EDGAR 10-K Filing

Company CIK: 736772
Filing Year: 2022
Filename: 736772_10-K_2022_0000736772-22-000020.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 Securities (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, and in July 2020, the Corporation acquired Bank of Akron.
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 ("Holiday"), 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 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 operated within the ERIEBANK division as of December 31, 2021 and has subsequently closed. In conjunction with the closing of the LPO, the Corporation opened a full-service branch in Cleveland, Ohio. The Bank currently operates eleven full-service branch locations, 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 six 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 ten branch locations and one drive-up office as BankOnBuffalo, a division of the Bank, with its headquarters in Buffalo, New York.
In 2021, the Bank received regulatory approval to conduct business in the state of Virginia as Ridge View Bank, a division of the Bank. The Bank currently operates two LPOs in Roanoke, Virginia.
The Bank had 44 full-service branch offices located in various communities in its market area at December 31, 2021, and as noted previously has subsequently opened one additional full service branch. 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 the New York counties of Erie and Niagara. Ridge View Bank, a division of the Bank, operates in Roanoke, Virginia.
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. Holiday currently has nine offices within the Corporation’s market area.
Cybersecurity
Following a cybersecurity incident in the fourth quarter of 2020 that resulted in potential unauthorized access to personally identifiable information, the Corporation has continued to enhance its data security systems, technology platforms, employee education and risk management processes in an effort to underpin its business strategy. Although the Corporation’s core systems were not compromised and the Corporation has not experienced any material losses, the Corporation is committed to implementing strategies to prevent and/or mitigate future cyber attacks.
Federal regulators issued two statements regarding cybersecurity: (i) a statement indicating that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institutions; and (ii) a statement indicating the expectation of a financial institution's management to maintain a sufficient business continuity planning process to ensure rapid recovery, resumption and maintenance of the financial institution's operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to: (a) enable recovery of data and business operations, (b) address rebuilding network capabilities, and (c) restore data if the financial institution or any of its critical service providers fall victim to this type of cyber-attack. If the Company does not comply with this regulatory guidance, it could be subject to various regulatory sanctions, as well as financial penalties.
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 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 greater resources 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 and 2021 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 the COVID-19 pandemic.
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 include those that are so closely related to banking or managing or controlling banks as to be a proper incident thereto." Activities for financial holding companies include those that are "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 were required to implement the simplification rule by April 1, 2020.
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 simplify 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 a certain size ( greater than 9% beginning January 1, 2022), 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, 2021, 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, 2021, the Corporation had a total of 703 employees, of which 659 were full time and 44 were part time.
The Corporation respects, values and promotes the realization of an increasing diversity and inclusivity profile in our team of Board members and employees, and our customers, reflective of the communities we serve. The Corporation emphasizes relevant governance and diversity and inclusion principles in strategic planning, human capital management and leadership development (which includes recruiting and retaining employees).
Strategic Planning and Related Training
The Corporation has established a formal Strategic Plan, and the framework of the Strategic Plan establishes that principles of inclusion and diversity encompass and integrate with the other objectives of the Strategic Plan, including exceptional experiences, demonstrated leadership, adaptable technology, and long-term growth. In establishing these principles as the foundation upon which all other strategic objectives are anchored, the Corporation seeks to further develop and sustain a diverse, equitable, and inclusive culture, with sensitivity to the entirety of the Corporation’s footprint and environment in which it operates. The differences among the Corporation’s Board and employees, and its customers and community members, are respected and embraced to drive innovative products, services, and solutions that effectively meet the variety of needs among the Corporation’s diverse group of stakeholders.
To ensure that the principles are understood, implemented, and demonstrated by the Corporation’s employee team on a sustained basis, the Corporation is developing comprehensive diversity, equity, and inclusion communication processes and a training curriculum - a comprehensive program to be delivered beginning in 2022 to all employees, including internal sessions delivered by a certified diversity and inclusion trainer, supplemented by relevant external training sources. This effort will include establishing measurable goals of inclusion and diversity accountability, qualitative processes and actions for achievement of these goals, and regular quantitative assessments to measure the impact on the Corporation, its experiences, and its culture.
Inclusion and Diversity Committee
In support of its strategic diversity and inclusion efforts, and to ensure that the diverse perspectives of the entire Corporation’s employee team is considered when developing and implementing its service and operating profile, the Corporation established an Inclusion and Diversity Committee (the “Diversity Committee”) in 2018. This Diversity Committee, which meets monthly, is comprised of over 10 employee members including underrepresented minorities, females, and those who identify as LGTBQ+, with the following committee responsibilities and goals:
•Encourage an inclusive and engaged workforce culture through communications and training;
•Demonstrate sustainability, commitment and accountability by tracking inclusion and diversity efforts bank wide;
•Bring awareness to the importance of inclusion and diversity internally and externally.
The Diversity Committee’s meeting minutes, activities and recommendations are provided regularly to the Corporation’s executive management team for consideration to promote the effective integration of diversity and inclusion principles into the respective facets of our business evaluated and addressed by the Diversity Committee.
Human Capital Management and Leadership Development
We seek to recognize the unique contribution each employee brings to the Corporation, and we are fully committed to supporting a workplace that understands, accepts and values the similarities and differences between individuals. The Corporation’s key human capital management objectives are to recruit, hire, develop and promote a deeply experienced and diverse employee team, supplemented by similarly inclusive and diversity-focused third-party vendors, that collectively translate into a strong workforce committed to fostering, promoting, and preserving the entire spectrum of our communities and culture, while successfully executing our business strategies and demonstrating our corporate values. To support these objectives, the Corporation’s Employee Experience processes and programs are designed and operated to:
•Attract and develop talented employees across the spectrum of professional experience, life experience, socio-economic background, gender, race, religion, skill set, and geographic representation;
•Prepare all members of our team for critical roles and leadership positions both now and the future, in serving as employees and valuable community members;
•Reward and support employees fairly and without discrimination based upon successful performance and through competitive pay and benefit programs;
•Enhance the Corporation’s culture through efforts to better understand, foster, promote, and preserve a culture of diversity and inclusion; and
•Evolve and invest in technology, tools, and resources to better support employees of varying skills and backgrounds at work.
Among the means we use to monitor our performance in employee diversity and inclusion management, we take recurring management and employee demographic measurements and engagement surveys, and utilize the results to identify progress made, as well as areas in need of more attention, in improving the diversity, equity, and inclusion of our leadership and workforce profile, and personnel management practices.
A critical measure is realizing increasing diversity in our senior leadership positions, as those members of the Corporation’s management have greater ability to effectuate sustained change in the composition of our team and the expanded, relevant involvement of all groups within the spectrum of our workforce and communities.
The Corporation’s senior leadership team, which is comprised of individuals with the titles of Senior Vice President, Executive Vice President, Senior Executive Vice President, Regional President, President, and CEO, opened the Year 2021 with 33 individuals, including 11 members, or 33%, who were female or members of underrepresented minority groups. As we began the Year 2022, our senior leadership team has expanded to 36 individuals, with females and members of underrepresented minority groups comprising 12, or 33%, of the team.
As a result of broadening our recruitment efforts to increase the diversity of our team, for the year ended December 31, 2021, the Corporation hired 48 individuals from groups designated as underrepresented minorities, out of 245 total hires for the entire Corporation in 2021. While 2021 saw the most minority hires made in one year by the Corporation, allowing us to realize improvement in our overall ethnic diversity workforce profile, we recognize that our efforts must continue to remain diligent and be increasingly productive, as some of our regional bank’s workforce profiles do not yet more closely parallel the overall underrepresented minority demographics of their respective communities, particularly our predominantly urban markets including Cleveland, Columbus, Buffalo, and Erie.
As part of expanding our efforts and outlets to reach more qualified underrepresented minority candidates for new or open positions in 2022 and beyond, we are broadening our outreach to new sources for identifying and recruiting talented and qualified minority candidates. This includes partnering with a local Buffalo, New York college to offer apprenticeship programs designed to provide meaningful on-the-job training, work experience and college credits towards certificates and banking degrees to minority students. Additionally, our involvement in the Ohio Bankers League Summer Banking Institute allows us to offer internships to minority college students to increase awareness of career opportunities available in the banking industry in both the Cleveland and Columbus, Ohio markets. We believe our participation in these programs will help us identify or develop similar programs and minority recruitment opportunities in other markets and communities within the Corporation’s footprint.
Community Involvement and Social Impacts
The Corporation serves as a cornerstone institution of both financial support and community service in the markets in which we serve. We are committed to strengthening these communities through the active volunteering of our employees.
The Corporation's employees actively participate in their communities through volunteer activities in education, economic development, human and health services, and community reinvestment. Despite the continuing COVID-19 pandemic, the Corporation’s employees found innovative ways to give back to their communities. During 2021, employees donated 7,835 hours in support of more than 456 organizations, with 58% of employees actively participating. Additionally, there were approximately $700,000 in donations to community organizations and events within the communities we serve. Notably, even during the COVID-19 pandemic, the Corporation’s Martin Luther King, Jr. “Take the Day On” efforts resulted in the support of 32 community organizations and 206 volunteer hours. Employees collected donations and delivered them to local organizations in need during this national day of service, which typically serves as a bank holiday. Another example of the Corporation’s involvement in the community is a Financial Reality Fair for high school students, many of which are in low-to-moderate income households, held at the local career center. The event benefited 400 high school students from six high schools, resulted in over 200 hours of volunteer time and partnerships with six community organizations. Bank experts not only shared their real-life knowledge of budgeting, but also provided additional follow up financial education after the fair.
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.
The COVID-19 pandemic has had and continues to have, and another pandemic or public health crisis in the future could have, repercussions across domestic and global economies and financial markets. The global impact of the COVID-19 pandemic evolved rapidly and many countries and state and local governments in the United States, including those in which we operate, reacted by instituting government restrictions, border closings, quarantines, “shelter-in-place” orders and “social distancing” guidelines that, among other things, resulted in a dramatic increase in national unemployment and a significant economic contraction in 2020. Although the United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the pandemic, including the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") in 2020 and ongoing relief efforts, 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;
•higher inflation and supply chain disruptions;
•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 scope, severity and duration of the pandemic and its impact on our customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the direct and indirect economic effects of the pandemic and containment measures, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and their effectiveness against emerging variants of COVID-19, such as the Delta and Omicron variants, 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. Volatility and uncertainty related to inflation and the effects of inflation, which may lead to increased costs for businesses and consumers and potentially contribute to poor business and economic conditions generally, may also enhance or contribute to some of the risks discussed herein. For example, higher inflation, or volatility and uncertainty related to inflation, could reduce demand for the Corporation’s products, adversely affect the creditworthiness of the Corporation’s borrowers or result in lower values for the Corporation’s investment securities and other interest-earning assets.
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 credit 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 credit 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, the CECL methodology may create more volatility in the level of our allowance for credit losses from quarter to quarter as changes in the level of allowance for credit 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.
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 Global Select Market of The NASDAQ Stock Market LLC ("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. As a bank holding company, the Corporation’s principal assets and sources of income are derived from the Bank and, as a result, 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. If the Corporation were unable to receive dividends from the Bank, it would materially and adversely affects the Corporation’s liquidity and its ability to service its debt, pay its other obligations, or pay cash dividends on its common stock. 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.
Severe weather, flooding and other effects of climate change and other natural disasters, such as earthquakes, could adversely affect our financial condition, results of operations or liquidity.
Our branch locations and our customers’ properties may be adversely impacted by flooding, wildfires, high winds and other effects of severe weather conditions that may be caused or exacerbated by climate change. These events can force property closures, result in property damage and/or result in delays in expansion, development or renovation of our properties and those of our customers. Even if these events do not directly impact our properties or our customers’ properties, they may impact us and our customers through increased insurance, energy or other costs. In addition, changes in laws or regulations, including federal, state or city laws, relating to climate change could result in increased capital expenditures to improve the energy efficiency of our branch locations and/or our customers’ properties.
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 Corporation depends on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer's audited financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. Our financial condition, results of operations and capital could be negatively impacted to the extent we incorrectly assess the creditworthiness of our borrowers, fail to detect or respond to deterioration in asset quality in a timely manner, or rely on financial statements that do not comply with GAAP or are materially misleading.
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.
The Corporation’s operations may be adversely affected if its external vendors do not perform as expected or if its access to third-party services is interrupted.
The Corporation relies on certain external vendors to provide products and services necessary to maintain the day-to-day operations of the Corporation. Some of the products and services provided by vendors include key components of our business infrastructure including data processing and storage and internet connections and network access, among other products and services. Accordingly, the Corporation’s operations are exposed to the risk that these vendors will not perform in accordance with the contracted arrangements or under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements or under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could disrupt the Corporation’s operations. If we are unable to find alternative sources for our vendors’ services and products quickly and cost-effectively, the failures of our vendors could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations.
Additionally, our information technology and telecommunications systems interface with and depend on third-party systems, and we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
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 unauthorized disclosure or misuse of confidential or proprietary information, damage its reputation, increase its costs, or cause losses.
The Corporation, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions. The Corporation also collects and processes regulated personal date of employees 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, vulnerabilities, 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 employees' or 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. In addition, significant disruptions of our third party vendors’ and/or service providers’ security systems or infrastructure, or other similar data security incidents, could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, regulated personal or confidential information, which could harm our business.
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 and our information systems remain a target of cyber attacks. Given the evolving nature of security threats and evolving safeguards, there can be no assurance that any preventive, protective, or remedial measures are or will be adequate to address threats that arise. However, even security measures that are appropriate, reasonable, and/or in accordance with applicable legal requirements may not be able to fully protect our operational or security systems or infrastructure and the data contained therein, or our data that is contained in our subsidiaries’ or third parties’ systems. Additionally, while we have implemented security measures that we believe are appropriate, a regulator could deem our security measures not to be appropriate given the lack of prescriptive measures in certain data protection laws. 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 as well as in response to the evolving threat landscape and any incidents we experience. 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. In addition, any actual or perceived failure by the Corporation or our vendors or business partners to comply with our privacy, confidentiality, or data security-related legal or other obligations to third parties may result in claims by third parties that we have breached our privacy- or confidentiality-related obligations, which could materially and adversely affect our business and prospects.
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 future information security vulnerabilities.
While we have purchased cybersecurity insurance, there are no assurances that the coverage would be adequate in relation to any incurred losses. Moreover, as cyber attacks increase in frequency and magnitude, we may be unable to obtain cybersecurity insurance in amounts and on terms we view as adequate for our operations.
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 Risk Factors
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 at December 31, 2021 and has subsequently opened one additional full-service office. Of these 45 offices, 23 are owned and 21 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. 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 the New York counties of Erie and Niagara. Ridge View Bank, a division of the Bank, operates in Roanoke, Virginia. 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 NASDAQ under the symbol "CCNE." As of December 31, 2021, the number of shareholders of record of the Corporation’s common stock was 6,191.
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, 2021.
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, 2021 0 $ 0 0 183,131 (1)
November 1 - 30, 2021 36,359 $ 27.50 36,359 146,772 (1)
December 1 - 31, 2021 0 $ 0 0 146,772 (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, 2021, there were 146,772 shares remaining for repurchase under the program.
Additionally, during the quarter ended December 31, 2021, 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, 2016 and ending December 31, 2021. Previously, the Corporation utilized the SNL Bank NASDAQ Index as the peer group index. The SNL Bank NASDAQ Index was retired in August 2021 and, therefore, there is no value to disclose for the SNL Bank NASDAQ Index as of 12/31/2021. The Corporation utilized as a replacement index the KBW NASDAQ Bank Index.
CNB Financial Corporation
Period Ending
Index 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21
CNB Financial Corporation 100.00 100.79 90.21 131.65 88.76 113.57
NASDAQ Composite Index 100.00 129.64 125.96 172.18 249.51 304.85
KBW NASDAQ Bank Index 100.00 118.59 97.58 132.84 119.14 164.80
Source : S&P Global Market Intelligence
© 2022

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED

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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
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented to provide insight into management’s assessment of financial results and should be read in conjunction with the following parts of this Form 10-K: Part I, Item 1 “Business,” Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” and Part II, Item 8 “Financial Statements and Supplementary Data.”
Dollar amounts in tables are stated in thousands, except for per share amounts.
Forward-Looking Statements and Factors that Could Affect Future Results
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 our customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the direct and indirect economic effects of the pandemic and containment measures, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and their effectiveness against emerging variants of COVID-19, such as the Delta and Omicron variants, 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 Part I, "Item 1A. Risk Factors" in this Annual Report on Form 10-K 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.
Overview
The Corporation is a financial holding company registered under 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. 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 New York counties of Erie and Niagara. Ridge View Bank, a division of the Bank, operates in Roanoke, Virginia.
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., 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.
COVID-19 Considerations
The global outbreak of COVID-19 and the public health measures that have been undertaken in response have had, and 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 while continuing to monitor and update the Corporation's quarantine protocols based on governmental guidelines;
•Enforcing safe practices in branch lobbies order to serve consumer and business customers and continued to offer the Corporation's customers alternatives through its drive-through capabilities, network of ATMs, internet banking, mobile application and telephone customer service capabilities;
•Continued 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; and
•Instituted mandatory social distancing policies for those employees not working remotely.
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-GAAP Financial Information
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:
•Tangible book value per share;
•Tangible equity/tangible assets;
•Tangible common equity/tangible assets;
•Pre-provision net revenue ("PPNR");
•Non-interest income excluding realized gains on available for sale securities;
•Net interest margin (fully tax equivalent basis);
•Efficiency ratio;
•Return on average tangible equity; and
•Return on average tangible common equity
In addition, non-GAAP evaluations on the impact of PPP-related loans (as defined below), merger costs, branch closure costs and Federal Home Loan Bank of Pittsburgh ("FHLB") prepayment penalties on various metrics of the Corporation’s financial performance include calculations related to return on average equity, return on average tangible equity, return on average tangible common equity, tangible equity/tangible assets, tangible common equity/tangible assets and allowance for credit losses/loans. A reconciliation of these non-GAAP financial measures is provided below in the "Non-GAAP Financial Measures" section.
Management considers return on average assets, return on average equity, earnings per common share, asset quality, and other metrics as key measures of the financial 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.
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 2020
Balance $ Change
vs. prior
year % Change
vs. prior
year
Total assets $ 5,328.9 $ 4,729.4 $ 599.5 12.7 %
Total loans, net of allowance for credit losses 3,597.2 3,337.4 259.8 7.8 %
Total securities 707.6 591.6 116.0 19.6 %
Total deposits 4,715.6 4,181.7 533.9 12.8 %
Total shareholders’ equity 442.8 416.1 26.7 6.4 %
Cash and Cash Equivalents
Cash and cash equivalents totaled $732.2 million at December 31, 2021, including additional excess liquidity of $684.3 million held at the Federal Reserve. Cash and cash equivalents totaled $532.7 million at December 31, 2020. The increase in liquidity was primarily the result of the impact of government stimulus initiatives and organic growth in deposits.
In addition to the Corporation's deposit growth strategies, management believes the liquidity needs of the Corporation are satisfied primarily by the current balance of cash and cash equivalents, customer deposits, FHLB borrowing capacity, and the portions of the securities and loan portfolios that mature within one year. The Corporation expects that these sources of funds will support both existing operations, future loan and investment portfolio growth and off-balance sheet commitments as they come due.
Securities
Securities available for sale and equity securities totaled $707.6 million and $591.6 million at December 31, 2021 and 2020, 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 increase of approximately $116.0 million, or 20%, from December 31, 2020 to December 31, 2021, resulted primarily from the Corporation’s liquidity strategy implemented in 2021. This strategy focused on deploying excess liquidity earning a relatively modest level of interest at the Federal Reserve towards investment securities that met the Corporation’s risk profile parameters for investments.
The following tables summarize the maturity distribution schedule with corresponding weighted-average yields of securities available for sale as of December 31, 2021. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are included in maturity categories based on their stated maturity date.
December 31, 2021
Within
One Year After One But Within
Five Years After Five But
Within Ten
Years After Ten
Years Total
$ Amt. Yield $ Amt. Yield $ Amt. Yield $ Amt. Yield $ Amt. Yield
U.S. Government Sponsored Entities $ 7,328 1.97 % $ 60,354 1.57 % $ 44,066 1.83 % $ 0 0.00 % $ 111,748 1.70 %
State and Political Subdivisions $ 3,139 3.00 % $ 26,223 2.85 % $ 51,851 2.22 % $ 22,497 2.33 % 103,710 2.43 %
Residential and multi-family mortgage $ 0 0.00 % $ 28,439 2.88 % $ 41,051 2.09 % $ 365,147 1.38 % 434,637 1.55 %
Corporate notes and bonds $ 661 0.38 % $ 2,946 0.62 % $ 24,457 3.92 % $ 0 0.00 % 28,064 3.49 %
Pooled SBA $ 0 0.00 % $ 359 5.15 % $ 12,449 2.73 % $ 6,224 1.78 % 19,032 2.46 %
Total $ 11,128 2.17 % $ 118,321 2.16 % $ 173,874 2.37 % $ 393,868 1.44 % $ 697,191 1.81 %
The portfolio contains no holdings of a single issuer that exceeds 10% of shareholders’ equity other than the U.S. 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's strategy given the current environment is to focus on lower risk securities, shorter durations that complement the current portfolio investment ladder, and consistent reinvestment of cash flows to replace lower earning assets.
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
Note 4, "Loans," in the consolidated financial statements provides more detail concerning the loan portfolio of the Corporation. At December 31, 2021, loans totaled $3.6 billion, an increase of $263.0 million, or 7.8%, compared to December 31, 2020. As further discussed below, during the second quarter of 2020, the Corporation began originating loans to qualified small businesses under the Paycheck Protection Program ("PPP") administered by the Small Business Administration ("SBA") under the provisions of the CARES Act. Excluding the impact of PPP loans, net of PPP deferred processing fees (such loans, the "PPP-related loans"), the Corporation's loan portfolio increased $373.3 million, or 11.6%, from December 31, 2020. The growth was primarily driven by the Corporation's ongoing expansion in the Cleveland and Ridge View regions, combined with continued strong growth in its Private Banking division, coupled with increased lending opportunities in other regions of the Corporation.
Included in the loan growth discussed above, and as part of the liquidity management strategies first implemented by the Corporation in 2020, the year ended December 31, 2021 reflected an increase in syndicated lending activities of $103.7 million from December 31, 2020. The syndicated loan portfolio totaled $125.8 million, or 3.5% of total loans, excluding PPP-related loans, at December 31, 2021. The Corporation internally underwrites each syndicated loan individually and considers these loans as an alternative to purchasing investment securities. While the overall strategy is to redeploy lower earning assets towards a higher profitability loan with a risk profile that meets the underwriting policies, the Corporation does not expect this type of activity to become a significant component of its business.
Loan Origination/Risk Management
The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. 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. As discussed more fully above, syndicated loan purchases are underwritten utilizing the same process as the Corporation’s originated loans.
The Corporation has begun to explore the credit and reputational risks associated with climate change and their potential impact on the foregoing, while closely monitoring regulatory developments on climate risk. This includes, among other things, researching and developing a formalized approach to considering climate change related risks in the Corporation's underwriting processes. This approach will be impacted, in part, by the accessibility and reliability of both customer climate risk data and climate risk data in general. One of the objectives of these efforts is to enable the Corporation to better understand the climate change related risks associated with the Corporation's customers' business activities and to be able to monitor their response to those risks and their ultimate impact on the Corporation's customers.
Although it is possible that the on-going effects of COVID-19 could continue to impact demand for our loan products, the Corporation expects to continue to achieve robust loan growth in 2022 as a result of its diversified markets and its focus on core customer acquisition strategies.
Customer Support Strategies and Loan Portfolio Profile
As of December 31, 2021, the Corporation had outstanding $47.1 million in PPP loans at a rate of 1.00%, representing 446 PPP loan relationships, and deferred PPP processing fees of approximately $1.9 million. For the twelve months ended December 31, 2021, the Corporation recognized $8.7 million in deferred PPP processing fees ("PPP-related fees"). The outstanding balance of PPP loans at December 31, 2021 included loans from the two different origination years: (i) $199 thousand, or seven loans from the Corporation's participation in the PPP in 2020, and (ii) $46.9 million, or 439 loans, from the Corporation’s participation in the PPP in 2021.
In accordance with the CARES Act, the Corporation also deferred loan payments for its commercial and consumer customers, as determined on a case-by-case basis by the financial needs of each customer. As of December 31, 2021, there were five loans with deferred loan payment arrangements totaling $397 thousand, compared to $151.0 million, or 167 loans, at December 31, 2020.
Maturities and Sensitivities of Loans to Changes in Interest Rate
The following table presents the maturity distribution of the Corporation's loan portfolio at December 31, 2021. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.
December 31, 2021
Due in
One Year
or Less After One,
but Within
Five Years After Five but Within Fifteen Years After
Fifteen Years Total
Loans with Fixed Interest Rate
Farmland
$ 99 $ 1,667 $ 1,611 $ 935 $ 4,312
Owner-occupied, nonfarm nonresidential properties
5,277 19,399 19,807 9,056 53,539
Agricultural production and other loans to farmers
0 284 0 0 284
Commercial and Industrial
15,621 224,510 62,089 185 302,405
Obligations (other than securities and leases) of states and political subdivisions
2,679 4,559 50,807 39,902 97,947
Other loans
21 1,125 871 295 2,312
Other construction loans and all land development and other land loans (1)
10,243 10,878 7,319 1,790 30,230
Multifamily (5 or more) residential properties
1,452 56,949 3,090 4,753 66,244
Non-owner occupied, nonfarm nonresidential properties
25,595 63,094 18,319 6,798 113,806
1-4 Family Construction (1)
2,482 0 652 4,951 8,085
Home equity lines of credit 1 102 701 518 1,322
Residential Mortgages secured by first liens 1,815 23,663 252,640 109,134 387,252
Residential Mortgages secured by junior liens 234 5,802 42,533 4,385 52,954
Other revolving credit plans 29 16 16 2 63
Automobile 394 15,514 4,954 0 20,862
Other consumer 7,646 31,176 7,793 2,852 49,467
Credit cards 0 0 0 0 0
Overdrafts 0 0 0 0 0
Total $ 73,588 $ 458,738 $ 473,202 $ 185,556 $ 1,191,084
Loans with Variable or Floating Interest Rate
Farmland
$ 451 $ 2,544 $ 9,010 $ 7,451 $ 19,456
Owner-occupied, nonfarm nonresidential properties
11,800 30,222 283,777 55,334 381,133
Agricultural production and other loans to farmers
829 0 266 0 1,095
Commercial and Industrial
196,459 120,532 87,633 1,960 406,584
Obligations (other than securities and leases) of states and political subdivisions
0 1,660 17,244 24,036 42,940
Other loans
2,174 2,911 1,647 4,935 11,667
Other construction loans and all land development and other land loans (1)
60,175 110,199 88,427 9,838 268,639
Multifamily (5 or more) residential properties
16,311 48,928 66,351 18,309 149,899
Non-owner occupied, nonfarm nonresidential properties
68,275 137,110 288,479 55,392 549,256
1-4 Family Construction (1)
7,382 1,287 3,526 17,542 29,737
Home equity lines of credit 4,786 6,761 73,563 18,085 103,195
Residential Mortgages secured by first liens 6,976 14,721 154,116 263,664 439,477
Residential Mortgages secured by junior liens 1,098 113 2,318 206 3,735
Other revolving credit plans 2,992 1,930 21,102 449 26,473
Automobile 0 0 0 0 0
Other consumer 1 46 78 84 209
Credit cards 9,935 0 0 0 9,935
Overdrafts 278 0 0 0 278
Total $ 389,922 $ 478,964 $ 1,097,537 $ 477,285 $ 2,443,708
11-4 family construction loans and other construction loans and all land development and other land loans segments include loans that are construction to permanent loans in which the loan segment will change when the construction period has concluded.
The Corporation generally structures commercial loans with shorter-term maturities in order to match our funding sources and to enable us to effectively manage the loan portfolio by providing the flexibility to respond to liquidity needs, changes in interest rates and changes in underwriting standards and loan structures, among other things. Due to the shorter-term nature of such loans, from time to time in the ordinary course of business and without any contractual obligation on our part, we will renew/extend maturing lines of credit or refinance existing loans at their maturity dates.
Loan Concentration
At December 31, 2021, no industry concentration existed which exceeded 10% of the total loan portfolio.
Loan Quality
The following table presents information concerning loan delinquency and other nonperforming assets at December 31, 2021 and 2020:
December 31, 2021 December 31, 2020
Nonaccrual loans $ 19,420 $ 30,359
Accrual loans greater than 90 days past due 168 325
Total nonperforming loans 19,588 30,684
Other real estate owned 707 862
Total nonperforming assets $ 20,295 $ 31,546
Loans modified in a troubled debt restructuring (TDR):
Performing TDR loans $ 9,006 $ 10,457
Nonperforming TDR loans (1)
7,600 4,631
Total TDR loans $ 16,606 $ 15,088
Total loans $ 3,634,792 $ 3,371,789
Nonaccrual loans as a percentage of loans 0.53 % 0.90 %
Total assets $ 5,328,939 $ 4,729,399
Nonperforming assets as a percentage of total assets 0.38 % 0.67 %
Allowance for credit losses on loans $ 37,588 $ 34,340
Ratio of allowance for credit losses on loans to nonaccrual loans 193.55 % 113.11 %
(1) Nonperforming TDR loans are also included in the balance of nonaccrual loans.
Total nonperforming assets were $20.3 million, or 0.38%, of total assets, as of December 31, 2021, reflecting a substantial decrease when compared to nonperforming assets of $31.5 million, or 0.67%, as of December 31, 2020. The reduction in nonperforming assets resulted primarily from the resolution of an $8.7 million commercial real estate loan relationship with no additional loss to the Corporation. In addition, the fourth quarter of 2021 included the resolution of a $1.4 million nonperforming commercial real estate loan relationship with no loss to the Corporation.
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.
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
As discussed in Note 1, "Summary of Significant Accounting Policies," in the consolidated financial statements, the Corporation's policies and procedures related to accounting for credit losses changed on January 1, 2020 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. The amount of each allowance account represents management's best estimate of current expected credit losses (“CECL”) on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of the Corporation's allowance accounts is dependent upon a variety of factors beyond the Corporation's control, including the performance of the Corporation's portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. The adequacy of the allowance for credit losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation. For additional information regarding the Corporation's accounting policies related to credit losses, refer to Note 1, "Summary of Significant Accounting Policies," and Note 4, "Loans" in the consolidated financial statements.
The table below provides an allocation of the allowance for credit losses on loans by loan portfolio segment at December 31, 2021 and 2020; however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments.
December 31, 2021
Amount of Allowance Allocated Percent of Loans in Each Category to Total Loans Total Loans Ratio of Allowance Allocated to Loans in Each Category
Farmland
$ 151 0.7 % $ 23,768 0.64 %
Owner-occupied, nonfarm nonresidential properties
3,339 12.0 % 434,672 0.77 %
Agricultural production and other loans to farmers
9 0.0 % 1,379 0.65 %
Commercial and Industrial 1
8,837 19.5 % 708,989 1.25 %
Obligations (other than securities and leases) of states and political subdivisions
1,649 3.9 % 140,887 1.17 %
Other loans
149 0.4 % 13,979 1.07 %
Other construction loans and all land development and other land loans 2,198 8.2 % 298,869 0.74 %
Multifamily (5 or more) residential properties
2,289 5.9 % 216,143 1.06 %
Non-owner occupied, nonfarm nonresidential properties
6,481 18.2 % 663,062 0.98 %
1-4 Family Construction 158 1.0 % 37,822 0.42 %
Home equity lines of credit 1,169 2.9 % 104,517 1.12 %
Residential Mortgages secured by first liens 6,943 22.7 % 826,729 0.84 %
Residential Mortgages secured by junior liens 546 1.6 % 56,689 0.96 %
Other revolving credit plans 528 0.7 % 26,536 1.99 %
Automobile 263 0.6 % 20,862 1.26 %
Other consumer 2,546 1.4 % 49,676 5.13 %
Credit cards 92 0.3 % 9,935 0.93 %
Overdrafts 241 0.0 % 278 86.69 %
Total loans $ 37,588 100.0 % $ 3,634,792 1.03 %
Excluding PPP loans, net of deferred processing fees $ 37,588 $ 3,589,589 1.05 %
1 PPP loans, net of deferred PPP processing fees, those disbursed in 2021, are included in the Commercial and Industrial classification.
December 31, 2020
Amount of Allowance Allocated Percent of Loans in Each Category to Total Loans Total Loans Ratio of Allowance Allocated to Loans in Each Category
Farmland
$ 221 0.7 % $ 23,316 0.95 %
Owner-occupied, nonfarm nonresidential properties
3,700 12.1 % 407,924 0.91 %
Agricultural production and other loans to farmers
24 0.1 % 2,664 0.90 %
Commercial and Industrial 1
6,233 19.7 % 663,550 0.94 %
Obligations (other than securities and leases) of states and political subdivisions
998 3.9 % 132,818 0.75 %
Other loans
68 0.4 % 11,961 0.57 %
Other construction loans and all land development and other land loans 1,956 6.1 % 205,734 0.95 %
Multifamily (5 or more) residential properties
2,724 6.3 % 212,815 1.28 %
Non-owner occupied, nonfarm nonresidential properties
8,658 19.0 % 640,945 1.35 %
1-4 Family Construction 82 0.8 % 27,768 0.30 %
Home equity lines of credit 985 3.2 % 109,444 0.90 %
Residential Mortgages secured by first liens 4,539 23.0 % 777,030 0.58 %
Residential Mortgages secured by junior liens 241 1.6 % 53,726 0.45 %
Other revolving credit plans 507 0.8 % 25,507 1.99 %
Automobile 132 0.8 % 25,344 0.52 %
Other consumer 2,962 1.3 % 42,792 6.92 %
Credit cards 66 0.2 % 8,115 0.81 %
Overdrafts 244 0.0 % 336 72.62 %
Total loans $ 34,340 100.0 % $ 3,371,789 1.02 %
Excluding PPP loans, net of deferred processing fees $ 34,340 $ 3,216,260 1.07 %
1 PPP loans, net of deferred PPP processing fees, those disbursed in 2020, are included in the Commercial and Industrial classification.
The allowance for credit losses measured as a percentage of loans was 1.03% as of December 31, 2021, compared to 1.02% as of December 2020. The allowance for credit losses measured as a percentage of loans, net of PPP-related loans, was 1.05% as of December 31, 2021 compared to 1.07% as of December 31, 2020.
The Corporation's allowance for credit losses is influenced by loan volumes, risk rating migration, delinquency status and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.
For the year ended December 31, 2021, the allowance for credit losses increased due to the growth in the Corporation's loan portfolio, coupled with qualitative adjustments in the Corporation's residential and consumer loan portfolios, growth in new market areas, and qualitative adjustments related to the continued uncertainty with the pandemic and economic environment. These factors were partially offset by improvements in the Corporation's historical loss rates and quantitative inputs including the unemployment forecast and prepayment and curtailment speeds, as well as the impact of net charge-offs and improvements or resolutions in the Corporation's individually evaluated loans.
There is still a significant amount of uncertainty related to the economic impact of COVID-19, including duration, new variants, future government responses, and the resiliency of the U.S. economy. During 2021, management reviewed internal and external factors to consider the need for any qualitative adjustments to the quantitative model. Specifically, management reevaluated the loss given default assumptions that utilize Frye Jacobs, the time period used for prepayment and curtailment speeds and the unemployment forecast. Management will continue to evaluate its estimate of expected credit losses as new information becomes available.
Note 4, "Loans," to the consolidated financial statements provides further disclosure of loan balances by portfolio segment as of December 31, 2021 and 2020, as well as the nature and scope of loans modified in a troubled debt restructuring during 2021 and 2020 and the related effect on provision for credit expense and allowance for credit losses.
Additional information related to credit loss expense and net (charge-offs) recoveries at December 31, 2021 and 2020 is presented in the tables below.
December 31, 2021
Provision (Benefit) for Credit Loss Expense Net
(Charge-Offs)
Recoveries Average
Loans Ratio of Annualized Net (Charge-Offs)
Recoveries to Average Loans
Farmland
$ (70) $ 0 $ 22,970 0.00 %
Owner-occupied, nonfarm nonresidential properties
213 (574) 428,377 (0.13) %
Agricultural production and other loans to farmers
(15) 0 2,245 0.00 %
Commercial and Industrial
2,564 40 680,368 0.01 %
Obligations (other than securities and leases) of states and political subdivisions
1,028 (377) 138,604 (0.27) %
Other loans
81 0 12,187 0.00 %
Other construction loans and all land development and other land loans 524 (282) 246,583 (0.11) %
Multifamily (5 or more) residential properties
(435) 0 218,285 0.00 %
Non-owner occupied, nonfarm nonresidential properties
(2,128) (49) 627,595 (0.01) %
1-4 Family Construction 76 0 30,513 0.00 %
Home equity lines of credit 186 (2) 106,214 0.00 %
Residential Mortgages secured by first liens 2,436 (32) 795,747 0.00 %
Residential Mortgages secured by junior liens 308 (3) 55,063 (0.01) %
Other revolving credit plans 49 (28) 25,751 (0.11) %
Automobile 154 (23) 23,027 (0.10) %
Other consumer 637 (1,053) 42,634 (2.47) %
Credit cards 120 (94) 9,532 (0.99) %
Overdrafts 275 (278) 224 (124.11) %
Total loans $ 6,003 $ (2,755) $ 3,465,919 (0.08) %
December 31, 2020
Provision (Benefit) for Credit Loss Expense Net
(Charge-Offs)
Recoveries Average
Loans Ratio of Annualized Net (Charge-Offs)
Recoveries to Average Loans
Farmland
$ (30) $ 0 $ 27,359 0.00 %
Owner-occupied, nonfarm nonresidential properties
2,031 (49) 396,881 (0.01) %
Agricultural production and other loans to farmers
(6) 0 3,185 0.00 %
Commercial and Industrial
5,283 (2,740) 644,793 (0.42) %
Obligations (other than securities and leases) of states and political subdivisions
207 0 147,851 0.00 %
Other loans
19 0 10,546 0.00 %
Other construction loans and all land development and other land loans (1,504) 125 191,984 0.07 %
Multifamily (5 or more) residential properties
1,301 0 184,980 0.00 %
Non-owner occupied, nonfarm nonresidential properties
3,266 (1,470) 532,088 (0.28) %
1-4 Family Construction 61 0 24,893 0.00 %
Home equity lines of credit 367 (5) 103,723 0.00 %
Residential Mortgages secured by first liens 2,366 (220) 691,294 (0.03) %
Residential Mortgages secured by junior liens 148 (156) 55,018 (0.28) %
Other revolving credit plans (51) (116) 27,102 (0.43) %
Automobile 99 (27) 26,419 (0.10) %
Other consumer 1,364 (1,383) 38,679 (3.58) %
Credit cards 179 (139) 8,126 (1.71) %
Overdrafts 254 (250) 250 (100.00) %
Total loans $ 15,354 $ (6,430) $ 3,115,171 (0.21) %
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 year ended December 31, 2019:
December 31, 2019
Provision (Benefit) for Credit Loss Expense Net
(Charge-Offs)
Recoveries Average
Loans Ratio of Annualized Net (Charge-Offs)
Recoveries to Average Loans
Commercial, Industrial, and Agricultural
$ 1,134 $ (188) $ 987,974 (0.02) %
Commercial Mortgages
2,729 (3,267) 748,915 (0.44) %
Residential Real Estate
(344) (313) 790,293 (0.04) %
Consumer
2,080 (2,046) 95,018 (2.15) %
Credit cards 82 (101) 7,448 (1.36) %
Overdrafts 343 (340) 462 (73.59) %
Total loans $ 6,024 $ (6,255) $ 2,630,110 (0.24) %
During the year ended December 31, 2021, the Corporation recorded a provision for credit losses of $6.0 million, as compared to a provision for credit losses of $15.4 million for the year ended December 31, 2020. Net chargeoffs during the year ended December 31, 2021 were $2.8 million, compared to net chargeoffs of $6.4 million during the year ended December 31, 2020. The year ended December 31, 2020 included (i) a charge-off of approximately $2.6 million related to a secured commercial and industrial loan relationship with a borrower who is deceased, and (ii) a separate $1 million charge-off related to the $8.7 million commercial real estate loan relationship discussed above.
Premises and Equipment
During the years ended December 31, 2021 and 2020, the Corporation invested $6.5 million and $5.6 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.
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 $22 million in purchases of BOLI during the twelve months ended December 31, 2021, while the Corporation made no purchases of BOLI during the twelve months ended December 31, 2020. The year ended December 31, 2020 includes $8.2 million of BOLI related to the Bank of Akron acquisition.
Funding Sources
Deposits
The Corporation’s sources of funds are deposits, borrowings, amortization and repayment of loan principal, interest earned on or maturation of investment securities and funds provided from operations. The Corporation considers deposits to be its primary source of funding in support of growth in assets.
December 31, 2021 December 31, 2020 Percentage change
2021 vs. 2020
Demand, Non interest bearing $ 792,086 $ 627,114 26.3%
Demand, Interest bearing 1,079,336 951,903 13.4%
Savings deposits 2,457,745 2,126,183 15.6%
Time deposits 386,452 476,544 (18.9)%
Total $ 4,715,619 $ 4,181,744 12.8%
Deposits totaled $4.7 billion at December 31, 2021, reflecting a $533.9 million, or 12.8%, increase from December 31, 2020, primarily resulting from the Corporation's customer acquisition strategies across all of the Corporation's regions and its Private Banking division, as well as the impact of government stimulus initiatives. The number of households across all regions increased 3.3% from December 31, 2020.
The following table sets forth the average balances of and the average rates paid on deposits for the period indicated.
Year Ended December 31,
2021 2020 2019
Average
Amount Annual
Rate Average
Amount Annual
Rate Average
Amount Annual
Rate
Demand - Non-Interest Bearing $ 724,839 $ 516,724 $ 360,208
Demand - Interest Bearing 978,279 0.18 % 755,200 0.24 % 580,244 0.42 %
Savings Deposits 2,309,560 0.22 % 1,923,214 0.66 % 1,450,653 1.39 %
Time Deposits 445,488 1.82 % 445,408 2.15 % 371,464 2.05 %
Total $ 4,458,166 $ 3,640,546 $ 2,762,569
The following table presents additional information about our December 31, 2021 and 2020 deposits:
December 31, 2021 December 31, 2020
Time deposits not covered by deposit insurance $ 68,562 $ 64,202
Total deposits not covered by deposit insurance 1,711,676 1,401,417
Scheduled maturities of time deposits not covered by deposit insurance at December 31, 2021 were as follows:
December 31, 2021
3 months or less $ 7,482
Over 3 through 6 months 9,618
Over 6 through 12 months 31,619
Over 12 months 19,843
Total $ 68,562
Borrowings
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, 2021 and 2020. 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%.
On October 18, 2021, the Corporation announced that it had completed the redemption of $50 million aggregate principal amount of its 5.75% Fixed-to-Floating Rate Subordinated Notes due October 15, 2026 (the “2026 Notes”), representing all outstanding 2026 Notes. The 2026 Notes were redeemed pursuant to their terms at a price equal to 100% of the principal amount, plus accrued and unpaid interest up to, but excluding, October 15, 2021. The Corporation financed the redemption of the 2026 Notes with cash on hand, including net proceeds from the issuance and sale of $85.0 million aggregate principal amount of the Corporation’s 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 completed in June 2021.
Liquidity and Capital Resources
Liquidity
Liquidity measures an organization’s ability to meet its cash obligations as they come due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.
The Corporation’s expected material cash requirements for the twelve months ended December 31, 2022 and thereafter consist withdrawals by depositors, credit commitments to borrowers, shareholder dividends, share repurchases, operating expenses and capital expenditures. The Corporation expects to satisfy these short-term and long-term cash requirements through deposit growth, principal and interest payments on loans and investment securities, maturing loans and investment securities, as well as the Corporation maintains access to wholesale funding sources.
The objective of the Corporation's liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Corporation's operations and to meet cash obligations and other commitments on a timely basis and at a reasonable cost. The Corporation seeks to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on its balance sheet. The Corporation's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, including the Federal Reserve, and securities available for sale. Liability liquidity is provided by access to funding sources which include core deposits, correspondent banks and other wholesale funding.
The Corporation's liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in the Corporation's asset/liability management process. The Corporation regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into the Corporation's contingency funding plan, which provides the basis for the identification of its liquidity needs.
As of December 31, 2021, the Corporation had approximately $684.3 million held in an interest-bearing account at the Federal Reserve. The Corporation also has the ability to borrow funds as a member of the FHLB. As of December 31, 2021, based upon available, pledgeable collateral, the Corporation's total borrowing capacity with the FHLB was approximately $932.7 million. Furthermore, at December 31, 2021, the Corporation had approximately $235.7 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through the Federal Reserve discount window, as needed. As of December 31, 2021, management is not aware of any events that are reasonably likely to have a material adverse effect on the Corporation's liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on the Corporation.
In the ordinary course of business the Corporation has entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of December 31, 2021. The Corporation’s material contractual obligations as of December 31, 2021 consist of (i) long-term borrowings - Note 12, "Borrowings," (ii) operating leases - Note 9, "Leases," (iii) time deposits with stated maturity dates - Note 11, "Deposits," and (iv) commitments to extend credit and standby letters of credit - Note 20, "Off-Balance Sheet Activities."
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, 2021, CNB’s total shareholders’ equity was $442.8 million, an increase of $26.7 million, or 6.4%, from December 31, 2020 primarily as a result of growth in organic earnings, partially offset by a decrease in accumulated other comprehensive income and payment of common and preferred stock dividends to the Corporation's common and preferred shareholders during the year ended December 31, 2021.
Under the Basel III Capital Rules, the Corporation elected to opt-out of the requirement to include most components of accumulated other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss related to securities available for sale, effective cash flow hedges and defined benefit post-retirement benefit plans do not impact regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. In connection with the adoption of ASC 326 on January 1, 2020, the Corporation also elected to exclude, for a transitional period, the effects of credit loss accounting under CECL in the calculation of our regulatory capital and regulatory capital ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 19, "Regulatory Capital Matters," in the accompanying notes to consolidated financial statements.
Preferred 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. The $57.8 million qualify as Tier 1 capital for regulatory capital purposes.
Subordinated Debentures and Notes
On October 18, 2021, the Corporation announced that it had completed the redemption of $50 million aggregate principal amount of its 5.75% Fixed-to-Floating Rate Subordinated Notes due October 15, 2026 (the “2026 Notes”), representing all outstanding 2026 Notes. The 2026 Notes were redeemed pursuant to their terms at a price equal to 100% of the principal amount, plus accrued and unpaid interest up to, but excluding, October 15, 2021. The Corporation financed the redemption of the 2026 Notes with cash on hand, including net proceeds from the issuance and sale of $85.0 million aggregate principal amount of the Corporation’s 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 completed in June 2021. The $85.0 million qualify as Tier 2 capital for regulatory capital purposes.
Additional details about our subordinated debentures and notes are included in Note 12, "Borrowings" in the accompanying notes to consolidated financial statements.
As of December 31, 2021 all of the Corporation's capital ratios exceeded regulatory “well-capitalized” levels and continue to support the Corporation's growth strategy. The Corporation’s capital ratios and book value per common share at December 31, 2021 and 2020 were as follows:
December 31, 2021 December 31, 2020
Total risk-based capital ratio 14.92 % 14.32 %
Tier 1 capital ratio 11.79 % 11.91 %
Common equity tier 1 ratio 9.65 % 9.50 %
Leverage ratio 8.22 % 8.11 %
Tangible common common equity/tangible assets (1)
6.45 % 6.70 %
Book value per common share $ 22.85 $ 21.29
Tangible book value per common share (1)
$ 20.22 $ 18.66
(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.
Average Balances, Interest Rates and Yields
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.
December 31, 2021 December 31, 2020 December 31, 2019
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)
$ 624,330 1.70 % $ 10,500 $ 505,770 2.35 % $ 11,510 $ 436,122 2.77 % $ 11,973
Tax-Exempt (1) (2)
42,658 3.43 % 1,403 55,460 3.32 % 1,772 85,802 3.40 % 2,867
Equity Securities (1) (2)
8,136 3.58 % 291 12,814 5.89 % 755 18,203 6.17 % 1,123
Total Securities 675,124 1.83 % 12,194 574,044 2.53 % 14,037 540,127 2.99 % 15,963
Loans:
Commercial (2)
1,284,750 4.95 % 63,642 1,230,615 4.80 % 59,016 987,974 5.35 % 52,868
Mortgage (2)
2,080,000 4.51 % 93,738 1,783,980 4.76 % 84,857 1,539,208 5.04 % 77,501
Consumer 101,169 9.98 % 10,098 100,576 9.71 % 9,766 102,928 10.08 % 10,373
Total Loans (3)
3,465,919 4.83 % 167,478 3,115,171 4.93 % 153,639 2,630,110 5.35 % 140,742
Other Earning Assets 626,997 0.14 % 881 402,861 0.21 % 852 24,674 2.02 % 499
Total earning assets 4,768,040 3.79 % $ 180,553 4,092,076 4.14 % $ 168,528 3,194,911 4.93 % $ 157,204
Non-Interest Earning Assets
Cash & Due From Banks 48,673 42,001 33,218
Premises, Equipment and Right of Use Assets 79,807 75,516 68,744
Other Assets 199,107 166,511 137,519
Allowance for Credit Losses (36,727) (28,962) (20,655)
Total Non-Interest Earning Assets 290,860 255,066 218,826
Total Assets $ 5,058,900 $ 4,347,142 $ 3,413,737
Liabilities and Shareholders’ Equity
Interest Bearing Deposits
Demand - interest bearing $ 978,279 0.18 % $ 1,783 $ 755,200 0.24 % $ 1,781 $ 580,244 0.42 % $ 2,455
Savings 2,309,560 0.22 % 5,164 1,923,214 0.66 % 12,775 1,450,653 1.39 % 20,138
Time 445,488 1.82 % 8,115 445,408 2.15 % 9,586 371,464 2.05 % 7,609
Total interest bearing deposits 3,733,327 0.40 % 15,062 3,123,822 0.77 % 24,142 2,402,361 1.26 % 30,202
Short-term borrowings 0 0.00 % 0 0 0.00 % 0 16,022 2.65 % 425
Long-term borrowings 0 0.00 % 0 220,849 2.04 % 4,507 228,714 2.15 % 4,894
Finance lease liabilities 507 4.54 % 23 587 4.60 % 27 663 4.52 % 30
Subordinated debentures & notes 108,963 4.35 % 4,735 70,620 5.35 % 3,780 70,620 5.63 % 3,979
Total interest bearing liabilities 3,842,797 0.52 % $ 19,820 3,415,878 0.95 % $ 32,456 2,718,380 1.45 % $ 39,530
Demand - non-interest bearing 724,839 516,724 360,208
Other liabilities 60,202 56,377 49,825
Total Liabilities 4,627,838 3,988,979 3,128,413
Shareholders’ Equity 431,062 358,163 285,324
Total Liabilities and Shareholders’ Equity $ 5,058,900 $ 4,347,142 $ 3,413,737
Interest Income/Earning Assets 3.79 % $ 180,553 4.14 % $ 168,528 4.93 % $ 157,204
Interest Expense/Interest Bearing Liabilities 0.52 % 19,820 0.95 % 32,456 1.45 % 39,530
Net Interest Spread 3.27 % $ 160,733 3.19 % $ 136,072 3.48 % $ 117,674
Interest Income/Earning Assets 3.79 % $ 180,553 4.14 % $ 168,528 4.93 % $ 157,204
Interest Expense/Earning Assets 0.41 % 19,820 0.80 % 32,456 1.24 % 39,530
Net Interest Margin 3.38 % $ 160,733 3.34 % $ 136,072 3.69 % $ 117,674
(1) Includes unamortized discounts and premiums. Average balance is computed using the fair value of securities. The average yield has been computed using the 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, 2021, 2020 and 2019. Interest income has been increased by $953 thousand, $1.4 million, and $1.5 million for the years ended December 31, 2021, 2020, and 2019, 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 are loan fees of $15.5 million, $10.4 million, and $4.0 million for the years ended December 31, 2021, 2020, and 2019, respectively. Loan fees for the year ended December 31, 2021 and 2020 included $8.7 million and $5.1 million in PPP deferred processing fees.
Volume Analysis of Changes in Net Interest Income
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, 2021 over (under) 2020 Due to Change In (1)
For Twelve Months Ended December 31, 2020 over (under) 2019 Due to Change In (1)
Volume Rate Net Volume Rate Net
Assets
Securities:
Taxable $ 2,278 $ (3,288) $ (1,010) $ 1,369 $ (1,832) $ (463)
Tax-Exempt (2)
(430) 61 (369) (1,026) (69) (1,095)
Equity Securities (2)
(168) (296) (464) (317) (51) (368)
Total Securities 1,680 (3,523) (1,843) 26 (1,952) (1,926)
Loans:
Commercial (2)
2,780 1,846 4,626 11,582 (5,434) 6,148
Mortgage (2)
13,341 (4,460) 8,881 11,666 (4,310) 7,356
Consumer 60 272 332 (226) (381) (607)
Total Loans 16,181 (2,342) 13,839 23,022 (10,125) 12,897
Other Earning Assets 311 (282) 29 800 (447) 353
Total Earning Assets $ 18,172 $ (6,147) $ 12,025 $ 23,848 $ (12,524) $ 11,324
Liabilities and Shareholders’ Equity
Interest Bearing Deposits
Demand - Interest Bearing $ 407 $ (405) $ 2 $ 413 $ (1,087) $ (674)
Savings 864 (8,475) (7,611) 3,139 (10,502) (7,363)
Time 1 (1,472) (1,471) 1,591 386 1,977
Total Interest Bearing Deposits 1,272 (10,352) (9,080) 5,143 (11,203) (6,060)
Short-Term Borrowings 0 0 0 0 (425) (425)
Long-Term Borrowings 0 (4,507) (4,507) (145) (242) (387)
Finance Lease Liabilities (4) 0 (4) (3) 0 (3)
Subordinated Debentures 1,666 (711) 955 0 (199) (199)
Total Interest Bearing Liabilities $ 2,934 $ (15,570) $ (12,636) $ 4,995 $ (12,069) $ (7,074)
Change in Net Interest Income $ 15,238 $ 9,423 $ 24,661 $ 18,853 $ (455) $ 18,398
(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, 2021 and 2020.
Results of Operations
Year Ended December 31, 2021 vs. Year Ended December 31, 2020
Overview of the Statements of Income and Comprehensive Income
Net income was $57.7 million, or $3.16 per diluted common share, for the year ended December 31, 2021, compared to $32.7 million, or $1.97 per diluted share, for the year ended December 31, 2020, reflecting increases of $25.0 million, or 76.2%, and $1.19 per diluted share, or 60.4%. The primary drivers of the increase in net income were the growth in earning assets and PPP related fees. In addition, included in net income for the year ended December 31, 2020 was the after-tax impact of $10.2 million, or $0.63 per diluted share, in merger costs, FHLB prepayment penalties and branch closure costs. Partially offsetting were the growth in operating expenses to support the Corporation's growth, as well as a lower net interest margin as a result of the low interest rate environment. Pre-provision net revenue ("PPNR") was $76.8 million for the year ended December 31, 2021, compared to $55.4 million for the year ended December 31, 2020, reflecting an increase of $21.3 million, or 38.5%. Included in PPNR for the year ended December 31, 2020 was $12.6 million in merger costs, prepayment penalties and branch closure costs.
Return on average equity was 13.39% for the year ended December 31, 2021, compared to 9.14% for the year ended December 31, 2020. Return on average tangible common equity was 16.23% and 10.67% for the same periods in 2021 and 2020, respectively. Excluding after-tax merger costs, FHLB prepayment penalties and branch closure costs, adjusted return on average equity and average tangible common equity were 11.98% and 14.10% for the year ended December 31, 2020, respectively.
As a measure of the Corporation’s efficiency in management of its expenses, the efficiency ratio was 59.76% for the year ended December 31, 2021, compared to 65.10% for the year ended December 31, 2020. The efficiency ratio for the year ended December 31, 2020 included $12.6 million in merger costs, FHLB prepayment penalties and branch closure costs.
Interest Income and Expense
Net interest income for the twelve months ended increased $25.1 million, or 18.6%, to $159.8 million from the twelve months ended December 31, 2020, primarily as a result of loan growth, various deposit pricing and liquidity strategies. Included in net interest income were PPP-related fees, which totaled approximately $8.7 million for the year ended December 31, 2021, compared to $5.1 million for the year ended December 31, 2020.
Net interest margin on a fully tax-equivalent basis was 3.38% and 3.34% for the year ended December 31, 2021 and 2020, respectively.
The yield on earning assets of 3.79% for the twelve months ended December 31, 2021 decreased 35 basis points from 4.14% for the twelve months ended December 31, 2020, primarily as a result of the lower interest rate environment and higher level of excess cash at the Federal Reserve, partially offset by higher PPP-related fees. The cost of interest-bearing liabilities decreased 43 basis points from 0.95% for the year ended December 31, 2020 to 0.52% for the year ended December 31, 2021, primarily as a result of the Corporation’s targeted deposit rate reductions and the prepayment of the Corporation's remaining FHLB borrowings, which were approximately $160 million at a weighted average interest rate of 2.24%, in the fourth quarter of 2020.
Provision for Credit Losses
The Corporation recorded a provision for credit losses of $6.0 million in 2021 compared to $15.4 million in 2020. Net loan charge-offs were $2.8 million during the year ended December 31, 2021, compared to $6.4 million during the year ended December 31, 2020. 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, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.
Management believes the charges to the provision for credit losses in 2021 were appropriate and the allowance for credit losses was adequate to absorb losses in the loan portfolio at December 31, 2021.
Non-Interest Income
Total non-interest income was $33.4 million for the year ended December 31, 2021 compared to $28.1 million from the same period in 2020, reflecting an increase of $5.4 million, or 19.2%. Included in non-interest income for the year ended December 31, 2021 and 2020 were $783 thousand and $2.2 million, respectively, in net realized gains on available for sale securities. Excluding the impact of the realized gains on available for sale securities for the year ended December 31, 2021 and 2020, total non-interest income for the year ended December 31, 2021 increased $6.8 million, or 26.2%, from the same period in 2020. The increase was partially driven by growth in Wealth and Asset Management fees, as assets under management increased by $135.2 million, or 11.9%, from December 31, 2020, to $1.3 billion as of December 31, 2021. Other significant factors that contributed to the increase included income from investments in small business investment company ("SBIC") funds, card processing and interchange income and service charges on deposits from increased business activity as well as an increase in bank owned life insurance income.
Non-Interest Expense
For the year ended December 31, 2021, total non-interest expense was $116.4 million, reflecting an increase of $9.1 million, or 8.5%, from the year ended December 31, 2020. Included in non-interest expense for the year ended December 31, 2020 was $12.6 million in merger costs, prepayment penalties and branch closure costs. In addition, non-interest expense for the year ended December 31, 2021 included expenses related to hiring additional personnel in the Corporation's growth regions of Cleveland, Buffalo and Ridge View (Roanoke) as well as investments in technology aimed at enhancing customer experience. Also, included in the fourth quarter of 2021 is approximately $2.3 million in additional personnel costs primarily from increased incentive compensation accruals and certain retirement benefit expenses.
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. PPNR 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.
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 for credit losses in 2020 were appropriate and the allowance for credit losses was 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.
Income Tax Expense
Income tax expense was $13.1 million in 2021, compared to $7.3 million in 2020 and $8.6 million in 2019. The effective tax rates were 18.5%, 18.3%, and 17.6% for 2021, 2020, and 2019, 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. Included in the 18.3% effective tax rate for the year ended December 30, 2020 were merger costs, FHLB prepayment penalties and branch closure costs, all of which reduced the effective tax rate.
Critical Accounting Policies and Estimates
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. The most significant accounting policies used by the Corporation are presented in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements. 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. In management’s opinion, some of these estimates and assumptions have a more significant impact than others on the Corporation's financial reporting. For the Corporation, these estimates and assumptions include accounting for the allowance for credit losses and goodwill.
Allowance for Credit Losses
The Corporation's allowance for credit losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its consolidated financial statements. In determining the appropriate estimate for the allowance for credit losses, management considers a number of factors relative to both individually evaluated credits in the loan portfolio and macro-economic factors relative to the economy of the U.S. as a whole and the economies of the areas in which the Corporation does business.
Management performs a quarterly evaluation of the adequacy of the allowance for credit losses. Management considers a variety of factors in establishing this estimate. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.
The evaluation is comprised of specific and pooled components. The specific component is the Corporation's evaluation of credit loss on individually evaluated loans based on the fair value of the collateral less estimated selling costs if collateral dependent or based on the present value of expected future cash flows discounted at the loan's initial effective interest rate if not collateral dependent. The majority of the Corporation's loans subject to individual evaluation are considered collateral dependent. All other loans are evaluated collectively for credit loss by pooling loans based on similar risk characteristics.
As a significant percentage of the Corporation's loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the charge-offs for specific loans. Assumptions are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined. Management carefully reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans.
The pooled component of the evaluation is determined by applying reasonable and supportable economic forecasts and historical averages to the remaining loans segmented by similar risk characteristics. The key assumptions used in projecting future loss rates include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions. The assumptions are used to calculate and aggregate estimated cash flows for the time period that remains in each loan's contractual life. The cash flows are discounted back to the balance sheet date using each loan's effective yield, to arrive at a present value of future cash flows, which is compared to the amortized cost basis of the loan pool to determine the amount of allowance for credit loss required by the calculation.
One of the most significant judgments used in projecting loss rates when estimating the allowance for credit loss is the macro-economic forecast provided by a third party. The economic indices sourced from the macro-economic forecast and used in projecting loss rates are national unemployment rate and changes in home values. The economic index used in the calculation to which the calculation is most sensitive is the national unemployment rate. Changes in the macro-economic forecast, especially for the national unemployment rate, could significantly impact the calculated estimated credit losses between reporting periods.
Other key assumptions in the calculation of the allowance for credit loss include the forecast and reversion to mean time periods and prepayment and curtailment assumptions. The macro-economic forecast is applied for a reasonable and supportable time period before reverting to long-term historical averages for each economic index. The forecast and reversion to mean time period used for each economic index at December 31, 2021 were four quarters and eight quarters, respectively. Prepayment and curtailment assumptions are based on the Corporation's historical experience over the trailing 12 months and are adjusted by management as deemed necessary. The prepayment and curtailment assumptions vary based on segment.
The quantitative estimated losses are supplemented by more qualitative factors that impact potential losses. Qualitative factors include changes in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors. The allowance for credit loss may be materially affected by these qualitative factors, especially during periods of economic uncertainty, for items not reflected in the lifetime credit loss calculation, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors. The qualitative factors applied at December 31, 2021, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of allowance for credit loss calculated by the model. The evaluation of qualitative factors is inherently imprecise and requires significant management judgment.
While management utilizes its best judgment and information available, the adequacy of the allowance for credit loss is determined by certain factors outside of the Corporation's control, such as the performance of the Corporation's portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of allowance for credit loss. Additionally, the level of allowance for credit loss may fluctuate based on the balance and mix of the loan portfolio. If actual results differ significantly from management's assumptions, the Corporation's allowance for credit loss may not be sufficient to cover inherent losses in the Corporation's loan portfolio, resulting in additions to the Corporation's allowance for credit loss and an increase in the provision for credit losses.
Goodwill
Certain intangible assets generated in connection with acquisitions are periodically assessed for impairment. Goodwill is tested at least annually for impairment, and if certain events occur which indicate goodwill might be impaired between annual tests, such as the potential impact of the COVID-19 pandemic, goodwill must be tested when such events occur. In making this assessment, the Corporation considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, stock price, etc. There are inherent uncertainties related to these factors and the Corporation's judgment in applying them to the analysis of goodwill impairment. Future changes in economic and operating conditions could result in goodwill impairment in subsequent periods.
Non-GAAP Financial Measures
The following tables reconcile the non-GAAP financial measures to their most directly comparable measures under GAAP.
December 31, December 31,
2021 2020
Calculation of tangible book value per share and tangible common equity/tangible assets:
Shareholders' equity $ 442,847 $ 416,137
Less: preferred equity 57,785 57,785
Less: goodwill 43,749 43,749
Less: core deposit intangible 460 567
Tangible common equity $ 340,853 $ 314,036
Total assets $ 5,328,939 $ 4,729,399
Less: goodwill 43,749 43,749
Less: core deposit intangible 460 567
Tangible assets $ 5,284,730 $ 4,685,083
Ending shares outstanding 16,855,062 16,833,008
Tangible book value per common share $ 20.22 $ 18.66
Tangible common equity/Tangible assets 6.45 % 6.70 %
December 31, December 31,
2021 2020
Calculation of allowance / loans, net of PPP-related loans:
Total allowance for credit losses $ 37,588 $ 34,340
Total loans $ 3,634,792 $ 3,371,789
Less: PPP-related loans 45,203 155,529
Adjusted total loans, net of PPP-related loans (non-GAAP) $ 3,589,589 $ 3,216,260
Adjusted allowance / loans, net of PPP-related loans (non-GAAP) 1.05 % 1.07 %
Twelve Months Ended
December 31,
2021 2020
Calculation of net interest margin (fully tax equivalent basis):
Interest income (fully tax equivalent basis) (non-GAAP) $ 180,553 $ 168,528
Interest expense (fully tax equivalent basis) (non-GAAP) 19,820 32,456
Net interest income (fully tax equivalent basis) (non-GAAP) $ 160,733 $ 136,072
Average total earning assets $ 4,768,040 $ 4,092,076
Less: average mark to market adjustment on investments 8,141 18,884
Adjusted average total earning assets, net of mark to market (non-GAAP) $ 4,759,899 $ 4,073,192
Net interest margin, fully tax equivalent basis (non-GAAP) (annualized) 3.38 % 3.34 %
Twelve Months Ended
December 31,
2021 2020
Calculation of efficiency ratio:
Non-interest expense $ 116,433 $ 107,326
Less: core deposit intangible amortization 107 206
Adjusted non-interest expense (non-GAAP) $ 116,326 $ 107,120
Non-interest income $ 33,434 $ 28,059
Net interest income $ 159,780 $ 134,711
Less: tax exempt investment and loan income, net of TEFRA (non-GAAP) 4,973 5,703
Add: tax exempt investment and loan income (non-GAAP) (tax-equivalent) 6,416 7,490
Adjusted net interest income (non-GAAP) 161,223 136,498
Adjusted net revenue (non-GAAP) (tax-equivalent) $ 194,657 $ 164,557
Efficiency ratio 59.76 % 65.10 %
Twelve Months Ended
December 31,
2021 2020
Calculation of PPNR:
Net interest income $ 159,780 $ 134,711
Add: Non-interest income 33,434 28,059
Less: Non-interest expense 116,433 107,326
PPNR (non-GAAP) $ 76,781 $ 55,444
Twelve Months Ended
December 31,
2021 2020
Calculation of adjusted return on average equity:
Net income $ 57,707 $ 32,743
Add: merger costs, prepayment penalties and branch closure costs (net of tax) 0 10,168
Adjusted net income $ 57,707 $ 42,911
Average shareholders' equity $ 431,062 $ 358,163
Adjusted return on average equity 13.39 % 11.98 %
Twelve Months Ended
December 31,
2021 2020
Calculation of return on average tangible common equity:
Net income available to common stockholders $ 53,405 $ 31,596
Average tangible common shareholders' equity 329,012 296,142
Return on average tangible common equity (non-GAAP) (annualized) 16.23 % 10.67 %
Calculation of adjusted return on average tangible common equity:
Net income available to common stockholders $ 53,405 $ 31,596
Add: merger costs, prepayment penalties and branch closure costs (net of tax) 0 10,168
Adjusted net income available to common stockholders $ 53,405 $ 41,764
Average tangible common shareholders' equity 329,012 296,142
Adjusted return on average tangible common equity (non-GAAP) (annualized) 16.23 % 14.10 %
Twelve Months Ended
December 31,
2021 2020
Calculation of non-interest income excluding net realized gains on available-for-sale securities:
Non-interest income $ 33,434 $ 28,059
Less: net realized gains on available-for-sale securities 783 2,190
Adjusted non-interest income $ 32,651 $ 25,869

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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, 2021 and 2020, 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, 2021 December 31, 2020
Change in
Basis Points % Change in Net
Interest Income Change in
Basis Points % Change in Net
Interest Income
400 23.7% 400 5.0%
300 17.4% 300 2.8%
200 12.1% 200 1.7%
100 6.5% 100 (0.2)%
(100) (4.8)% (100) (7.2)%
(200) (9.0)% (200) (11.4)%
At December 31, 2021, the Corporation has approximately $1.8 billion in outstanding loan balances that are rate sensitive over the next twelve months.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the threeyear period ended December 31, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 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, 2021, 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.
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 company’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 company’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 company; (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 company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’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 financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the 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 on Loans
The allowance for credit losses (the “ACL”) as described in Notes 1 and 4 is an accounting estimate of expected credit losses over the estimated life of loans. The Corporation’s loan portfolio, measured at amortized cost, is 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 life of the loans.
The Corporation measures expected credit losses based on pooled loans when similar risk characteristics exist primarily using a discounted cash flow (“DCF”) model. 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 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 ACL was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management. 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, including assistance by our valuation services specialists.
•Significant auditor judgment and audit effort to evaluate the qualitative factors used in the calculation.
The primary procedures performed to address the critical audit matter included:
•Testing the effectiveness of management’s controls addressing:
◦Evaluation of the appropriateness of the loss driver analysis and probability of default and loss given default curves input into the model.
◦Evaluation of the relevance and reliability of data used in the DCF model.
◦Evaluation of the appropriateness of the key assumptions and judgments used in the determination of qualitative factors.
•Substantive testing including:
◦Evaluating the appropriateness of the loss driver analysis and probability of default and loss given default curves in the DCF model, assisted by our valuation services specialists.
◦Evaluating the relevance and reliability of data used in the DCF model.
◦Evaluating management’s judgments and the relevance of data used in applying qualitative factors, including evaluating assumptions for reasonableness.
/s/ Crowe LLP
We have served as the Corporation’s auditor since 2000.
Columbus, Ohio
March 3, 2022
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share data
December 31,
2021 2020
ASSETS
Cash and due from banks $ 42,440 $ 44,368
Interest bearing deposits with other banks 689,758 488,326
Total cash and cash equivalents 732,198 532,694
Debt securities available for sale, at fair value (amortized cost of $698,085 as of December 31, 2021 and $565,493 as of December 31, 2020)
697,191 584,908
Equity securities 10,366 6,649
Loans held for sale 849 8,514
Loans
PPP 45,203 155,529
Syndicated 125,761 22,064
All other 3,463,828 3,194,196
Total loans 3,634,792 3,371,789
Less: allowance for credit losses (37,588) (34,340)
Net loans 3,597,204 3,337,449
FHLB and other equity interests 23,276 21,018
Premises and equipment, net 61,659 60,064
Operating lease right-of-use assets 19,928 18,407
Bank owned life insurance 99,719 76,471
Mortgage servicing rights 1,664 1,527
Goodwill 43,749 43,749
Core deposit intangible 460 567
Accrued interest receivable and other assets 40,676 37,382
Total Assets $ 5,328,939 $ 4,729,399
LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits $ 792,086 $ 627,114
Interest bearing demand deposits 1,079,336 951,903
Savings 2,457,745 2,126,183
Certificates of deposit 386,452 476,544
Total deposits 4,715,619 4,181,744
Subordinated debentures 20,620 20,620
Subordinated notes, net of unamortized issuance costs 83,661 50,000
Operating lease liabilities 21,159 19,449
Accrued interest payable and other liabilities 45,033 41,449
Total liabilities 4,886,092 4,313,262
Commitments and contingent liabilities
Preferred stock, Series A non-cumulative perpetual,
$0 par value; $1,000 liquidation preference; shares authorized 60,375;
Shares issued 60,375 at December 31, 2021 and 60,375 at December 31, 2020
57,785 57,785
Common stock, $0 par value; 50,000,000 shares authorized;
Shares issued 16,978,057 shares at December 31, 2021 and 16,978,057 at December 31, 2020
0 0
Additional paid in capital 127,351 127,518
Retained earnings 260,582 218,727
Treasury stock, at cost (122,995 shares at December 31, 2021 and 145,049 shares at December 31, 2020)
(2,477) (2,967)
Accumulated other comprehensive income (loss) (394) 15,074
Total shareholders’ equity 442,847 416,137
Total Liabilities and Shareholders’ Equity $ 5,328,939 $ 4,729,399
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Dollars in thousands, except per share data
Year ended December 31,
2021 2020 2019
INTEREST AND DIVIDEND INCOME:
Loans including fees
Interest and fees on loans $ 157,799 $ 147,547 $ 139,867
Processing fees on PPP loans 8,737 5,140 0
Securities and cash and cash equivalents:
Taxable 11,680 12,362 12,472
Tax-exempt 1,125 1,441 2,372
Dividends 259 677 1,017
Total interest and dividend income 179,600 167,167 155,728
INTEREST EXPENSE:
Deposits 15,062 24,142 30,202
Borrowed funds and finance lease liabilities 23 4,534 5,349
Subordinated debentures (includes $276, $224, and $63 accumulated other comprehensive
income reclassification for change in fair value of interest rate swap agreements, respectively)
4,735 3,780 3,979
Total interest expense 19,820 32,456 39,530
NET INTEREST INCOME 159,780 134,711 116,198
PROVISION FOR CREDIT LOSS EXPENSE 6,003 15,354 6,024
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSS EXPENSE 153,777 119,357 110,174
NON-INTEREST INCOME:
Service charges on deposit accounts 6,195 5,095 6,402
Other service charges and fees 2,436 2,548 2,930
Wealth and asset management fees 6,740 5,497 4,627
Net realized gains on available-for-sale securities (includes $783, $2,190, and $148
accumulated other comprehensive income reclassifications for net realized gains
on available-for-sale securities, respectively)
783 2,190 148
Net realized gains on equity securities 0 75 16
Net unrealized gains on equity securities 790 253 1,872
Realized gains on Visa Class B shares 0 0 463
Mortgage banking 3,147 3,354 1,412
Bank owned life insurance 2,638 1,747 1,317
Card processing and interchange income 7,796 5,727 4,641
Other 2,909 1,573 2,147
Total non-interest income 33,434 28,059 25,975
NON-INTEREST EXPENSES:
Compensation and benefits (includes $(44), $0, and $23 accumulated other comprehensive
income reclassifications for net amortization of actuarial (gains) losses, respectively)
61,175 48,723 46,405
Net occupancy expense 12,381 12,333 11,221
Amortization of core deposit intangible 107 206 567
Technology expense 11,723 7,153 4,994
State and local taxes 4,057 3,340 3,140
Legal, professional and examination fees 3,517 2,990 2,514
Advertising 2,081 1,993 2,113
FDIC insurance 2,509 2,414 1,252
Merger costs, prepayment penalties and branch closure costs 0 12,642 170
Dues and subscriptions 2,089 1,843 1,876
Card processing and interchange expenses 3,836 3,135 2,891
Other 12,958 10,554 10,365
Total non-interest expenses 116,433 107,326 87,508
INCOME BEFORE INCOME TAXES 70,778 40,090 48,641
INCOME TAX EXPENSE (includes $116, $413, and $13 income tax expense
reclassification items, respectively)
13,071 7,347 8,560
NET INCOME 57,707 32,743 40,081
PREFERRED STOCK DIVIDENDS 4,302 1,147 0
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 53,405 31,596 40,081
EARNINGS PER COMMON SHARE:
Basic $ 3.16 $ 1.97 $ 2.63
Diluted $ 3.16 $ 1.97 $ 2.63
NET INCOME $ 57,707 $ 32,743 $ 40,081
OTHER COMPREHENSIVE INCOME (LOSS):
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification and tax $ (16,044) $ 8,140 $ 10,732
Change in actuarial gain, for post-employment health care plan, net of amortization and tax 275 219 428
Change in fair value of interest rate swap agreements designated as a cash flow hedge, net of interest and tax 301 (224) (225)
Total other comprehensive income (loss) (15,468) 8,135 10,935
COMPREHENSIVE INCOME $ 42,239 $ 40,878 $ 51,016
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020, AND 2019
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, 2019 0 97,602 171,780 (2,556) (3,996) 262,830
Net income 40,081 40,081
Other comprehensive income 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 CHANGES IN SHAREHOLDERS’ EQUITY (continued)
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020, AND 2019
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
Net income 57,707 57,707
Other comprehensive loss (15,468) (15,468)
Forfeiture of restricted stock award grants (2,669 shares)
64 (64) 0
Restricted stock award grants (55,218 shares)
(1,374) 1,374 0
Performance based restricted stock award grants (10,587 shares)
(262) 262 0
Stock-based compensation expense 1,411 1,411
Contribution of treasury stock (3,000 shares)
(81) 81 0
Stock-based contribution expense 75 75
Purchase of treasury stock (36,359 shares)
(1,000) (1,000)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (6,782 shares)
(143) (143)
Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting (941 shares)
(20) (20)
Preferred cash dividend declared (4,302) (4,302)
Cash dividends declared ($0.685 per share)
(11,550) (11,550)
Balance, December 31, 2021 $ 57,785 $ 127,351 $ 260,582 $ (2,477) (394) $ 442,847
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
Year ended December 31,
2021 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,707 $ 32,743 $ 40,081
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit loss expense 6,003 15,354 6,024
Depreciation and amortization of premises and equipment, operating leases assets,
core deposit intangible, and mortgage servicing rights 6,241 6,082 5,963
Amortization (accretion) of securities, deferred loan fees and costs,
net yield and credit mark on acquired loans, and unearned income (2,127) (1,955) (870)
Net amortization of deferred costs on borrowings 177 0 0
Accretion of deferred PPP processing fees (8,737) (5,140) 0
Deferred taxes (1,691) 1,390 (204)
Net realized gains on sales of available-for-sale securities (783) (2,190) (148)
Net realized and unrealized losses (gains) on equity securities (790) (328) (1,888)
Proceeds from sale of Visa Class B shares 0 0 463
Gain on sale of Visa Class B shares 0 0 (463)
Gain on sale of loans (2,737) (2,961) (990)
Net losses (gains) on dispositions of premises and equipment and foreclosed assets 230 1,097 (377)
Proceeds from sale of loans 95,258 82,619 43,198
Origination of loans held for sale (95,411) (87,528) (43,458)
Income on bank owned life insurance (2,184) (1,747) (1,317)
Gain on bank owned life insurance (death benefit proceeds in excess of cash surrender value) (454) 0 0
Stock-based compensation expense 1,411 1,410 1,346
Stock-based contribution expense 75 0 0
Changes in:
Accrued interest receivable and other assets (1,056) (6,242) 1,072
Accrued interest payable, lease liabilities, and other liabilities 7,788 (3,846) 3,610
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,920 28,758 52,042
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, prepayments and calls of available-for-sale securities 170,962 164,488 98,274
Proceeds from sales of available-for-sale securities 33,553 57,185 11,403
Proceeds from sale of equity securities 0 5,935 301
Purchase of available-for-sale securities (341,140) (224,080) (122,358)
Purchase of equity securities (407) (2,447) (436)
Proceeds from loans held for sale previously classified as portfolio loans 1,921 0 0
Loan origination and payments, net (246,043) (244,903) (335,965)
Purchase of bank owned life insurance (22,000) 0 (8,778)
Proceeds from death benefit of bank owned life insurance policies 1,390 0 0
Net cash from business combinations 0 72,852 0
Redemption (purchase) of FHLB, other equity, and restricted equity interests (2,258) 7,268 (3,360)
Purchase of premises and equipment (6,484) (5,644) (9,045)
Proceeds from the sale of premises and equipment and foreclosed assets 746 666 1,228
NET CASH USED BY INVESTING ACTIVITIES (409,760) (168,680) (368,736)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Checking, money market and savings accounts 623,967 702,452 459,162
Certificates of deposit (90,092) (42,510) 32,379
Purchase of treasury stock (1,163) (1,307) (1,291)
Proceeds from stock offering, net of issuance costs 0 3,257 1,423
Proceeds from preferred stock offering, net of issuance costs 0 57,785 0
Cash dividends paid on common stock (11,550) (10,981) (10,358)
Cash dividends paid on preferred stock (4,302) (1,147) 0
Proceeds from issuance of subordinated notes, net of issuance costs 83,484 0 0
Proceeds from long-term borrowings 0 231,985 30,353
Repayments on long-term borrowings (50,000) (459,892) (47,563)
NET CASH PROVIDED BY FINANCING ACTIVITIES 550,344 479,642 464,105
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 199,504 339,720 147,411
CASH AND CASH EQUIVALENTS, Beginning 532,694 192,974 45,563
CASH AND CASH EQUIVALENTS, Ending $ 732,198 $ 532,694 $ 192,974
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Dollars in thousands
Year ended December 31,
2021 2020 2019
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 20,030 $ 32,957 $ 39,282
Income taxes 11,788 9,524 8,006
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers to other real estate owned $ 1,470 $ 241 $ 2,066
Transfers from loans held for sale to loans held for investment 9,965 0 0
Transfers from loans held for investment to loans held for sale 1,921 0 0
Grant of restricted stock awards from treasury stock 1,374 934 1,086
Grant of performance based restricted stock awards from treasury stock 262 217 21
Restricted stock forfeiture 64 0 71
Contribution of stock from treasury stock 81 0 0
Lease liabilities arising from obtaining right-of-use assets 2,643 1,386 19,465
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Unless otherwise indicated, dollar amounts in tables are stated in thousands, except for per share amounts.
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 wealth 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, western New York and Roanoke, Virginia.
Basis of Financial Presentation
The financial statements are consolidated to include the accounts of the Corporation, 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 effects the global COVID-19 pandemic may have, and, as a result, the ultimate impact of the COVID-19 pandemic and the extent to which the COVID-19 pandemic and the related government responses 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 actual 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 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.
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 Corporation monitors 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
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and 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, 2021.
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, 2021 and 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 and $2.2 million at December 31, 2021 and December 31, 2020, respectivley, and is excluded from the estimate of credit losses.
Equity Securities
Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
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 $13.3 million and $15.4 million at December 31, 2021 and December 31, 2020, respectively, 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. 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 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, New York and Virginia. Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economies of Pennsylvania, Ohio, New York and Virginia.
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 allowance for credit losses 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, western New York and the Roanoke, Virginia market. 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, western New York and the Roanoke, Virginia market. 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, western New York and the Roanoke, Virginia market. 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, western New York and the Roanoke, Virginia market. 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, western New York and the Roanoke, Virginia market. 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 other consumer 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 municipality's 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 88.4% and 90.8% of the amortized cost of loans as of December 31, 2021 and December 31, 2020, respectively, 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 11.6% and 9.2% of the amortized cost of loans as of December 31, 2021 and December 31, 2020, respectively, 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 nonperforming 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, 2021 or December 31, 2020.
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.
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.
Leases
The Corporation leases real estate property for branches and certain equipment. The Corporation determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease.
Operating lease right-of-use assets represent the Corporation's right to use an underlying asset during the lease term and operating lease liabilities represent the Corporation's obligation to make lease payments arising from the lease. The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset. The lease liability is decreased as periodic lease payments are made. The Corporation performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable.
The calculated amounts of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments. The Corporation's lease agreements often include one or more options to renew at the Corporation's discretion. If, at lease inception, the Corporation considers the exercising of a renewal option to be reasonably certain, the Corporation includes the extended term in the calculation of the right-of-use asset and lease liability. Generally, the Corporation cannot practically determine the interest rate implicit in the lease so the Corporation's incremental borrowing rate is used as the discount rate for the lease. The Corporation uses Federal Home Loan Bank ("FHLB") of Pittsburgh advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception based upon the term of the lease. The Corporation's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Corporation's consolidated statements of income. For facility-related leases, the Corporation elected, by lease class, to not separate lease and non-lease components. Lease expense is recognized on a straight-line basis over the lease term. Variable lease expense primarily represents payments such as common area maintenance, real estate taxes, and utilities and are recognized as expense in the period when those payments are incurred. Short-term lease expense relates to leases with an initial term of 12 months or less. The Corporation has elected to not record a right-of-use asset or lease liability for short-term leases.
Federal Home Loan Bank Stock
As a member of the 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.
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 31st 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.
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.
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.
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
Post retirement obligation expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. 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 time-based restricted stock awards are participating securities.
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.
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.
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 shareholders’ equity as previously reported.
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 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, 2021 and did not have a material impact on the Corporation's financial statement disclosures.
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. ASU 2019-12 was effective for the Corporation on January 1, 2021 and did not have a material impact on the Corporation's financial statements.
In January 2020, the FASB issued ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU 2020-01 represents changes to clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these transactions. ASU 2020-01 was effective for the Corporation on January 1, 2021 and did not have a material impact on the Corporation's financial statement disclosures.
In March 2020, the FASB issued ASU 2020-04, - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-04 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2020-04 did not have a material impact on the Corporation's financial statement disclosures.
In October 2020, the FASB issued ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. ASU 2020-08 clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 was effective for the Corporation on January 1, 2021 and did not have a material impact on the Corporation's financial statement disclosures.
In August 2021, FASB issued ASU 2021-06 - Presentation of Financial Statements (Topic 205), Financial Services-Depository and Lending (Topic 942), and Financial Services-Investment Companies (Topic 946). ASU 2021-06 updates the codification to align with SEC Final Rule Releases No. 33-10786 and No. 33-10835. Specific to financial institutions, these SEC releases updated required annual statistical disclosures. The amendments in ASU 2021-06 were effective immediately. The updates to the statistical disclosures are reflected in the Corporation's Annual Report on Form 10-K for the fiscal year ending December 31, 2021, to align with this guidance.
Effects of Newly Issued But Not Yet Effective Accounting Standards
In March 2020, the FASB issued ASU 2020-04, - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. 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.
In January 2021, the FASB issued ASU 2021-01 - Reference Rate Reform (Topic 848). ASU 2021-01 expands and clarifies the scope of ASU No. 2020-04 to include derivatives affected by changes in interest rates used for margining, discounting, or contract price alignment, commonly referred to as the “discounting transaction.” Derivatives impacted by the discounting transaction will be eligible for certain optional expedients and exceptions related to contract modifications and hedge accounting as defined in Topic 848. 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.
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 the Bank (the "Merger"), with the Bank continuing as the surviving entity. Banking offices of Bank of Akron continue to operate under the trade name BankOnBuffalo, a division of the 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 no merger-related expenses during the year ended December 31, 2021 and $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 the closing date of transaction as additional information relative to the closing date estimates and uncertainties becomes available. There were no adjustments recorded to goodwill or closing date fair values subsequent to December 31, 2020 and the measurement period closed in July 2021.
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 nonaccrual 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, 2021 and 2020 were as follows:
December 31, 2021 December 31, 2020
Amortized Gross Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
U.S. Gov’t sponsored entities $ 110,788 $ 2,728 $ (1,768) $ 111,748 $ 150,404 $ 6,698 $ (60) $ 157,042
State & political subdivisions 103,232 2,162 (1,682) 103,712 67,819 3,186 (122) 70,883
Residential & multi-family mortgage 437,021 4,127 (6,513) 434,635 306,054 9,276 (138) 315,192
Corporate notes & bonds 28,257 250 (443) 28,064 15,221 105 (400) 14,926
Pooled SBA 18,787 283 (38) 19,032 24,975 912 (1) 25,886
Other 0 0 0 0 1,020 0 (41) 979
Total $ 698,085 $ 9,550 $ (10,444) $ 697,191 $ 565,493 $ 20,177 $ (762) $ 584,908
Information pertaining to security sales is as follows:
Year ended December 31 Proceeds Gross Gains Gross Losses
2021 $ 33,553 $ 783 $ 0
2020 57,185 2,257 67
2019 11,403 152 4
The tax provision related to these net realized gains at December 31, 2021, 2020 and 2019 were $164 thousand, $460 thousand, and $31 thousand, respectively.
The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at December 31, 2021:
December 31, 2021
Amortized Cost Fair Value
1 year or less $ 17,959 $ 18,241
1 year - 5 years 77,146 78,191
5 years - 10 years 139,201 139,000
After 10 years 7,971 8,092
242,277 243,524
Residential and multi-family mortgage 437,021 434,635
Pooled SBA 18,787 19,032
Total debt securities $ 698,085 $ 697,191
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, 2021 and 2020, securities carried at $461.5 million and $453.4 million, respectively, were pledged to secure public deposits and for other purposes as provided by law.
At December 31, 2021 and 2020, 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, 2021 and 2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
December 31, 2021 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 $ 23,733 $ (553) 37,911 (1,215) $ 61,644 $ (1,768)
State & political subdivisions 55,636 (1,399) 5,026 (283) 60,662 (1,682)
Residential & multi-family mortgage 248,690 (4,837) 45,185 (1,676) 293,875 (6,513)
Corporate notes & bonds 6,466 (249) 3,806 (194) 10,272 (443)
Pooled SBA 4,394 (37) 127 (1) 4,521 (38)
338,919 $ (7,075) $ 92,055 $ (3,369) $ 430,974 $ (10,444)
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 and 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)
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, 2021 and 2020, 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, 2021 and 2020 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, 2021 and 2020, 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.
Equity securities at December 31, 2021 and 2020 were as follows:
December 31, 2021 December 31, 2020
Corporate equity securities $ 6,715 $ 4,343
Mutual funds 2,566 1,283
Money market 506 404
Corporate notes and bonds 579 569
U.S. Government sponsored entities 0 50
Total $ 10,366 $ 6,649
During December 31, 2021, 2020, and 2019, the Corporation sold equity securities. Proceeds were $0 in December 31, 2021, $5.9 million in December 31, 2020 and $301 thousand in December 31, 2019, resulting in net realized gains of $0 in December 31, 2021, $75 thousand in December 31, 2020, and $16 thousand in December 31, 2019. 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 thousand.
4. Loans
Total net loans at December 31, 2021 and 2020 are summarized as follows:
2021 Percentage
of Total 2020 Percentage
of Total
Farmland
$ 23,768 0.7 % $ 23,316 0.7 %
Owner-occupied, nonfarm nonresidential properties
434,672 12.0 % 407,924 12.1 %
Agricultural production and other loans to farmers
1,379 0.0 % 2,664 0.1 %
Commercial and Industrial 1
708,989 19.5 % 663,550 19.7 %
Obligations (other than securities and leases) of states and political subdivisions
140,887 3.9 % 132,818 3.9 %
Other loans
13,979 0.4 % 11,961 0.4 %
Other construction loans and all land development and other land loans 298,869 8.2 % 205,734 6.1 %
Multifamily (5 or more) residential properties
216,143 5.9 % 212,815 6.3 %
Non-owner occupied, nonfarm nonresidential properties
663,062 18.2 % 640,945 19.0 %
1-4 Family Construction 37,822 1.0 % 27,768 0.8 %
Home equity lines of credit 104,517 2.9 % 109,444 3.2 %
Residential Mortgages secured by first liens 826,729 22.7 % 777,030 23.0 %
Residential Mortgages secured by junior liens 56,689 1.6 % 53,726 1.6 %
Other revolving credit plans 26,536 0.7 % 25,507 0.8 %
Automobile 20,862 0.6 % 25,344 0.8 %
Other consumer 49,676 1.4 % 42,792 1.3 %
Credit cards 9,935 0.3 % 8,115 0.2 %
Overdrafts 278 0.0 % 336 0.0 %
Total loans $ 3,634,792 100.0 % $ 3,371,789 100.0 %
Less: Allowance for credit losses (37,588) (34,340)
Loans, net $ 3,597,204 $ 3,337,449
Net deferred loan origination fees (costs) included in the above loan table $ 5,667 $ 8,789
1 PPP loans, net of deferred PPP processing fees, both those disbursed in 2020 and those disbursed in 2021, are included in the Commercial and Industrial classification and totaled $45.2 million and $155.5 million as of December 31, 2021 and 2020, respectively. In addition, syndicated loans, net of deferred fees and costs, are included in the Commercial and Industrial classification and totaled $125.8 million and $22.1 million as of December 31, 2021 and 2020, respectively.
The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within central and northwest Pennsylvania, central and northeast Ohio, western New York and Roanoke, Virginia. 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. Beginning with the quarter ended December 31, 2020, the Corporation adopted ASC 326 and subsequent results are presented using the current expected credit losses (“CECL”) methodology. Prior to the quarter ended December 31, 2020, the results were reported in accordance with the incurred loss methodology and have not been restated.
PPP loans, both those disbursed in 2020 and those disbursed in 2021, are included in the commercial and industrial classification and, as the PPP loans are fully guaranteed by the Small Business Administration, no required allowance for credit losses was recorded against the PPP loans, net of deferred PPP processing fees, outstanding of $45.2 million and $155.5 million as of December 31, 2021 and 2020, respectively. Syndicated loans, net of deferred fees and costs, are included in the commercial and industrial classification and totaled $125.8 million and $22.1 million as of December 31, 2021 and 2020, respectively.
Transactions in the allowance for credit losses for the year ended December 31, 2021 were as follows:
Beginning
Allowance (Charge-offs) Recoveries Provision (Benefit) for Credit Loss Expense Ending Allowance
Farmland
$ 221 $ 0 $ 0 $ (70) $ 151
Owner-occupied, nonfarm nonresidential properties
3,700 (584) 10 213 3,339
Agricultural production and other loans to farmers
24 0 0 (15) 9
Commercial and Industrial
6,233 (163) 203 2,564 8,837
Obligations (other than securities and leases) of states and political subdivisions
998 (407) 30 1,028 1,649
Other loans
68 0 0 81 149
Other construction loans and all land development and other land loans 1,956 (282) 0 524 2,198
Multifamily (5 or more) residential properties
2,724 0 0 (435) 2,289
Non-owner occupied, nonfarm nonresidential properties
8,658 (49) 0 (2,128) 6,481
1-4 Family Construction 82 0 0 76 158
Home equity lines of credit 985 (7) 5 186 1,169
Residential Mortgages secured by first liens 4,539 (79) 47 2,436 6,943
Residential Mortgages secured by junior liens 241 (3) 0 308 546
Other revolving credit plans 507 (41) 13 49 528
Automobile 132 (26) 3 154 263
Other consumer 2,962 (1,193) 140 637 2,546
Credit cards 66 (112) 18 120 92
Overdrafts 244 (438) 160 275 241
Total loans $ 34,340 $ (3,384) $ 629 $ 6,003 $ 37,588
The Corporation's allowance for credit losses is influenced by loan volumes, risk rating migration, delinquency status and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.
For the year ended December 31, 2021, the allowance for credit losses increased due to the growth in the Corporation's loan portfolio, coupled with qualitative adjustments in the Corporation's residential and consumer loan portfolios, growth in new market areas, and qualitative adjustments related to the continued uncertainty with the pandemic and economic environment. These factors were partially offset by improvements in the Corporation's historical loss rates and quantitative inputs including the unemployment forecast and prepayment and curtailment speeds, as well as the impact of net charge-offs and improvements or resolutions in the Corporation's individually evaluated loans.
There is still a significant amount of uncertainty related to the economic impact of COVID-19, including duration, new variants, future government responses, and the resiliency of the U.S. economy. During 2021, management reviewed internal and external factors to consider the need for any qualitative adjustments to the quantitative model. Specifically, management reevaluated the loss given default assumptions that utilize Frye Jacobs, the time period used for prepayment and curtailment speeds and the unemployment forecast. Management will continue to evaluate its estimate of expected credit losses as new information becomes available.
Transactions in the allowance for loan 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
The following table presents information related to impaired loans by class of loan as of and for the year ended December 31, 2019:
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
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, 2021:
Nonaccrual Nonaccrual With No Allowance for Credit Loss Loans Past Due over 89 Days Still Accruing
Farmland
$ 965 $ 965 $ 0
Owner-occupied, nonfarm nonresidential properties
850 762 0
Commercial and Industrial
7,060 1,653 8
Other construction loans and all land development and other land loans 516 77 0
Multifamily (5 or more) residential properties
1,270 5 0
Non-owner occupied, nonfarm nonresidential properties
3,771 2,143 0
Home equity lines of credit 824 824 0
Residential Mortgages secured by first liens 3,410 3,410 137
Residential Mortgages secured by junior liens 147 147 0
Other revolving credit plans 13 13 0
Automobile 36 36 0
Other consumer 558 558 0
Credit cards 0 0 23
Total loans $ 19,420 $ 10,593 $ 168
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 $ 633 $ 0
Owner-occupied, nonfarm nonresidential properties
1,781 967 0
Commercial and Industrial
6,657 959 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 9,466 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 $ 16,930 $ 325
All payments received while on nonaccrual status are applied against the principal balance of the loan. The Corporation does not recognize interest income while loans are on nonaccrual status.
The following tables present the amortized cost basis of collateral-dependent loans by class of loans that are individually evaluated as of December 31, 2021:
Real Estate Collateral Non-Real Estate Collateral
Farmland
$ 920 $ 0
Owner-occupied, nonfarm nonresidential properties
194 9
Commercial and Industrial
1,488 2,351
Other construction loans and all land development and other land loans 438 0
Multifamily (5 or more) residential properties
1,265 0
Non-owner occupied, nonfarm nonresidential properties
3,378 0
Residential Mortgages secured by first liens 435 0
Total loans $ 8,118 $ 2,360
The following tables present the amortized cost basis of collateral-dependent loans by class of loans that are individually evaluated 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, 2021 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
$ 348 $ 0 $ 0 $ 348 $ 23,420 $ 23,768
Owner-occupied, nonfarm nonresidential properties
278 18 414 710 433,962 434,672
Agricultural production and other loans to farmers
0 0 0 0 1,379 1,379
Commercial and Industrial
377 13 333 723 708,266 708,989
Obligations (other than securities and leases) of states and political subdivisions
0 0 0 0 140,887 140,887
Other loans
0 0 0 0 13,979 13,979
Other construction loans and all land development and other land loans 0 0 77 77 298,792 298,869
Multifamily (5 or more) residential properties
0 10 209 219 215,924 216,143
Non-owner occupied, nonfarm nonresidential properties
0 0 1,792 1,792 661,270 663,062
1-4 Family Construction 0 0 0 0 37,822 37,822
Home equity lines of credit 506 50 172 728 103,789 104,517
Residential Mortgages secured by first liens 1,286 1,145 1,647 4,078 822,651 826,729
Residential Mortgages secured by junior liens 32 24 1 57 56,632 56,689
Other revolving credit plans 56 17 4 77 26,459 26,536
Automobile 45 3 23 71 20,791 20,862
Other consumer 283 158 295 736 48,940 49,676
Credit cards 26 12 23 61 9,874 9,935
Overdrafts 0 0 0 0 278 278
Total loans $ 3,237 $ 1,450 $ 4,990 $ 9,677 $ 3,625,115 $ 3,634,792
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
Troubled Debt Restructurings
During the years ended December 31, 2021 and 2020, 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 $16.6 million and $15.1 million as of December 31, 2021 and 2020, respectively. The Corporation has allocated $2.6 million and $779 thousand of allowance for those loans as of December 31, 2021 and 2020, respectively.
The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2021, 2020, and 2019:
Year Ended December 31, 2021
Number of
Loans Pre-Modification
Outstanding Recorded
Investment Post-Modification
Outstanding Recorded
Investment
Commercial and Industrial
2 $ 3,336 $ 3,336
Multifamily (5 or more) residential properties
1 717 717
Non-owner occupied, nonfarm nonresidential properties
1 1,604 1,604
Total loans 4 $ 5,657 $ 5,657
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 mortgages 1 $ 383 $ 383
Total 1 $ 383 $ 383
The troubled debt restructurings described above increased the allowance for credit losses by immaterial amounts for the years ended December 31, 2021, 2020, and 2019, respectively.
There were no loans modified as troubled debt restructures for which there was a payment default within twelve months following the modification during the years ended December 31, 2021, 2020 and 2019, respectively, and no principal balances were forgiven in connection with the loan restructurings.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
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.
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 represent the Corporation's credit risk profile by risk rating as of December 31, 2021 and 2020. Loans not rated as special mention, substandard, or doubtful are considered to be pass rated loans.
December 31, 2021
Non-Pass Rated
Pass Special Mention Substandard Doubtful Total Non-Pass Total
Farmland
$ 21,286 $ 1,514 $ 968 $ 0 $ 2,482 $ 23,768
Owner-occupied, nonfarm nonresidential properties
419,368 6,723 8,581 0 15,304 434,672
Agricultural production and other loans to farmers
1,379 0 0 0 0 1,379
Commercial and Industrial
687,010 7,946 12,654 1,379 21,979 708,989
Obligations (other than securities and leases) of states and political subdivisions
140,887 0 0 0 0 140,887
Other loans
13,979 0 0 0 0 13,979
Other construction loans and all land development and other land loans 294,103 4,221 545 0 4,766 298,869
Multifamily (5 or more) residential properties
214,772 100 1,271 0 1,371 216,143
Non-owner occupied, nonfarm nonresidential properties
631,534 9,628 21,900 0 31,528 663,062
Total loans $ 2,424,318 $ 30,132 $ 45,919 $ 1,379 $ 77,430 $ 2,501,748
December 31, 2020
Non-Pass Rated
Pass Special Mention Substandard Doubtful Total Non-Pass Total
Farmland
$ 20,316 $ 1,156 $ 1,844 $ 0 $ 3,000 $ 23,316
Owner-occupied, nonfarm nonresidential properties
391,899 2,826 13,199 0 16,025 407,924
Agricultural production and other loans to farmers
2,664 0 0 0 0 2,664
Commercial and Industrial
637,071 11,368 15,111 0 26,479 663,550
Obligations (other than securities and leases) of states and political subdivisions
132,110 0 708 0 708 132,818
Other loans
11,961 0 0 0 0 11,961
Other construction loans and all land development and other land loans 198,206 5,611 1,917 0 7,528 205,734
Multifamily (5 or more) residential properties
211,563 0 1,252 0 1,252 212,815
Non-owner occupied, nonfarm nonresidential properties
594,603 12,496 33,846 0 46,342 640,945
Total loans $ 2,200,393 $ 33,457 $ 67,877 $ 0 $ 101,334 $ 2,301,727
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, 2021. The current period originations may include modifications, extensions and renewals.
Term Loans Amortized Cost Basis by Origination Year
2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total
Farmland
Risk rating
Pass $ 8,203 $ 1,690 $ 3,276 $ 3,547 $ 564 $ 3,545 $ 461 $ 0 $ 21,286
Special mention 0 0 0 0 394 1,120 0 0 1,514
Substandard 388 0 0 0 48 532 0 0 968
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 8,591 $ 1,690 $ 3,276 $ 3,547 $ 1,006 $ 5,197 $ 461 $ 0 $ 23,768
Owner-occupied, nonfarm nonresidential properties
Risk rating
Pass $ 135,095 $ 78,068 $ 78,621 $ 29,100 $ 40,677 $ 50,079 $ 7,728 $ 0 $ 419,368
Special mention 243 0 903 4,287 135 1,145 10 0 6,723
Substandard 687 416 2,190 868 250 4,152 18 0 8,581
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 136,025 $ 78,484 $ 81,714 $ 34,255 $ 41,062 $ 55,376 $ 7,756 $ 0 $ 434,672
Agricultural production and other loans to farmers
Risk rating
Pass $ 211 $ 103 $ 76 $ 198 $ 0 $ 0 $ 791 $ 0 $ 1,379
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 $ 211 $ 103 $ 76 $ 198 $ 0 $ 0 $ 791 $ 0 $ 1,379
Commercial and Industrial
Risk rating
Pass $ 313,983 $ 84,815 $ 31,375 $ 16,577 $ 12,389 $ 6,777 $ 221,094 $ 0 $ 687,010
Special mention 0 363 793 381 82 844 5,483 0 7,946
Substandard 1,991 800 1,862 452 29 2,016 5,504 0 12,654
Doubtful(1)
1,379 0 0 0 0 0 0 0 1,379
Total $ 317,353 $ 85,978 $ 34,030 $ 17,410 $ 12,500 $ 9,637 $ 232,081 $ 0 $ 708,989
Obligations (other than securities and leases) of states and political subdivisions
Risk rating
Pass $ 36,853 $ 16,688 $ 8,774 $ 16,957 $ 20,071 $ 36,764 $ 4,780 $ 0 $ 140,887
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 $ 36,853 $ 16,688 $ 8,774 $ 16,957 $ 20,071 $ 36,764 $ 4,780 $ 0 $ 140,887
Other loans
Risk rating
Pass $ 5,851 $ 5,305 $ 552 $ 3 $ 0 $ 0 $ 2,268 $ 0 $ 13,979
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 $ 5,851 $ 5,305 $ 552 $ 3 $ 0 $ 0 $ 2,268 $ 0 $ 13,979
(1) Consists of one loan relationship that was originated in 2015 and modified in 2021. The modification met the requirements to disclose the loan relationship as a new loan during the current period.
Term Loans Amortized Cost Basis by Origination Year
2021 2020 2019 2018 2017 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 $ 98,406 $ 168,372 $ 8,752 $ 11,141 $ 853 $ 898 $ 5,681 $ 0 $ 294,103
Special mention 1,500 0 650 0 2,071 0 0 0 4,221
Substandard 0 0 0 29 439 0 77 0 545
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 99,906 $ 168,372 $ 9,402 $ 11,170 $ 3,363 $ 898 $ 5,758 $ 0 $ 298,869
Multifamily (5 or more) residential properties
Risk rating
Pass $ 74,687 $ 55,663 $ 33,436 $ 7,937 $ 27,729 $ 12,882 $ 2,438 $ 0 $ 214,772
Special mention 0 0 0 0 0 100 0 0 100
Substandard 0 6 682 379 204 0 0 0 1,271
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 74,687 $ 55,669 $ 34,118 $ 8,316 $ 27,933 $ 12,982 $ 2,438 $ 0 $ 216,143
Non-owner occupied, nonfarm nonresidential properties
Risk rating
Pass $ 194,800 $ 125,039 $ 84,943 $ 52,233 $ 42,714 $ 123,021 $ 8,784 $ 0 $ 631,534
Special mention 0 0 428 1,004 189 5,556 2,451 0 9,628
Substandard 826 0 2,305 1,662 4,638 12,134 335 0 21,900
Doubtful 0 0 0 0 0 0 0 0 0
Total $ 195,626 $ 125,039 $ 87,676 $ 54,899 $ 47,541 $ 140,711 $ 11,570 $ 0 $ 663,062
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
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 89 days and still accruing interest.
December 31, 2021 December 31, 2020
Performing Nonperforming Total Performing Nonperforming Total
1-4 Family Construction $ 37,822 $ 0 $ 37,822 $ 27,768 $ 0 $ 27,768
Home equity lines of credit 103,693 824 104,517 108,759 685 109,444
Residential Mortgages secured by first liens 823,182 3,547 826,729 772,572 4,458 777,030
Residential Mortgages secured by junior liens 56,542 147 56,689 53,612 114 53,726
Other revolving credit plans 26,523 13 26,536 25,501 6 25,507
Automobile 20,826 36 20,862 25,312 32 25,344
Other consumer 49,118 558 49,676 42,288 504 42,792
Total loans $ 1,117,706 $ 5,125 $ 1,122,831 $ 1,055,812 $ 5,799 $ 1,061,611
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, 2021. The current period originations may include modifications, extensions and renewals.
Term Loans Amortized Cost Basis by Origination Year
2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total
1-4 Family Construction
Payment performance
Performing $ 27,539 $ 9,137 $ 857 $ 66 $ 0 $ 0 $ 223 $ 0 $ 37,822
Nonperforming 0 0 0 0 0 0 0 0 0
Total $ 27,539 $ 9,137 $ 857 $ 66 $ 0 $ 0 $ 223 $ 0 $ 37,822
Home equity lines of credit
Payment performance
Performing $ 14,383 $ 14,621 $ 9,564 $ 10,584 $ 6,863 $ 39,527 $ 8,151 $ 0 $ 103,693
Nonperforming 0 0 9 10 377 428 0 0 824
Total $ 14,383 $ 14,621 $ 9,573 $ 10,594 $ 7,240 $ 39,955 $ 8,151 $ 0 $ 104,517
Residential mortgages secured by first lien
Payment performance
Performing $ 232,606 $ 178,380 $ 111,333 $ 62,850 $ 74,136 $ 160,402 $ 3,475 $ 0 $ 823,182
Nonperforming 79 259 227 151 258 2,379 194 0 3,547
Total $ 232,685 $ 178,639 $ 111,560 $ 63,001 $ 74,394 $ 162,781 $ 3,669 $ 0 $ 826,729
Residential mortgages secured by junior liens
Payment performance
Performing $ 20,617 $ 11,256 $ 7,239 $ 4,407 $ 3,508 $ 9,095 $ 420 $ 0 $ 56,542
Nonperforming 0 0 0 0 84 63 0 0 147
Total $ 20,617 $ 11,256 $ 7,239 $ 4,407 $ 3,592 $ 9,158 $ 420 $ 0 $ 56,689
Other revolving credit plans
Payment performance
Performing $ 5,313 $ 3,596 $ 3,090 $ 2,592 $ 2,977 $ 8,955 $ 0 $ 0 $ 26,523
Nonperforming 0 0 4 4 0 5 0 0 13
Total $ 5,313 $ 3,596 $ 3,094 $ 2,596 $ 2,977 $ 8,960 $ 0 $ 0 $ 26,536
Automobile
Payment performance
Performing $ 7,047 $ 5,448 $ 4,668 $ 2,457 $ 682 $ 524 $ 0 $ 0 $ 20,826
Nonperforming 11 13 12 0 0 0 0 0 36
Total $ 7,058 $ 5,461 $ 4,680 $ 2,457 $ 682 $ 524 $ 0 $ 0 $ 20,862
Other consumer
Payment performance
Performing $ 30,423 $ 11,017 $ 4,537 $ 1,451 $ 316 $ 1,374 $ 0 $ 0 $ 49,118
Nonperforming 204 170 96 25 3 60 0 0 558
Total $ 30,627 $ 11,187 $ 4,633 $ 1,476 $ 319 $ 1,434 $ 0 $ 0 $ 49,676
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, 2021 December 31, 2020
Credit card
Payment performance
Performing $ 9,912 $ 8,081
Nonperforming 23 34
Total $ 9,935 $ 8,115
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, 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 other consumer loans above, is summarized as follows at December 31, 2021 and 2020:
December 31, 2021 December 31, 2020
Gross consumer loans $ 29,227 $ 27,998
Less: unearned discounts (5,716) (5,181)
Total consumer loans, net of unearned discounts $ 23,511 $ 22,817
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, 2021, 2020, and 2019 were as follows:
December 31, 2021 December 31, 2020 December 31, 2019
Balance, beginning of year $ 862 $ 1,633 $ 418
Loans transferred to real estate owned 1,470 241 2,066
Sales of real estate owned (at carrying value) (1,625) (1,012) (851)
Balance, end of year $ 707 $ 862 $ 1,633
Expenses related to foreclosed real estate include:
December 31, 2021 December 31, 2020 December 31, 2019
Net loss (gain) on sales $ 32 $ 346 $ (377)
Operating expenses, net of rental income 85 240 316
$ 117 $ 586 $ (61)
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 equity 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).
Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a loan-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).
Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Corporation's derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
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 were as follows at December 31, 2021 and 2020:
Fair Value Measurements at December 31, 2021 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 $ 111,748 $ 0 $ 111,748 $ 0
States and political subdivisions 103,712 0 103,712 0
Residential and multi-family mortgage 434,635 4,995 429,640 0
Corporate notes and bonds 28,064 0 28,064 0
Pooled SBA 19,032 0 19,032 0
Total Securities Available For Sale $ 697,191 $ 4,995 $ 692,196 $ 0
Interest rate swaps $ 2,124 $ 0 $ 2,124 $ 0
Equity Securities:
Corporate equity securities $ 6,715 $ 6,715 $ 0 $ 0
Mutual funds 2,566 2,566 0 0
Certificates of deposit 506 506 0 0
Corporate notes and bonds 579 579 0 0
Total Equity Securities $ 10,366 $ 10,366 $ 0 $ 0
Liabilities
Interest rate swaps $ (2,512) $ 0 $ (2,512) $ 0
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
Equity 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 Equity Securities $ 6,649 $ 6,599 $ 50 $ 0
Liabilities
Interest rate swaps $ (4,785) $ 0 $ (4,785) $ 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, 2021:
States and Political Subdivisions Corporate Notes and Bonds
Balance, January 1, 2021 $ 64 $ 0
Purchases 0 8,250
Total gains or (losses):
Included in other comprehensive income (loss) 0 0
Settlements (64) 0
Transfers out of Level 3 0 (8,250)
Balance, December 31, 2021 $ 0 $ 0
The Corporation's corporate notes and bonds with a fair value of $8.3 million for the year ended December 31, 2021 were transferred out of Level 3 and into Level 2 because of available observable market data for these investments.
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:
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
The Corporation's states and political subdivsions with a fair value of $358 thousand and residential and multi-family mortgage of $2.8 million for the year ended December 31, 2020 were transferred out of Level 3 and into Level 2 because of available observable market data for these investments.
Assets and liabilities measured at fair value on a non-recurring basis are as follows at December 31, 2021 and 2020:
Fair Value Measurements at December 31, 2021 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 $ 920 0 0 $ 920
Owner-occupied, nonfarm nonresidential properties 194 0 0 194
Commercial and industrial 3,102 0 0 3,102
Other construction loans and all land development loans and other land loans 248 0 0 248
Multifamily (5 or more) residential properties 627 0 0 627
Non-owner occupied, nonfarm nonresidential 2,889 0 0 2,889
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
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, 2021:
Fair
value Valuation
Technique Unobservable Inputs Range
(Weighted
Average)
Collateral-dependent loans - Farmland $ 920 Valuation of third party appraisal on underlying collateral Loss severity rates 60% (60%)
Collateral-dependent loans - Owner-occupied, nonfarm nonresidential properties 194 Valuation of third party appraisal on underlying collateral Loss severity rates 0%-60% (57%)
Collateral-dependent loans - Commercial and industrial 3,102 Valuation of third party appraisal on underlying collateral Loss severity rates 0%-59% (42%)
Collateral-dependent loans - Other construction loans and all land development loans and other land loans 248 Valuation of third party appraisal on underlying collateral Loss severity rates 25% (25%)
Collateral-dependent loans - Multifamily (5 or more) residential properties 627 Valuation of third party appraisal on underlying collateral Loss severity rates 0%-57% (26%)
Collateral-dependent loans - Non-owner occupied, nonfarm nonresidential 2,889 Valuation of third party appraisal on underlying collateral Loss severity rates 25%-60% (34%)
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%)
Fair Value of Financial Instruments
The following table presents the carrying amount and fair value of financial instruments at December 31, 2021:
Carrying
Amount Fair Value Measurement Using: Total
Fair Value
Level 1 Level 2 Level 3
ASSETS
Cash and cash equivalents $ 732,198 $ 732,198 $ 0 $ 0 $ 732,198
Securities available for sale 697,191 4,995 692,196 0 697,191
Equity securities 10,366 10,366 0 0 10,366
Loans held for sale 849 0 858 0 858
Net loans 3,597,204 0 0 3,613,452 3,613,452
FHLB and other equity interests 23,276 n/a n/a n/a n/a
Interest rate swaps 2,124 0 2,124 0 2,124
Accrued interest receivable 15,516 16 2,171 13,329 15,516
LIABILITIES
Deposits $ (4,715,619) $ (4,329,167) $ (391,850) $ 0 $ (4,721,017)
Subordinated debentures (104,281) 0 (92,675) 0 (92,675)
Interest rate swaps (2,512) 0 (2,512) 0 (2,512)
Accrued interest payable (886) 0 (886) 0 (886)
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
Equity 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)
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)
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 $264.2 million and $224.3 million for the years ended December 31, 2021 and 2020, respectively.
The following summarizes secondary market mortgage activities for the years ended December 31, 2021, 2020, and 2019:
December 31, 2021 December 31, 2020 December 31, 2019
Loans originated for resale $ 95,411 $ 87,528 $ 43,458
Proceeds from sales of loans held for sale 97,179 82,619 43,198
Net gains on sales of loans held for sale 2,737 2,961 990
Loan servicing fees 720 726 634
The following summarizes activity for capitalized mortgage servicing rights for the years ended December 31, 2021, 2020, and 2019:
December 31, 2021 December 31, 2020 December 31, 2019
Balance, beginning of year $ 1,527 $ 1,573 $ 1,495
Additions 514 540 292
Servicing rights acquired 0 0 0
Amortization (377) (586) (214)
Balance, end of year $ 1,664 $ 1,527 $ 1,573
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, 2021 and 2020, respectively. No valuation allowance was deemed necessary at December 31, 2021, 2020, and 2019. The fair value of interest rate lock commitments and forward commitments to sell loans was not material at December 31, 2021 or 2020.
8. Premises and Equipment
The following summarizes premises and equipment at December 31, 2021 and 2020:
December 31, 2021 December 31, 2020
Land $ 8,798 $ 8,016
Premises and leasehold improvements 70,212 68,346
Furniture and equipment 39,851 37,203
Construction in process 2,589 1,556
121,450 115,121
Less: accumulated depreciation 59,791 55,057
Premises and equipment, net $ 61,659 $ 60,064
Depreciation on premises and equipment amounted to $5.3 million in 2021, $4.6 million in 2020 and $4.1 million in 2019.
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, 2021 December 31, 2020
Assets:
Operating lease assets Operating lease right-of-use assets $ 19,928 $ 18,407
Finance lease assets Premises and equipment, net (1)
358 429
Total leased assets $ 20,286 $ 18,836
Liabilities:
Operating lease liabilities Operating lease liabilities $ 21,159 $ 19,449
Finance lease liabilities Accrued interest payable and other liabilities 469 550
Total leased liabilities $ 21,628 $ 19,999
(1) Finance lease assets are recorded net of accumulated amortization of $858 thousand and $787 thousand as of December 31, 2021 and 2020, respectively.
The components of the Corporation's net lease expense for the year ended December 31, 2021, 2020 and 2019 were as follows:
Lease Cost Classification December 31, 2021 December 31, 2020 December 31, 2019
Operating lease cost Net occupancy expense $ 1,801 $ 1,785 $ 1,666
Variable lease cost Net occupancy expense 55 87 98
Finance lease cost:
Amortization of leased assets Net occupancy expense 72 72 72
Interest on lease liabilities Interest expense - borrowed funds 23 27 30
Sublease income (1)
Net occupancy expense (71) (86) (83)
Net lease cost $ 1,880 $ 1,885 $ 1,783
(1) Sublease income excludes rental income from owned properties.
The following table sets forth future minimum rental payments under noncancelable leases with terms in excess of one year as of December 31, 2021:
Maturity of Lease Liabilities as of December 31, 2021 Operating Leases (1)
Finance Leases Total
2022 $ 1,804 $ 105 $ 1,909
2023 1,693 105 1,798
2024 1,649 105 1,754
2025 1,637 105 1,742
2026 1,605 105 1,710
After 2026 20,564 0 20,564
Total lease payments 28,952 525 29,477
Less: Interest 7,793 56 7,849
Present value of lease liabilities $ 21,159 $ 469 $ 21,628
(1) Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude $10.4 million of legally binding minimum lease payments for leases signed, but not yet commenced.
Other information related to the Corporation's lease liabilities as of December 31, 2021 and 2020 was as follows:
Lease Term and Discount Rate December 31, 2021 December 31, 2020
Weighted-average remaining lease term (years)
Operating leases 18.8 19.0
Finance leases 5.0 6.0
Weighted-average discount rate
Operating leases 3.42 % 3.46 %
Finance leases 4.49 % 4.49 %
Other information related to the Corporation's lease liabilities as of December 31, 2021 and 2020 was as follows:
Other Information December 31, 2021 December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used by operating leases $ 964 $ 922
10. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the years ended December 31, 2021 and 2020 was as follows:
December 31, 2021 December 31, 2020
Balance, beginning of year $ 43,749 $ 38,730
Acquired during the year 0 5,019
Balance, end of year $ 43,749 $ 43,749
Impairment exists when the 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.
At December 31, 2021, the Corporation elected to perform a qualitative assessment to determine if it was more likely than not that the fair value exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value exceeded its carrying value, resulting in no impairment.
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 $4.8 million. During the years ended December 31, 2021, 2020, and 2019, the Corporation recorded amortization expense of $0, $94 thousand and $316 thousand, respectively. The net carrying values at December 31, 2021 and 2020 was $0, 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 $1.6 million. During the year ended December 31, 2021, 2020, and 2019, the Corporation recorded amortization expense of $0, $66 thousand, and $251 thousand, respectively. The net carrying values at December 31, 2021 and 2020 was $0, 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 thousand. During the year ended December 31, 2021 and 2020, the Corporation recorded amortization expense of $107 thousand and $46 thousand, respectively. The net carrying value at December 31, 2021 and 2020 was $460 thousand and $567 thousand, respectively. 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:
2022 $ 96
2023 85
2024 73
2025 62
2026 51
Thereafter 93
$ 460
11. Deposits
The following table reflects time certificates of deposit accounts included in total deposits and their remaining maturities at December 31, 2021:
Time deposits maturing:
2022 $ 252,340
2023 54,676
2024 34,009
2025 26,121
2026 7,258
Thereafter 12,048
$ 386,452
Certificates of deposit of $250 thousand or more totaled $116.6 million and $128.2 million at December 31, 2021 and 2020, respectively.
The Corporation had $52.9 million and $23.6 million in reciprocal ICS deposits at December 31, 2021 and 2020, respectively.
12. Borrowings
At December 31, 2021 and 2020, 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, 2021 and 2020.
FHLB Borrowings
The Bank has the ability to borrow funds from the FHLB. The Bank maintains a $150.0 million line-of-credit (Open Repo Plus) with the FHLB which is a revolving term commitment available on an overnight basis. The term of this commitment may not exceed 364 days and it reprices daily at market rates. Under terms of a blanket collateral agreement with the FHLB, the line-of-credit and long term advances are secured by FHLB stock and the Bank pledges its single-family residential mortgage loan portfolio, certain commercial real estate loans, and certain agriculture real estate loans as security for any advances.
Total loans pledged to the FHLB at December 31, 2021, and 2020, were $1.3 billion and $1.2 billion, respectively. The Bank could obtain advances of up to approximately $932.7 million from the FHLB at December 31, 2021 and $797.4 million at December 31, 2020.
At December 31, 2021 and December 31, 2020, the Bank had no outstanding advances from the FHLB. During 2020 CNB prepaid the entire balance of its borrowings from the FHLB, totaling $190.4 million. The pre-payment penalty associated with these prepayments totaled approximately $7.9 million and the weighted average rate associated with these borrowings was 2.20%.
At December 31, 2021 and 2020, municipal deposit letters of credit issued by the FHLB on behalf of the Bank naming applicable municipalities as beneficiaries were $10.4 million and $57.3 million, 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, 2021 and 2020, the Bank had no outstanding borrowings from unaffiliated institutions under overnight borrowing agreements.
Subordinated Debentures
In 2007, the Corporation issued two $10.0 million 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 1.75% at December 31, 2021 and 1.80% at December 31, 2020. 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.
Subordinated Notes
In September 2016, the Corporation completed a private placement of $50.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the "2026 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. On October 15, 2021, the Corporation completed its redemption of the 2026 Notes, representing all of the outstanding 2026 Notes. The 2026 Notes were redeemed pursuant to their terms at a price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, October 15, 2021. The total aggregate redemption price was $50.7 million, which amount included an accrued interest payment of $719 thousand. The Corporation financed the redemption with cash on hand, including the net proceeds from the issuance and sale of $85.0 million aggregate principal amount of the Corporation’s 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031.
In June 2021, the Corporation sold $85.0 million aggregate principal amount of its fixed-to-floating rate subordinated notes to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act and the provisions of Rule 506 of Regulation D thereunder. The notes will mature in June 2031, and initially bear interest at a fixed rate of 3.25% per annum, payable semi-annually in arrears, to, but excluding, June 15, 2026, and thereafter to, but excluding, the maturity date or earlier redemption, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month average Secured Overnight Financing Rate (“SOFR”) plus 2.58%. The net proceeds from the sale were approximately $83.5 million, after deducting offering expenses. 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 unamortized debt issuance costs were $1.3 million as of December 31, 2021.
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 $1.2 million, $1.1 million and $906 thousand for the years ended December 31, 2021, 2020, and 2019, 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 $143 thousand, subject to a $290 thousand salary limit. The Corporation recognized profit sharing expense of $2.0 million, $1.9 million and $1.9 million for the year ended December 31, 2021, 2020, and 2019 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, 2021 and 2020, obligations of $8.8 million and $7.0 million, respectively, were included in other liabilities for this plan. Expenses related to this plan were $2.1 million for the year ended December 31, 2021, $992 thousand for the year ended December 31, 2020 and $724 thousand for the year ended December 31, 2019.
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, 2021 and 2020, obligations of $1.5 million and $1.4 million, respectively, were included in other liabilities for this plan. Expenses (benefits) related to this plan were $196 thousand for the year ended December 31, 2021, $253 thousand for the year ended December 31, 2020 and $(1) thousand for the year ended December 31, 2019.
On December 31, 2021, the Corporation adopted a Defined Contribution Plan for several employees (the “Plan”), pursuant to which the Corporation will make certain annual contributions to the Plan on the employee's behalf, which will be paid to the employee following their termination of employment from the Corporation or, if earlier, upon the employee becoming disabled. The Plan became effective as of January 2, 2022.
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, 2021 and 2020:
December 31, 2021 December 31, 2020
Benefit obligation at beginning of year $ 1,829 $ 2,030
Interest cost 28 51
Service cost 52 61
Actual claims (31) (36)
Actuarial gain (391) (277)
Benefit obligation at end of year $ 1,487 $ 1,829
Amounts recognized in accumulated other comprehensive income at December 31, 2021 and 2020 consisted of:
December 31, 2021 December 31, 2020
Net actuarial gain $ 782 $ 435
Tax effect (165) (92)
$ 617 $ 343
The accumulated benefit obligation was $1.5 million and $1.8 million at December 31, 2021 and 2020, respectively.
The following table sets forth the components of net periodic benefit cost and other amounts recognized in other comprehensive income:
December 31, 2021 December 31, 2020 December 31, 2019
Service cost $ 52 $ 61 $ 74
Interest cost 28 51 89
Net amortization of transition obligation and actuarial loss (43) 0 23
Net periodic benefit cost 37 112 186
Net gain (391) (277) (518)
Amortization 43 0 (23)
Total recognized in other comprehensive income (348) (277) (541)
Total recognized in net periodic benefit cost and other comprehensive income $ (311) $ (165) $ (355)
The estimated net gain that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $(113) thousand.
The weighted average discount rate used to calculate net periodic benefit cost was 1.55% for year ended December 31, 2021, 2.59% for year ended December 31, 2020, and 3.78% for year ended December 31, 2019. The weighted average rate used to calculate accrued benefit obligations was 2.10% for year ended December 31, 2021, 1.55% for year ended December 31, 2020, and 2.59% for year ended December 31, 2019. The health care cost trend rate used to measure the expected costs of benefits is 5.0% for 2022 and thereafter.
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, 2021 December 31, 2020 December 31, 2019
Balance, beginning of year $ 3,085 $ 3,234 $ 2,408
Deferrals, dividends, and changes in fair value 1,084 (70) 904
Deferred compensation payments (494) (79) (78)
Balance, end of year $ 3,675 $ 3,085 $ 3,234
15. Income Taxes
The following is a summary of income tax expense for the years ended December 31, 2021, 2020, and 2019:
December 31, 2021 December 31, 2020 December 31, 2019
Current - federal $ 13,494 $ 8,681 $ 8,265
Current - state 1,268 729 499
Deferred - federal (1,025) (1,672) (204)
Deferred - state (666) (391) 0
Income tax expense $ 13,071 $ 7,347 $ 8,560
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, 2021 % December 31, 2020 % December 31, 2019 %
Tax at statutory rate $ 14,863 21.0 $ 8,419 21.0 $ 10,214 21.0
Tax exempt income, net (1,231) (1.7) (1,223) (3.1) (1,382) (2.8)
Bank owned life insurance (554) (0.8) (367) (0.9) (276) (0.6)
Effect of state tax 476 0.7 576 1.4 394 0.8
Other (483) (0.7) (58) (0.1) (390) (0.8)
Income tax expense $ 13,071 18.5 $ 7,347 18.3 $ 8,560 17.6
The following table sets forth deferred taxes as of December 31, 2021 and 2020:
December 31, 2021 December 31, 2020
Deferred tax assets:
Allowance for credit losses $ 7,606 $ 6,751
Fair value adjustments - business combination 1,240 1,685
Deferred compensation 3,344 2,787
Net operating loss carryover 327 346
Post-retirement benefits 696 722
Unrealized loss on interest rate swap 81 161
Nonaccrual loan interest 509 478
Accrued expenses 1,718 681
Deferred fees and costs 1,259 1,613
Unrealized loss on securities available for sale 188 0
Operating lease liability 4,845 4,214
Other 383 300
22,196 19,738
Deferred tax liabilities:
Unrealized gain on securities available for sale 0 4,077
Premises and equipment 3,093 2,997
Unrealized gain on equity securities 292 294
Intangibles - section 197 2,494 2,399
Mortgage servicing rights 366 321
Operating lease asset 4,649 4,079
Other 220 293
11,114 14,460
Net deferred tax asset $ 11,082 $ 5,278
At December 31, 2021 and 2020, 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.
At December 31, 2021, the Corporation had state net operating loss carryforwards of approximately $15.9 million related to the acquisition of Bank of Akron, which expire at various dates from 2034 to 2039. The Corporation's ability to utilize carryforwards is limited to $363 thousand per year. Due to this limitation, management determined it is more likely than not that approximately $9.5 million of net operating loss carryforwards will expire unutilized.
The Corporation recognizes interest and/or penalties related to income tax matters as part of income tax expense. At December 31, 2021, 2020 and 2019, there were no amounts accrued for interest and/or penalties and no amounts recorded as expense for the years ending December 31, 2021, 2020, and 2019.
The Corporation and its subsidiaries are subject to U.S. federal income tax, as well as filing various state returns. The Corporation is no longer subject to U.S. federal income tax examinations by the taxing authorities for years prior to 2018. Tax years 2018 through 2021 are open to examination.
16. Related Party Transactions
Loans to principal officers, directors, and their affiliates during 2021 were as follows:
Beginning balance $ 37,665
New loans and advances 11,830
Effect of changes in composition of related parties 0
Repayments (3,738)
Ending balance $ 45,757
Deposits from principal officers, directors, and their affiliates were $23.5 million and $24.5 million at December 31, 2021 and 2020, respectively.
17. 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, 2021, 2020 and 2019 and outstanding at December 31, 2021, 2020 and 2019 were time-based and performance-based restricted stock.
During the years ended December 31, 2021, 2020, and 2019, the Executive Compensation and Personnel Committee of the Corporation's Board of Directors granted a total of 55,218, 36,968 and 40,978 shares, respectively, of time-based 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 $1.4 million, $1.4 million and $1.3 million for the years ended December 31, 2021, 2020, and 2019, respectively. The total income tax benefit related to the recognized compensation cost of vested restricted stock awards was $296 thousand, $296 thousand and $283 thousand for the years ended December 31, 2021, 2020 and 2019, respectively.
A summary of changes in time-based unvested restricted stock awards follows:
Shares Weighted-average
Grant Date
Fair Value
Non-vested at January 1, 2021 56,306 $ 27.14
Granted 40,332 21.61
Forfeited (2,669) 23.49
Vested (24,326) 26.85
Non-vested at December 31, 2021 69,643 $ 24.18
The above table excludes 14,886 shares in restricted stock awards that were granted to the Corporation’s Board of Directors and certain employees at a weighted average fair value of $21.03 and immediately vested. As of December 31, 2021 and 2020, there was $1.1 million and $1.1 million, 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 the year end December 31, 2021, 2020, and 2019 was $835 thousand, $1.1 million and $1.5 million, 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 2021, awards with a maximum of 18,210 shares in aggregate were granted to key employees. 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.
Total compensation expense related to the PBRSAs and included in the above compensation expense total was $378 thousand, $384 thousand and $221 thousand for 2021, 2020 and 2019. Estimated remaining unearned compensation related to PBRSAs at December 31, 2021 was $312 thousand.
In 2020, the 2018 PBRSAs were fully earned and in 2021, 10,587 shares were fully distributed. The fair value of the shares distributed in 2021 was $223 thousand. 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 thousand.
The number of authorized stock-based awards still available for grant as of December 31, 2021 was 390,090.
18. Regulatory Capital Matters
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 is excluded from computing regulatory capital. Management believes as of December 31, 2021 the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
The PCA regulations provide five classifications: 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, 2021 and 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the PCA. 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, 2021 and 2020. The capital adequacy ratio includes the capital conservation buffer.
Actual For Capital
Adequacy Purposes (1)
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 2021
Total Capital to Risk Weighted Assets
Consolidated $ 541,651 14.92 % $ 381,093 10.50 % N/A
Bank $ 475,231 13.16 % $ 379,180 10.50 % $ 361,123 10.00 %
Tier 1 (Core) Capital to Risk Weighted Assets
Consolidated $ 427,988 11.79 % $ 308,504 8.50 % N/A
Bank $ 447,055 12.38 % $ 306,955 8.50 % $ 288,899 8.00 %
Common equity Tier 1 to Risk Weighted Assets
Consolidated $ 350,203 9.65 % $ 254,062 7.00 % N/A
Bank $ 439,676 12.18 % $ 252,786 7.00 % $ 234,730 6.50 %
Tier 1 (Core) Capital to Average Assets
Consolidated $ 427,988 8.22 % $ 208,208 4.00 % N/A
Bank $ 447,055 8.63 % $ 207,109 4.00 % $ 258,887 5.00 %
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 %
(1) The minimum amounts and ratios as of December 31, 2021 and 2020 include the full phase in of the capital conservation buffer of 2.5 percent required by the Basel III framework.
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 2021, $134.6 million of accumulated net earnings of the Bank included in consolidated shareholders’ equity, plus any 2022 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.
19. 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 $10.0 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, 2021, the variable rate on the subordinated debt was 1.75% (LIBOR plus 155 basis points) and the Corporation was paying 4.53% (2.98% fixed rate plus 155 basis points).
As of December 31, 2021 and 2020, 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, 2021 and 2020 and for the years ended December 31, 2021, 2020, and 2019:
As of December 31 Liability Derivative
Balance Sheet Fair value
Location December 31, 2021 December 31, 2020
Interest rate contract Accrued interest payable and other liabilities $(388) $(768)
For the Year Ended December 31, 2021 (a) (b) (c) (d) (e)
Interest rate contract $301 Interest expense - subordinated debentures $(276) Other
income $0
For the Year Ended December 31, 2020
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
(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 $278 thousand.
As of December 31, 2021 and 2020, a cash collateral balance of $1.1 million and $1.1 million, 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 $3.4 million as of December 31, 2021 and $4.9 million as of December 31, 2020. 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, 2021 and 2020:
Notional
Amount Average
Maturity
(in years) Weighted
Average
Fixed Rate Weighted
Average Variable Rate Fair
Value
December 31, 2021
3rd Party interest rate swaps
$ 32,768 5.8 4.12 % 1 month LIBOR + 2.27%
$ 2,124 (a)
Customer interest rate swaps (32,768) 5.8 4.12 % 1 month LIBOR + 2.27%
(2,124) (b)
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)
(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
20. 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, 2021 and 2020:
December 31, 2021 December 31, 2020
Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans $ 94,924 $ 323,013 $ 52,073 $ 266,336
Unused lines of credit 13,265 663,903 24,328 673,919
Standby letters of credit 15,063 1,623 15,301 1,597
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments at December 31, 2021 have interest rates ranging from 0.56% to 9.00% and maturities ranging from six months to approximately 31 years. 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 Corporation makes investments in limited partnerships, including certain small business investment corporations and low income housing partnerships. Capital contributions for investments in small business companies ("SBIC") and other limited partnerships, reported in FHLB and other equity interests on the consolidated balance sheet, as of December 31, 2021 and 2020 were $14.5 million and $11.8 million, respectively. Unfunded capital commitments in investments in SBIC's and other limited partnerships totaled $8.0 million and $3.7 million as of December 31, 2021 and 2020, respectively. These investments are accounted for either under the equity method of accounting.
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, 2021 and 2020 were $5.3 million and $6.0 million, respectively. The related amortization for the twelve months ended December 31, 2021, 2020 and 2019 were $691 thousand, $634 thousand and $531 thousand, respectively. Unfunded commitments, reported in accrued interest payable and other liabilities on the consolidated balance sheet, as of December 31, 2021 and 2020 were $2.1 million and $3.6 million, respectively.
21. Parent Company Only Financial Information
CONDENSED BALANCE SHEETS December 31,
2021 2020
Assets
Cash $ 47,035 $ 10,729
Equity securities 2,850 2,692
Investment in bank subsidiary 474,902 456,531
Investment in non-bank subsidiaries 20,327 15,681
Deferreds and current receivable 1,798 1,788
Other assets 1,044 1,264
Total assets $ 547,956 $ 488,685
Liabilities
Subordinated debentures $ 104,281 $ 70,620
Other liabilities 828 1,928
Total liabilities 105,109 72,548
Stockholders' equity 442,847 416,137
Total liabilities and stockholders' equity $ 547,956 $ 488,685
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
Income: 2021 2020 2019
Dividends from:
Bank subsidiary $ 22,165 $ 16,702 $ 12,696
Non-bank subsidiaries 1,700 10,350 0
Other 210 216 208
Total income 24,075 27,268 12,904
Expenses (6,657) (6,838) (5,518)
Income before income taxes and equity in undistributed net income of subsidiaries: 17,418 20,430 7,386
Change in net unrealized holdings gains (losses) on equity securities not held for trading 121 (31) 24
Income tax benefit 1,381 1,306 1,177
Equity in undistributed net income of bank subsidiary 37,178 18,197 27,580
Equity in undistributed (distributions in excess) of net income of non-bank subsidiaries 1,609 (7,159) 3,914
Net income 57,707 32,743 40,081
Dividends on preferred stock (4,302) (1,147) 0
Net income available to common stockholders $ 53,405 $ 31,596 $ 40,081
Comprehensive income attributable to the parent $ 58,008 $ 32,519 $ 39,856
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
2021 2020 2019
Net income
Adjustments to reconcile net income to net cash provided by $ 57,707 $ 32,743 $ 40,081
operating activities:
Equity in undistributed net income of bank subsidiary (37,178) (18,197) (27,580)
(Equity in undistributed) distributions in excess of net income of non-bank subsidiaries (1,609) 7,159 (3,914)
Net unrealized (gains) losses on equity securities (121) 31 (24)
Decrease in other assets 60 21 177
Increase in other liabilities 978 1,091 1,267
Net cash provided by operating activities 19,837 22,848 10,007
Cash flows from investing activities
Purchase of equity securities 0 (2,000) (36)
Outlays for business acquisition 0 (16,126) 0
Investment in bank subsidiaries 0 (41,500) 0
Net cash used in investing activities 0 (59,626) (36)
Cash flows from financing activities:
Dividends paid on common stock (11,550) (10,981) (10,358)
Dividends paid on preferred stock (4,302) (1,147) 0
Proceeds from issuance of long term debt 83,484 0 0
Repayment of long term debt (50,000) 0 0
Purchase of treasury stock (1,163) (1,307) (1,291)
Net proceeds from the issuance of preferred stock 0 57,785 0
Net proceeds from issuance of common stock 0 3,257 1,423
Net advance (to) from subsidiary 0 (850) 650
Net cash provided by (used in) financing activities 16,469 46,757 (9,576)
Net increase (decrease) in cash 36,306 9,979 395
Cash beginning of year 10,729 750 355
Cash end of year $ 47,035 $ 10,729 $ 750
22. 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, 2021, 2020, and 2019.
Years Ended December 31,
2021 2020 2019
Basic earnings per common share computation
Net income per consolidated statements of income $ 53,405 $ 31,596 $ 40,081
Net earnings allocated to participating securities (183) (100) (147)
Net earnings allocated to common stock $ 53,222 $ 31,496 $ 39,934
Distributed earnings allocated to common stock $ 11,514 $ 10,942 $ 10,317
Undistributed earnings allocated to common stock 41,708 20,554 29,617
Net earnings allocated to common stock $ 53,222 $ 31,496 $ 39,934
Weighted average common shares outstanding, including shares considered participating securities 16,875 16,048 15,219
Less: Average participating securities (55) (48) (55)
Weighted average shares 16,820 16,000 15,164
Basic earnings per common share $ 3.16 $ 1.97 $ 2.63
Diluted earnings per common share computation
Net earnings allocated to common stock $ 53,222 $ 31,496 $ 39,934
Weighted average common shares outstanding for basic earnings per common share 16,820 16,000 15,164
Add: Dilutive effects of performance based-shares 0 0 0
Weighted average shares and dilutive potential common shares 16,820 16,000 15,164
Diluted earnings per common share $ 3.16 $ 1.97 $ 2.63
23. Other Comprehensive Income
Other comprehensive income components and related tax effects were as follows for the years ended December 31, 2021, 2020, and 2019:
December 31, 2021 December 31, 2020 December 31, 2019
Unrealized holding gains (losses) on available for sale securities $ (19,526) $ 12,494 $ 13,732
Less reclassification adjustment for gains recognized in earnings (783) (2,190) (148)
Net unrealized gains (losses) (20,309) 10,304 13,584
Tax effect 4,265 (2,164) (2,852)
Net-of-tax amount (16,044) 8,140 10,732
Actuarial gain (loss) on postemployment health care plan 391 277 518
Net amortization of transition obligation and actuarial gain (43) 0 23
Net unrealized gain (loss) on postemployment health care plan 348 277 541
Tax effect (73) (58) (113)
Net-of-tax amount 275 219 428
Unrealized gain (loss) on interest rate swap 105 (508) (347)
Less reclassification adjustment for losses recognized in earnings 276 224 63
Net unrealized gain (loss) 381 (284) (284)
Tax effect (80) 60 59
Net-of-tax amount 301 (224) (225)
Other comprehensive income (loss) $ (15,468) $ 8,135 $ 10,935
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, 2021, 2020, and 2019.
Balance
12/31/20 Comprehensive
Income (Loss) Balance
12/31/21
Unrealized gains (losses) on securities available for sale $ 15,338 $ (16,044) $ (706)
Unrealized gain on postretirement benefits plan 343 275 618
Unrealized loss on interest rate swap (607) 301 (306)
Total $ 15,074 $ (15,468) $ (394)
Balance
12/31/19 Comprehensive
Income (Loss) Balance
12/31/20
Unrealized gains on securities available for sale $ 7,198 $ 8,140 $ 15,338
Unrealized gain on postretirement benefits plan 124 219 343
Unrealized loss on interest rate swap (383) (224) (607)
Total $ 6,939 $ 8,135 $ 15,074
Balance
1/1/19 Comprehensive
Income (Loss) Balance
12/31/19
Unrealized gains (losses) on securities available for sale $ (3,534) $ 10,732 $ 7,198
Unrealized gain (loss) on postretirement benefits plan (304) 428 124
Unrealized loss on interest rate swap (158) (225) (383)
Total $ (3,996) $ 10,935 $ 6,939
24. 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 sources of Non-Interest Income for the years ended December 31, 2021, 2020 and 2019. Items outside the scope of ASC 606 are noted as such.
December 31, 2021 December 31, 2020 December 31, 2019
Non-interest Income
Service charges on deposit accounts $ 6,195 $ 5,095 $ 6,402
Wealth and asset management fees 6,740 5,497 4,627
Mortgage banking (1)
3,147 3,354 1,412
Card processing and interchange income 7,796 5,727 4,641
Net realized gains on available-for-sale securities (1)
783 2,190 148
Other income 8,773 6,196 8,745
Total non-interest income $ 33,434 $ 28,059 $ 25,975
(1)Not within scope of ASC 606
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 equity 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.

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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.
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, 2021. 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, 2021. The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by Crowe LLP, Columbus, OH, (U.S. PCAOB Auditor Firm I.D.: 173), 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.
/s/ Joseph B. Bower, Jr. /s/ Tito L. Lima
President and Chief Executive Officer Treasurer and Principal Financial Officer
Date: March 3, 2022 Date: March 3, 2022

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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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 2022 Annual Meeting of Stockholders (the "2022 Proxy Statement"), which we will file with the SEC on or before 120 days after our 2021 fiscal year-end, and which will appear in the 2022 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 2022 Proxy Statement, including the information in the 2022 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 2022 Proxy Statement, including the information in the 2022 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 2022 Proxy Statement, including the information in the 2022 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 2022 Proxy Statement, including the information in the 2022 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:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019
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)
4.5
Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on June 3, 2021)
10.1(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(1)
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(1)
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)
Exhibit No. Description
10.4(1)
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)
10.5(1)
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(1)
Executive Employment Agreement, dated August 30, 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 September 3, 2021)
10.7
Form of Subordinated Note Purchase Agreement, dated June 3, 2021, by and among CNB Financial Corporation and the Purchasers identified therein (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 3, 2021)
10.8(1)
Defined Contribution Plan for Tito L. Lima, effective as of January 2, 2022 (incorporated by reference to Exhibit 10.1 to the Registration’s Current Report on Form 8-K filed on January 4, 2022)
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)
(1) Indicates a management contract or compensatory plan.