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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 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
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 5, 2020:
COMMON STOCK, NO PAR VALUE PER SHARE: 15,396,617 SHARES


Table of Contents

INDEX
PART I.
FINANCIAL INFORMATION
 
 
Page Number
 
 
 
 
 
1

 
 
2

 
 
3

 
 
4

 
 
5

 
 
6

 
 
28

 
 
39

 
 
40

 
PART II.
OTHER INFORMATION
 
 
41

 
 
41

 
 
42

 
 
42

 
 
42

 
 
42

 
 
43

 
 
44



Table of Contents

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, 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, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

Additional factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) changes in general business, industry or economic conditions or competition; (ii) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting principles or otherwise; (iii) adverse changes or conditions in capital and financial markets; (iv) changes in interest rates; (v) higher than expected costs or other difficulties related to integration of combined or merged businesses; (vi) the effects of business combinations and other acquisition transactions, including the inability to realize our loan and investment portfolios; (vii) changes in the quality or composition of our loan and investment portfolios; (viii) adequacy of loan loss reserves; (ix) increased competition; (x) loss of certain key officers; (xi) deposit attrition; (xii) rapidly changing technology; (xiii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xiv) changes in the cost of funds, demand for loan products or demand for financial services; and (xv) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Such developments could have an adverse impact on CNB's financial position and results of operations.

The forward-looking statements contained herein are based upon management’s beliefs and assumptions. Any forward-looking statement made herein speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. CNB undertakes no obligation to publicly update or revise any forward-looking statements included in this 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.
.




Table of Contents

Part I Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share data
 
(unaudited) March 31, 2020
 
December 31, 2019
ASSETS
Cash and due from banks
$
58,922

 
$
42,373

Interest bearing deposits with other banks
77,419

 
150,601

Total cash and cash equivalents
136,341

 
192,974

Securities available for sale
570,582

 
542,313

Trading securities
5,507

 
9,809

Loans held for sale
1,815

 
930

Loans
2,855,206

 
2,809,197

Less: unearned discount
(4,546
)
 
(5,162
)
Less: allowance for loan losses
(21,915
)
 
(19,473
)
Net loans
2,828,745

 
2,784,562

FHLB, other equity, and restricted equity interests
27,975

 
27,868

Premises and equipment, net
55,109

 
54,867

Operating lease assets
18,360

 
18,422

Bank owned life insurance
67,017

 
66,538

Mortgage servicing rights
1,578

 
1,573

Goodwill
38,730

 
38,730

Core deposit intangible
77

 
160

Accrued interest receivable and other assets
27,302

 
24,913

Total Assets
$
3,779,138

 
$
3,763,659

LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits
$
376,840

 
$
382,259

Interest bearing deposits
2,723,376

 
2,720,068

Total deposits
3,100,216

 
3,102,327

FHLB and other long term borrowings
225,722

 
227,907

Subordinated debentures
70,620

 
70,620

Operating lease liabilities
19,397

 
19,363

Accrued interest payable and other liabilities
38,381

 
38,476

Total liabilities
3,454,336

 
3,458,693

Common stock, $0 par value; authorized 50,000,000 shares; issued 15,476,736 shares at March 31, 2020 and 15,360,946 shares at December 31, 2019
0

 
0

Additional paid in capital
102,128

 
99,335

Retained earnings
207,698

 
201,503

Treasury stock, at cost (80,119 and 112,961 shares for March 31, 2020 and December 31, 2019, respectively)
(2,026
)
 
(2,811
)
Accumulated other comprehensive income (loss)
17,002

 
6,939

Total shareholders’ equity
324,802

 
304,966

Total Liabilities and Shareholders’ Equity
$
3,779,138

 
$
3,763,659

 
 
 
 
See Notes to Consolidated Financial Statements

1

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Dollars in thousands, except per share data
 
 
 
 
 
Three months ended March 31,
 
2020
 
2019
INTEREST AND DIVIDEND INCOME:
 
 
 
Loans including fees
$
35,510

 
$
32,824

Securities:
 
 
 
Taxable
3,880

 
2,978

Tax-exempt
481

 
697

Dividends
219

 
254

Total interest and dividend income
40,090

 
36,753

INTEREST EXPENSE:
 
 
 
Deposits
7,905

 
6,587

Borrowed funds
1,227

 
1,410

Subordinated debentures (includes $21 and $6 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements, respectively)
964

 
998

Total interest expense
10,096

 
8,995

NET INTEREST INCOME
29,994

 
27,758

PROVISION FOR LOAN LOSSES
3,079

 
1,306

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
26,915

 
26,452

NON-INTEREST INCOME:
 
 
 
Service charges on deposit accounts
1,527

 
1,481

Other service charges and fees
590

 
646

Wealth and asset management fees
1,293

 
1,042

Net realized gains on available-for-sale securities (includes $0 and $148 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities, respectively)
0

 
148

Net realized and unrealized gains (losses) on trading securities
(588
)
 
800

Mortgage banking
337

 
239

Bank owned life insurance
479

 
361

Card processing and interchange income
1,128

 
1,029

Other
598

 
407

Total non-interest income
5,364

 
6,153

NON-INTEREST EXPENSES:
 
 
 
Salaries and benefits
11,397

 
10,900

Net occupancy expense
3,027

 
2,866

Amortization of core deposit intangible
83

 
165

Data processing
1,336

 
1,185

State and local taxes
581

 
768

Legal, professional, and examination fees
645

 
553

Advertising
405

 
411

FDIC insurance premiums
619

 
422

Card processing and interchange expenses
796

 
747

Other
2,853

 
3,158

Total non-interest expenses
21,742

 
21,175

INCOME BEFORE INCOME TAXES
10,537

 
11,430

INCOME TAX EXPENSE (includes ($4) and $30 income tax expense from reclassification items, respectively)
1,724

 
1,957

NET INCOME
$
8,813

 
$
9,473

EARNINGS PER SHARE:
 
 
 
Basic
$
0.57

 
$
0.62

Diluted
$
0.57

 
$
0.62

DIVIDENDS PER SHARE:
 
 
 
Cash dividends per share
$
0.17

 
$
0.17

 
 
 
 
See Notes to Consolidated Financial Statements

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Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Dollars in thousands
 
 
 
 
 
Three months ended March 31,
 
2020
 
2019
NET INCOME
$
8,813

 
$
9,473

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 of $92 and $26, respectively
(346
)
 
(100
)
Reclassification adjustment for losses recognized in earnings, net of tax of ($4) and ($1), respectively
17

 
5

 
(329
)
 
(95
)
Net change in unrealized gains on securities available for sale:
 
 
 
Unrealized holding gains (losses) arising during the period, net of tax of ($2,763) and ($1,348), respectively
10,392

 
5,068

Reclassification adjustment for realized gains included in net income, net of tax of $0 and $31, respectively
0

 
(117
)
 
10,392

 
4,951

Other comprehensive income
10,063

 
4,856

COMPREHENSIVE INCOME
$
18,876

 
$
14,329

 
 
 
 
See Notes to Consolidated Financial Statements

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Dollars in thousands
 
 
 
 
 
Three months ended March 31,
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
8,813

 
$
9,473

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Provision for loan losses
3,079

 
1,306

Depreciation and amortization of premises and equipment, operating leases assets, core deposit intangible, and mortgage servicing rights
1,299

 
1,509

Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income
(812
)
 
(409
)
Net realized gains on sales of available-for-sale securities
0

 
(148
)
Net realized and unrealized (gains) losses on trading securities
588

 
(800
)
Proceeds from sale of trading securities
5,860

 
236

Purchase of trading securities
2,000

 
(144
)
Gain on sale of loans
(243
)
 
(84
)
Net gains on dispositions of premises and equipment and foreclosed assets
(15
)
 
0

Proceeds from sale of loans
8,536

 
4,569

Origination of loans held for sale
(9,412
)
 
(7,118
)
Income on bank owned life insurance
(479
)
 
(361
)
Stock-based compensation expense
549

 
592

Changes in:
 
 
 
Accrued interest receivable and other assets
(4,061
)
 
(707
)
Accrued interest payable, lease liabilities, and other liabilities
(1,285
)
 
(6,520
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
14,417

 
1,394

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from maturities, prepayments and calls of available-for-sale securities
27,389

 
20,152

Proceeds from sales of available-for-sale securities
0

 
11,403

Purchase of available-for-sale securities
(46,882
)
 
(9,252
)
Loan origination and payments, net
(46,383
)
 
(51,635
)
Redemption (purchase) of FHLB, other equity, and restricted equity interests
(107
)
 
1,379

Purchase of premises and equipment
(1,327
)
 
(2,399
)
Proceeds from the sale of premises and equipment and foreclosed assets
145

 
8

NET CASH USED BY INVESTING ACTIVITIES
(67,165
)
 
(30,344
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net change in:
 
 
 
Checking, money market and savings accounts
888

 
88,105

Certificates of deposit
(2,999
)
 
(41,532
)
Purchase of treasury stock
(324
)
 
(201
)
Cash dividends paid
(2,618
)
 
(2,591
)
Proceeds from stock offering, net of issuance costs
3,353

 
0

Repayment of long-term borrowings
(2,185
)
 
(5,112
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
(3,885
)
 
38,669

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(56,633
)
 
9,719

CASH AND CASH EQUIVALENTS, Beginning
192,974

 
45,563

CASH AND CASH EQUIVALENTS, Ending
$
136,341

 
$
55,282

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
9,933

 
$
8,942

Income taxes
78

 
1,250

SUPPLEMENTAL NONCASH DISCLOSURES:
 
 
 
Transfers to other real estate owned
$
165

 
$
66

Grant of restricted stock awards from treasury stock
892

 
1,055

Grant of performance based restricted stock awards from treasury stock
217

 
0

Right of use assets obtained in exchange for lease liabilities
0

 
16,478



 
 
 
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
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Share-
holders’
Equity
Balance, January 1, 2020
$
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 share)
 
 
(2,618
)
 
 
 
 
 
(2,618
)
Balance, March 31, 2020
$
102,128

 
$
207,698

 
$
(2,026
)
 
$
17,002

 
$
324,802

 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
$
97,602

 
$
171,780

 
$
(2,556
)
 
$
(3,996
)
 
$
262,830

Net income
 
 
9,473

 
 
 
 
 
9,473

Other comprehensive income
 
 
 
 
 
 
4,856

 
4,856

Restricted stock award grants (39,790 shares)
(1,055
)
 
 
 
1,055

 
 
 
0

Stock-based compensation expense
592

 
 
 
 
 
 
 
592

Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (7,700 shares)
 
 
 
 
(201
)
 
 
 
(201
)
Cash dividends declared ($0.17 per share)
 
 
(2,591
)
 
 
 
 
 
(2,591
)
Balance, March 31, 2019
$
97,139

 
$
178,662

 
$
(1,702
)
 
$
860

 
$
274,959

 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements

5

Table of Contents

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, 2020 and for the three month period ended March 31, 2020 and 2019 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, 2020 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, 2019 (the “2019 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 stockholders’ equity as previously reported.

Risks and Uncertainties

The outbreak of the novel strain of coronavirus, or COVID-19, has adversely impacted a broad range of industries in which the Corporation's clients operate and could impair their ability to fulfill their financial obligations to the Corporation. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic, indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed, with the goal of decreasing the rate of new infections. The spread of the COVID-19 outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Corporation operates. While there has been no material impact to the Corporation’s employees to date, the COVID-19 pandemic could also potentially create widespread business continuity issues for the Corporation.  

The federal government has taken several actions designed to mitigate the economic impact. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, which was signed into law at the end of March 2020, allocates $2 trillion for COVID-19 related relief and initiatives. Among other things, the CARES Act provides direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Corporation's operations.

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 our operations will depend on future developments that are highly uncertain, the Corporation cannot estimate the impact on its business, financial condition or near or long-term financial or operational results with reasonable certainty. Accordingly, the Corporation is disclosing potentially material items of which it is aware.

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

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



6

Table of Contents

Lending operations and accommodations to borrowers: In keeping with regulatory guidance to continue to assist borrowers during the COVID-19 pandemic, and as detailed in the CARES Act, the Corporation has implemented a payment deferral program for its commercial lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Corporation is deferring either the full loan payment or the principal component of the loan payment for up to six months. As of March 31, 2020, the deferred loan payment commitments were 561 loans, totaling $264 million, comprised of (i) 150 loans, totaling $151 million, for which principal and interest were deferred, and (ii) 411 loans, totaling $113 million, for which principal only was deferred.  In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.

The Corporation is participating in the Paycheck Protection Program (“PPP”) established by the CARES Act for loans provided under the auspices of the Small Business Administration (“SBA”). Under this program, the Corporation expects to lend money primarily to its existing loan and/or deposit customers, based on a pre-determined SBA-developed formula, intended to incentivize small business owners to retain their employees. The PPP was designed such that a loan originated under this program will be forgiven if the small business retains its employees and level of payroll through the first two months of the loan. These loans carry a customer rate of 1.00% plus a processing fee that varies depending on the balance of the loan at origination and have a two-year maturity. As of April 16, 2020, the Corporation has committed approximately $177 million, or 1,031 PPP loan relationships, under this program, at a rate of 1.00% coupled with processing fees estimated at approximately $6 million. As of April 16, 2020, the SBA funds allocated in the original PPP authorization were fully utilized. Additional funding was made available on April 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act ("PPP Enhancement Act"). The PPP Enhancement Act authorizes additional funding under the CARES Act of $310 billion for PPP loans to be issued by financial institutions through the SBA. The Corporation is participating in the PPP Enhancement Act. It is the Corporation's understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Corporation could be required to establish additional allowance for loan loss through additional provision for loan loss expense charged to earnings.

Credit: The Corporation is working with customers directly affected by the COVID-19 pandemic. The Corporation is prepared to offer short-term 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. Should economic conditions worsen, the Corporation could experience further increases in its required allowance for loan 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

In June 2016, the FASB issued an Accounting Standards Update ("ASU") 2016-13, "Financial Instruments – Credit Losses" which will require recognition of an entity’s current estimate of all expected credit losses for assets measured at amortized cost. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical credit loss experience, current market conditions, and reasonable and supportable forecast. This eliminates the probable initial recognition threshold in current GAAP. The update will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments – Credit Losses."  The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 and should be accounted for in accordance with Topic 842, "Leases." In April 2019, ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” was issued to address certain codification improvements and to provide certain accounting policy electives related to accrued interest as well as disclosure related to credit losses, among other things. In May 2019, ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief,” was issued to provide transition relief in connection with the adoption of ASU 2016-03 whereby entities would have the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. 
The CARES Act provides financial institutions with the option to delay the adoption of ASU No. 2016-13, “Financial Instruments – Credit Losses,” until the earlier of December 31, 2020 or until the national emergency related to the COVID-19 pandemic is terminated. Given the complexity of the processes necessary to properly evaluate, document and implement the current expected credit losses methodology, combined with the extraneous circumstances impacted on its employees, caused by the spread of the coronavirus, the Corporation opted to delay the adoption of ASU No. 2016-13 and recorded its provision for loan losses under the incurred loss model that existed prior to ASU 2016-13.

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Table of Contents

Prior to passage of the CARES Act, based upon the Corporation's fourth quarter parallel run, assessment of the composition, characteristics and credit quality of the Corporation's loan and investment securities portfolio, as well as the economic conditions in effect as of the adoption date, management estimates the adoption of ASU 2016-13 will result in an increase of approximately 20-30% to the Corporation's allowance for credit losses, as reported in its Annual Report Form 10-K for the fiscal year ended December 31, 2019. The adjustment to record the allowance for credit losses may fall outside of management’s estimated increase based on completion of the Corporation's evaluation of qualitative factors and forecasts adjustments to estimate expected credit losses inherent in the loan portfolio.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017-04 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statement disclosures.

In August 2018, the FASB issued ASU 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 amends ASC 715-20, "Compensation - Retirement Benefits - Defined Benefit Plans - General." The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated Other Comprehensive Income ("OCI") expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. ASU 2018-14 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statement disclosures.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”).  ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018-15 was effective for the Corporation on January 1, 2020 and did not have a material impact on the Corporation's financial statements.

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.

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Table of Contents


In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Federal Deposit Insurance Corporation (the "FDIC”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the COVID-19 pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables - Troubled Debt Restructurings by Creditors” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. See Note 1 of the footnotes to the consolidated financial statements for disclosure of the impact to date.

3.    BUSINESS COMBINATIONS

On December 18, 2019, CNB Financial Corporation (“CNB"), CNB Bank (“CNB Bank") and Bank of Akron (“Akron") entered into an Agreement and Plan of Merger (the “Agreement"), pursuant to which CNB will acquire Akron. Under the terms of the Agreement, Akron will be merged with and into CNB Bank (the “Merger") with CNB Bank continuing as the surviving entity. At December 31, 2019, Akron had $388.5 million in assets, $341.4 million in deposits and $38.7 million in shareholders' equity. Following the completion of the Merger, Akron will operate as part of CNB’s BankOnBuffalo division. The Agreement provides that shareholders of Akron will have the right to elect to receive, for each share of Akron common stock, either (x) $215.00 in cash or (y) 6.6729 shares of CNB common stock. Elections will be subject to proration procedures whereby at least 75% of Akron shares will be exchanged for CNB common stock. The shareholders of Akron voted to approve the Agreement and Plan of Merger on March 18, 2020. CNB and Akron expect to consummate the transaction in the third quarter of 2020 following the receipt of the requisite regulatory approvals and the satisfaction of all closing conditions.

4.    SECURITIES

Securities available for sale at March 31, 2020 and December 31, 2019 are as follows:
 
March 31, 2020
 
December 31, 2019
 
Amortized
 
Unrealized
 
Fair
 
Amortized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
U.S. Gov’t sponsored entities
$
119,158

 
$
6,908

 
$
0

 
$
126,066

 
$
124,189

 
$
2,924

 
$
(19
)
 
$
127,094

State & political subdivisions
99,926

 
3,664

 
(298
)
 
103,292

 
101,177

 
3,288

 
(102
)
 
104,363

Residential & multi-family mortgage
295,695

 
12,052

 
(227
)
 
307,520

 
273,404

 
4,117

 
(885
)
 
276,636

Corporate notes & bonds
8,350

 
12

 
(740
)
 
7,622

 
8,350

 
14

 
(282
)
 
8,082

Pooled SBA
24,168

 
933

 
0

 
25,101

 
25,063

 
274

 
(163
)
 
25,174

Other
1,020

 
0

 
(39
)
 
981

 
1,020

 
0

 
(56
)
 
964

Total
$
548,317

 
$
23,569

 
$
(1,304
)
 
$
570,582

 
$
533,203

 
$
10,617

 
$
(1,507
)
 
$
542,313



At March 31, 2020 and December 31, 2019, 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.
Trading securities at March 31, 2020 and December 31, 2019 are as follows:
 
March 31, 2020
 
December 31, 2019
Corporate equity securities
$
3,699

 
$
7,946

Mutual funds
487

 
807

Certificates of deposit
614

 
350

Corporate notes and bonds
655

 
655

U.S. Government sponsored entities
52

 
51

Total
$
5,507

 
$
9,809



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Table of Contents

Securities with unrealized losses at March 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
March 31, 2020
 
Less than 12 Months
 
12 Months or More
 
Total
Description of Securities
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. Gov’t sponsored entities
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

State & political subdivisions
3,761

 
(111
)
 
682

 
(187
)
 
4,443

 
(298
)
Residential & multi-family mortgage
2,382

 
(63
)
 
2,822

 
(164
)
 
5,204

 
(227
)
Corporate notes & bonds
0

 
0

 
4,848

 
(740
)
 
4,848

 
(740
)
Pooled SBA
0

 
0

 
0

 
0

 
0

 
0

Other
0

 
0

 
981

 
(39
)
 
981

 
(39
)
 
$
6,143

 
$
(174
)
 
$
9,333

 
$
(1,130
)
 
$
15,476

 
$
(1,304
)

December 31, 2019
 
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
$
7,040

 
$
(3
)
 
$
14,989

 
$
(16
)
 
$
22,029

 
$
(19
)
State & political subdivisions
826

 
(5
)
 
684

 
(97
)
 
1,510

 
(102
)
Residential & multi-family mortgage
41,841

 
(346
)
 
32,555

 
(539
)
 
74,396

 
(885
)
Corporate notes & bonds
0

 
0

 
4,718

 
(282
)
 
4,718

 
(282
)
Pooled SBA
8,560

 
(80
)
 
6,075

 
(83
)
 
14,635

 
(163
)
Other
0

 
0

 
964

 
(56
)
 
964

 
(56
)
 
$
58,267

 
$
(434
)
 
$
59,985

 
$
(1,073
)
 
$
118,252

 
$
(1,507
)

The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.

At March 31, 2020 and December 31, 2019, management performed an assessment for possible other-than-temporary impairment of the Corporation’s debt securities, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. Based on the results of the assessment, management believes impairment of these debt securities at March 31, 2020 and December 31, 2019 to be temporary.
For the securities that comprise corporate notes and bonds and the securities that are issued by state and political subdivisions, management monitors publicly available financial information, such as filings with the Securities and Exchange Commission, in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management monitors information from quarterly “call” report filings that are used to generate Uniform Bank Performance Reports. All other securities that were in an unrealized loss position at the balance sheet date were reviewed by management, and issuer-specific documents were reviewed as appropriate given the following considerations; the financial condition and near-term prospects of the issuer and whether downgrades by bond rating agencies have occurred, 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.
As of March 31, 2020 and December 31, 2019, management concluded that the securities described in the previous paragraph were not other-than-temporarily impaired for the following reasons:
 
There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.
All contractual interest payments on the securities have been received as scheduled, and no information has come to management’s attention through the processes previously described which would lead to a conclusion that future contractual payments will not be timely received.
The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.

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Table of Contents

On March 31, 2020 and December 31, 2019, securities carried at $409,616 and $405,200, respectively, were pledged to secure public deposits and for other purposes as provided by law.
The following is a schedule of the contractual maturity of securities available for sale at March 31, 2020:
 
Amortized
Cost
 
Fair
Value
1 year or less
$
64,728

 
$
64,979

1 year – 5 years
90,138

 
93,743

5 years – 10 years
65,049

 
70,592

After 10 years
7,519

 
7,666

 
227,434

 
236,980

Residential & multi-family mortgage
295,695

 
307,520

Pooled SBA
24,168

 
25,101

Other
1,020

 
981

Total debt securities
$
548,317

 
$
570,582


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.
Information pertaining to security sales on available for sale securities is as follows:
 
Proceeds
 
Gross
Gains
 
Gross
Losses
Three months ended March 31, 2020
$
0

 
$
0

 
$
0

Three months ended March 31, 2019
$
11,403

 
$
152

 
$
4



The tax provision related to these net realized gains was $0 and $31 during the three months ended March 31, 2020 and 2019, respectively.

Subsequent to March 31, 2020, the Corporation received $50,902 in proceeds from security sales on available for sale securities and recognized a net realized gain of $2,033, comprised of $2,100 in gross gains and $67 in gross losses. The Corporation’s decision to sell these securities was based on a proactive approach to reduce higher concentration levels in bond types and geographies. Given the total fair value of the securities available for sale portfolio of $570,582, at March 31, 2020, the Corporation believes this transaction does not represent a significant impact on the overall portfolio.

5.    LOANS
Total net loans at March 31, 2020 and December 31, 2019 are summarized as follows:
 
March 31, 2020
 
December 31, 2019
Commercial, industrial and agricultural
$
1,090,915

 
$
1,046,665

Commercial mortgages
846,215

 
814,002

Residential real estate
814,657

 
814,030

Consumer
94,425

 
124,785

Credit cards
8,683

 
7,569

Overdrafts
311

 
2,146

Less: unearned discount
(4,546
)
 
(5,162
)
allowance for loan losses
(21,915
)
 
(19,473
)
Loans, net
$
2,828,745

 
$
2,784,562


At March 31, 2020 and December 31, 2019, net unamortized loan fees of $3,267 and $3,092, respectively, have been included in the carrying value of loans.


11

Table of Contents

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.

Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether to extend credit to a customer, including loan-to-value ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees.
Commercial, industrial and agricultural loans comprised 38% and 37% of the Corporation’s total loan portfolio at March 31, 2020 and December 31, 2019, respectively. Commercial mortgage loans comprised 30% and 29% of the Corporation’s total loan portfolio at March 31, 2020 and December 31, 2019, respectively. Management assigns a risk rating to all commercial loans at loan origination. The loan-to-value policy guidelines for commercial, industrial and agricultural loans are generally a maximum of 80% of the value of business equipment, a maximum of 70% of the value of accounts receivable, and a maximum of 60% of the value of business inventory at loan origination. The loan-to-value policy guideline for commercial mortgage loans is generally a maximum of 85% of the appraised value of the real estate.
Residential real estate loans comprised 29% and 29% of the Corporation’s total loan portfolio at March 31, 2020 and December 31, 2019, respectively. The loan-to-value policy guidelines for residential real estate loans vary depending on the collateral position and the specific type of loan. Higher loan-to-value terms may be approved with the appropriate private mortgage insurance coverage. The Corporation also originates and prices loans for sale into the secondary market. Loans so originated are classified as loans held for sale and are excluded from residential real estate loans reported above. The rationale for these sales is to mitigate interest rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing the loan. The Corporation also offers a variety of unsecured and secured consumer loan and credit card products which represented less than 4% of the total loan portfolio at both March 31, 2020 and December 31, 2019. Terms and collateral requirements vary depending on the size and nature of the loan.
Transactions in the allowance for loan losses for the three months ended March 31, 2020 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