectively. The related amortization for the twelve months ended December 31, 2020, December 31, 2019 and December 31, 2018 were $634, $531 and $533, respectively. Unfunded commitments, reported in accrued interest payable and other liabilities on the consolidated balance sheet, as of December 31, 2020 and December 31, 2019 were $3,624 and $4,190, respectively.
22. Parent Company Only Financial Information
CONDENSED BALANCE SHEETS December 31,
2020 2019
Assets
Cash $ 10,729 $ 750
Trading securities 2,692 683
Investment in bank subsidiary 456,531 349,307
Investment in non-bank subsidiaries 15,681 24,606
Deferreds and current receivable 1,788 1,576
Other assets 1,264 1,479
Total assets $ 488,685 $ 378,401
Liabilities
Borrowings from subsidiary $ 0 $ 850
Subordinated debentures 70,620 70,620
Other liabilities 1,928 1,965
Total liabilities 72,548 73,435
Stockholders' equity 416,137 304,966
Total liabilities and stockholders' equity $ 488,685 $ 378,401
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
Income: 2020 2019 2018
Dividends from:
Bank subsidiary $ 16,702 $ 12,696 $ 12,029
Non-bank subsidiaries 10,350 0 3,000
Other 216 208 212
Total income 27,268 12,904 15,241
Expenses (6,838) (5,518) (5,184)
Income before income taxes and equity in undistributed net income of subsidiaries: 20,430 7,386 10,057
Change in net unrealized holdings gains (losses) on equity securities not held for trading (31) 24 0
Income tax benefit 1,306 1,177 1,116
Equity in undistributed net income of bank subsidiary 18,197 27,580 24,031
Equity in undistributed (distributions in excess) of net income of non-bank subsidiaries (7,159) 3,914 (1,485)
Net income 32,743 40,081 33,719
Dividends on preferred stock (1,147) 0 0
Net income available to common stockholders $ 31,596 $ 40,081 $ 33,719
Comprehensive income attributable to the parent $ 32,519 $ 39,856 $ 33,687
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
2020 2019 2018
Net income
Adjustments to reconcile net income to net cash provided by $ 32,743 $ 40,081 $ 33,719
operating activities:
Equity in undistributed net income of bank subsidiary (18,197) (27,580) (24,031)
(Equity in undistributed) distributions in excess of net income of non-bank subsidiaries 7,159 (3,914) 1,485
Net unrealized gains on trading securities 31 (24) 0
Decrease (increase) in other assets 21 177 872
Increase in other liabilities 1,091 1,267 1,089
Net cash provided by operating activities 22,848 10,007 13,134
Cash flows from investing activities
Purchase of trading securities (2,000) (36) (44)
Investment in non-bank subsidiaries 0 0 (400)
Outlays for business acquisition (16,126) 0 0
Investment in bank subsidiaries (41,500) 0 0
Net cash used in investing activities (59,626) (36) (444)
Cash flows from financing activities:
Dividends paid on common stock (10,981) (10,358) (10,237)
Dividends paid on preferred stock (1,147) 0 0
Purchase of treasury stock (1,307) (1,291) (2,454)
Net proceeds from the issuance of preferred stock 57,785 0 0
Net proceeds from issuance of common stock 3,257 1,423 0
Net advance (to) from subsidiary (850) 650 (1,200)
Net cash provided by (used in) financing activities 46,757 (9,576) (13,891)
Net increase (decrease) in cash 9,979 395 (1,201)
Cash beginning of year 750 355 1,556
Cash end of year $ 10,729 $ 750 $ 355
23. Earnings Per Share
The computation of basic and diluted earnings per common share is shown below. There were no anti-dilutive stock options for the years ended December 31, 2020, December 31, 2019, and December 31, 2018.
Years Ended December 31,
2020 2019 2018
Basic earnings per common share computation
Net income per consolidated statements of income $ 31,596 $ 40,081 $ 33,719
Net earnings allocated to participating securities (100) (147) (150)
Net earnings allocated to common stock $ 31,496 $ 39,934 $ 33,569
Distributed earnings allocated to common stock $ 10,942 $ 10,317 $ 10,186
Undistributed earnings allocated to common stock 20,554 29,617 23,383
Net earnings allocated to common stock $ 31,496 $ 39,934 $ 33,569
Weighted average common shares outstanding, including shares considered participating securities 16,048 15,219 15,274
Less: Average participating securities (48) (55) (64)
Weighted average shares 16,000 15,164 15,210
Basic earnings per common share $ 1.97 $ 2.63 $ 2.21
Diluted earnings per common share computation
Net earnings allocated to common stock $ 31,496 $ 39,934 $ 33,569
Weighted average common shares outstanding for basic earnings per common share 16,000 15,164 15,210
Add: Dilutive effects of assumed exercises of stock options 0 0 0
Weighted average shares and dilutive potential common shares 16,000 15,164 15,210
Diluted earnings per common share $ 1.97 $ 2.63 $ 2.21
24. Other Comprehensive Income
Other comprehensive income components and related tax effects were as follows for the years ended December 31, 2020, December 31, 2019, and December 31, 2018:
December 31, 2020 December 31, 2019 December 31, 2018
Unrealized holding gains (losses) on available for sale securities $ 12,494 $ 13,732 $ (5,073)
Less reclassification adjustment for gains recognized in earnings (2,190) (148) 0
Net unrealized gains (losses) 10,304 13,584 (5,073)
Tax effect (2,164) (2,852) 1,066
Net-of-tax amount 8,140 10,732 (4,007)
Actuarial gain (loss) on postemployment health care plan 277 518 404
Net amortization of transition obligation and actuarial gain 0 23 84
Net unrealized gain (loss) on postemployment health care plan 277 541 488
Tax effect (58) (113) (102)
Net-of-tax amount 219 428 386
Unrealized gain (loss) on interest rate swap (508) (347) (204)
Less reclassification adjustment for losses recognized in earnings 224 63 164
Net unrealized gain (loss) (284) (284) (40)
Tax effect 60 59 8
Net-of-tax amount (224) (225) (32)
Other comprehensive income (loss) $ 8,135 $ 10,935 $ (3,653)
The following is a summary of the change in the accumulated other comprehensive income (loss) balance, net of tax, for the years ended December 31, 2020, December 31, 2019, and December 31, 2018.
Balance
12/31/19 Comprehensive
Income (Loss) Reclassification of
Disproportionate
Tax Effect Balance
12/31/20
Unrealized gains (losses) on securities available for sale $ 7,198 $ 8,140 $ 0 $ 15,338
Unrealized gain (loss) on postretirement benefits plan 124 219 0 343
Unrealized loss on interest rate swap (383) (224) 0 (607)
Total $ 6,939 $ 8,135 $ 0 $ 15,074
Balance
12/31/18 Comprehensive
Income (Loss) Reclassification of
Disproportionate
Tax Effect Balance
12/31/19
Unrealized gains (losses) on securities available for sale $ (3,534) $ 10,732 $ 0 $ 7,198
Unrealized gain (loss) on postretirement benefits plan (304) 428 0 124
Unrealized loss on interest rate swap (158) (225) 0 (383)
Total $ (3,996) $ 10,935 $ 0 $ 6,939
Balance
1/1/18 Comprehensive
Income (Loss) Reclassification of
Disproportionate
Tax Effect Balance
12/31/18
Unrealized gains (losses) on securities available for sale $ 473 $ (4,007) $ 0 $ (3,534)
Unrealized gain (loss) on postretirement benefits plan (690) 386 0 (304)
Unrealized loss on interest rate swap (126) (32) 0 (158)
Total $ (343) $ (3,653) $ 0 $ (3,996)
25. Quarterly Financial Data (Unaudited)
The table below sets forth the Corporation's unaudited condensed consolidated quarterly results of operations data for the years ended December 31, 2020 and December 31, 2019 (in thousands, except per share data). In the opinion of management, all adjustments (consisting of normal recurring accruals) that are necessary for a fair presentation of the quarterly results have been reflected in the data. It is also management's opinion, however, that quarterly results of operations data are not indicative of the financial results to be achieved in succeeding years or quarters. In order to obtain a more accurate indication of performance, one should review the financial and operating results, changes in stockholders' equity and cash flows for a period of several years.
Beginning with the quarter ended December 31, 2020 the Corporation adopted ASC 326. Prior to the quarter ended December 31, 2020, the results were based on incurred loss methodology and these results have not been restated.
Quarters Ended in December 31, 2020 Quarters Ended in December 31, 2019
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
Total interest and dividend income $ 40,090 $ 38,073 $ 42,356 $ 46,648 $ 36,753 $ 38,282 $ 40,085 $ 40,608
Net interest income 29,994 29,938 34,664 40,115 27,758 28,794 29,901 29,745
Provision for credit losses 3,079 5,680 3,306 3,289 1,306 1,788 2,118 812
Non-interest income 5,364 7,949 6,778 7,968 6,153 6,792 6,276 6,754
Non-interest expense 21,742 22,199 28,368 35,017 21,175 21,984 21,444 22,905
Net income 8,813 8,246 7,785 7,899 9,473 9,767 10,357 10,484
Net income per share, basic 0.57 0.54 0.47 0.40 0.62 0.64 0.68 0.69
Net income per share, diluted 0.57 0.54 0.47 0.40 0.62 0.64 0.68 0.69
26. Revenue from Contracts with Customers
All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Corporation's Non-Interest Income by revenue stream and reportable segment for the years ended December 31, 2020 and December 31, 2019. Items outside the scope of ASC 606 are noted as such.
December 31, 2020 December 31, 2019 December 31, 2018
Non-interest Income
Service charges on deposit accounts $ 5,095 $ 6,402 $ 5,759
Wealth and asset management fees 5,497 4,627 4,172
Mortgage banking (1)
3,354 1,412 1,019
Card processing and interchange income 5,727 4,641 4,261
Net realized gains on available-for-sale securities (1)
2,190 148 0
Other income 6,196 8,745 5,512
Total non-interest income $ 28,059 $ 25,975 $ 20,723
(1)Not within scope of ASU 2014-9
Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investment securities along with non-interest revenue resulting from security gains, loan servicing, gains on the sale of loans, commitment fees, fees from financial guarantees, certain credit card fees, gains (losses) on sale of other real estate owned not financed by the Corporation, is not within the scope of ASU 2014-9.
The types of non-interest income within the scope of the standard that are material to the consolidated financial statements are services charges on deposit accounts, wealth and asset management fee income, card processing and interchange income, and other income.
Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed, as that is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Services charges on deposits are withdrawn from the customer’s account balance.
Wealth and asset management fees: The Corporation earns wealth and asset management fees from its contracts with trust and brokerage customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management at month end. Fees for these services are billed to customers on a monthly or quarterly basis and are recorded as revenue at the end of the period for which the wealth and asset management services have been performed. Other performance obligations, such as the delivery of account statements to customers, are generally considered immaterial to the overall transaction price.
Card processing and interchange income: The Corporation earns interchange fees from check card and credit card transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Other income: The Corporation's other income includes sources such as bank owned life insurance, changes in fair value and realized gains on sales of trading securities, certain service fees, gains (losses) on sales of fixed assets, and gains (losses) on sale of other real estate owned. The service fees are recognized in the same manner as the service charges mentioned above. While gains (losses) on the sale of other real estate owned are within the scope of ASU 2014-9 if financed by the Corporation, the Corporation does not finance the sale of transactions. The revenue on the sale is recorded upon the transfer of control of the property to the buyer and the other real estate owned asset is derecognized.
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors
CNB Financial Corporation
Clearfield, Pennsylvania
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of CNB Financial Corporation (the "Corporation") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework: (2013) issued
by COSO.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Corporation adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.
Basis for Opinions
The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Adoption and Qualitative Factors
In accordance with Accounting Standards Update (the "ASU") 2016-13, Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, the Corporation adopted Accounting Standards Codification ("ASC") 326 as of January 1, 2020 as described in Notes 1 and 4 of the consolidated financial statements. See also the explanatory paragraph above. The allowance for credit losses (the "ACL") is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures. The ASU requires a financial asset (or a group of financial assets), including the Corporation's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the estimated life of the loans. In order to estimate the expected credit losses, the Corporation implemented a new loss estimation model. The Corporation disclosed the impact of adoption of this standard on January 1, 2020 with a $4.3 million increase to the allowance for credit losses and a $3.4 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. Provision for credit losses expense for the year ending December 31, 2020 was $15.4 million and the Allowance for Credit Losses at December 31, 2020 was $34.3 million.
The Corporation measures expected credit losses based on pooled loans when similar risk characteristics exist. The Corporation uses a discounted cash flow ("DCF") model for approximately 91% of the amortized cost of loans and a weighted average remaining maturity ("WARM") model for approximately 9% of the amortized cost of loans. The DCF model discounts instrument-level cash flows, adjusting for prepayments and curtailments, and incorporates loss expectations based on inputs of current and forecasted macroeconomic indicators. The WARM model contemplates expected losses at a pool-level utilizing historic loss information. The Corporation adjusts its quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The qualitative framework reflects changes related to relevant data, such as differences in underwriting standards, changes in environmental conditions, delinquency levels, segment growth rates and changes in duration within new markets, or other relevant factors not considered in the base model.
The adoption of the allowance for credit losses and application of the qualitative factors was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the subjective and complex judgments made by management throughout the initial adoption and subsequent application processes related to the qualitative factors. The principal considerations resulting in our determination included the following:
•Significant auditor judgment and audit effort to evaluate the significant assumptions input into the DCF model.
•Significant auditor judgment and audit effort were used in evaluating the qualitative factors used in the calculation.
The primary procedures performed to address the critical audit matter included:
•Testing the effectiveness of controls included:
◦Testing management’s selection of the DCF model, including evaluation of the relevance and reliability of the loss driver analysis and probability of default and loss given default curves input into the model.
◦Testing management’s review controls over the Corporation’s key assumptions and judgments used in the determination of qualitative factors.
•Substantive testing included:
◦Evaluating the appropriateness of the Corporation's policies, methodologies, and elections involved in the adoption of ASC 326.
◦Utilizing the assistance of specialists to evaluate the appropriateness and mathematical accuracy of the loss driver analysis used in the adoption of the DCF model, and the relevance and reliability of the data used in the development of the loss rate forecasts in the DCF model.
◦Evaluating management’s process and judgments for developing and applying qualitative factors and assessing relevance of data used to develop factors, including evaluating their assumptions for reasonableness.
/s/ Crowe LLP
We have served as the Corporation’s auditor since 2000.
Columbus, Ohio
March 4, 2021

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
The Corporation’s management, under the supervision of and with the participation of the Corporation’s Principal Executive Officer and Principal Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, management, including the Principal Executive Officer and Principal Financial Officer, have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to provide reasonable assurance that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Effective January 1, 2020, the Corporation adopted the CECL accounting standard. The Corporation designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes to the Corporation's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Corporation’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the U.S.
The Corporation’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based on our assessment and those criteria, management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2020. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Crowe LLP, an independent registered public accounting firm that audited the Corporation’s financial statements, as stated in their report which is located in Item 8 of this Annual Report on Form 10-K.
Joseph B. Bower, Jr. Tito L. Lima
President and Chief Executive Officer Treasurer and Principal Financial Officer
Date: March 4, 2021 Date: March 4, 2021

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated herein by reference from our definitive Proxy Statement for our 2021 Annual Meeting of Stockholders (the "2021 Proxy Statement"), which we will file with the SEC on or before 120 days after our 2020 fiscal year-end, and which will appear in the 2021 Proxy Statement under the captions "Proposal 1. Election of Directors," "Executive Officers," "Corporate Governance - Meetings and Committees of the Board of Directors - Audit Committee," "Certain Transactions" and "Other Matters - Section 16(a) Beneficial Ownership Reporting Compliance."
The Corporation’s Board of Directors has approved a Code of Ethics for Officers and Directors. The Code of Ethics can be found at the Bank’s website, www.cnbbank.bank.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is incorporated herein by reference from the 2021 Proxy Statement, including the information in the 2021 Proxy Statement appearing under the captions "Compensation of Executive Officers," "Compensation Committee Report" and "Compensation of Directors."

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this Item 12 is incorporated herein by reference from the 2021 Proxy Statement, including the information in the 2021 Proxy Statement appearing under the captions "Stock Ownership" and "Compensation of Executive Officers - Equity Compensation Plan Information."

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this Item 13 is incorporated herein by reference from the 2021 Proxy Statement, including the information in the 2021 Proxy Statement appearing under the captions "Proposal 1. Election of Directors," "Corporate Governance" and "Certain Transactions."

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item 14 is incorporated herein by reference from the 2021 Proxy Statement, including the information in the 2021 Proxy Statement appearing under the captions "Corporate Governance - Meetings and Committees of the Board of Directors - Audit Committee" and "Concerning the Independent Registered Public Accounting Firm."
PART IV.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements are set forth in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
(a)(2) Financial statement schedules are not applicable or are included in the consolidated financial statements or related notes.
(a)(3) The following exhibits are filed as a part of this report:
Exhibit No. Description
2.1
Agreement and Plan of Merger, dates as of December 18, 2019, by and among CNB Financial Corporation, CNB Bank and Bank of Akron (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on December 18, 2019)
3.1
Second Amended and Restated Articles of Incorporation of CNB Financial Corporation (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on April 18, 2019)
3.2
Second Amended and Restated Bylaws of CNB Financial Corporation (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on April 18, 2019)
3.3
Statement with Respect to Shares of 7.125% Series A Fixed-Rate Non-Cumulative Perpetual Preferred Stock, effective as of August 25, 2020 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 25, 2020)
4.1
Description of Registrant's Securities
4.2
Form of Certificate representing the 7.125% Series A Fixed-Rated Non-Cumulative Perpetual Preferred Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on August 25, 2020)
4.3
Deposit Agreement, dated August 25, 2020, among CNB Financial Corporation, American Stock Transfer & Trust Company, LLC, and the holders from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on August 25, 2020)
4.4
Form of Depositary Receipt representing the Depositary Shares (included as Exhibit A to Exhibit 4.3 of the Registration Statement on Form 8-A filed on August 25, 2020)
10.1
CNB Financial Corporation 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on April 18, 2019)
10.2
Executive Employment Agreement dated October 24, 2019 by and among CNB Financial Corporation, CNB Bank and Joseph B. Bower Jr. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on October 25, 2019)
10.3
Executive Employment Contract, dated February 8, 2012, by and between CNB Bank and Richard l. Greslick, Jr. (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on March 9, 2012)
10.4
Executive Employment Contract, dated September 23, 2013, by and between CNB Financial Corporation, CNB Bank and Joseph E. Dell, Jr. (incorporated by reference to Exhibit 10.7 to the Registrant's Current Report on Form 10-K filed on March 7, 2014)
Exhibit No. Description
10.5
Executive Employment Agreement, dated March 23, 2020, by and between CNB Financial Corporation, CNB Bank and Tito L. Lima (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 24, 2020)
10.6
Executive Employment Agreement, dated February 3, 2021, by and between CNB Financial Corporation, CNB Bank and Martin T. Griffith (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on February 5, 2021)
List of subsidiaries of CNB Financial Corporation, filed herewith
23.1
Consent of Crowe LLP
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB XBRL Taxonomy Extension Presentation Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)