Company Quick10K Filing
Quick10K
CNB Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$26.75 15 $408
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-16 Officers, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-04-15 Earnings, Exhibits
8-K 2019-04-15 Regulation FD, Exhibits
8-K 2019-03-25 Regulation FD, Exhibits
8-K 2019-03-01 Officers
8-K 2019-02-22 Regulation FD, Exhibits
8-K 2019-02-13 Other Events, Exhibits
8-K 2019-01-28 Earnings, Exhibits
8-K 2019-01-28 Earnings, Exhibits
8-K 2018-11-13 Other Events, Exhibits
8-K 2018-10-19 Earnings, Exhibits
8-K 2018-10-10 Officers
8-K 2018-09-18 Officers
8-K 2018-08-14 Other Events, Exhibits
8-K 2018-08-08 Regulation FD, Exhibits
8-K 2018-07-20 Earnings, Exhibits
8-K 2018-05-08 Other Events, Exhibits
8-K 2018-04-17 Shareholder Vote, Other Events, Exhibits
8-K 2018-04-16 Earnings, Exhibits
8-K 2018-02-13 Officers
8-K 2018-02-02 Earnings, Exhibits
8-K 2018-01-12 Other Events
BAC Bank of America 288,010
SNY Sanofi 104,040
RF Regions Financial 15,840
TWLO Twilio 15,640
AWR American States Water 2,500
VRTS Virtus Investment Partners 841
KE Kimball Electronics 411
NVLN Novelion Therapeutics 26
ICON ICON Equipment 17
INBT Inbit 0
CCNE 2018-12-31
Part I.
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV.
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-21 ccned12312018ex21.htm
EX-23.1 ccned12312018ex231.htm
EX-31.1 ccned12312018ex311.htm
EX-31.2 ccned12312018ex312.htm
EX-32.1 ccned12312018ex321.htm
EX-32.2 ccned12312018ex322.htm
EX-99.1 ccned506004dex9912.htm

CNB Financial Earnings 2018-12-31

CCNE 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 ccne1231201810-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 1 0 – K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Commission File Number 0-13396
CNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
 
25-1450605
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
1 South Second Street
P.O. Box 42
Clearfield, Pennsylvania 16830
(Address of principal executive office)
Registrant’s telephone number, including area code (814) 765-9621
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, no par value per share
The NASDAQ Stock Market LLC
 
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨  Yes  ý  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨  Yes  ý  No
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. ý  Yes  £  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ý  Yes  ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
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. (Check one):
Large accelerated filer  ¨
Accelerated filer  ý
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 Act). ¨  Yes  ý  No
Aggregate market value of the common stock held by nonaffiliates of the registrant as of June 30, 2018:
$433,388,637
The number of shares outstanding of the registrant’s common stock as of March 4, 2019:
15,239,527 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2019 Annual Meeting of Stockholders to be held on April 16, 2019 are incorporated by reference into Part III of this report.



TABLE OF CONTENTS

 
 
Page Number
PART I.
 
 
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
 
PART III.
 
 
 
 
 
 
 
 
PART IV.
 
 
 
 
 
 
 
 
 
 
 
 



PART I.

ITEM 1.  BUSINESS

CNB Financial Corporation (the “Corporation”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). It was incorporated under the laws of the Commonwealth of Pennsylvania in 1983 for the purpose of engaging in the business of a financial holding company. On April 26, 1984, the Corporation acquired all of the outstanding capital stock of County National Bank, a national banking chartered institution. In December 2006, County National Bank changed its name to CNB Bank (the "Bank"), and became a state bank chartered in Pennsylvania and subject to regulation by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. In October 2013, the Corporation acquired FC Banc Corp. and its subsidiary, The Farmers Citizens Bank. In July 2016, the Corporation acquired Lake National Bank.

In addition to the Bank, the Corporation has four other subsidiaries. CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. CNB Risk Management, Inc. is a Delaware-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. Holiday Financial Services Corporation, incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.

CNB Bank

The Bank was originally chartered as a national bank in 1934 and is now a a Pennsylvania-chartered bank. In February 2017, the Bank completed construction of a full-service branch location in Duncansville, Pennsylvania and concurrently closed its loan production office in Hollidaysburg, Pennsylvania. The full-service branch is being operated as part of the CNB Bank franchise.

ERIEBANK, a division of the Bank, began operations in 2005. In July 2016, the Corporation acquired Lake National Bank, which operated two full-service branches in Mentor, Ohio, approximately 20 miles east of Cleveland, Ohio. The Bank is continuing to operate these two branch locations within its ERIEBANK franchise. In February 2017, the Corporation completed construction of a full-service branch location in Ashtabula, Ohio, which is also operating within the ERIEBANK franchise.

In October 2013, the Corporation acquired FC Banc Corp. and its subsidiary, Farmers Citizens Bank. In 2017, the Bank sold its Mount Hope branch of FCBank to First Federal Community Bank of Dover, Ohio. The Bank currently operates seven branch locations as FCBank, a division of the Bank, with its headquarters in Worthington, Ohio.

In 2016, the Bank received regulatory approval to conduct business in the state of New York as BankOnBuffalo, a division of the Bank. The Bank opened a loan production office in Buffalo, New York in May 2016, which was closed in February 2017 concurrent opening of a full-service location in downtown Buffalo in February 2017. The Bank opened full-service locations in Williamsville, New York and Orchard Park, New York in the fourth quarter of 2017, and a full-service location in Niagara Falls, New York in the third quarter of 2018.

The Bank has 42 full-service branch offices located in various communities in its market area. The Bank’s primary market area includes the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson, and McKean. ERIEBANK, a division of the Bank, operates in the Pennsylvania counties of Crawford, Erie, and Warren and the Ohio counties of Ashtabula, Cuyahoga, and Lake. FCBank, a division of the Bank, operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware, and Franklin. BankOnBuffalo, a division of the Bank, operates in Erie and Niagara counties, New York.

The Bank is a full-service bank engaging in a full range of banking activities and services for individual, business, governmental and institutional customers. These activities and services principally include checking, savings, and time deposit accounts; real estate, commercial, industrial, residential and consumer loans; and a variety of other specialized financial services. The Bank’s Private Client Solutions division offers a full range of client services, including private banking and wealth and asset management.






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Holiday Financial Services Corporation

In 2005, the Corporation entered the consumer discount loan and finance business, which is conducted through a wholly-owned subsidiary, Holiday Financial Services Corporation ("Holiday"). Holiday currently has nine offices within the Corporation’s market area.

Competition

The financial services industry in the Corporation’s service area continues to be extremely competitive, both among commercial banks and with other financial service providers such as consumer finance companies, thrifts, investment firms, mutual funds and credit unions. The increased competition has resulted from changes in the legal and regulatory guidelines as well as from economic conditions. Mortgage banking firms, leasing companies, financial affiliates of industrial companies, brokerage firms, retirement fund management firms, and even government agencies provide additional competition for loans and other financial services. Some of the financial service providers operating in the Corporation’s market area operate on a large-scale regional or national basis and possess resources greater than those of the Corporation. The Corporation is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.

Supervision and Regulation

The Corporation is a bank holding company that has elected financial holding company status, and the Bank is a Pennsylvania state-chartered bank that is not a member of the Federal Reserve System. Accordingly, the Corporation is subject to the oversight of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the Pennsylvania Department of Banking and is regulated under the BHC Act, and the Bank is subject to the oversight of the Pennsylvania Department of Banking and Federal Deposit Insurance Corporation (“FDIC”), as its primary federal regulator. The Corporation and the Bank are also subject to various requirements and restrictions under federal and state law, such as requirements to maintain reserves against deposits, restrictions on the types, amounts and terms and conditions of loans that may be granted, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer financial protection laws and regulations also affect the operation of the Bank and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Consumer Financial Protection Bureau (“CFPB”) is authorized to write rules on consumer financial products and services which could affect the operations of the Bank and Holiday. In addition to the impact of regulation, commercial banks are significantly affected by the actions of the Federal Reserve Board, including actions taken with respect to interest rates, as the Federal Reserve Board attempts to control the money supply and credit availability in the U.S. in order to influence the economy.

The following summary sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information about us and our subsidiaries. It does not describe all of the provisions of the statutes, regulations and policies that are identified. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by express reference to each of the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.

Bank Holding Company Regulation

As a bank holding company that controls a Pennsylvania state-chartered bank, the Corporation is subject to regulation and examination by the Pennsylvania Department of Banking and the Federal Reserve Board. We are required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require pursuant to the BHC Act, and applicable regulations. For instance, the BHC Act requires each bank holding company to obtain the approval of the Federal Reserve Board before it may acquire substantially all the assets of any bank, or before it may acquire ownership or control of any voting shares of any bank if, after such acquisition, it would own or control, directly or indirectly, more than five percent of any class of voting shares of such bank. Such a transaction may also require approval of the Pennsylvania Department of Banking.

Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, the Corporation may only engage in, or own companies that engage in, activities deemed by the Federal Reserve Board to be permissible for bank holding companies or financial holding companies. Activities permissible for bank holding companies are those that are so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. Permissible activities for financial holding companies include those “so closely related to banking as to be a proper incident thereto” as well as certain additional activities deemed “financial in nature or incidental to such financial activity” or complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of the depository institution or the financial system.

2


The Corporation must obtain permission from or provide notice to the Federal Reserve Board prior to engaging in most new business activities.

Regulation of CNB Bank

Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, the loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and acquisitions, the establishment of branches, management practices, and numerous other aspects of banking operations.

Source of Strength Doctrine

Under Section 616 of the Dodd-Frank Act, a bank holding company is required to serve as a source of financial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board’s policy that in serving as a source of financial and managerial strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility, and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice, a violation of the Federal Reserve Board regulations, or both. This doctrine is commonly known as the “source of strength” doctrine.

Identity Theft

The Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission (together with the SEC, the “Commissions”) jointly issued final rules and guidelines to require certain regulated entities to establish programs to address risks of identity theft. The rules and guidelines implement provisions of the Dodd-Frank Act. These provisions amend Section 615(e) of the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions’ jurisdiction to address identity theft in two ways. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and debit card issuers that are subject to the Commissions’ jurisdiction, to assess the validity of notifications of changes of address under certain circumstances.

Capital Adequacy

The Capital Rules adopted in 2013 by the Federal Reserve Board, the FDIC, and the Office of the Comptroller of the Currency, generally implement the Basel Committee on Banking Supervision’s capital framework, referred to as Basel III, for strengthening international capital standards. The Capital Rules revise the definitions and components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of assets.

The Capital Rules, among other things:
revise minimum capital requirements and adjust prompt corrective action thresholds;
revise the components of regulatory capital, including adding a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets and increasing the minimum Tier 1 capital ratio requirement from 4% to 6%;
retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;
permit most banking organizations to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income;
implement the capital conservation buffer beginning January 1, 2016, which was phased in incrementally until it reached 2.5% of risk-weighted assets, in addition to the minimum common equity Tier 1, Tier 1 and total capital ratios, on January 1, 2019;
require a minimum leverage ratio of 4%;
require a total capital ratio of 8%;

3


increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;
require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of common equity Tier 1 capital in the aggregate; and
remove references to credit ratings consistent with the Dodd-Frank Act and establish due diligence requirements for securitization exposures.

Compliance with the Capital Rules was required beginning January 1, 2015, for most banking organizations including the Corporation, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. The Corporation implemented the Capital Rules on January 1, 2015, and continues to exceed all estimated well-capitalized regulatory requirements on a fully phased-in basis.

In November 2017, the Federal Reserve Board finalized a rule extending the currently applicable capital rules for mortgage servicing assists and certain other items for non-advanced approaches institutions. This rule is in effect pending the comment period and review of the general proposal to simplify the Capital Rules for non-advanced approaches institutions.

Dividend Restrictions

The Corporation is a legal entity separate and distinct from the Bank. Declaration and payment of cash dividends depends upon cash dividend payments to the Corporation by the Bank, which is our primary source of revenue and cash flow. Accordingly, the right of the Corporation, and consequently the right of our creditors and shareholders, to participate in any distribution of the assets or earnings of any subsidiary is necessarily subject to the prior claims of creditors of the Bank, except to the extent that claims of the Corporation in its capacity as a creditor may be recognized.

As a Pennsylvania state-chartered bank, the Bank is subject to regulatory restrictions on the payment and amounts of dividends under the Pennsylvania Banking Code. Further, the ability of banking subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements.

The payment of dividends by the Bank and the Corporation may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory requirements. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. A depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal banking agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. Federal banking regulators have the authority to prohibit banks and bank holding companies from paying a dividend if the regulators deem such payment to be an unsafe or unsound practice.

Prompt Corrective Action and Safety and Soundness

Under applicable “prompt corrective action” (“PCA”) statutes and regulations, depository institutions are placed into one of five capital categories, ranging from “well capitalized” to “critically undercapitalized.” The PCA statute and regulations provide for progressively more stringent supervisory measures as an insured depository institution’s capital category declines. An institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. An undercapitalized depository institution must submit an acceptable restoration plan to the appropriate federal banking agency. One requisite element of such a plan is that the institution’s parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations.

At December 31, 2018, the Bank qualified as “well capitalized” under applicable regulatory capital standards.

Bank holding companies and insured depository institutions may also be subject to potential enforcement actions of varying levels of severity by the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation, condition imposed in writing by the agency, or term of a written agreement with the agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors, and other institution affiliated parties; the termination of the insured depository institution’s deposit insurance; the appointment of a conservator or receiver for the insured depository institution; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the FDIC, as receiver, would be harmed if such equitable relief was not granted.

4


Community Reinvestment Act

Under the Community Reinvestment Act of 1977 (“CRA”), the FDIC is required to assess the record of all financial institutions it supervises to determine if these institutions are meeting the credit needs of the community (including low and moderate income neighborhoods) which they serve. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. The Bank received a CRA rating of “Satisfactory” at its most recent CRA exam.

Restrictions on Transactions with Affiliates and Insiders

The Bank is subject to the restrictions of Sections 23A and 23B of the Federal Reserve Act and the implementing Regulation W. The Bank's "affiliates" for purposes of these sections include, among other potential entities, the Corporation and its direct subsidiaries. Section 23A requires that loans or extensions of credit by the Bank to an affiliate, purchases by the Bank of securities issued by an affiliate, purchases by the Bank of assets from an affiliate (except as may be exempted by order or regulation), the Bank’s acceptance of securities or debt obligations issued by an affiliate as collateral for a loan or extension of the credit to a third party, the Bank’s acceptance of a guarantee or letter of credit on behalf of an affiliate, a transaction with an affiliate involving the borrowing or lending of securities to the extent the transaction causes the Bank to have credit exposure to the affiliate, and a derivative transaction with an affiliate, to the extent the Bank will have credit exposure to the affiliate (collectively, “Covered Transactions”) be on terms and conditions consistent with safe and sound banking practices. Section 23A also imposes quantitative restrictions on the amount of and collateralization requirements on such transactions. Section 23B requires that all Covered Transactions and certain other transactions, including the sale of securities or other assets by the Bank to an affiliate and the payment of money or the furnishing of services by the Bank to an affiliate, be on terms comparable to those prevailing for similar transactions with nonaffiliates.

The Bank is also subject to Sections 22(g) and 22(h) of the Federal Reserve Act, and the implementation of Regulation O issued by the Federal Reserve Board. These provisions impose limitations on loans and extensions of credit by the Bank to its and its affiliates' executive officers, directors and principal shareholders and their related interests. The limitations restrict the terms and aggregate amount of such transactions. Regulation O also imposes certain recordkeeping and reporting requirements.

Deposit Insurance and Premiums

The deposits of the Bank are insured up to applicable limits per insured depositor by the FDIC. The standard maximum deposit insurance amount is $250,000 per depositor, per insured depository institution, per ownership category, in accordance with applicable FDIC regulations.

The FDIC uses a risk-based assessment system that imposes insurance premiums based on a risk matrix that takes into account the bank’s capital level and supervisory rating. The base for insurance assessments is the average consolidated total assets less tangible equity capital of a financial institution. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. FDIC deposit insurance expense also includes deposit insurance assessments and FICO assessments related to outstanding FICO bonds.

Financial Privacy and Data Security

The Corporation is subject to federal laws, including the Gramm-Leach-Bliley Act and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated financial institutions. These provisions require notice of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain nonpublic personal information to affiliates or non-affiliated third parties by means of opt-out or opt-in authorizations.

The Gramm-Leach-Bliley Act requires that financial institutions implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information. Federal banking agencies have also adopted guidelines for establishing information security standards and programs to protect such information. Further, pursuant to interpretive guidance issued under the Gramm-Leach-Bliley Act and certain state laws, financial institutions are required to notify customers of security breaches that result in unauthorized access to their nonpublic personal information.



5


Incentive Compensation

The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the Corporation and the Bank, with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured.

The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions.

USA PATRIOT Act

Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. The Bank has in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engages in very few transactions of any kind with foreign financial institutions or foreign persons.

Office of Foreign Assets Control Regulation

The United States government has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control. The Office of Foreign Assets Control-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from the Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences.

Other Federal Laws and Regulations

State usury and other credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. The Bank is also subject to lending limits on loans to one borrower and regulatory guidance on concentrations of credit. The Bank’s loans and other products and services are also subject to numerous federal and state consumer financial protection laws, including, but not limited to, the following:
Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
Truth-in-Savings Act, which governs disclosures of the terms of deposit accounts to consumers;
Home Mortgage Disclosure Act, requiring financial institutions to provide information to regulators to enable determinations as to whether financial institutions are fulfilling their obligations to meet the home lending needs of the communities they serve and not discriminating in their lending practices;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, sex or other prohibited factors in extending credit;

6


Real Estate Settlement Procedures Act, which imposes requirements relating to real estate settlements, including requiring lenders to disclose certain information regarding the nature and cost of real estate settlement services;
Fair Credit Reporting Act, covering numerous areas relating to certain types of consumer information and identity theft;
Privacy provisions of the Gramm-Leach-Bliley Act and related regulations, which require that financial institutions provide privacy policies to consumers, to allow customers to “opt out” of certain sharing of their nonpublic personal information, and to safeguard sensitive and confidential customer information;
Electronic Funds Transfer Act, which is a consumer protection law regarding electronic fund transfers; and
Numerous other federal and state laws and regulations, including those related to consumer protection and bank operations.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934, as amended, including publicly-held financial holding companies such as the Corporation. In particular, the Sarbanes-Oxley Act establishes: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws.

Governmental Policies

Our earnings are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently uses these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on our business and earnings.

Other Legislative Initiatives

Proposals may be introduced in the United States Congress, in the Pennsylvania Legislature, and/or by various bank regulatory authorities that could alter the powers of, and restrictions on, different types of banking organizations and which could restructure part or all of the existing regulatory framework for banks, bank and financial holding companies and other providers of financial services. Moreover, other bills may be introduced in Congress which would further regulate, deregulate or restructure the financial services industry, including proposals to substantially reform the regulatory framework. It is not possible to predict whether any such proposals will be enacted into law or, even if enacted, what effect such action may have on our business and earnings.

Employees

As of December 31, 2018, the Corporation had a total of 556 employees, of which 505 were full time and 51 were part time.

Available Information

The Corporation makes available free of charge on its website (www.cnbbank.bank) its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission, the SEC. Information on the Corporation’s website is not incorporated by reference into this report.

Shareholders may obtain a copy of the Corporation’s Annual Report on Form 10-K free of charge by writing to: CNB Financial Corporation, 1 South Second Street, PO Box 42, Clearfield, PA 16830, Attn: Shareholder Relations.

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The SEC maintains an internet site that contains reports, proxy statements and other information about electronic filers such as the Corporation. The site is available at http://www.sec.gov.

ITEM 1A. RISK FACTORS

The Corporation’s financial condition and results of operations are subject to various risks inherent in its business. The material risks and uncertainties that management believes affect the Corporation are described below. If any of these risks actually occur, the Corporation’s business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. The following risks together with all of the other information in this Annual Report on Form 10-K should be considered.

The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on the Corporation’s business, financial position and results of operations.

The Corporation continues to face risks resulting from the aftermath of the severe recession generally and the moderate pace of the current recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on the Corporation and on others in the financial services industry. In particular, the Corporation may face the following risks in connection with the economic or market environment:
The Corporation’s and the Bank’s ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
The Corporation faces increased regulation of the banking and financial services industry. Compliance with such regulation may increase its costs and limit its ability to pursue business opportunities.
Market developments may affect customer confidence levels and may cause increases in loan delinquencies and default rates, which management expects would adversely impact the Bank’s charge-offs and provision for loan losses.
Market developments may adversely affect the Bank’s securities portfolio by causing other-than-temporary-impairments, prompting write-downs and securities losses.
Competition in banking and financial services industry could intensify as a result of the consolidation of financial services companies in connection with current market conditions.

The Bank’s allowance for loan losses may not be adequate to cover loan losses which could have a material adverse effect on the Corporation’s business, financial condition and results of operations.

A significant source of risk for the Corporation arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Bank are secured, but some loans are unsecured based upon management’s evaluation of the creditworthiness of the borrowers. With respect to secured loans, the collateral securing the repayment of these loans principally includes a wide variety of real estate, and to a lesser extent personal property, either of which may be insufficient to cover the obligations owed under such loans.

Collateral values and the financial performance of borrowers may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates and debt service levels, changes in oil and gas prices, changes in monetary and fiscal policies of the federal government, widespread disease, terrorist activity, environmental contamination and other external events, which are beyond the control of the Bank. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards might create the impression that a loan is adequately collateralized when in fact it is not. Although the Bank may acquire any real estate or other assets that secure defaulted loans through foreclosures or other similar remedies, the amounts owed under the defaulted loans may exceed the value of the assets acquired.

The allowance for loan losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation using a methodology whereby loan pools are segregated into special mention, substandard, doubtful and unclassified categories and the pools are evaluated based on historical loss factors. The Bank monitors delinquencies and losses on a monthly basis. The Bank has adopted underwriting and credit monitoring policies and procedures, including the review of borrower financial statements and collateral appraisals, which management believes are appropriate to mitigate the risk of loss by assessing the likelihood of borrower nonperformance and the value of available collateral. The Bank also manages credit risk by diversifying its loan portfolio. An ongoing independent review, subsequent to management’s review, of individual credits is performed by an independent loan review function, which reports to the Loan Committee of the Corporation’s Board of Directors. However, such policies and procedures have limitations, including judgment errors in management’s risk analysis, and may not prevent unexpected losses that could have a material adverse effect on the Corporation’s business, financial condition and results of operations.

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Interest rate volatility could significantly reduce the Corporation’s profitability.

The Corporation’s earnings largely depend on the relationship between the yield on its earning assets, primarily loans and investment securities, and the cost of funds, primarily deposits and borrowings. This relationship, commonly known as the net interest margin, is susceptible to significant fluctuation and is affected by economic and competitive factors that influence the yields and rates, and the volume and mix of the Bank’s interest earning assets and interest bearing liabilities.

Interest rate risk can be defined as the sensitivity of net interest income and of the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk arises from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. The Corporation is subject to interest rate risk to the degree that its interest bearing liabilities re-price or mature more slowly or more rapidly or on a different basis than its interest earning assets. Changes in interest rates, including those due to federal monetary policy, will affect the levels of income and expense recorded on a large portion of the Bank’s assets and liabilities, and fluctuations in interest rates will impact the market value of all interest sensitive assets. Significant fluctuations in interest rates could have a material adverse impact on the Corporation’s business, financial condition, results of operations, or liquidity.

The Bank’s interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of its balance sheet and off-balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on earnings, is determined through the use of static gap analysis and earnings simulation modeling under multiple interest rate scenarios. Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank’s balance sheet in order to preserve the sensitivity of net interest income to actual or potential changes in interest rates. At December 31, 2018, the interest rate sensitivity position was asset sensitive in the short-term. For further information on risk relating to interest rates, refer to Part I, Item 7a, “Quantitative and Qualitative Disclosures about Market Risk,” herein.

The Bank’s loans are principally concentrated in certain areas of Pennsylvania, Ohio and New York, and adverse economic conditions in those markets could adversely affect the Corporation’s business, financial condition and results of operations.

The Corporation’s success is dependent to a significant extent upon general economic conditions in the United States and, in particular, the local economies in central and northwest Pennsylvania, central and northeast Ohio, and western New York - the primary markets served by the Bank. The Bank is particularly exposed to real estate and economic factors in these geographic areas, as most of its loan portfolio is concentrated among borrowers in these markets. Furthermore, because a substantial portion of the Bank’s loan portfolio is secured by real estate in these areas, the value of the associated collateral is also subject to regional real estate market conditions.

The Bank is not immune to negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the local real estate markets served by the Bank. While the Bank’s loan portfolio has not shown significant signs of credit quality deterioration despite continued challenges in the U.S. economy, we cannot assure you that no deterioration will occur. An economic recession in the markets served by the Bank, and the nation as a whole, could negatively impact household and corporate incomes. This impact could lead to decreased loan demand and increase the number of borrowers who fail to pay the Bank interest or principal on their loans, and accordingly, could have a material adverse effect on the Corporation’s business, financial condition, results of operations, or liquidity.

The Corporation’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk, and declines in value in its investment securities portfolio may require it to record other-than-temporary impairment charges that could have a material adverse effect on its results of operations and financial condition.

The Corporation’s investment securities portfolio has risks beyond its control that can significantly influence the portfolio’s fair value. These factors include, but are not limited to, rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and continued instability in the credit markets. Recent lack of market activity with respect to certain of the securities has, in certain circumstances, required the Corporation to base its fair market valuation on unobservable inputs. The Corporation has engaged valuation experts to price these certain securities using proprietary models, which incorporate assumptions that market participants would use in pricing the securities, including bid/ask spreads and liquidity and credit premiums. Any change in current accounting principles or interpretations of these principles could impact the Corporation’s assessment of fair value and thus its determination of other-than-temporary impairment of the securities in its investment securities portfolio.


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The Bank may be required to record other-than-temporary impairment charges on its investment securities if they suffer declines in value that are considered other-than-temporary. Numerous factors, including collateral deterioration underlying certain private label mortgage-backed securities, lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for certain investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could negatively effect the Bank’s securities portfolio in future periods. An other-than-temporary impairment charge could have a material adverse effect on the Corporation’s results of operations and financial condition.

The Corporation is subject to extensive government regulation and supervision, which may affect its ability to conduct its business and may negatively impact its financial results.

The Corporation, primarily through the Bank and its non-bank subsidiary, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, the Federal Deposit Insurance Fund and the safety and soundness of the banking system as a whole, not stockholders. These regulations affect the Corporation’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject it to additional costs, limit the types of financial services and products the Corporation may offer, and/or limit the pricing it may charge on certain banking services, among other things. Additionally, the Dodd-Frank Act has and will continue to change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings by various federal agencies to implement various parts of the legislation, some of which have yet to be implemented. The Corporation cannot be certain when final rules affecting it will be issued through such rulemakings and what the specific content of such rules will be. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and the Corporation’s ability to conduct business. The Corporation will have to apply resources to ensure that it is in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase its costs of operations and adversely impact its earnings. Additionally, revised capital adequacy guidelines and prompt corrective action rules applicable to it became effective January 1, 2015. Compliance with these rules have imposed additional costs on the Corporation.

Failure to comply with laws, including the Bank Secrecy Act and USA Patriot Act, regulations or policies could result in sanctions by regulatory agencies, restrictions, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial condition and results of operations and/or cause the Corporation to lose its financial holding company status. While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Supervision and Regulation” in Part I, Item 1 of this report for further information.

The Corporation relies on its management and other key personnel, and the loss of any of them may adversely affect its operations.

The Corporation is and will continue to be dependent upon the services of its executive management team. In addition, it will continue to depend on its ability to retain and recruit key client relationship managers. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on its business and financial condition.

Strong competition within the Corporation’s markets and technological change may have a material adverse impact on its profitability.

The Corporation competes with an ever-increasing array of financial service providers. As noted above, as a financial holding company and state-chartered financial institution, respectively, the Corporation and the Bank are subject to extensive regulation and supervision, including, in many cases, regulations that limit the type and scope of activities. The non-bank financial service providers that compete with the Corporation and the Bank may not be subject to such extensive regulation, supervision, and tax burden. Competition from nationwide banks, as well as local institutions, is strong in the Corporation’s markets.


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The financial services industry is undergoing rapid technological change and technological advances are likely to intensify competition. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Accordingly, the Corporation’s future success will depend in part on its ability to address customer needs by using technology. The Corporation cannot assure you that it will be able to successfully take advantage of technological changes or advances or develop and market new technology driven products and services to its customers.

Many regional, national and international competitors have far greater assets and capitalization than the Corporation has and greater resources to invest in technology and access to capital markets and can consequently offer a broader array of financial services than it can. We cannot assure you that we will continue to be able to compete effectively with other financial institutions in the future. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation’s business, financial condition, results of operations, or liquidity. For further information on competition, refer to Part I, Item 1, “Competition,” herein.

A failure in or breach of the Corporation’s or any of its subsidiaries’ operational or security systems or infrastructure, or those of third party vendors and other service providers, including as a result of cyber attacks, could disrupt the Corporation’s or any of its subsidiaries’ businesses, result in the disclosure or misuse of confidential or proprietary information, damage its reputation, increase its costs and cause losses.

The Corporation, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, its and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Although the Corporation has business continuity plans and other safeguards in place, disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Corporation’s and its subsidiaries products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Corporation’s results of operations or financial condition.
Although to date the Corporation has not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. The Corporation’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our Internet banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served. As a result, cybersecurity and the continued development and enhancement of the Corporation’s controls, processes and practices designed to protect its and its subsidiaries systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for the Corporation. As
cyber threats continue to evolve, the Corporation may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.

The Corporation may not be able to meet its cash flow needs on a timely basis at a reasonable cost, and the Corporation’s cost of funds for banking operations may significantly increase as a result of general economic conditions, interest rates and competitive pressures.

Liquidity is the ability to meet cash flow obligations as they come due and cash flow needs on a timely basis and at a reasonable cost. The liquidity of the Bank is used to make loans and to repay deposit and borrowing liabilities as they become due, or are demanded by customers and creditors. Many factors affect the Bank’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and standing in the marketplace, and general economic conditions.

The Bank’s primary source of funding is retail deposits, gathered throughout its network of banking offices. Periodically, the Corporation utilizes term borrowings from the Federal Home Loan Bank (the "FHLB") of Pittsburgh, of which the Bank is a member, and other lenders to meet funding obligations. The Bank’s securities and loan portfolios provide a source of contingent liquidity that could be accessed in a reasonable time period through sales.

Significant changes in general economic conditions, market interest rates, competitive pressures or otherwise, could cause the Bank’s deposits to decrease relative to overall banking operations, and it would have to rely more heavily on brokered funds and borrowings in the future, which are typically more expensive than deposits.


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Management and the Corporation's Board of Directors, through the Asset/Liability Committee, or the ALCO, monitor liquidity and the ALCO establishes and monitors acceptable liquidity ranges. The Bank actively manages its liquidity position through target ratios. Continual monitoring of these ratios, both historical and through forecasts under multiple rate scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity.

Changes in economic conditions, including consumer savings habits and availability of or access to capital, could potentially have a significant impact on the Bank’s liquidity position, which in turn could materially impact the Corporation’s financial condition, results of operations and cash flows.

A substantial decline in the value of the Bank’s FHLB common stock may adversely affect the Corporation’s results of operations, liquidity and financial condition.

As a requirement of membership in the FHLB of Pittsburgh, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. Borrowings from the FHLB represent the Bank’s primary source of short-term and long-term wholesale funding.

In an extreme situation, it is possible that the capitalization of an FHLB, including the FHLB of Pittsburgh, could be substantially diminished or reduced to zero. Consequently, given that there is no trading market for the Bank’s FHLB common stock, the Corporation’s management believes that there is a risk that the Corporation’s investment could be deemed impaired at some time in the future. If this occurs, it may adversely affect the Corporation’s results of operations and financial condition.

In addition, if the capitalization of the FHLB of Pittsburgh is substantially diminished, the Bank’s liquidity may be adversely impacted if it is not able to obtain alternative sources of funding.

There are 11 FHLB banks, including the FHLB of Pittsburgh, in the FHLB system. The 11 FHLB banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB bank cannot meet its obligations to pay its share of the system’s debt, other FHLB banks can be called upon to make the payment. The Corporation cannot assure you, however, that the FHLB system will be able to meet these obligations.

The Bank could be held responsible for environmental liabilities relating to properties acquired through foreclosure, resulting in significant financial loss.

In the event the Bank forecloses on a defaulted commercial or residential mortgage loan to recover its investment, it may be subject to environmental liabilities in connection with the underlying real property, which could significantly exceed the value of the real property. Although the Bank exercises due diligence to discover potential environmental liabilities prior to acquiring any property through foreclosure, hazardous substances or wastes, contaminants, pollutants, or their sources may be discovered on properties during its ownership or after a sale to a third party. The Corporation cannot assure you that the Bank would not incur full recourse liability for the entire cost of any removal and cleanup on an acquired property, that the cost of removal and cleanup would not exceed the value of the property, or that the Bank could recover any of the costs from any third party. Losses arising from environmental liabilities could have a material adverse impact on the Corporation’s business, financial condition, results of operations, or liquidity.

Federal and state governments could pass legislation responsive to current credit conditions which could cause the Corporation to experience higher credit losses.

The Corporation could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Corporation could experience higher credit losses because of federal or state legislation or regulatory action that limits the Bank’s ability to foreclose on property or other collateral or makes foreclosure less economically feasible. The Corporation cannot assure you that future legislation will not significantly and adversely impact its ability to collect on its current loans or foreclose on collateral.







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The preparation of the Corporation’s financial statements requires the use of estimates that could significantly vary from actual results, which could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make significant estimates that affect the financial statements. For example, one of these significant estimates is the allowance for loan losses. Due to the inherent nature of estimates, the Corporation cannot provide absolute assurance that it will not significantly increase the allowance for loan losses and/or sustain credit losses that are significantly higher than the provided allowance, which could have a material adverse effect on the Corporation’s business, financial condition, results of operations or liquidity.

The Corporation’s financial results may be subject to the impact of changes in accounting standards or interpretation in new or existing standards.

From time to time the Financial Accounting Standards Board ("FASB"), and the SEC change accounting regulations and reporting standards that govern the preparation of the Corporation’s financial statements. In addition, the FASB, SEC, and bank regulators may revise their previous interpretations regarding existing accounting regulations and the application of these accounting standards. These revisions in their interpretations are out of the Corporation’s control and may have a material impact on its financial statements.

The unsoundness of other financial institutions with which the Corporation does business could adversely affect the Corporation’s business, financial condition or results of operations.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty, investment or other relationships. The Corporation routinely executes transactions with counterparties in the financial services industry such as commercial banks, brokers and dealers, investment banks and other institutional clients for a range of transactions including loan participations, derivatives and hedging transactions. In addition, the Corporation invests in securities or loans originated or issued by financial institutions or supported by the loans they originate. As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the financial industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or other institutions. Many of these transactions expose the Corporation to credit or investment risk in the event of default by the Corporation’s counterparty. In addition, the Corporation’s credit risk may be exacerbated if the collateral it holds cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or other exposure to the Corporation. The Corporation could incur losses to its securities portfolio as a result of these issues. These types of losses may have a material adverse effect on the Corporation’s business, financial condition or results of operation.

Some provisions contained in the Corporation’s articles of incorporation and its bylaws and under Pennsylvania law could deter a takeover attempt or delay changes in control or management of the Corporation.

Certain anti-takeover provisions of the Pennsylvania Business Corporation Law of 1988, as amended, apply to Pennsylvania registered corporations (e.g., publicly traded companies) including, but not limited to, those relating to (1) control share acquisitions, (2) disgorgement of profits by certain controlling persons, (3) business combination transactions with interested shareholders, and (4) the rights of shareholders to demand fair value for their stock following a control transaction. Pennsylvania law permits corporations to opt-out of these anti-takeover provisions, but the Corporation has not done so. Such provisions could have the effect of deterring takeovers or delaying changes in control or management of the Corporation. Additionally, such provisions could limit the price that some investors might be willing to pay in the future for shares of the Corporation’s common stock.

For example, the Corporation’s amended and restated articles of incorporation require the affirmative vote of 66% of the outstanding shares entitled to vote to effect a business combination. In addition, the Corporation’s amended and restated articles of incorporation, subject to the limitations prescribed in such articles and subject to limitations prescribed by Pennsylvania law, authorize the Corporation’s Board of Directors, from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation, powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof. As a result of its broad discretion with respect to the creation and issuance of preferred stock without shareholder approval, the Corporation's Board of Directors could adversely affect the voting power and other rights of the holders of common stock and, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights, could discourage any attempt to obtain control of the Corporation.


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The Corporation’s bylaws, as amended and restated, provide for the division of the Corporation’s Board of Directors into three classes of directors, with each serving staggered terms. In addition, any amendment to the Corporation’s bylaws must be approved by the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any shareholders are entitled to vote thereon as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class.

Any of the foregoing provisions may have the effect of deterring takeovers or delaying changes in control or management of the Corporation.

The price of the Corporation’s common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.

The price of the Corporation’s common stock on the NASDAQ constantly changes. The Corporation expects that the market price of its common stock will continue to fluctuate, and the Corporation cannot give you any assurances regarding any trends in the market prices for its common stock.

The Corporation’s stock price may fluctuate as a result of a variety of factors, many of which are beyond its control. These factors include the Corporation’s:
past and future dividend practice;
financial condition, performance, creditworthiness and prospects;
quarterly variations in the Corporation’s operating results or the quality of the Corporation’s assets;
operating results that vary from the expectations of management, securities analysts and investors;
changes in expectations as to the Corporation’s future financial performance;
announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by the Corporation or its competitors;
the operating and securities price performance of other companies that investors believe are comparable to the Corporation;
future sales of the Corporation’s equity or equity-related securities;
the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial institutions generally; and
instability in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or real estate valuations or volatility, budget deficits or sovereign debt level concerns and other geopolitical, regulatory or judicial events.

The Corporation’s ability to pay dividends is limited by law and regulations.

The future declaration of dividends by the Corporation’s Board of Directors will depend on a number of factors, including capital requirements, regulatory limitations, the Corporation’s operating results and financial condition and general economic conditions. The Corporation’s ability to pay dividends depends primarily on the receipt of dividends from the Bank. Dividend payments from the Bank are subject to legal and regulatory limitations, generally based on retained earnings, imposed by bank regulatory agencies. The ability of the Bank to pay dividends is also subject to financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. The Corporation cannot assure you that the Bank will be able to pay dividends to the Corporation in the future. The Corporation may decide to limit the payment of dividends to its stockholders even when the Corporation has the legal ability to pay them in order to retain earnings for use in the Corporation’s business.

The risks presented by acquisitions could adversely affect our financial condition and results of operations.

Any acquisitions will be accompanied by the risks commonly encountered in acquisitions including, among other things: our ability to realize anticipated cost savings and avoid unanticipated costs relating to the merger, the difficulty of integrating operations and personnel, the potential disruption of our or the acquired company’s ongoing business, the inability of our management to maximize our financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management. These risks may prevent the Corporation from fully realizing the anticipated benefits of an acquisition or cause the realization of such benefits to take longer than expected.




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Replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.

In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision of LIBOR, could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, could create considerable costs and additional risk and could have an adverse impact on our overall financial condition or results of operations. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

The headquarters of the Corporation and the Bank are located at 1 South Second Street, Clearfield, Pennsylvania, in a building owned by the Corporation. The Bank operates 42 full-service offices. Of these 42 offices, 24 are owned and 17 are leased from independent owners and one is leased from the Corporation. Holiday has nine full-service offices, of which eight are leased from independent owners and one is leased from the Corporation. There are no encumbrances on the offices owned and the rental expense on the leased property is immaterial in relation to operating expenses. The initial lease terms range from three to twenty-nine years.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  MINE SAFETY DISCLOSURES

None.


15


PART II.

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is traded on the Global Select Market of The NASDAQ Stock Market LLC ("NASDAQ") under the symbol "CCNE." As of December 31, 2018, the number of shareholders of record of the Corporation’s common stock was 4,097.

Issuer Purchases of Equity Securities

The following table provides information with respect to any purchase of shares of the Corporation’s common stock made by or on behalf of the Corporation for the quarter ended December 31, 2018.
Period
Total Number
of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or approximate dollar value) of Shares that May
Yet Be Purchased
Under the Plans or
Programs
 
October 1 – 31, 2018
37,830

 
$
26.41

 
37,830

 
332,030

(1)
November 1 – 30, 2018
0

 
$
0

 
0

 
332,030

(1)
December 1 – 31, 2018
42,299

 
$
23.61

 
42,299

 
289,731

(1)

(1)
The Corporation’s new stock repurchase program, which was announced on November 12, 2014, authorizes the repurchase of up to 500,000 shares of common stock. The program will remain in effect until fully utilized or until modified, suspended or terminated. As of December 31, 2018, there were 289,731 shares remaining in the program.


16


Share Return Performance

Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the NASDAQ Composite Index and a peer group index of banking organizations for the five-year period commencing December 31, 2013 and ending December 31, 2018.
 
 CNB Financial Corporation
chart-bf50978e55b9539a963.jpg
 
Period Ending
Index
12/31/13

12/31/14

12/31/15

12/31/16

12/31/17

12/31/18

CNB Financial Corporation
100.00

101.10

102.34

156.99

158.23

141.68

NASDAQ Composite
100.00

114.75

122.74

133.62

173.22

168.30

SNL Bank NASDAQ
100.00

103.57

111.80

155.02

163.20

137.56


Source : S&P Global Market Intelligence
© 2018


17


ITEM 6.  SELECTED FINANCIAL DATA
 
The following selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and results of Operations" and the consolidated financial statements as of December 31, 2018 and 2017 and for the three years ended December 31, 2018, 2017, and 2016, and the related notes included elsewhere in this Annual Report on Form 10-K.

The selected financial information as of and for the years ended December 31, 2018, 2017, 2016, 2015, and 2014 has been derived from our audited historical financial statements.
 
Year ended December 31,
(Dollars in thousands, except per share data)
2018
 
2017
 
2016
 
2015
 
2014
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
 
 
Loans including fees
$
118,193

 
$
97,005

 
$
81,209

 
$
71,814

 
$
69,512

Securities:
 
 
 
 
 
 
 
 
 
Taxable
9,921

 
8,165

 
9,134

 
10,977

 
13,257

Tax-exempt
2,739

 
2,983

 
3,390

 
3,778

 
3,713

Dividends
1,017

 
721

 
582

 
609

 
400

Total interest and dividend income
131,870

 
108,874

 
94,315

 
87,178

 
86,882

INTEREST EXPENSE:
 
 
 
 
 
 
 
 
 
Deposits
17,228

 
9,312

 
8,470

 
8,498

 
8,300

Borrowed funds
5,856

 
4,021

 
2,981

 
3,222

 
3,241

Subordinated debentures
3,866

 
4,032

 
1,577

 
751

 
746

Total interest expense
26,950

 
17,365

 
13,028

 
12,471

 
12,287

NET INTEREST INCOME
104,920

 
91,509

 
81,287

 
74,707

 
74,595

PROVISION FOR LOAN LOSSES
6,072

 
6,655

 
4,149

 
2,560

 
3,840

Net interest income after provision for loan losses
98,848

 
84,854

 
77,138

 
72,147

 
70,755

NON-INTEREST INCOME
20,723

 
21,435

 
17,691

 
14,799

 
14,321

NON-INTEREST EXPENSES
79,342

 
70,037

 
67,118

 
56,457

 
52,688

INCOME BEFORE INCOME TAXES
40,229

 
36,252

 
27,711

 
30,489

 
32,388

INCOME TAX EXPENSE
6,510

 
12,392

 
7,171

 
8,292

 
9,314

NET INCOME
$
33,719

 
$
23,860

 
$
20,540

 
$
22,197

 
$
23,074

PER SHARE DATA:
 
 
 
 
 
 
 
 
 
Basic
$
2.21

 
$
1.57

 
$
1.42

 
$
1.54

 
$
1.60

Fully diluted
2.21

 
1.57

 
1.42

 
1.54

 
1.60

Dividends declared
0.67

 
0.66

 
0.66

 
0.66

 
0.66

Book value per share at year end
17.28

 
15.98

 
14.64

 
13.87

 
13.09

AT END OF PERIOD:
 
 
 
 
 
 
 
 
 
Total assets
$
3,221,521

 
$
2,768,773

 
$
2,573,821

 
$
2,285,136

 
$
2,189,213

Securities
524,649

 
416,859

 
500,693

 
550,619

 
690,225

Loans, net of unearned discount
2,474,557

 
2,145,959

 
1,873,536

 
1,577,798

 
1,355,289

Allowance for loan losses
19,704

 
19,693

 
16,330

 
16,737

 
17,373

Deposits
2,610,786

 
2,167,815

 
2,017,522

 
1,815,053

 
1,847,079

FHLB and other borrowings
245,117

 
257,359

 
237,004

 
104,243

 
75,715

Subordinated debentures
70,620

 
70,620

 
70,620

 
20,620

 
20,620

Deposits held for sale
0

 
0

 
6,456

 
0

 
0

Shareholders’ equity
262,830

 
243,910

 
211,784

 
201,913

 
188,548

KEY RATIOS:
 
 
 
 
 
 
 
 
 
Return on average assets
1.12
%
 
0.89
%
 
0.85
%
 
0.99
%
 
1.07
%
Return on average equity
13.46
%
 
9.97
%
 
9.69
%
 
11.23
%
 
12.76
%
Loan to deposit ratio
94.78
%
 
98.99
%
 
92.86
%
 
86.93
%
 
73.37
%
Dividend payout ratio
30.35
%
 
42.31
%
 
46.48
%
 
42.86
%
 
41.26
%
Average equity to average assets ratio
8.33
%
 
8.93
%
 
8.76
%
 
8.86
%
 
8.37
%


18


ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. CNB Risk Management, Inc., incorporated in Delaware, is a captive insurance company that insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. Holiday , incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.

The financial condition and results of operations of the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance. Management’s discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes.

Risk identification and management are essential elements for the successful management of the Corporation. In the normal course of business, the Corporation is subject to various types of risk, including interest rate, credit, and liquidity risk. These risks are controlled through policies and procedures established by the Corporation.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates. Interest rate risk results from various repricing frequencies and the maturity structure of the financial instruments owned by the Corporation. The Corporation uses its asset/liability management policy and systems to control, monitor and manage interest rate risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms. Credit risk results from loans to customers and the purchase of securities. The Corporation manages credit risk by following an established credit policy and using a disciplined evaluation of the adequacy of the allowance for loan losses. Also, the Corporation's investment policy limits the amount of credit risk that may be taken in the securities portfolio.

Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors. The Corporation has established guidelines within its asset-liability management policy to manage liquidity risk. These guidelines include contingent funding alternatives.



















19


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 the financial condition, liquidity, results of operations, and future performance of our 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 our 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.” Such known and unknown risks, uncertainties and other 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 principals 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 inability to realize expected cost savings or achieve other anticipated benefits in connection with business combinations and other acquisitions; (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 our financial position and our 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. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

General Overview

Management looks to return on average equity, earnings per share, asset quality, and other metrics to measure the performance of the Corporation. The interest rate environment will continue to play an important role in the future earnings of the Corporation. In order to address the flattening yield curve and highly competitive environment, the Corporation has remained focused on disciplined loan pricing to sustain a strong net interest margin.

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 2019 and beyond. While past results are not an indication of future earnings, management believes the Corporation is well positioned to sustain core earnings during 2019. All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated.

Financial Condition

The following table presents ending balances, growth, and the percentage change of certain measures of our financial condition for specified years (dollars in millions):
 
2018
Balance
 
$ Change
vs. prior
year
 
% Change
vs. prior
year
 
2017
Balance
 
$ Change
vs. prior
year
 
% Change
vs. prior
year
 
2016
Balance
Total assets
$
3,221.5

 
$
452.7

 
16.4
%
 
$
2,768.8

 
$
195.0

 
7.6
 %
 
$
2,573.8

Total loans, net
2,454.9

 
328.6

 
15.5
%
 
2,126.3

 
269.1

 
14.5
 %
 
1,857.2

Total securities
524.6

 
107.7

 
25.8
%
 
416.9

 
(83.8
)
 
(16.7
)%
 
500.7

Total deposits
2,610.8

 
443.0

 
20.4
%
 
2,167.8

 
150.3

 
7.4
 %
 
2,017.5

Total shareholders’ equity
262.8

 
18.9

 
7.7
%
 
243.9

 
32.1

 
15.2
 %
 
211.8



20


The following table presents average balances of certain measures of our financial condition and net interest margin for the specified years.
 
12/31/2018
 
12/31/2017
 
12/31/2016
 
Average
Balance
Annual
Rate
Interest
Inc./
Exp.
 
Average
Balance
Annual
Rate
Interest
Inc./
Exp.
 
Average
Balance
Annual
Rate
Interest
Inc./
Exp.
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable (1)
$
365,784

2.67
%
$
9,921

 
$
318,481

2.58
%
$
8,165

 
$
380,534

2.44
%
$
9,134

Tax-Exempt (1, 2)
97,412

3.42
%
3,326

 
109,630

4.18
%
4,493

 
124,360

4.24
%
5,103

Equity Securities (1, 2)
29,773

3.93
%
1,170

 
26,270

3.72
%
976

 
19,277

4.09
%
788

Total Securities
492,969

2.89
%
14,417

 
454,381

3.02
%
13,634

 
524,171

2.93
%
15,025

Loans
 
 
 
 
 
 
 
 
 
 
 
Commercial (2)
820,547

4.98
%
40,846

 
645,357

4.93
%
31,844

 
522,345

4.63
%
24,201

Mortgage (2)
1,420,562

4.88
%
69,338

 
1,296,548

4.54
%
58,899

 
1,110,287

4.54
%
50,437

Consumer
85,776

10.16
%
8,717

 
81,383

9.42
%
7,668

 
84,592

9.14
%
7,730

Total Loans (3)
2,326,885

5.11
%
118,901

 
2,023,288

4.86
%
98,411

 
1,717,224

4.80
%
82,368

Total earning assets
2,819,854

4.72
%
$
133,318

 
2,477,669

4.53
%
$
112,045

 
2,241,395

4.37
%
$
97,393

Non-Interest Earning Assets
 
 
 
 
 
 
 
 
 
 
 
Cash & Due From Banks
33,345

 
 
 
28,204

 
 
 
29,869

 
 
Premises & Equipment
49,986

 
 
 
50,377

 
 
 
43,758

 
 
Other Assets
126,630

 
 
 
138,754

 
 
 
121,554

 
 
Allowance for Loan Losses
(21,511
)
 
 
 
(17,473
)
 
 
 
(16,336
)
 
 
Total Non-Interest Earning Assets
188,450

 
 
 
199,862

 
 
 
178,845

 
 
Total Assets
$
3,008,304

 
 
 
$
2,677,531

 
 
 
$
2,420,240

 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest Bearing Deposits
 
 
 
 
 
 
 
 
 
 
 
Demand – interest bearing
$
582,289

0.38
%
$
2,209

 
$
550,922

0.36
%
$
1,976

 
$
513,445

0.35
%
$
1,801

Savings
1,077,209

0.85
%
9,184

 
953,960

0.49
%
4,643

 
954,010

0.46
%
4,429

Time
383,531

1.52
%
5,835

 
252,176

1.07
%
2,693

 
214,684

1.04
%
2,240

Total interest bearing deposits
2,043,029

0.84
%
17,228

 
1,757,058

0.53
%
9,312

 
1,682,139

0.50
%
8,470

Short-term borrowings
37,363

1.91
%
713

 
122,758

1.09
%
1,344

 
99,075

0.57
%
565

Long-term borrowings
250,242

2.06
%
5,143

 
158,782

1.69
%
2,677

 
81,937

2.95
%
2,416

Subordinated Debentures
70,620

5.47
%
3,866

 
70,620

5.71
%
4,032

 
33,120

4.76
%
1,577

Total interest bearing liabilities
2,401,254

1.12
%
$
26,950

 
2,109,218

0.82
%
$
17,365

 
1,896,271

0.69
%
$
13,028

Demand – non-interest bearing
327,014

 
 
 
300,942

 
 
 
267,876

 
 
Other liabilities
29,545

 
 
 
28,148

 
 
 
44,035

 
 
Total Liabilities
2,757,813

 
 
 
2,438,308

 
 
 
2,208,182

 
 
Shareholders’ Equity
250,491

 
 
 
239,223

 
 
 
212,058

 
 
Total Liabilities and Shareholders’ Equity
$
3,008,304

 
 
 
$
2,677,531

 
 
 
$
2,420,240

 
 
Interest Income/Earning Assets
 
4.72
%
$
133,318

 
 
4.53
%
$
112,045

 
 
4.37
%
$
97,393

Interest Expense/Interest Bearing Liabilities
 
1.12
%
26,950

 
 
0.82
%
17,365

 
 
0.69
%
13,028

Net Interest Spread
 
3.60
%
$
106,368

 
 
3.71
%
$
94,680

 
 
3.68
%
$
84,365

Interest Income/Earning Assets
 
4.72
%
$
133,318

 
 
4.53
%
$
112,045

 
 
4.37
%
$
97,393

Interest Expense/Earning Assets
 
0.96
%
26,950

 
 
0.71
%
17,365

 
 
0.59
%
13,028

Net Interest Margin
 
3.76
%
$
106,368

 
 
3.82
%
$
94,680

 
 
3.78
%
$
84,365


1.
Includes unamortized discounts and premiums. Average balance is computed using the amortized cost of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.
2.
Average yields and interest income are stated on a fully taxable equivalent basis using the Corporation’s marginal federal income tax rate of 21% for the year end December 31, 2018 and 35% for the years ended December 31, 2017 and 2016. Interest income has been increased by $1,448, $3,171, and $3,078 for the years ended December 31, 2018, 2017, and 2016, respectively, as a result of the effect of tax-exempt interest and dividends earned by the Corporation.

21


3.
Average outstanding includes the average balance outstanding of all nonaccrual loans. Loans consist of the average of total loans less average unearned income. Included in loan interest income is loan fees of $3,722, $3,328, and $3,170 for the years ended December 31, 2018, 2017, and 2016, respectively.

The following table presents the change in net interest income for the years specified.
Net Interest Income Rate-Volume Variance
For Twelve Months Ended December 31, 2018 over (under) 2017 Due to Change In (1)
 
For Twelve Months Ended
December 31, 2017 over
(under) 2016
Due to Change In (1)
  
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
 
 
 
 
      Taxable
$
1,432

 
$
324

 
$
1,756

 
$
(1,392
)
 
$
423

 
$
(969
)
      Tax-Exempt (2)
(427
)
 
(740
)
 
(1,167
)
 
(541
)
 
(69
)
 
(610
)
      Equity Securities (2)
132

 
62

 
194

 
286

 
(98
)
 
188

Total Securities
1,137

 
(354
)
 
783

 
(1,647
)
 
256

 
(1,391
)
Loans
 
 
 
 
 
 
 
 
 
 
 
      Commercial (2)
8,609

 
393

 
9,002

 
5,699

 
1,944

 
7,643

      Mortgage (2)
5,595

 
4,844

 
10,439

 
8,461

 
1

 
8,462

      Consumer
412

 
637

 
1,049

 
(293
)
 
231

 
(62
)
      Total Loans
14,616

 
5,874

 
20,490

 
13,867

 
2,176

 
16,043

Total Earning Assets
$
15,753

 
$
5,520

 
$
21,273

 
$
12,220

 
$
2,432

 
$
14,652

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Interest Bearing Deposits
 
 
 
 
 
 
 
 
 
 
 
Demand – Interest Bearing
$
120

 
$
113

 
$
233

 
$
131

 
$
44

 
$
175

Savings
635

 
3,906

 
4,541

 
0

 
214

 
214

Time
1,411

 
1,731

 
3,142

 
391

 
62

 
453

Total Interest Bearing Deposits
2,166

 
5,750

 
7,916

 
522

 
320

 
842

Short-Term Borrowings
(937
)
 
306

 
(631
)
 
135

 
644

 
779

Long-Term Borrowings
1,552

 
914

 
2,466

 
2,266

 
(2,005
)
 
261

Subordinated Debentures
0

 
(166
)
 
(166
)
 
1,786

 
669

 
2,455

Total Interest Bearing Liabilities
$
2,781

 
$
6,804

 
$
9,585

 
$
4,709

 
$
(372
)
 
$
4,337

 
 
 
 
 
 
 
 
 
 
 
 
Change in Net Interest Income
$
12,972

 
$
(1,284
)
 
$
11,688

 
$
7,511

 
$
2,804

 
$
10,315


1.
The change in interest due to both volume and rate have been allocated entirely to volume changes.
2.
Changes in interest income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% for the year ended December 31, 2018 and 35% for the year ended December 31, 2017.

Cash and Cash Equivalents

Cash and cash equivalents totaled $45.6 million at December 31, 2018 compared to $35.3 million at December 31, 2017. Cash and cash equivalents fluctuate based on the timing and amount of liquidity events that occur in the normal course of business.

Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, Federal Home Loan Bank 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.



22


Securities

Securities available for sale and trading securities totaled $524.6 million and $416.9 million at December 31, 2018 and 2017, respectively. The Corporation’s objective is to maintain the securities portfolio at a size that ranges between 15% and 20% of total assets in order to appropriately balance the earnings and liquidity that the portfolio provides.  As of December 31, 2018 and 2017, the securities portfolio as a percentage of total assets was 16.3% and 15.1%, respectively. Note 4 to the consolidated financial statements  provides more detail concerning the composition of the Corporation’s securities portfolio and the process for evaluating securities for other-than-temporary impairment.
The following table sets forth the carrying value of our securities available-for-sale portfolio at year-end December 31, 2018, December 31, 2017, and December 31, 2016.
 
December 31, 2018
 
December 31, 2017
 
December 31, 2016
 
Amortized
 
Unrealized
 
Market
 
Amortized
 
Unrealized
 
Market
 
Amortized
 
Unrealized
 
Market
 
Cost
Gains
Losses
 
Value
Cost
Gains
Losses
 
Value
Cost
Gains
Losses
 
Value
Securities Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government Sponsored Entities
$
134,010

 
$
254

$
(1,570
)
 
$
132,694

 
$
108,578

 
$
478

$
(908
)
 
$
108,148

 
$
139,823

 
$
1,107

$
(579
)
 
$
140,351

State and Political Subdivisions
134,662

 
1,942

(573
)
 
136,031

 
134,428

 
3,609

(314
)
 
137,723

 
153,492

 
4,194

(649
)
 
157,037

Residential and multi-family mortgage
209,126

 
500

(3,573
)
 
206,053

 
111,214

 
304

(1,882
)
 
109,636

 
136,807

 
551

(2,382
)
 
134,976

Corporate notes and bonds
12,356

 
22

(601
)
 
11,777

 
17,610

 
52

(462
)
 
17,200

 
18,299

 
77

(962
)
 
17,414

Pooled trust preferred
0

 
0

0

 
0

 
0

 
0

0

 
0

 
800

 
1,249

0

 
2,049

Pooled SBA
30,163

 
135

(924
)
 
29,374

 
36,260

 
355

(575
)
 
36,040

 
43,450

 
505

(918
)
 
43,037

Other
1,020

 
0

(86
)
 
934

 
1,020

 
0

(58
)
 
962

 
1,020

 
0

(49
)
 
971

 
$
521,337

 
$
2,853

$
(7,327
)
 
$
516,863

 
$
409,110

 
$
4,798

$
(4,199
)
 
$
409,709

 
$
493,691

 
$
7,683

$
(5,539
)
 
$
495,835


The following table sets forth the maturities of investment securities in our available-for-sale portfolio as of December 31, 2018.

Maturity Distribution of Investment Securities
December 31, 2018
 
Within
One Year
 
After One But Within
Five Years
 
After Five But
Within Ten
Years
 
After Ten
Years
 
Pooled SBA,
Residential and Multi-
Family Mortgage and
Commercial Mortgage
 
$ Amt.
 
Yield (1)
 
$ Amt.
 
Yield (1)
 
$ Amt.
 
Yield (1)
 
$ Amt.
 
Yield (1)
 
$ Amt.
 
Yield (1)
Securities Available for Sale (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government Sponsored Entities
$
19,900

 
2.57
%
 
$
86,067

 
2.15
%
 
$
26,727

 
3.00
%
 
 
 
 
 
 
 
 
State and Political Subdivisions
28,694

 
3.79
%
 
58,021

 
3.75
%
 
44,379

 
4.04
%
 
$
4,937

 
4.21
%
 
 
 
 
Corporate notes and bonds
9,409

 
2.78
%
 
2,023

 
4.21
%
 
345

 
6.36
%
 


 


 
 
 
 
Pooled SBA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
29,374

 
2.69
%
Residential and multi-family mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
206,053

 
2.79
%
Other
 
 
 
 
 
 
 
 
934

 
2.65
%
 
 
 
 
 
 
 
 
Total
$
58,003

 
3.21
%
 
$
146,111

 
2.81
%
 
$
72,385

 
3.65
%
 
$
4,937

 
4.21
%
 
$
235,427

 
2.78
%

(1)
The weighted average yields are based on market value and effective yields weighted for the scheduled maturity with tax-exempt securities adjusted to a taxable-equivalent basis using a tax rate of 21%.
(2)
The portfolio contains no holdings of a single issuer that exceeds 10% of shareholders’ equity other than the US Treasury and governmental sponsored entities.

The Corporation generally 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.

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 (“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.

23


Loans

As detailed in the table below, at December 31, 2018, the Corporation had $2.5 billion in loans outstanding, net of unearned discount, an increase of $328.6 million, or 15%, since December 31, 2017.
 
2018
 
2017
 
2016
 
2015
 
2014
Commercial, industrial and agricultural
$
916,297

 
$
704,606

 
$
567,800

 
$
475,364

 
$
428,458

Commercial mortgages
697,776

 
644,597

 
574,826

 
448,179

 
352,752

Residential real estate
771,309

 
713,347

 
652,883

 
574,225

 
502,317

Consumer
86,035

 
80,193

 
74,816

 
78,345

 
69,648

Credit cards
7,623

 
6,753

 
6,046

 
5,201

 
5,233

Overdrafts
308

 
352

 
595

 
1,040

 
1,188

Gross loans
2,479,348

 
2,149,848

 
1,876,966

 
1,582,354

 
1,359,596

Less: unearned income
4,791

 
3,889

 
3,430

 
4,556

 
4,307

Total loans net of unearned
$
2,474,557

 
$
2,145,959

 
$
1,873,536

 
$
1,577,798

 
$
1,355,289


The Corporation has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented.

The Corporation expects strong loan growth in 2019 as it continues its planned expansion within the Buffalo, New York market and expands commercial lending relationships in its Pennsylvania and Ohio markets.
The below table discusses loan maturities and sensitivities to interest rates.
 
December 31, 2018
 
One Year
or Less
 
One Through
Five Years
 
Over
Five Years
 
Total Gross
Loans
Commercial, industrial and agricultural
 
 
 
 
 
 
 
Loans With Fixed Interest Rate
$
14,153

 
$
93,695

 
$
155,551

 
$
263,399

Loans With Floating Interest Rate
25,877

 
78,883

 
548,138

 
652,898

 
$
40,030

 
$
172,578

 
$
703,689

 
$
916,297


Loan Concentration

The Corporation monitors loan concentrations by individual industries in order to track potential risk exposures resulting from industry related downturns. At December 31, 2018, no concentration existed within our commercial or real estate loan portfolio that exceeded 10% of the total loans.

Loan Quality

The Corporation has established written lending policies and procedures that require underwriting standards, loan documentation, and credit analysis standards to be met prior to funding a loan. Subsequent to the funding of a loan, ongoing review of credits is required. Credit reviews are performed annually on approximately 65% of the commercial loan portfolio by an outsourced loan review firm. In addition, classified assets, past due loans and nonaccrual loans are reviewed by the loan review firm semiannually.











24


The following table presents information concerning loan delinquency and other nonperforming assets at December 31, 2018, 2017, 2016, 2015, and 2014: 
 
2018
 
2017
 
2016
 
2015
 
2014
Nonaccrual loans
$
17,239

 
$
19,232

 
$
15,329

 
$
12,159

 
$
9,190

Accrual loans greater than 90 days past due
890

 
664

 
10

 
105

 
213

Total nonperforming loans
18,129

 
19,896

 
15,339

 
12,264

 
9,403

Other real estate owned
418

 
710

 
1,015

 
654

 
806

Total nonperforming assets
$
18,547

 
$
20,606

 
$
16,354

 
$
12,918

 
$
10,209

Loans modified in a troubled debt restructuring (TDR):
 
 
 
 
 
 
 
 
 
Performing TDR loans
$
8,201

 
$
8,344

 
$
8,710

 
$
9,304

 
$
14,771

Nonperforming TDR loans *
6,425

 
8,959

 
3,120

 
5,637

 
3,887

Total TDR loans
$
14,626

 
$
17,303

 
$
11,830

 
$
14,941

 
$
18,658

Total loans, net of unearned income
$
2,474,557

 
$
2,145,959

 
$
1,873,536

 
$
1,577,798

 
$
1,355,289

Nonperforming loans as a percentage of loans, net
0.73
%
 
0.93
%
 
0.82
%
 
0.78
%
 
0.69
%
Total assets
$
3,221,521

 
$
2,768,773

 
$
2,573,821

 
$
2,285,136

 
$
2,189,213

Nonperforming assets as a percentage of total assets
0.58
%
 
0.72
%
 
0.64
%
 
0.57
%
 
0.47
%

* - Nonperforming TDR loans are also included in the balance of nonaccrual loans in the previous table.

Management continues to closely monitor nonperforming loans, and the Corporation’s nonperforming loans to total loans ratio continues to be favorable compared to peer institutions. See the “Allowance for Loan Losses” section for further discussion of credit review procedures and changes in nonperforming loans.

Allowance for Loan Losses

The allowance for loan losses is established by provisions for losses in the loan portfolio as well as overdrafts in deposit accounts. These provisions are charged against current income. Loans and overdrafts deemed not collectible are charged off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance. The provision for loan losses reflects the amount deemed appropriate by management to establish an adequate reserve for probable incurred losses. Management’s judgment is based on the evaluation of individual loans, the overall risk characteristics of various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors.

In determining the allocation of the allowance for loan losses, the Corporation considers economic trends, historical patterns and specific credit reviews.
With regard to the credit reviews, a “watchlist” is evaluated on a monthly basis to determine potential commercial losses. The "watchlist" comprises of all credits risk rated special mention, substandard and doubtful. Consumer and mortgage loans are allocated using historical loss experience.


25


The following table presents activity within the allowance for loan losses during the years ended December 31, 2018, 2017, 2016, 2015, and 2014:
 
2018
 
2017
 
2016
 
2015
 
2014
Balance at beginning of period
$
19,693

 
$
16,330

 
$
16,737

 
$
17,373

 
$
16,234

Charge-offs:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
(253
)
 
(544
)
 
(601
)
 
(307
)
 
(618
)
Commercial mortgages
(3,337
)
 
(116
)
 
(201
)
 
(486
)
 
(50
)
Residential real estate
(315
)
 
(466
)
 
(499
)
 
(632
)
 
(436
)
Consumer
(2,279
)
 
(2,555
)
 
(3,324
)
 
(1,956
)
 
(1,744
)
Credit cards
(90
)
 
(144
)
 
(96
)
 
(116
)
 
(78
)
Overdrafts
(319
)
 
(252
)
 
(240
)
 
(221
)
 
(256
)
 
(6,593
)
 
(4,077
)
 
(4,961
)
 
(3,718
)
 
(3,182
)
Recoveries:
 
 
 
 
 
 
 
 
 
Commercial, industrial, and agricultural
171

 
235

 
89

 
267

 
1

Commercial mortgages
30

 
197