CNB FINANCIAL CORP/PA - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-13396

CNB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Pennsylvania						25-1450605
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1 South Second Street

P.O. Box 42

Clearfield, Pennsylvania 16830

(Address of principal executive offices)

Registrant’s telephone number, including area code, (814) 765-9621

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

CCNE

The NASDAQ Stock Market LLC

Depositary Shares (each representing a 1/40th interest in a share of 7.125% Series A Non-Cumulative, perpetual preferred stock)

CCNEP

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

Accelerated Filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares outstanding of the issuer’s common stock as of May 3, 2021:

COMMON STOCK, NO PAR VALUE PER SHARE: 16,884,584 SHARES

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INDEX

PART I.

FINANCIAL INFORMATION


			Page Number

ITEM 1 – Financial Statements

Consolidated Balance Sheets – March 31, 202 1 (unaudited) and December 31, 2020 (audited)			1

Consolidated Statements of Income – Three months ended M arch 3 1 , 202 1 and 20 20 (unaudited)			2

Consolidated Statements of Comprehensive Income – Three months ended March 3 1 , 202 1 and 20 20 (unaudited)			3

Consolidated Statements of Cash Flows – Three months ended March 3 1 , 202 1 and 20 20 (unaudited)			4

Consolidated Statements of Changes in Shareholders' Equity - Three months ended March 3 1 , 202 1 and 20 20 (unaudited)			5

Notes to Consolidated Financial Statements			6

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			36

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk			51

ITEM 4 – Controls and Procedures			52

PART II. OTHER INFORMATION

ITEM 1 – Legal Proceedings			53

ITEM 1A – Risk Factors			53

ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds			53

ITEM 3 – Defaults Upon Senior Securities			53

ITEM 4 – Mine Safety Disclosures			53

ITEM 5 – Other Information			53

ITEM 6 – Exhibits			54

Signatures			55

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Forward-Looking Statements

The information below includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to CNB’s financial condition, liquidity, results of operations, future performance and business. These forward-looking statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond CNB’s control). Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would” and “could.” CNB’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Corporation, our customers and the global economy and financial markets. The extent to which the COVID-19 pandemic impacts us 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 impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, the speed and effectiveness of vaccine and treatment developments and their deployment, including public adoption rates of COVID-19 vaccines, and the pace of recovery when the COVID-19 pandemic subsides, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2020 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

Additional factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) the duration and scope of the COVID-19 pandemic and the local, national and global impact of COVID-19; (ii) actions governments, businesses and individuals take in response to the pandemic; (iii) the speed and effectiveness of vaccine and treatment developments and deployment; (iv) the pace of recovery when the COVID-19 pandemic subsides; (v) changes in general business, industry or economic conditions or competition; (vi) 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; (vii) adverse changes or conditions in capital and financial markets; (viii) changes in interest rates; (ix) higher than expected costs or other difficulties related to integration of combined or merged businesses; (x) the effects of business combinations and other acquisition transactions, including the inability to realize our loan and investment portfolios; (xi) changes in the quality or composition of our loan and investment portfolios; (xii) adequacy of loan loss reserves; (xiii) increased competition; (xiv) loss of certain key officers; (xv) deposit attrition; (xvi) rapidly changing technology; (xvii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xviii) changes in the cost of funds, demand for loan products or demand for financial services; and (xix) 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 Quarterly Report on Form 10-Q, 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.

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Part I Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share data


	(unaudited)
	March 31, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	43,518	$	44,368
Interest bearing deposits with other banks	609,725		488,326
Total cash and cash equivalents	653,243		532,694
Debt securities available for sale, at fair value (amortized cost of $605,711 and $565,493 as of March 31, 2021 and December 31, 2020, respectively)	613,461		584,908
Trading securities	6,877		6,649
Loans held for sale	1,897		8,514
Loans	3,400,984		3,371,789

Less: allowance for credit losses	(35,555)		(34,340)
Net loans	3,365,429		3,337,449
FHLB, other equity, and restricted equity interests	20,463		21,018
Premises and equipment, net	60,177		60,064
Operating lease assets	18,130		18,407
Bank owned life insurance	76,022		76,471
Mortgage servicing rights	1,723		1,527
Goodwill	43,749		43,749
Core deposit intangible	539		567
Accrued interest receivable and other assets	39,382		37,382
Total Assets	$	4,901,092	$	4,729,399
LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits	$	699,231	$	627,114
Interest bearing deposits	3,658,869		3,554,630
Total deposits	4,358,100		4,181,744


Subordinated debentures	70,620		70,620
Operating lease liabilities	19,234		19,449
Accrued interest payable and other liabilities	35,535		41,449
Total liabilities	4,483,489		4,313,262
Preferred stock, Series A non-cumulative perpetual, $0 par value; $1,000 liquidation preference; authorized 60,375 shares; issued 60,375 shares at March 31, 2021 and December 31, 2020, respectively	57,785		57,785
Common stock, $0 par value; authorized 50,000,000 shares; issued 16,978,057 shares at March 31, 2021 and December 31, 2020, respectively	0		0
Additional paid in capital	126,572		127,518
Retained earnings	228,973		218,727
Treasury stock, at cost (93,473 and 145,049 shares for March 31, 2021 and December 31, 2020, respectively)	(1,671)		(2,967)
Accumulated other comprehensive income (loss)	5,944		15,074
Total shareholders’ equity	417,603		416,137
Total Liabilities and Shareholders’ Equity	$	4,901,092	$	4,729,399

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data



	Three Months Ended March 31,
	2021		2020
INTEREST AND DIVIDEND INCOME:
Loans including fees	$	41,139	$	35,510
Securities:
Taxable	2,661		3,880
Tax-exempt	351		481
Dividends	144		219
Total interest and dividend income	44,295		40,090
INTEREST EXPENSE:
Deposits	4,280		7,905
Borrowed funds and finance lease liabilities	6		1,227
Subordinated debentures (includes $69 and $21 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements, respectively)	888		964
Total interest expense	5,174		10,096
NET INTEREST INCOME	39,121		29,994
PROVISION FOR CREDIT LOSS EXPENSE	2,122		3,079
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSS EXPENSE	36,999		26,915
NON-INTEREST INCOME:
Service charges on deposit accounts	1,348		1,527
Other service charges and fees	490		590
Wealth and asset management fees	1,522		1,293

Net realized and unrealized gains (losses) on trading securities	120		(588)
Mortgage banking	1,235		337
Bank owned life insurance	940		479
Card processing and interchange income	1,834		1,128
Other	750		598
Total non-interest income	8,239		5,364
NON-INTEREST EXPENSES:
Salaries and benefits	14,573		11,397
Net occupancy expense	3,269		3,024
Amortization of core deposit intangible	28		83
Technology expense	2,670		1,336
State and local taxes	1,017		581
Legal, professional, and examination fees	1,153		645
Advertising	281		399
FDIC insurance premiums	616		619
Card processing and interchange expenses	680		796
Merger costs	0		72
Other	3,517		2,790
Total non-interest expenses	27,804		21,742
INCOME BEFORE INCOME TAXES	17,434		10,537
INCOME TAX EXPENSE (includes $(14) and $(4) income tax expense from reclassification items, respectively)	3,253		1,724
NET INCOME	14,181		8,813
PREFERRED STOCK DIVIDENDS	1,075		0
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	13,106		8,813

EARNINGS PER COMMON SHARE:
Basic	$	0.78	$	0.57
Diluted	$	0.78	$	0.57
DIVIDENDS PER COMMON SHARE:
Cash dividends per share	$	0.17	$	0.17

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands



	Three months ended March 31,
	2021		2020
NET INCOME	$	14,181	$	8,813
Other comprehensive income (loss), net of tax:
Net change in fair value of interest rate swap agreements designated as cash flow hedges:
Unrealized gain (loss) on interest rate swaps, net of tax $(8) and $92, respectively	29		(346)
Reclassification adjustment for losses recognized in earnings, net of tax $(14) and $(4), respectively	55		17
	84		(329)
Net change in unrealized gains on securities available for sale:
Unrealized holding gains (losses) arising during the period, net of tax of $2,451 and $(2,763), respectively	(9,214)		10,392

Reclassification adjustment for realized gains included in net income, net of tax of $0 and $0, respectively	0		0
	(9,214)		10,392


Other comprehensive income (loss)	(9,130)		10,063
COMPREHENSIVE INCOME	$	5,051	$	18,876

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands



	Three months ended March 31,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,181	$	8,813
Adjustments to reconcile net income to net cash provided by operations:
Provision for credit loss expense	2,122		3,079
Depreciation and amortization of premises and equipment, operating leases assets, core deposit intangible, and mortgage servicing rights	1,721		1,299
Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income	(963)		(812)
Amortization and accretion of deferred PPP processing fees	(2,731)		0

Net realized and unrealized (gains) losses on trading securities	(120)		588
Gain on sale of loans	(1,144)		(243)
Net losses (gains) on dispositions of premises and equipment and foreclosed assets	42		(15)
Proceeds from sale of loans	22,807		8,536
Origination of loans held for sale	(18,612)		(9,412)
Income on bank owned life insurance, including death benefit proceeds in excess of cash surrender value	(940)		(479)
Stock-based compensation expense	509		549
Changes in:
Accrued interest receivable and other assets	(2,190)		(4,061)
Accrued interest payable, lease liabilities, and other liabilities	(3,572)		(1,285)
NET CASH PROVIDED BY OPERATING ACTIVITIES	11,110		6,557
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, prepayments and calls of available-for-sale securities	44,082		31,389

Purchase of available-for-sale securities	(84,961)		(46,882)
Proceeds from sale of trading securities	0		5,860
Purchase of trading securities	(108)		(2,000)
Loan origination and payments, net	(22,471)		(46,383)
Proceeds from death benefit of BOLI policies	1,389		0

Redemption (purchase) of FHLB, other equity, and restricted equity interests	555		(107)
Purchase of premises and equipment	(1,439)		(1,327)
Proceeds from the sale of premises and equipment and foreclosed assets	130		145
NET CASH USED BY INVESTING ACTIVITIES	(62,823)		(59,305)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Checking, money market and savings accounts	193,911		888
Certificates of deposit	(17,555)		(2,999)

Purchase of treasury stock	(159)		(324)
Cash dividends paid, common stock	(2,860)		(2,618)
Cash dividends paid, preferred stock	(1,075)		0

Proceeds from common stock offering, net of issuance costs	0		3,353

Repayment of long-term borrowings	0		(2,185)


NET CASH PROVIDED BY FINANCING ACTIVITIES	172,262		(3,885)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	120,549		(56,633)
CASH AND CASH EQUIVALENTS, Beginning	532,694		192,974
CASH AND CASH EQUIVALENTS, Ending	$	653,243	$	136,341
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	5,053	$	9,933
Income taxes	726		78
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers to other real estate owned	$	4	$	165
Grant of restricted stock awards from treasury stock	1,228		892
Grant of performance based restricted stock awards from treasury stock	262		217

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

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, 2021	$	57,785	$	127,518	$	218,727	$	(2,967)	$	15,074	$	416,137
Net income					14,181						14,181
Other comprehensive loss									(9,130)		(9,130)
Forfeiture of restricted stock award grants (1,578 shares)			35				(35)				0
Restricted stock award grants (50,106 shares)			(1,228)				1,228				0
Performance based restricted stock award grants (10,587 shares)			(262)				262				0
Stock-based compensation expense			509								509


Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (6,598 shares)							(139)				(139)
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					(1,075)						(1,075)
Cash dividends declared ($0.17 per common share)					(2,860)						(2,860)
Balance, March 31, 2021	$	57,785	$	126,572	$	228,973	$	(1,671)	$	5,944	$	417,603

Balance, January 1, 2020	$	0	$	99,335	$	201,503	$	(2,811)	$	6,939	$	304,966
Net income					8,813						8,813
Other comprehensive income									10,063		10,063
Restricted stock award grants (35,160 shares)			(892)				892				0
Performance based restricted stock award grants (8,351 shares)			(217)				217				0
Stock-based compensation expense			549								549
Issuance of common stock, net of issuance costs (115,790 shares)			3,353								3,353

Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (7,211 shares)							(211)				(211)
Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting (3,458 shares)							(113)				(113)

Cash dividends declared ($0.17 per common share)					(2,618)						(2,618)
Balance, March 30, 2020	$	0	$	102,128	$	207,698	$	(2,026)	$	17,002	$	324,802

See Notes to Consolidated Financial Statements

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CNB FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared pursuant to rules and regulations of the SEC and in compliance with accounting principles generally accepted in the United States of America ("GAAP"). Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

In the opinion of management of the registrant, the accompanying consolidated financial statements as of March 31, 2021 and for the three month period ended March 31, 2021 and 2020 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the periods presented. The financial performance reported for CNB Financial Corporation (the "Corporation") for the three month period ended March 31, 2021 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the period ended December 31, 2020 (the "2020 Form 10-K"). All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated. Certain amounts appearing in the consolidated 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.

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 future results could differ.

The Corporation's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain the COVID-19 pandemic requires further restricted measures or is unsuccessful, the Corporation could experience a material adverse effect on its business, financial condition, results of operations and cash flows. Since the extent to which the COVID-19 pandemic impacts its operations will depend on future developments that are highly uncertain, the Corporation cannot estimate the impact on its business, financial condition or near or long-term financial or operational results with reasonable certainty. Accordingly, the Corporation is disclosing potentially material items of which it is aware.

Asset valuation: Currently, the Corporation does not expect the COVID-19 pandemic to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods due to any number of potential impacts from the COVID-19 pandemic.

The COVID-19 pandemic could cause a decline in the Corporation's stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test, resulting in an impairment charge being recorded for that period. In the event that the Corporation concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Credit: The Corporation is working with customers directly affected by the COVID-19 pandemic. The Corporation has offered assistance in accordance with regulator guidelines. As a result of the current economic slowdown related to the COVID-19 pandemic, the Corporation is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise.

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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.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in 2021

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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. ASU 2019-12 did not have a material impact on the Corporation's consolidated financial statements.

Accounting Pronouncements Pending Adoption

In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation is currently evaluating the impact of the reference rate reform on the Corporation's consolidated financial statements.

3. BUSINESS COMBINATIONS

On July 17, 2020, the Corporation completed its previously announced acquisition of Bank of Akron, pursuant to the Merger Agreement. Under the terms of the Merger Agreement, Bank of Akron merged with and into CNB Bank (the "Merger"), with CNB Bank continuing as the surviving entity. Banking offices of Bank of Akron will operate under the trade name BankOnBuffalo, a division of CNB Bank.

Pursuant to the Merger Agreement, for each share of Bank of Akron common stock, Bank of Akron shareholders were entitled to elect to receive either (x) $215.00 in cash or (y) 6.6729 shares of the Corporation's common stock and also received cash in lieu of fractional shares. Elections were subject to proration procedures whereby at least 75% of the shares of Bank of Akron common stock were exchanged for shares of the Corporation's common stock. Based on the elections and proration procedures, the total consideration payable to Bank of Akron shareholders was approximately $40.8 million, comprised of approximately $16.1 million in cash and 1,501,321 shares of the Corporation's common stock, net of fractional shares, valued at approximately $24.7 million based on the July 17, 2020 closing price of $16.43 per share of the Corporation's common stock.

Bank of Akron's results of operations were included in the Corporation's results of operations beginning July 17, 2020. The Corporation incurred $72 thousand of merger-related expenses during the three months ended March 31, 2020, consisting largely of professional services of attorneys, accountants, investment bankers and other advisors.


	July 17, 2020
Merger consideration
Value of stock consideration assigned to Akron common shares exchanged for stock paid to shareholders	$	24,667
Value of cash consideration for Akron common stock exchanged for cash	16,126
Total merger consideration	$	40,793

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Core deposit intangible ("CDI") of $613 thousand and goodwill of $5.0 million were recognized as a result of the acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.


	July 17, 2020
Identifiable net assets acquired, at fair value
Assets acquired
Cash and due from banks	$	78,830
Interest bearing deposits with other banks	10,148
Investment securities	29,407
Loans, net of allowance for credit losses on PCD loans	319,063
Premises and equipment, net	4,265
Core deposit intangible	613
Deferred tax assets	2,777
Bank owned life insurance	8,187
Accrued interest receivable and other assets	5,307
Total assets acquired	$	458,597
Liabilities assumed
Deposits	$	419,475
Accrued interest payable and other liabilities	3,348
Total liabilities assumed	422,823
Total fair value of identifiable net assets	35,774
Total merger consideration	40,793
Goodwill recognized	$	5,019

The Corporation accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed and consideration exchanged to be recorded at their respective estimated fair values at the date of acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the acquisition and other future events that are highly subjective in nature and subject to refinement for up to one year after the closing date of acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier.

The calculation of goodwill is subject to change for up to one year after closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available.

Financial assets acquired in a business combination after January 1, 2020 are recorded in accordance with ASC Topic 326, after which acquired assets are separated into two types. Purchased credit deteriorated ("PCD") assets are acquired assets that, as of the acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. Non-PCD assets are acquired assets that have experienced no or insignificant deterioration in credit quality since origination. To distinguish between the two types of acquired assets, the Corporation evaluates risk characteristics that have been determined to be indicators of deteriorated credit quality. In the case of loans, the determining criteria may involve general characteristics, such as loan payment history or changes in creditworthiness since the loan was originated, while others are relevant to recent economic conditions, such as borrowers in industries impacted by the COVID-19 pandemic.

Securities

The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.

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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.

4. SECURITIES

Securities available for sale at March 31, 2021 and December 31, 2020 are as follows:


	March 31, 2021								December 31, 2020
	Amortized		Unrealized				Fair		Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. Gov’t sponsored entities	$	156,342	$	4,897	$	(1,673)	$	159,566	$	150,404	$	6,698	$	(60)	$	157,042
State & political subdivisions	78,024		2,422		(1,251)		79,195		67,819		3,186		(122)		70,883
Residential & multi-family mortgage	327,536		7,670		(4,915)		330,291		306,054		9,276		(138)		315,192
Corporate notes & bonds	18,856		273		(275)		18,854		15,221		105		(400)		14,926
Pooled SBA	23,933		678		(22)		24,589		24,975		912		(1)		25,886
Other	1,020		0		(54)		966		1,020		0		(41)		979
Total	$	605,711	$	15,940	$	(8,190)	$	613,461	$	565,493	$	20,177	$	(762)	$	584,908

The following is a schedule of the contractual maturity of securities available for sale at March 31, 2021:


	Amortized Cost		Fair Value
1 year or less	$	51,119	$	51,083
1 year – 5 years	103,898		106,263
5 years – 10 years	89,159		91,195
After 10 years	9,046		9,074
	253,222		257,615
Residential & multi-family mortgage	327,536		330,291
Pooled SBA	23,933		24,589
Other	1,020		966
Total debt securities	$	605,711	$	613,461

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Mortgage and asset backed 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 March 31, 2021 and December 31, 2020, securities carried at $380,495 and $453,407, respectively, were pledged to secure public deposits and for other purposes as provided by law.

At March 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of shareholders’ equity. The Corporation’s residential and multi-family mortgage securities are issued by government sponsored entities.

Securities with unrealized losses at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

March 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	$	56,352	$	(1,673)	$	0	$	0	$	56,352	$	(1,673)
State & political subdivisions	29,540		(1,165)		182		(86)		29,722		(1,251)
Residential & multi-family mortgage	143,879		(4,703)		6,377		(212)		150,256		(4,915)
Corporate notes & bonds	268		(1)		4,726		(274)		4,994		(275)
Pooled SBA	3,356		(22)		0		0		3,356		(22)
Other	0		0		966		(54)		966		(54)
	$	233,395	$	(7,564)	$	12,251	$	(626)	$	245,646	$	(8,190)

December 31, 2020


	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Gov’t sponsored entities	$	24,991	$	(60)	0		0		$	24,991	$	(60)
State & political subdivisions	3,854		(19)		164		(103)		4,018		(122)
Residential & multi-family mortgage	44,092		(119)		3,277		(19)		47,369		(138)
Corporate notes & bonds	0		0		4,545		(400)		4,545		(400)
Pooled SBA	525		(1)		0		0		525		(1)
Other	0		0		979		(41)		979		(41)
	$	73,462	$	(199)	$	8,965	$	(563)	$	82,427	$	(762)

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 March 31, 2021 and December 31, 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 March 31, 2021 and December 31, 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, the length of time and extent to which fair value has been less than cost, 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.

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As of March 31, 2021 and December 31, 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.

Trading securities at March 31, 2021 and December 31, 2020 are as follows:


	March 31, 2021		December 31, 2020
Corporate equity securities	$	4,524	$	4,343
Mutual funds	1,361		1,283
Certificates of deposit	400		404
Corporate notes and bonds	592		569
U.S. Government sponsored entities	0		50
Total	$	6,877	$	6,649

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5. LOANS

Total net loans at March 31, 2021 and December 31, 2020 are summarized as follows:


	March 31, 2021		Percentage of Total		December 31, 2020		Percentage of Total
Farmland	$	24,066	0.7	%	$	23,316	0.7	%
Owner-occupied, nonfarm nonresidential properties	408,355		12.0	%	407,924		12.1	%
Agricultural production and other loans to farmers	3,519		0.1	%	2,664		0.1	%
Commercial and Industrial	690,927		20.3	%	663,550		19.7	%
Obligations (other than securities and leases) of states and political subdivisions	130,859		3.8	%	132,818		3.9	%
Other loans	11,413		0.3	%	11,961		0.4	%
Other construction loans and all land development and other land loans	221,012		6.5	%	205,734		6.1	%
Multifamily (5 or more) residential properties	235,702		6.9	%	212,815		6.3	%
Non-owner occupied, nonfarm nonresidential properties	622,765		18.3	%	640,945		19.0	%
1-4 Family Construction	23,667		0.7	%	27,768		0.8	%
Home equity lines of credit	105,754		3.1	%	109,444		3.2	%
Residential Mortgages secured by first liens	771,564		22.7	%	777,030		23.0	%
Residential Mortgages secured by junior liens	53,014		1.6	%	53,726		1.6	%
Other revolving credit plans	25,966		0.8	%	25,507		0.8	%
Automobile	24,171		0.7	%	25,344		0.8	%
Other consumer	40,120		1.2	%	42,792		1.3	%
Credit cards	7,875		0.2	%	8,115		0.2	%
Overdrafts	235		0.0	%	336		0.0	%
Total loans	$	3,400,984	100.0	%	$	3,371,789	100.0	%
Less: Allowance for credit losses	(35,555)				(34,340)
Loans, net	$	3,365,429			$	3,337,449

Net deferred loan origination fees (costs) included in the above loan table	$	10,889			$	8,789

The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within central and northwest Pennsylvania, central and northeast Ohio, and western New York. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer. The Corporation maintains lending policies to control the quality of the loan portfolio. These policies delegate the authority to extend loans under specific guidelines and underwriting standards. These policies are prepared by the Corporation’s management and reviewed and ratified annually by the Corporation’s Board of Directors.

As a result of the adoption of ASC 326 effective January 1, 2020, there is a lack of comparability in both the allowance and provisions for credit losses for the periods presented. 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 are reported in accordance with the incurred loss methodology and have not been restated.

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Transactions in the allowance for credit losses for the three months ended March 31, 2021 were as follows:


	Beginning Allowance		(Charge-offs)		Recoveries		Provision (Benefit) for Credit Loss Expense		Ending Allowance
Farmland	$	221	$	0	$	0	$	3	$	224
Owner-occupied, nonfarm nonresidential properties	3,700		(531)		2		(236)		2,935
Agricultural production and other loans to farmers	24		0		0		4		28
Commercial and Industrial	6,233		(56)		5		297		6,479
Obligations (other than securities and leases) of states and political subdivisions	998		0		0		717		1,715
Other loans	68		0		0		5		73
Other construction loans and all land development and other land loans	1,956		0		0		50		2,006
Multifamily (5 or more) residential properties	2,724		0		0		30		2,754
Non-owner occupied, nonfarm nonresidential properties	8,658		0		0		2,668		11,326
1-4 Family Construction	82		0		0		(15)		67
Home equity lines of credit	985		0		0		(142)		843
Residential Mortgages secured by first liens	4,539		(28)		31		(992)		3,550
Residential Mortgages secured by junior liens	241		0		0		(17)		224
Other revolving credit plans	507		(6)		2		24		527
Automobile	132		(5)		0		55		182
Other consumer	2,962		(315)		48		(321)		2,374
Credit cards	66		(33)		8		24		65
Overdrafts	244		(84)		55		(32)		183
Total loans	$	34,340	$	(1,058)	$	151	$	2,122	$	35,555

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 three months ended March 31, 2021, the allowance for credit losses increased due to the addition of $2,349 in specific reserves related to three commercial loan relationships, partially offset by net charge offs of $907, which were primarily impacted by one commercial loan relationship. The Corporation did not have any significant changes in their assumptions to the key drivers of the allowance for credit losses during the period.

Transactions in the allowance for loan losses for the three months ended March 31, 2020 under the incurred loss methodology were as follows:


	Commercial, Industrial and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses, January 1, 2020	$	8,287	$	6,952	$	1,499	$	2,411	$	84	$	240	$	19,473
Charge-offs	(25)		0		(143)		(592)		(31)		(119)		(910)
Recoveries	18		172		3		43		1		36		273
Provision (benefit) for loan losses	2,252		368		99		276		58		26		3,079
Allowance for loan losses, March 31, 2020	$	10,532	$	7,492	$	1,458	$	2,138	$	112	$	183	$	21,915

The following table presents information for impaired loans for the three months ended March 31, 2020:


	Three months ended March 31, 2020
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial and agricultural	$	4,272	$	17	$	17
Commercial mortgage	4,331		37		37
Residential real estate	463		5		5
With no related allowance recorded:
Commercial, industrial and agricultural	7,161		42		42
Commercial mortgage	9,598		158		158
Residential real estate	0		0		0
Total	$	25,825	$	259	$	259

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The following tables presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of March 31, 2021 and December 31, 2020, respectively:


	March 31, 2021
	Nonaccrual		Nonaccrual With No Allowance for Credit Loss		Loans Past Due over 89 Days Still Accruing
Farmland	$	1,843	$	50	$	0
Owner-occupied, nonfarm nonresidential properties	1,482		1,179		0

Commercial and Industrial	6,477		587		884
Obligations (other than securities and leases) of states and political subdivisions	706		0		0

Other construction loans and all land development and other land loans	1,892		77		0
Multifamily (5 or more) residential properties	994		0		0
Non-owner occupied, nonfarm nonresidential properties	13,980		489		0

Home equity lines of credit	754		754		0
Residential Mortgages secured by first liens	3,283		3,283		76
Residential Mortgages secured by junior liens	100		100		0
Other revolving credit plans	17		17		0
Automobile	7		7		0
Other consumer	347		347		0
Credit cards	0		0		27

Total loans	$	31,882	$	6,890	$	987


	December 31, 2020
	Nonaccrual		Nonaccrual With No Allowance for Credit Loss		Loans Past Due over 89 Days Still Accruing
Farmland	$	1,844	$	51	$	0
Owner-occupied, nonfarm nonresidential properties	1,781		909		0

Commercial and Industrial	6,657		464		0


Other construction loans and all land development and other land loans	2,349		77		0
Multifamily (5 or more) residential properties	288		0		0
Non-owner occupied, nonfarm nonresidential properties	11,932		394		0

Home equity lines of credit	685		685		0
Residential Mortgages secured by first liens	4,175		3,495		283
Residential Mortgages secured by junior liens	114		114		0
Other revolving credit plans	6		6		0
Automobile	32		32		0
Other consumer	496		496		8
Credit cards	0		0		34

Total loans	$	30,359	$	6,723	$	325

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 table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2021:


	Real Estate Collateral		Non-Real Estate Collateral
Farmland	$	1,793	$	0
Owner-occupied, nonfarm nonresidential properties	267		36

Commercial and Industrial	398		5,492
Obligations (other than securities and leases) of states and political subdivisions	706		0

Other construction loans and all land development and other land loans	1,815		0
Multifamily (5 or more) residential properties	994		0
Non-owner occupied, nonfarm nonresidential properties	11,747		158


Residential Mortgages secured by first liens	451		0






Total loans	$	18,171	$	5,686

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The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020:


	Real Estate Collateral		Non-Real Estate Collateral
Farmland	$	1,793	$	0
Owner-occupied, nonfarm nonresidential properties	285		587

Commercial and Industrial	594		5,600


Other construction loans and all land development and other land loans	2,272		0
Multifamily (5 or more) residential properties	288		0
Non-owner occupied, nonfarm nonresidential properties	9,072		880


Residential Mortgages secured by first liens	1,135		0






Total loans	$	15,439	$	7,067

The following table presents the aging of the amortized cost basis in past-due loans as of March 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	$	193	$	0	$	1,211	$	1,404	$	22,662	$	24,066
Owner-occupied, nonfarm nonresidential properties	334		0		991		1,325		407,030		408,355
Agricultural production and other loans to farmers	0		0		0		0		3,519		3,519
Commercial and Industrial	1,064		1,045		4,281		6,390		684,537		690,927
Obligations (other than securities and leases) of states and political subdivisions	0		0		0		0		130,859		130,859
Other loans	0		0		0		0		11,413		11,413
Other construction loans and all land development and other land loans	0		0		1,453		1,453		219,559		221,012
Multifamily (5 or more) residential properties	209		0		0		209		235,493		235,702
Non-owner occupied, nonfarm nonresidential properties	0		312		10,233		10,545		612,220		622,765
1-4 Family Construction	0		0		0		0		23,667		23,667
Home equity lines of credit	33		178		98		309		105,445		105,754
Residential Mortgages secured by first liens	1,365		462		1,381		3,208		768,356		771,564
Residential Mortgages secured by junior liens	0		93		21		114		52,900		53,014
Other revolving credit plans	0		8		13		21		25,945		25,966
Automobile	55		0		5		60		24,111		24,171
Other consumer	211		99		166		476		39,644		40,120
Credit cards	17		26		27		70		7,805		7,875
Overdrafts	0		0		0		0		235		235
Total loans	$	3,481	$	2,223	$	19,880	$	25,584	$	3,375,400	$	3,400,984

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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

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.

As of March 31, 2021 and December 31, 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 $17,105 and $15,088 as of March 31, 2021 and December 31, 2020, respectively. The Corporation has allocated $1,385 and $779 of allowance for those loans as of March 31, 2021 and December 31, 2020, respectively.

The following table presents loans modified as TDRs during the three months ended March 31, 2021:


	Three Months Ended March 31, 2021
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment







Multifamily (5 or more) residential properties	1	$	717	$	717
Non-owner occupied, nonfarm nonresidential properties	1	1,604		1,604









Total loans	2	$	2,321	$	2,321

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2020.

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The troubled debt restructurings described above increased the allowance for credit losses by zero and zero during the three months ended March 31, 2021 and March 31, 2020, respectively.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no loans modified as troubled debt restructurings for which there was a payment default within a twelve-month cycle following the modification during the three months ended March 31, 2021 and March 31, 2020. There were no principal balances forgiven in connection with the loan restructurings.

Generally, nonperforming troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Credit Quality Indicators

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually to classify the loans as to credit risk.

The Corporation uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Table of Contents

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 March 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	$	2,340	$	1,609	$	4,018	$	3,686	$	3,623	$	5,112	$	680	$	0	$	21,068
Special mention	0		1,156		0		0		0		0		0		0		1,156
Substandard	0		0		0		0		49		1,793		0		0		1,842
Doubtful	0		0		0		0		0		0		0		0		0
Total	$	2,340	$	2,765	$	4,018	$	3,686	$	3,672	$	6,905	$	680	$	0	$	24,066
Owner-occupied, nonfarm nonresidential properties
Risk rating
Pass	$	21,542	$	92,037	$	97,475	$	48,063	$	54,569	$	71,633	$	8,211	$	0	$	393,530
Special mention	0		0		863		65		146		1,595		77		0		2,746
Substandard	0		996		2,401		2,006		384		6,035		257		0		12,079
Doubtful	0		0		0		0		0		0		0		0		0
Total	$	21,542	$	93,033	$	100,739	$	50,134	$	55,099	$	79,263	$	8,545	$	0	$	408,355
Agricultural production and other loans to farmers
Risk rating
Pass	$	785	$	217	$	142	$	599	$	0	$	53	$	1,723	$	0	$	3,519
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	$	785	$	217	$	142	$	599	$	0	$	53	$	1,723	$	0	$	3,519
Commercial and Industrial
Risk rating
Pass	$	160,165	$	209,202	$	46,734	$	35,707	$	23,364	$	28,812	$	164,494	$	0	$	668,478
Special mention	0		110		980		3,544		223		1,223		939		0		7,019
Substandard	70		786		1,949		1,214		144		5,613		5,654		0		15,430
Doubtful	0		0		0		0		0		0		0		0		0
Total	$	160,235	$	210,098	$	49,663	$	40,465	$	23,731	$	35,648	$	171,087	$	0	$	690,927
Obligations (other than securities and leases) of states and political subdivisions
Risk rating
Pass	$	69	$	10,596	$	12,163	$	34,411	$	20,742	$	43,512	$	8,660	$	0	$	130,153
Special mention	0		0		0		0		0		0		0		0		0
Substandard	0		706		0		0		0		0		0		0		706
Doubtful	0		0		0		0		0		0		0		0		0
Total	$	69	$	11,302	$	12,163	$	34,411	$	20,742	$	43,512	$	8,660	$	0	$	130,859
Other loans
Risk rating
Pass	$	11	$	7,855	$	699	$	366	$	0	$	0	$	2,482	$	0	$	11,413
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	$	11	$	7,855	$	699	$	366	$	0	$	0	$	2,482	$	0	$	11,413

Table of Contents


	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	$	9,167	$	127,040	$	54,770	$	18,002	$	1,035	$	1,648	$	3,088	$	0	$	214,750
Special mention	0		1,340		666		29		2,774		0		0		0		4,809
Substandard	0		0		0		0		0		1,376		77		0		1,453
Doubtful	0		0		0		0		0		0		0		0		0
Total	$	9,167	$	128,380	$	55,436	$	18,031	$	3,809	$	3,024	$	3,165	$	0	$	221,012
Multifamily (5 or more) residential properties
Risk rating
Pass	$	45,945	$	70,202	$	33,892	$	14,010	$	48,845	$	19,039	$	2,566	$	0	$	234,499
Special mention	0		0		0		0		0		0		0		0		0
Substandard	717		6		0		276		204		0		0		0		1,203
Doubtful	0		0		0		0		0		0		0		0		0
Total	$	46,662	$	70,208	$	33,892	$	14,286	$	49,049	$	19,039	$	2,566	$	0	$	235,702
Non-owner occupied, nonfarm nonresidential properties
Risk rating
Pass	$	15,475	$	141,872	$	124,898	$	87,695	$	50,563	$	147,584	$	9,371	$	0	$	577,458
Special mention	3,727		91		754		1,201		3,660		1,668		450		0		11,551
Substandard	1,604		0		12,294		326		7,552		11,382		598		0		33,756
Doubtful	0		0		0		0		0		0		0		0		0
Total	$	20,806	$	141,963	$	137,946	$	89,222	$	61,775	$	160,634	$	10,419	$	0	$	622,765

Table of Contents

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

Table of Contents


	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 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.

Table of Contents

The following tables detail the amortized cost of loans, by year of origination (for term loans) and by payment activity within each portfolio segment as of March 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	$	1,764	$	14,202	$	7,632	$	69	$	0	$	0	$	0	$	0	$	23,667
Nonperforming	0		0		0		0		0		0		0		0		0
Total	$	1,764	$	14,202	$	7,632	$	69	$	0	$	0	$	0	$	0	$	23,667
Home equity lines of credit
Payment performance
Performing	$	1,096	$	20,280	$	11,732	$	11,636	$	7,955	$	47,750	$	4,551	$	0	$	105,000
Nonperforming	0		0		0		0		399		355		0		0		754
Total	$	1,096	$	20,280	$	11,732	$	11,636	$	8,354	$	48,105	$	4,551	$	0	$	105,754
Residential mortgages secured by first lien
Payment performance
Performing	$	40,254	$	202,846	$	127,240	$	85,003	$	93,825	$	215,258	$	3,779	$	0	$	768,205
Nonperforming	0		156		83		51		212		2,796		61		0		3,359
Total	$	40,254	$	203,002	$	127,323	$	85,054	$	94,037	$	218,054	$	3,840	$	0	$	771,564
Residential mortgages secured by junior liens
Payment performance
Performing	$	3,303	$	14,238	$	11,113	$	6,337	$	5,118	$	12,403	$	402	$	0	$	52,914
Nonperforming	0		0		0		0		0		100		0		0		100
Total	$	3,303	$	14,238	$	11,113	$	6,337	$	5,118	$	12,503	$	402	$	0	$	53,014
Other revolving credit plans
Payment performance
Performing	$	2,305	$	3,262	$	4,424	$	3,461	$	2,953	$	9,544	$	0	$	0	$	25,949
Nonperforming	0		0		0		12		0		5		0		0		17
Total	$	2,305	$	3,262	$	4,424	$	3,473	$	2,953	$	9,549	$	0	$	0	$	25,966
Automobile
Payment performance
Performing	$	1,806	$	8,221	$	7,633	$	3,981	$	1,331	$	1,192	$	0	$	0	$	24,164
Nonperforming	0		0		0		0		5		2		0		0		7
Total	$	1,806	$	8,221	$	7,633	$	3,981	$	1,336	$	1,194	$	0	$	0	$	24,171
Other consumer
Payment performance
Performing	$	5,045	$	20,619	$	9,051	$	2,763	$	623	$	1,672	$	0	$	0	$	39,773
Nonperforming	0		82		147		46		4		68		0		0		347
Total	$	5,045	$	20,701	$	9,198	$	2,809	$	627	$	1,740	$	0	$	0	$	40,120

Table of Contents

The following tables detail the amortized cost of loans, by year of origination (for term loans) and by payment activity 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	$	1,655	$	0	$	0	$	42,288
Nonperforming	82		264		75		13		0		70		0		0		504
Total	$	24,939	$	11,447	$	3,654	$	809	$	218	$	1,725	$	0	$	0	$	42,792


	March 31, 2021		December 31, 2020
	Consumer		Consumer
Credit card
Payment performance
Performing	$	7,848	$	8,081
Nonperforming	27		34
Total	$	7,875	$	8,115

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Purchased Credit Deteriorated Loans

The Corporation has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:


	July 17, 2020
Purchase price of loans at acquisition	$	21,768
Allowance for credit losses at acquisition	980
Non-credit discount / (premium) at acquisition	1,063
Par value of acquired loans at acquisition	$	23,811

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”) are considered to be subprime loans. Holiday is 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.

Holiday’s loan portfolio, included in consumer loans above, is summarized as follows at March 31, 2021 and December 31, 2020:


	March 31, 2021		December 31, 2020
Gross consumer loans	$	25,999	$	27,998

Less: unearned discounts	(4,753)		(5,181)
Total consumer loans, net of unearned discounts	$	21,246	$	22,817

6. 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	March 31, 2021		December 31, 2020
Assets:
Operating lease assets	Operating lease assets	$	18,130	$	18,407
Finance lease assets	Premises and equipment, net (1)	411		429
Total leased assets		$	18,541	$	18,836

Liabilities:
Operating lease liabilities	Operating lease liabilities	$	19,234	$	19,449
Finance lease liabilities	Accrued interest payable and other liabilities	530		550
Total leased liabilities		$	19,764	$	19,999

(1) Finance lease assets are recorded net of accumulated amortization of $805 as of March 31, 2021 and $787 as of December 31, 2020.

Table of Contents

The components of the Corporation's net lease expense for the three months ended March 31, 2021 and 2020, respectively, were as follows:


		Three months ended March 31,
Lease Cost	Classification	2021		2020
Operating lease cost	Net occupancy expense	$	440	$	455
Variable lease cost	Net occupancy expense	17		24
Finance lease cost:
Amortization of leased assets	Net occupancy expense	18		18
Interest on lease liabilities	Interest expense - borrowed funds	6		7
Sublease income (1)	Net occupancy expense	(19)		(21)
Net lease cost		$	462	$	483

(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 March 31, 2021:


Maturity of Lease Liabilities as of March 31, 2021	Operating Leases (1)		Finance Leases		Total
2021	$	1,181	$	78	$	1,259
2022	1,661		105		1,766
2023	1,550		105		1,655
2024	1,515		105		1,620
2025	1,505		105		1,610
After 2025	19,281		105		19,386
Total lease payments	26,693		603		27,296
Less: Interest	7,459		73		7,532
Present value of lease liabilities	$	19,234	$	530	$	19,764

(1) Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude $6,565 of legally binding minimum lease payments for leases signed, but not yet commenced.

Lease terms and discount rates related to the Corporation's lease liabilities as of March 31, 2021 and December 31, 2020 were as follows:


Lease Term and Discount Rate	March 31, 2021		December 31, 2020
Weighted-average remaining lease term (years)
Operating leases	18.9		19.0
Finance leases	5.7		6.0

Weighted-average discount rate
Operating leases	3.47	%	3.46	%
Finance leases	4.49	%	4.49	%

Other information related to the Corporation's lease liabilities as of March 31, 2021 and 2020 was as follows:


Other Information	March 31, 2021		March 31, 2020

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	223	$	212

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7. DEPOSITS

Total deposits at March 31, 2021 and December 31, 2020 are summarized as follows:


	March 31, 2021		December 31, 2020		Percentage Change
Checking, non-interest bearing	$	699,231	$	627,114	11.5	%
Checking, interest bearing	941,630		951,903		(1.1)	%
Savings accounts	2,258,250		2,126,183		6.2	%
Certificates of deposit	458,989		476,544		(3.7)	%
Total	$	4,358,100	$	4,181,744	4.2	%

8. STOCK 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.

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. At March 31, 2021, there was no unrecognized compensation cost related to stock-based compensation awarded under this plan and, except for the time-based and performance-based restricted stock awards disclosed below and in previous filings, no other stock-based compensation was granted during the three month period ended March 31, 2021 and 2020.

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 $509 and $549 for the three months ended March 31, 2021 and March 31, 2020, respectively. The total income tax benefit related to the recognized compensation cost of vested restricted stock awards was $107 and $115 for the three months ended March 31, 2021 and March 31, 2020, respectively.

A summary of changes in time-based unvested restricted stock awards for the three months ended March 31, 2021 follows:


	Shares	Per Share Weighted Average Grant Date Fair Value
Unvested at beginning of period	56,306	$	27.14
Granted	35,220	21.09
Forfeited	(1,578)	26.82
Vested	(22,369)	27.07
Unvested at end of period	67,579	$	24.02

The above table excludes 14,886 shares in restricted stock awards that were granted at a weighted average fair value of $21.03 and immediately vested. There was $1,586 and $1,055 of total unrecognized compensation cost related to unvested restricted stock awards, as of March 31, 2021 and December 31, 2020, respectively. The fair value of shares vested was $786 and $1,101 during the three months ended March 31, 2021 and March 31, 2020, 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.

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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.

9. EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing net income, excluding net earnings allocated to participating securities, by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares issuable under certain stock compensation plans. For the three months ended March 31, 2021 and 2020, there were no outstanding stock options to include in the diluted earnings per common share calculations and the impact of performance-based shares was immaterial.

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 common share pursuant to the two-class method. The Corporation has determined that its outstanding unvested stock awards are participating securities.

The computation of basic and diluted earnings per common share is shown below:


	Three months ended March 31,
	2021		2020
Basic earnings per common share computation:
Net income per consolidated statements of income	$	13,106	$	8,813
Net earnings allocated to participating securities	(45)		(30)
Net earnings allocated to common stock	$	13,061	$	8,783
Distributed earnings allocated to common stock	$	2,859	$	2,608
Undistributed earnings allocated to common stock	10,202		6,175
Net earnings allocated to common stock	$	13,061	$	8,783
Weighted average common shares outstanding, including shares considered participating securities	16,855		15,333
Less: Average participating securities	(56)		(52)
Weighted average shares	16,799		15,281
Basic earnings per common share	$	0.78	$	0.57
Diluted earnings per common share computation:
Net earnings allocated to common stock	$	13,061	$	8,783
Weighted average common shares outstanding for basic earnings per common share	16,799		15,281
Add: Dilutive effects of performance based-shares	0		0
Weighted average shares and dilutive potential common shares	16,799		15,281
Diluted earnings per common share	$	0.78	$	0.57

10. DERIVATIVE INSTRUMENTS

On September 7, 2018, the Corporation executed an interest rate swap agreement with a 5-year term and an effective date of September 15, 2018 in order to hedge cash flows associated with $10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2018 to September 15, 2023 without the exchange of the underlying notional amount. At March 31, 2021, the variable rate on the subordinated debt was 1.77% (LIBOR plus 155 basis points) and the Corporation was paying 4.53% (2.98% fixed rate plus 155 basis points).

As of March 31, 2021 and December 31, 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 March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020:

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		Fair value as of
	Balance Sheet Location	March 31, 2021		December 31, 2020
Interest rate contracts	Accrued interest and other liabilities	$	(662)	$	(768)


For the Three Months Ended March 31, 2021	(a)		(b)	(c)		(d)	(e)
Interest rate contracts	$	84	Interest expense – subordinated debentures	$	(69)	Other income	$	0


For the Three Months Ended March 31, 2020	(a)		(b)	(c)		(d)	(e)
Interest rate contracts	$	(329)	Interest expense – subordinated debentures	$	(21)	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 Gain or (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 income (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 income (loss) to interest expense in the next twelve months are expected to be $276.

As of March 31, 2021 and December 31, 2020, a cash collateral balance in the amount of $1,050 and $1,050, respectively, was maintained with a counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheets.

The Corporation entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Corporation enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. Concurrently, the Corporation agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Corporation’s customers to effectively convert a variable rate loan to a fixed rate. Because the Corporation acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not impact the Corporation’s results of operations.

The Corporation pledged cash collateral to another financial institution with a balance $4,873 as of March 31, 2021 and $4,873 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.

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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 March 31, 2021 and December 31, 2020:


	Notional Amount		Weighted Average Maturity (in years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value
March 31, 2021
3rd Party interest rate swaps	$	33,760	6.5	4.13	%	1 month LIBOR + 2.27%	$	2,593	(a)
Customer interest rate swaps	(33,760)		6.5	4.13	%	1 month LIBOR + 2.27%	(2,593)		(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

11. FAIR VALUE

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The following three levels of inputs are used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values of most trading securities and debt securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted securities (Level 2). These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities that observable inputs about the specific issuer are not available, fair values are estimated using observable data from other securities presumed to be similar or other market data on other similar securities (Level 3).

Derivatives: The Corporation’s derivative instruments are interest rate swaps that are similar to those that trade in liquid markets. As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2).

Individually Evaluated Loans: The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is generally based on recent real estate appraisals prepared by third-parties. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

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Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2021 and December 31, 2020:


			Fair Value Measurements at March 31, 2021 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	159,566	$	0	$	159,566	$	0
States and political subdivisions	79,195		0		79,195		0
Residential and multi-family mortgage	330,291		4,054		326,237		0
Corporate notes and bonds	18,854		3,000		13,604		2,250
Pooled SBA	24,589		0		24,589		0
Other	966		966		0		0
Total Securities Available For Sale	$	613,461	$	8,020	$	603,191	$	2,250
Interest Rate swaps	$	2,593	$	0	$	2,593	$	0
Trading Securities:
Corporate equity securities	$	4,524	$	4,524	$	0	$	0
Mutual funds	1,361		1,361		0		0
Certificates of deposit	400		400		0		0
Corporate notes and bonds	592		592		0		0

Total Trading Securities	$	6,877	$	6,877	$	0	$	0
Liabilities:
Interest rate swaps	$	(3,255)	$	0	$	(3,255)	$	0

























			Fair Value Measurements at December 31, 2020 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	157,042	$	0	$	157,042	$	0
States and political subdivisions	70,883		0		70,819		64
Residential and multi-family mortgage	315,192		15,039		300,153		0
Corporate notes and bonds	14,926		0		14,926		0
Pooled SBA	25,886		0		25,886		0
Other	979		979		0		0
Total Securities Available For Sale	$	584,908	$	16,018	$	568,826	$	64
Interest Rate swaps	$	4,017	$	0	$	4,017	$	0
Trading Securities:
Corporate equity securities	$	4,343	$	4,343	$	0	$	0
Mutual funds	1,283		1,283		0		0
Certificates of deposit	404		404		0		0
Corporate notes and bonds	569		569		0		0
U.S. Government sponsored entities	50		0		50		0
Total Trading Securities	$	6,649	$	6,599	$	50	$	0
Liabilities:
Interest rate swaps	$	(4,785)	$	0	$	(4,785)	$	0

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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) as of March 31, 2021:


	States and Political Subdivisions		Corporate Notes and Bonds
Balance, January 1, 2021	$	64	$	0
Purchases	0		750
Total gains or (losses):
Included in other comprehensive income (loss)	0		0
Settlements	64		0
Transfers into Level 3	0		1,500
Transfers out of Level 3	0		$	0
Balance, March 31, 2021	$	0	$	2,250

The Corporation's corporate notes and bonds with a fair value of $1,500 as of March 31, 2021 were transferred out of Level 2 and into Level 3 because of a lack of observable market data for these investments due to a decrease in the market activity for these securities.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at March 31, 2021 and December 31, 2020:


			Fair Value Measurements at March 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	$	659	0	0	$	659
Owner-occupied, nonfarm nonresidential properties	303		0	0	303
Commercial and industrial	2,924		0	0	2,924
Other construction loans and all land development loans and other land loans	1,383		0	0	1,383
Multifamily (5 or more) residential properties	717		0	0	717
Non-owner occupied, nonfarm nonresidential	11,539		0	0	11,539


			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

Non-owner occupied, nonfarm nonresidential	9,622		0	0	9,622
Residential mortgages secured by first liens	659		0	0	659

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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 March 31, 2021:

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

57%-60% (58%)

Owner-occupied, nonfarm nonresidential properties

303

Valuation of third party appraisal on underlying collateral

Loss severity rates

0%-60% (53%)

Commercial and industrial

2,924

Valuation of third party appraisal on underlying collateral

Loss severity rates

19%-100% (51%)

Other construction loans and all land development loans and other land loans

1,383

Valuation of third party appraisal on underlying collateral

Loss severity rates

25%-44% (30%)

Multifamily (5 or more) residential properties

717

Valuation of third party appraisal on underlying collateral

Loss severity rates

58%-60% (59%)

Non-owner occupied, nonfarm nonresidential

11,539

Valuation of third party appraisal on underlying collateral

Loss severity rates

25%-100% (30%)

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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%)

Owner-occupied, nonfarm nonresidential properties

329

Valuation of third party appraisal on underlying collateral

Loss severity rates

60%-90% (80%)

Commercial and industrial

3,680

Valuation of third party appraisal on underlying collateral

Loss severity rates

0%-100% (39%)

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%)

Non-owner occupied, nonfarm nonresidential

9,622

Valuation of third party appraisal on underlying collateral

Loss severity rates

25%-100% (29%)

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 March 31, 2021:


	Carrying		Fair Value Measurement Using:						Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	653,243	$	653,243	$	0	$	0	$	653,243
Securities available for sale	613,461		8,020		603,191		2,250		613,461
Trading securities	6,877		6,877		0		0		6,877
Loans held for sale	1,897		0		1,994		0		1,994
Net loans	3,365,429		0		0		3,372,178		3,372,178
FHLB and other restricted interests	20,463		n/a		n/a		n/a		n/a

Interest rate swaps	2,593		0		2,593		0		2,593
Accrued interest receivable	18,451		31		2,296		16,116		18,442
LIABILITIES
Deposits	$	(4,358,100)	$	(3,899,111)	$	(468,032)	$	0	$	(4,367,143)

Subordinated debentures	(70,620)		0		(62,723)		0		(62,723)
Interest rate swaps	(3,255)		0		(3,255)		0		(3,255)
Accrued interest payable	(1,217)		0		(1,217)		0		(1,217)

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The following table presents the carrying amount and fair value of financial instruments at December 31, 2020:


	Carrying		Fair Value Measurement Using:						Total
	Amount		Level 1		Level 2		Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	532,694	$	532,694	$	0	$	0	$	532,694
Securities available for sale	584,908		16,018		568,826		64		584,908
Trading securities	6,649		6,599		50		0		6,649
Loans held for sale	8,514		0		8,617		0		8,617
Net loans	3,337,449		0		0		3,339,482		3,339,482
FHLB and other restricted 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.

12. REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Corporation's Non-Interest Income by revenue stream and reportable segment for the three months ended March 31, 2021 and 2020. Items outside the scope of ASC 606 are noted as such.


	Three months ended March 31,
	2021		2020
Non-interest Income
Service charges on deposit accounts	$	1,348	$	1,527
Wealth and asset management fees	1,522		1,293
Mortgage banking (1)	1,235		337
Card processing and interchange income	1,834		1,128
Net gains (losses) on sales of securities (1)	0		0
Other income	2,300		1,079
Total non-interest income	$	8,239	$	5,364

(1)Not within scope of ASU 2014-9

Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investment securities along with non-interest revenue resulting from security gains, loan servicing, gains on the sale of loans, commitment fees, fees from financial guarantees, certain credit card fees, gains (losses) on sale of other real estate owned not financed by the Corporation, is not within the scope of ASU 2014-9.

The types of non-interest income within the scope of the standard that are material to the consolidated financial statements are services charges on deposit accounts, wealth and asset management fee income, card processing and interchange income, and other income.

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Service charges on deposit accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed, as that is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Services charges on deposits are withdrawn from the customer’s account balance.

Wealth and asset management fees: The Corporation earns wealth and asset management fees from its contracts with trust and brokerage customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management at month end. Fees for these services are billed to customers on a monthly or quarterly basis and are recorded as revenue at the end of the period for which the wealth and asset management services have been performed. Other performance obligations, such as the delivery of account statements to customers, are generally considered immaterial to the overall transaction price.

Card processing and interchange income: The Corporation earns interchange fees from check card and credit card transactions conducted through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Other income: The Corporation's other income includes sources such as bank owned life insurance, changes in fair value and realized gains on sales of trading securities, certain service fees, gains (losses) on sales of fixed assets, and gains (losses) on sale of other real estate owned. The service fees are recognized in the same manner as the service charges mentioned above. While gains (losses) on the sale of other real estate owned are within the scope of ASU 2014-9 if financed by the Corporation, the Corporation does not finance the sale of transactions. The revenue on the sale is recorded upon the transfer of control of the property to the buyer and the other real estate owned asset is derecognized.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of financial results. The terms “we”, “us” and “our” refer to CNB Financial Corporation and its subsidiaries. The financial condition and results of operations of the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance.

The Corporation’s subsidiary, the Bank, provides financial services to individuals and businesses primarily within its primary market area of the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson and McKean. ERIEBANK, a division of the Bank, operates in the Pennsylvania counties of Crawford, Erie, and Warren and in the Ohio counties of Ashtabula, Cuyahoga and Lake. FCBank, a division of the Bank, operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware and Franklin. BankOnBuffalo, a division of the Bank, operates in Erie and Niagara counties, New York. The Bank is subject to regulation, supervision and examination by the Pennsylvania State Department of Banking as well as the FDIC.

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.

The following discussion should be read in conjunction with the Corporation’s Consolidated Financial Statements and Notes thereto for the year ended December 31, 2020, included in its Annual Report on Form 10-K for the year ended December 31, 2020, and in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for three months ended March 31, 2021 are not necessarily indicative of the results for the full year ending December 31, 2021, or any future period.

GENERAL OVERVIEW

This report contains references to financial measures that are not defined in GAAP. Management uses non-GAAP financial information in its analysis of the Corporation’s performance. Management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented. The Corporation’s management believes that investors may use these non-GAAP measures to analyze the Corporation’s financial performance without the impact of unusual items or events that may obscure trends in the Corporation’s underlying performance. This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. Non-GAAP measures reflected within the discussion below include:

•Tangible book value per share;

•Tangible common equity/tangible assets;

•Pre-tax pre-provision ("PTPP")

•Net interest margin (fully tax equivalent basis);

•Efficiency ratio; and

•Return on average tangible common equity.

In addition, non-GAAP evaluations on the impact of PPP-related loans (as defined below) on various metrics of the Corporation’s financial performance include calculations related to 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 (dollars in thousands, except per share data).

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Management considers 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.

In addition, the global outbreak of COVID-19 and the public health measures that have been undertaken in response have had, and will continue to have, significant repercussions across regional and global economies and financial markets. The COVID-19 pandemic, its associated responsive measures and the resulting economic slowdown have disrupted our business and are expected to continue to have a significant impact on our business, financial performance and operating results. Since we cannot estimate when the COVID-19 pandemic and the associated responsive measures will end, we cannot estimate the ultimate operational and financial impact of COVID-19 on our business. However, management will continue to proactively implement strategies to mitigate the impact of the pandemic on the Corporation’s business, risk profile and financial performance.

To address the challenges arising as a result of the COVID-19 pandemic, and in order to continue to deliver essential services to the communities the Corporation serves while maintaining a high level of safety for customers and employees, the Corporation implemented its Pandemic Response Plan. Among other things, significant actions taken include:

•Implemented communication plans to ensure employees, customers and critical vendors are kept abreast of developments affecting the Corporation's operations. Communication protocols remain in place and management will continue to evaluate these protocols based on developments regarding the pandemic;

•Restricted all non-essential travel and instituted a mandatory quarantine period for anyone who has traveled to certain impacted areas. While non-essential business travel remains restricted, the Corporation continues to monitor and update its quarantine protocols based on governmental guidelines;

•Temporarily closed all branch lobbies to non-employees, except for certain limited cases by appointment only. Based on updated governmental guidelines, the Corporation re-opened its branch lobbies, while enforcing safe practices in order to serve its consumer and business customers. In addition, the Corporation continued to offer its customers alternatives through its drive-through capabilities, network of ATMs, internet banking, mobile application and telephone customer service capabilities;

•Expanded remote-access availability for the Corporation's workforce to work from home or other remote locations. The Corporation has taken appropriate efforts to ensure that activities are performed in accordance with the Corporation's compliance and information security policies, which are designed to ensure customer data and other information is properly safeguarded;

•Instituted mandatory social distancing policies for those employees not working remotely. Members of branch and operation teams were split into separate teams to provide a higher level of safety for employees and redundancy for key functions across the Corporation. Based upon updated governmental guidelines, the Corporation has reintegrated its branch teams and the majority of its operation teams, while continuing to require social distancing, wearing of masks and other appropriate safety precautions; and

•To ensure the safety of its customers and employees, the Corporation continues to monitor the COVID-19 pandemic closely and update its response plan accordingly.

Non-interest costs are expected to increase with the growth of the Corporation; however, management’s growth strategies are also expected to result in an increase in earning assets as well as enhanced non-interest income, which is expected to more than offset increases in non-interest expenses in 2021 and beyond. Although the Corporation's discussion regarding its financial performance distinguishes between certain markets and Private Banking, it does not meet the criteria for discrete segment reporting of its operating results. Management's conclusion was based on the limited level of financial information available to segregate operating results, coupled with the fact that no operating results are available for the Corporation's Chief Operating Decision Maker to review on a regular basis.

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CUSTOMER SUPPORT STRATEGIES AND LOAN PORTFOLIO PROFILE

The Corporation is participating in the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Relief, and Economics Security Act of 2020 (the “CARES Act”) for loans provided under the auspices of the Small Business Administration (“SBA”). Under PPP, the Corporation provides loans primarily to its existing loan and/or deposit customers based on a pre-determined SBA-developed formula intended to incentivize small business owners to continue to employ their employees during the COVID-19 pandemic. Loans provided pursuant to PPP are subject to certain specified rates and processing fees, among other items. As of March 31, 2021, the Corporation had outstanding $201.2 million in PPP loans, or 1,757 PPP loan relationships, at a rate of 1.00% together with deferred PPP processing fees of approximately $6.2 million. For the three months ended March 31, 2021, the Corporation recognized $2.7 million in deferred PPP processing fees ("PPP-related fees"). At March 31, 2021, the outstanding balance of PPP loans from the Corporation's participation in PPP in 2020 was $84.9 million, or 657 loans, while and additional $116.3 million, or 1,100 loans, is related to the Corporation’s participation in PPP in the first quarter of 2021.

The Corporation also deferred loan payments for certain of its commercial and consumer customers, as determined on a case-by-case basis by the financial needs of each customer. As of March 31, 2021, the loans with deferred loan payment arrangements, totaled $114.0 million, or 3.4% of total loans outstanding, consisting of 58 loans, totaling $92.0 million, for which principal and interest were deferred, and 10 loans, totaling $22.0 million, for which principal only was deferred. The Corporation expects $90.1 million, or 79.0%, of such loans to resume contractual payments by the end of the third quarter of 2021, with the remaining $23.9 million, or 21.0%, resuming contractual payments by the end of 2021. Loan payment deferrals by loan type were as follows:

•Commercial and industrial loans – 27 loans, totaling $26.4 million;

•Commercial real estate loans – 21 loans, totaling $85.3 million;

•Residential mortgage loans – 19 loans, totaling $2.3 million; and

•Consumer loans – 1 loan, totaling $7 thousand.

The Corporation tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As a result of the COVID-19 pandemic, the Corporation has determined the Hotels/Motels and Restaurants/Fast Foods industries represent a potentially higher level of credit risk, as many of these customers have incurred a significant, negative impact to their businesses as a result of government mandated stay-at-home orders as well as travel limitations. At March 31, 2021, the Corporation had loan concentrations for these industries as follows:

•Hotels/Motels – $209.2 million, or 6.52% of total loans outstanding, excluding PPP-related loans; and

•Restaurants/Fast Foods – $30.7 million, or 0.96% of total loans outstanding, excluding PPP-related loans.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $653.2 million at March 31, 2021, including additional excess liquidity of $604.5 million held at the Federal Reserve. Cash and cash equivalents totaled $532.7 million at December 31, 2020. The increase in liquidity is primarily the result of the impact of government stimulus initiatives.

Management believes the liquidity needs of the Corporation are satisfied primarily by the current balance of cash and cash equivalents, customer deposits, Federal Home Loan Bank ("FHLB") financing, and the portions of the securities and loan portfolios that mature within one year. The Corporation expects that these sources of funds will enable it to meet cash obligations and off-balance sheet commitments as they come due. In addition to the above noted liquidity sources, the Corporation maintains access to the Federal Reserve discount window.

SECURITIES

Securities available for sale and trading securities totaled $620.3 million and $591.6 million at March 31, 2021 and December 31, 2020, respectively. The Corporation’s objective is to maintain the securities portfolio at an appropriate level to balance the earnings and liquidity provided by the portfolio. Note 4, "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 Corporation generally buys into the market over time and does not attempt to "time" its transactions. In doing this, the highs and lows of the market are averaged into the portfolio and the overall effect of different rate environments is minimized.

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The Corporation monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through meetings of the Asset/Liability Committee of the Corporation’s Board of Directors (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

The Corporation's total loan portfolio reached $3.4 billion as of March 31, 2021, including $319.1 million at July 17, 2020, related to the acquisition of Bank of Akron, net of fair value adjustments and $195.0 million in PPP loans, net of PPP deferred processing fees (such loans, the "PPP-related loans"). Compared to December 31, 2020, total loans increased approximately $29.2 million. Lending efforts consist principally of commercial and retail lending, which includes single family residential mortgages and other consumer loans. The Corporation views commercial lending as its competitive advantage and continues to focus on this area by hiring and retaining experienced loan officers and supporting them with robust credit analysis.

ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses on loans represents management’s estimate of expected credit losses over the estimated life of our existing portfolio of loans. The allowance for credit losses is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans.

The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses on loans at the amount of expected credit losses inherent within the loan portfolio. Loans are recorded as charge offs against the allowance when management confirms a loan balance is uncollectable. 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, as well as other significant quantitative and qualitative factors.

Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors.

Beginning with the quarter ended December 31, 2020 the Corporation adopted ASU 2016-13, effective January 1, 2020. Although the Corporation's adoption of CECL was effective January 1, 2020, the results from quarters prior to the quarter ended December 31, 2020, were based on the incurred loss methodology and these results have not been restated to reflect the CECL methodology. Results for March 31, 2021 and December 31, 2020 (as reflected in the tables below) are presented based on the CECL methodology.

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The following table below presents activity within the allowance account for the three months ended March 31, 2021:


	Beginning Allowance		(Charge-offs)		Recoveries		Net (Charge-Offs) Recoveries		Provision (Benefit) for Credit Loss Expense		Ending Allowance
Farmland	$	221	$	0	$	0	$	0	$	3	$	224
Owner-occupied, nonfarm nonresidential properties	3,700		(531)		2		(529)		(236)		2,935
Agricultural production and other loans to farmers	24		0		0		0		4		28
Commercial and Industrial	6,233		(56)		5		(51)		297		6,479
Obligations (other than securities and leases) of states and political subdivisions	998		0		0		0		717		1,715
Other loans	68		0		0		0		5		73
Other construction loans and all land development and other land loans	1,956		0		0		0		50		2,006
Multifamily (5 or more) residential properties	2,724		0		0		0		30		2,754
Non-owner occupied, nonfarm nonresidential properties	8,658		0		0		0		2,668		11,326
1-4 Family Construction	82		0		0		0		(15)		67
Home equity lines of credit	985		0		0		0		(142)		843
Residential Mortgages secured by first liens	4,539		(28)		31		3		(992)		3,550
Residential Mortgages secured by junior liens	241		0		0		0		(17)		224
Other revolving credit plans	507		(6)		2		(4)		24		527
Automobile	132		(5)		0		(5)		55		182
Other consumer	2,962		(315)		48		(267)		(321)		2,374
Credit cards	66		(33)		8		(25)		24		65
Overdrafts	244		(84)		55		(29)		(32)		183
Total loans	$	34,340	$	(1,058)	$	151	$	(907)	$	2,122	$	35,555

Loans											$	3,400,984
Allowance to loans											1.05		%
Allowance to loans, net of PPP-related loans (1)											1.11		%
Percentage of net charge-offs during the period to average loans outstanding											0.11		%
Nonperforming assets											33,639
Nonperforming % of total assets											0.69		%

(1) A reconciliation of this non-GAAP financial measures is provided in the "Non-GAAP Financial Measures" section.

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The following table below presents activity within the allowance account for the year ended December 31, 2020:


	Beginning Allowance (Before ASC 326 Adoption)		Impact of ASC 326 Adoption		Initial Allowance on Loans Purchased with Credit Deterioration		(Charge-offs)		Recoveries		Net (Charge-Offs) Recoveries		Provision (Benefit) for Credit Loss Expense		Ending Allowance (After ASC 326 Adoption)
Farmland	$	190	$	61	$	0	$	0	$	0	$	0	$	(30)	$	221
Owner-occupied, nonfarm nonresidential properties	2,390		(754)		82		(61)		12		(49)		2,031		3,700
Agricultural production and other loans to farmers	25		5		0		0		0		0		(6)		24
Commercial and Industrial	4,105		(631)		216		(2,779)		39		(2,740)		5,283		6,233
Obligations (other than securities and leases) of states and political subdivisions	1,022		(231)		0		0		0		0		207		998
Other loans	41		8		0		0		0		0		19		68
Other construction loans and all land development and other land loans	2,327		780		228		0		125		125		(1,504)		1,956
Multifamily (5 or more) residential properties	1,087		312		24		0		0		0		1,301		2,724
Non-owner occupied, nonfarm nonresidential properties	3,980		2,547		335		(1,522)		52		(1,470)		3,266		8,658
1-4 Family Construction	56		(35)		0		0		0		0		61		82
Home equity lines of credit	180		421		22		(6)		1		(5)		367		985
Residential Mortgages secured by first liens	1,220		1,100		73		(285)		65		(220)		2,366		4,539
Residential Mortgages secured by junior liens	114		135		0		(158)		2		(156)		148		241
Other revolving credit plans	296		378		0		(137)		21		(116)		(51)		507
Automobile	156		(96)		0		(29)		2		(27)		99		132
Other consumer	1,960		1,021		0		(1,513)		130		(1,383)		1,364		2,962
Credit cards	84		(58)		0		(153)		14		(139)		179		66
Overdrafts	240		0		0		(435)		185		(250)		254		244
Total loans	$	19,473	$	4,963	$	980	$	(7,078)	$	648	$	(6,430)	$	15,354	$	34,340

Loans															$	3,371,789
Allowance to loans															1.02		%
Allowance to loans, net of PPP-related loans (1)															1.07		%
Percentage of net charge-offs during the period to average loans outstanding															0.21		%
Nonperforming assets															31,546
Nonperforming % of total assets															0.67		%

(1) A reconciliation of this non-GAAP financial measures is provided in the "Non-GAAP Financial Measures" section.

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The following table below presents activity within the allowance account for the three months ended March 31, 2020:


	Three months ending March 31, 2020
Balance at beginning of period	$	19,473
Charge-offs:
Commercial, industrial and agricultural	(25)
Commercial mortgages	0
Residential real estate	(143)
Consumer	(592)
Credit cards	(31)
Overdrafts	(119)
	(910)
Recoveries:
Commercial, industrial and agricultural	18
Commercial mortgages	172
Residential real estate	3
Consumer	43
Credit cards	1
Overdraft deposit accounts	36
	273
Net charge-offs	(637)
Provision for loan losses	3,079
Balance at end of period	$	21,915
Loans, net of unearned	$	2,850,660
Allowance to net loans	0.77		%
Net charge-offs to average loans (annualized)	0.09		%
Nonperforming assets	$	33,533
Nonperforming % of total assets	0.89		%

The allowance for credit losses measured as a percentage of loans as of March 31, 2021 was 1.05% compared to 1.02% as of December 31, 2020. Total loans at March 31, 2021 and December 31, 2020 include approximately $195.0 million and $155.5 million in PPP-related loans, respectively. Excluding PPP-related loans, the allowance for credit losses measured as a percentage of loans was 1.11% as of March 31, 2021 compared to 1.07% as of December 31, 2020.

The adequacy of the allowance for credit losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation.

During the three months ended March 31, 2021, the Corporation added $2.3 million in specific reserves related to three commercial loan relationships, partially offset by net charge offs of $907 thousand, which were primarily impacted by one commercial loan relationship.

Management believes the provision for loan losses recorded during the three months ended March 31, 2021, in conjunction with the resultant allowance for credit losses at March 31, 2021, were sufficient to support credit losses embedded in its loan portfolio at March 31, 2021.

DEPOSITS

The Corporation considers deposits to be its primary source of funding in support of growth in assets. At March 31, 2021, deposits totaled approximately $4.4 billion, reflecting an increase of approximately $176.4 million, or 4.2%, from total deposits of $4.2 billion at December 31, 2020, primarily as a result of the impact of government stimulus initiatives.

OTHER FUNDING SOURCES

The Corporation also considers other funding sources, such as short-term borrowings and term debt, when evaluating funding needs. As of March 31, 2021 and December 31, 2020 there were no borrowings from the FHLB. Additionally, at March 31, 2021 and December 31, 2020, subordinated debt totaled $70.6 million comprised of $50.0 million in subordinated debt and $20.6 million in trust preferred securities.

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Periodically, the Corporation utilizes borrowings from the FHLB and other lenders as a supplemental strategy to meet funding obligations or match fund certain assets. As part of the Corporation's liquidity management, management continues to focus on maintaining a robust level of short-term and long-term borrowing capacity as an available source of liquidity.

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

The Corporation’s capital continues to provide a source of strength for the Corporation's growth, strategies and profitability. Total shareholders’ equity was $417.6 million at March 31, 2021, reflecting an increase of $1.5 million, or 0.4%, from $416.1 million at December 31, 2020, as a result of organic growth in earnings combined with a reduction in treasury stock, partially offset by decreases in additional paid in capital, accumulated other comprehensive income and payment of dividends to our common and preferred shareholders during the three months ended March 31, 2021.

The Corporation has complied with the standards of capital adequacy mandated by government regulations. Bank regulators have established "risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category (0% for the lowest risk assets and increasing for each tier of higher risk assets) is assigned to each asset on the balance sheet.

As of March 31, 2021, the Corporation’s tangible common equity/tangible assets ratio was 6.50% compared to 6.70% as of December 31, 2020. At March 31, 2021 and December 31, 2020, the Corporation's tangible common equity/tangible assets ratio reflects the impact of the PPP of approximately $195.0 million and $155.5 million in PPP-related loans, respectively, and $604.5 million and $482.5 million in excess liquidity held at the Federal Reserve, respectively. Excluding PPP-related loans and excess liquidity, the Corporation’s tangible common equity/tangible assets ratio of 7.78% increased 2 bps from December 31, 2020.


	March 31, 2021			December 31, 2020
Total risk-based capital ratio	14.60		%	14.32		%
Tier 1 capital ratio	12.18		%	11.91		%
Common equity tier 1 ratio	9.79		%	9.50		%
Leverage ratio	8.34		%	8.11		%
Tangible common equity/tangible assets (1)	6.50		%	6.70		%
Tangible common equity/tangible assets, net of PPP-related loans and excess liquidity (1)	7.78		%	7.76		%
Book value per common share	$	21.31		$	21.29
Tangible book value per common share (1)	$	18.69		$	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 shareholders’ 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.

LIQUIDITY

Liquidity measures an organization’s ability to meet its cash obligations as they come due. The consolidated statements of cash flows included in the accompanying financial statements provide analysis of the Corporation’s cash and cash equivalents and the sources and uses of cash. Additionally, the portion of the loan portfolio that matures within one year and securities with maturities within one year in the investment portfolio are considered part of the Corporation’s primary liquid assets. Liquidity is monitored by both management and the ALCO, which establishes and monitors ranges of acceptable liquidity. Management believes that the Corporation’s current liquidity position is acceptable and commensurate with the Corporation’s current and expected liquidity requirements.

At March 31, 2021, the Corporation’s cash position totaled approximately $653.2 million, including excess liquidity of $604.5 million held at the Federal Reserve, reflecting, in management's view, a strong liquidity level. In addition to its cash position, the Corporation’s borrowing capacity with the FHLB at March 31, 2021 was approximately $828.8 million.

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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 financial instruments 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 March 31, 2021 and December 31, 2020:


	March 31, 2021				December 31, 2020
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	53,638	$	285,551	$	52,073	$	266,336
Unused lines of credit	23,150		701,393		24,328		673,919
Standby letters of credit	13,817		1,592		15,301		1,597

The fixed rate loan commitments at March 31, 2021 have interest rates ranging from 1.24% to 18.00% and maturities ranging from six months to 35 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 corporations, reported in FHLB and other equity interests on the consolidated balance sheet, as of March 31, 2021 and December 31, 2020 were $11,835 and $11,835, respectively. Unfunded capital commitments in investments in small business corporations totaled $3,665 and $3,665 as of March 31, 2021 and December 31, 2020, respectively.

The carrying value of investments in the low income housing partnerships, reported in FHLB and other equity interests on the consolidated balance sheet, as of March 31, 2021 and December 31, 2020 were $5,826 and 6,015, respectively. The related amortization for the three months ended March 31, 2021 and March 31, 2020 were $189 and $170, respectively. Unfunded commitments, reported in accrued interest payable and other liabilities on the consolidated balance sheet, as of March 31, 2021 and December 31, 2020 were $2,826 and $3,624, respectively.

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CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE THREE MONTHS ENDED

MARCH 31, 2021 AND 2020

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.


	March 31, 2021						March 31, 2020
	Average Balance		Annual Rate		Interest Inc./Exp.		Average Balance		Annual Rate		Interest Inc./Exp.
ASSETS:
Securities:
Taxable (1)	$	564,498	1.86	%	$	2,513	$	491,375	2.88	%	$	3,451
Tax-Exempt (1) (2)	45,165		4.10	%	436		71,984		3.35	%	580
Equity Securities (1) (2)	5,744		11.44	%	162		13,407		7.23	%	241
Total securities	615,407		2.11	%	3,111		576,766		3.04	%	4,272
Loans:
Commercial (2)	1,267,780		5.14	%	16,076		1,065,513		4.98	%	13,181
Mortgage (2)	2,019,841		4.60	%	22,897		1,644,978		4.89	%	19,989
Consumer	98,547		9.82	%	2,387		107,194		9.58	%	2,554
Total loans (3)	3,386,168		4.76	%	41,360		2,817,685		5.10	%	35,724
Other earning assets	508,087		0.12	%	148		110,610		1.56	%	429
Total earning assets	4,509,662		4.03	%	$	44,619	3,505,061		4.65	%	$	40,425

Non interest-bearing assets:
Cash and due from banks	46,529						35,826
Premises and equipment	78,727						73,413
Other assets	181,520						151,944
Allowance for loan losses	(35,221)						(19,526)
Total non interest-bearing assets	271,555						241,657
TOTAL ASSETS	$	4,781,217					$	3,746,718
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Demand—interest-bearing	$	906,297	0.20	%	$	438	$	586,496	0.37	%	$	538
Savings	2,200,577		0.27	%	1,469		1,698,923		1.19	%	5,021
Time	472,974		2.03	%	2,373		424,795		2.22	%	2,346
Total interest-bearing deposits	3,579,848		0.48	%	4,280		2,710,214		1.17	%	7,905

Long-term borrowings and finance lease liabilities	537		4.53	%	6		226,627		2.18	%	1,227
Subordinated debentures	70,620		5.06	%	888		70,620		5.49	%	964
Total interest-bearing liabilities	3,651,005		0.57	%	$	5,174	3,007,461		1.35	%	$	10,096
Demand—non interest-bearing	652,080						369,838
Other liabilities	57,683						56,292
Total liabilities	4,360,768						3,433,591
Shareholders’ equity	420,449						313,127
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	4,781,217					$	3,746,718
Interest income/Earning assets			4.03	%	$	44,619			4.65	%	$	40,425
Interest expense/Interest-bearing liabilities			0.57	%	5,174				1.35	%	10,096
Net interest spread			3.46	%	$	39,445			3.30	%	$	30,329
Interest income/Earning assets			4.03	%	44,619				4.65	%	40,425
Interest expense/Earning assets			0.47	%	5,174				1.16	%	10,096
Net interest margin			3.56	%	$	39,445			3.49	%	$	30,329

(1) Includes unamortized discounts and premiums. Average balance is computed using the amortized cost of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.

(2) Average yields are stated on a fully taxable equivalent basis.

(3) Average outstanding includes the average balance outstanding of all nonaccrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans is not material.

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RESULTS OF OPERATIONS

Three Months Ended March 31, 2021 and 2020

OVERVIEW

The Corporation’s operating results for the three months ended March 31, 2021 were impacted by the COVID-19 pandemic. In an effort to proactively support the U.S. economy, the Federal Reserve cut its interest rates by 150 basis points in March 2020, which had an impact on the Corporation’s net interest margin and net interest income for the quarter. In addition, in an effort to quantify the potential impact of the COVID-19 pandemic on its loan portfolio, the Corporation implemented a qualitative factor specifically related to the pandemic as described in more detail below.

The first quarter of 2021 reported earnings per diluted shares of $0.78, an increase of 36.8% from the first quarter of 2020 primarily as a result of a widening net interest margin, coupled with stable credit quality and well-controlled operating efficiency, as evidenced by an improved efficiency ratio.

Net income was $14.2 million, or $0.78 per diluted common share, for the quarter ended March 31, 2021, as compared to $8.8 million, or $0.57 per diluted share, for the same period in 2020, reflecting increases of $5.4 million, or 60.9%, and $0.21 per diluted share, or 36.8%, respectively.

Provision expense was $2.1 million for the three months ended March 31, 2021 compared to $3.1 million for the three months ended March 31, 2020. The provision expense for the first quarter of 2021 included $2.3 million in provision expense resulting from specific loan loss reserves related to three commercial loan relationships. The first quarter of 2020 included a provision expense of approximately $2.5 million resulting from a specific loan loss reserve related to a secured commercial and industrial loan relationship. The remaining change in provision for loan losses during the three months ended March 31, 2021 reflects routine adjustments to reserves on impaired loans coupled with a lower reserve requirement resulting from a lower growth level in the Corporation's loan portfolio compared to historical levels.

PTPP income was $19.6 million for the three months ended March 31, 2021, as compared to $13.6 million for the three months ended March 31, 2020, reflecting an increase of $5.9 million, or 43.6%.

Total revenue (comprised of net interest income plus non-interest income) was $47.4 million for the three months ended March 31, 2021, reflecting an increase of $12.0 million, or 33.9%, from the three months ended March 31, 2020, while total non-interest expense was $27.8 million, an increase of $6.1 million, or 27.9%, from the three months ended March 31, 2020.

Annualized return on average common equity was 14.66% for the three months ended March 31, 2021 compared to 11.32% for the three months ended March 31, 2020. Annualized return on average tangible common equity of 16.70% for the three months ended March 31, 2021, increased 378 basis points from 12.92% for the three months ended March 31, 2020. Efficiency ratio was 58.18% for the three months ended March 31, 2021, compared to 60.34% for the comparable period in 2020.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income of $39.1 million for the three months ended March 31, 2021, reflected an increase of $9.1 million, or 30.4%, from the three months ended March 31, 2020, primarily as a result of $1.0 billion, or 28.7%, growth in average earning assets coupled with a 7 basis point increase in net interest margin for the same period. The three months ended March 31, 2021 also included PPP-related fees totaling approximately $2.7 million, compared to zero for the three months ended March 31, 2020.

Net interest margin on a fully tax-equivalent basis was 3.56% and 3.49% for the three months ended March 31, 2021 and 2020, respectively. The yield on earning assets of 4.03% for the three months ended March 31, 2021 decreased 62 basis points from 4.65% for the three months ended March 31, 2020, primarily as a result of the lower interest rate environment. The cost of interest-bearing liabilities decreased 78 basis points from 1.35% for the three months ended March 31, 2020 to 0.57% for the three months ended March 31, 2021 primarily as a result of the Corporation’s targeted deposit rate reductions coupled with the Corporation’s prepayment of the entire balance of its borrowings from the FHLB.

PROVISION FOR CREDIT LOSSES

During the quarter ended March 31, 2021, the Corporation recorded a provision for loan losses of $2.1 million, as compared to a provision for loan losses of $3.1 million for the quarter ended March 31, 2020, as discussed in more detail above under Allowance for Credit Losses and Overview.

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NON-INTEREST INCOME

Total non-interest income was $8.2 million for the three months ended March 31, 2021, representing an increase of $2.9 million, or 53.6%, from the same period in 2020. This increase resulted from the continued growth in Wealth and Asset Management fees, as assets under management increased by $224.2 million, or 23.6%, from March 31, 2020 to $1.2 billion as of March 31, 2021. Other significant factors included increases in mortgage banking and 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 EXPENSES

For the three months ended March 31, 2021, total non-interest expense was $27.8 million, which increased $6.1 million, or 27.9%, from the three months ended March 31, 2020. In addition to the acquisition of Bank of Akron, the first quarter of 2021 included the effects of hiring additional personnel in our growth regions of Cleveland and Buffalo. Also, the first quarter of 2021 included a market value appreciation in the Corporation’s deferred compensation plans, as well as investments in technology aimed at enhancing customer experience. Accordingly, the efficiency ratio was 58.18%, for the three months ended March 31, 2021, compared to 60.34% during the comparable period in 2020. The improvement in efficiency ratio resulted from a revenue increase of $12.0 million, which outpaced an increase in total expenses of $6.1 million, for the same period.

INCOME TAX EXPENSE

Income tax expense of $3.3 million for the three months ended March 31, 2021 increased $1.5 million, or 88.7%, from the three months ended March 31, 2020. Our effective tax rate was 18.7% for the three months ended March 31, 2021, compared to 16.4% for the three months ended March 31, 2020. The increase in the effective tax rate is primarily attributable to a higher percentage of pre-tax net income in the first quarter of 2021 that is not tax-exempt than was recorded in the first quarter of 2020.

CRITICAL ACCOUNTING POLICIES

The Corporation’s accounting and reporting policies are in accordance with GAAP and conform to general practices within the financial services industry. Accounting and reporting practices for the allowance for credit losses and fair value of securities are deemed critical since they involve the use of estimates and require significant management judgments. In addition, the fair value of assets acquired and liabilities assumed in connection with business combinations, including the associated goodwill and intangibles that was recorded, required the use of material estimates. Application of assumptions different than those used by management could result in material changes in the Corporation’s financial position or results of operations. Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combinations) Note 3 (Securities) and Note 4 (Loans) of the 2020 Form 10-K provide additional detail with regard to the Corporation’s accounting for the allowance for credit losses, the fair value of securities, business combinations and loans. There have been no other significant changes in the application of accounting policies since December 31, 2020.

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NON-GAAP FINANCIAL MEASURES

The following tables reconcile the non-GAAP financial measures to their most directly comparable measures under GAAP.



	(unaudited)
	March 31,			December 31,
	2021			2020
Calculation of tangible book value per share and tangible common equity/tangible assets:
Shareholders' equity	$	417,603		$	416,137
Less: preferred equity	57,785			57,785
Less: goodwill	43,749			43,749
Less: core deposit intangible	539			567
Tangible common equity	$	315,530		$	314,036

Total assets	$	4,901,092		$	4,729,399
Less: goodwill	43,749			43,749
Less: core deposit intangible	539			567
Tangible assets	$	4,856,804		$	4,685,083

Ending shares outstanding	16,884,584			16,833,008

Tangible book value per common share	$	18.69		$	18.66
Tangible common equity/Tangible assets	6.50		%	6.70		%

Calculation of tangible common equity/tangible assets, net of PPP-related loans:
Tangible common equity	$	315,530		$	314,036

Tangible assets	$	4,856,804		$	4,685,083
Less: PPP-related loans	195,025			155,529
Less: Excess liquidity at the Federal Reserve	604,545			482,503
Adjusted tangible assets	$	4,057,234		$	4,047,051

Adjusted tangible common equity/tangible assets	7.78		%	7.76		%



	(unaudited)
	March 31,			December 31,
	2021			2020











Calculation of allowance / loans, net of PPP-related loans:
Total allowance for credit losses (2)	$	35,555		$	34,340

Total loans net of unearned income	$	3,400,984		$	3,371,789
Less: PPP-related loans	195,025			155,529
Adjusted total loans, net of unearned income, PPP-related loans (non-GAAP)	$	3,205,959		$	3,216,260

Adjusted allowance / loans, net of PPP-related loans (non-GAAP) (2)	1.11		%	1.07		%

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	(unaudited)
	Three Months Ended
	March 31,
	2021			2020
Calculation of net interest margin (fully tax equivalent basis):
Interest income (fully tax equivalent basis) (non-GAAP)	$	44,619		$	40,425
Interest expense (fully tax equivalent basis) (non-GAAP)	5,174			10,096
Net interest income (fully tax equivalent basis) (non-GAAP)	$	39,445		$	30,329

Average total earning assets	$	4,509,662		$	3,505,061
Less: average mark to market adjustment on investments	17,310			12,206
Adjusted average total earning assets, net of mark to market (non-GAAP)	$	4,492,352		$	3,492,855

Net interest margin, fully tax equivalent basis (non-GAAP) (annualized)	3.56		%	3.49		%




	(unaudited)
	Three Months Ended
	March 31,
	2021			2020
Calculation of efficiency ratio:
Non-interest expense	$	27,804		$	21,742
Less: core deposit intangible amortization	28			83

Adjusted non-interest expense (non-GAAP)	$	27,776		$	21,659

Non-interest income	$	8,239		$	5,364

Net interest income	$	39,121		$	29,994
Less: tax exempt investment and loan income, net of TEFRA (non-GAAP)	1,304			1,536
Add: tax exempt investment and loan income (non-GAAP) (tax-equivalent)	1,689			2,070
Adjusted net interest income (non-GAAP)	39,506			30,528
Adjusted net revenue (non-GAAP) (tax-equivalent)	$	47,745		$	35,892
Efficiency ratio	58.18		%	60.34		%




	(unaudited)
	Three Months Ended
	March 31,
	2021		2020












Calculation of PTPP income:
Net income	$	14,181	$	8,813
Add: Provision expense	2,122		3,079
Add: Income tax expense	3,253		1,724
PTPP income (non-GAAP) (1)	$	19,556	$	13,616

(1) Management believes that this is an important metric as it illustrates the underlying performance of the Corporation, it enables investors and others to assess the Corporation's ability to generate capital to cover credit losses through the credit cycle and provides consistent reporting with a key metric used by bank regulatory agencies.

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	(unaudited)
	Three Months Ended
	March 31,
	2021			2020
Calculation of return on average tangible common equity:
Net income available to common stockholders	$	13,106		$	8,813
Average tangible common shareholders' equity	318,358			274,266
Return on average tangible common equity (non-GAAP) (annualized)	16.70		%	12.92		%

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ITEM 3

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 March 31, 2021, 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 from the table.


March 31, 2021
Change in Basis Points						% Change in Net Interest Income
400						23.2%
300						16.8%
200						11.5%
100						5.7%
(100)						(6.2)%
(200)						(10.7)%

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ITEM 4

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.

There was no significant change in the Corporation’s internal control over financial reporting that occurred during the quarter ended March 31, 2021 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no 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.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item 1A of the 2020 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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 three months ended March 31, 2021.


Period	Total Number of Shares Purchased	Average Price Paid per Common 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 (1)
January 1 – 31, 2021	0	$	0	0	183,131
February 1 – 28, 2021	0	0		0	183,131
March 1 – 31, 2021	0	0		0	183,131

(1)The Corporation’s stock repurchase program, which was approved by the Corporation's Board of Directors 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 March 31, 2021, there were 183,131 shares remaining in the program.

Additionally, during the quarter ended March 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS


Exhibit No.						Description

10.1						Executive Employment Agreement, dated February 3, 2021, by and between CNB Financial Corporation, CNB Bank and Martin T. Griffith (incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 5, 2021)

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, 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, 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						Inline XBRL Instance Document

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						Inline XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CNB FINANCIAL CORPORATION

(Registrant)

DATE: May 6, 2021

/s/ Joseph B. Bower, Jr.

Joseph B. Bower, Jr.

President and Chief Executive Officer

(Principal Executive Officer)

DATE: May 6, 2021

/s/ Tito L. Lima

Tito L. Lima

Treasurer

(Principal Financial and Accounting Officer)