UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10–Q
ýQUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018March 31, 2019
or 
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission File Number 000-13396
CNB FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1450605
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1 South Second Street
P.O. Box 42
Clearfield, Pennsylvania 16830
(Address of principal executive offices)
Registrant’s telephone number, including area code, (814) 765-9621
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý    Yes    ¨    No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ¨  Accelerated filer ý
    
Non-accelerated filer ¨  Smaller reporting company ¨
Emerging growth company¨
Emerging growth company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
¨  Yes    ý    No
Securities registered pursuant to Section 12(b) of the Act:
Title of ClassTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par value   CCNEThe NASDAQ Stock Market LLC
The number of shares outstanding of the issuer’s common stock as of NovemberMay 6, 20182019
COMMON STOCK NO PAR VALUE PER SHARE: 15,247,41115,239,371 SHARES


INDEX
PART I.
FINANCIAL INFORMATION
 
 Page Number
  
 
  
1
  
2
  
3
4
  
5
  
6
  
2728
  
3837
  
3938
 
PART II.
OTHER INFORMATION
  
4039
  
4039
  
39
4039
39
39
  
4140
  
4241


Forward-Looking Statements
This quarterly report on form 10-Q
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 andof 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 principlesprincipals 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) continued relationships with major customers; (xii) deposit attrition; (xiii)(xii) rapidly changing technology; (xiv)(xiii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xv)(xiv) changes in the cost of funds, demand for loan products or demand for financial services; (xvi)and (xv) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices; and (xvii) our success at managing the foregoing items. Some of these and other factors are discussed in our annual and quarterly reports filed with the Securities and Exchange Commission ("SEC").prices. Such factorsdevelopments 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.



Part I Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
Dollars in thousands, except share data
(unaudited)  
September 30, 2018 December 31, 2017(unaudited) March 31, 2019 December 31, 2018
ASSETS
Cash and due from banks$34,637
 $33,146
$52,833
 $43,327
Interest bearing deposits with other banks1,863
 2,199
2,449
 2,236
Total cash and cash equivalents36,500
 35,345
55,282
 45,563
Securities available for sale522,334
 409,709
500,608
 516,863
Trading securities8,887
 7,150
8,642
 7,786
Loans held for sale775
 852
2,952
 367
Loans2,391,463
 2,149,848
2,530,761
 2,479,348
Less: unearned discount(4,508) (3,889)(4,671) (4,791)
Less: allowance for loan losses(22,510) (19,693)(20,346) (19,704)
Net loans2,364,445
 2,126,266
2,505,744
 2,454,853
FHLB, other equity, and restricted equity interests23,836
 21,517
23,129
 24,508
Premises and equipment, net49,301
 50,715
51,331
 49,920
Operating lease assets16,222
 0
Bank owned life insurance56,108
 55,035
56,805
 56,443
Mortgage servicing rights1,492
 1,387
1,498
 1,495
Goodwill38,730
 38,730
38,730
 38,730
Core deposit intangible907
 1,625
562
 727
Accrued interest receivable and other assets25,998
 20,442
25,819
 24,266
Total Assets$3,129,313
 $2,768,773
$3,287,324
 $3,221,521
LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits$345,154
 $321,858
$345,386
 $356,797
Interest bearing deposits2,177,225
 1,845,957
2,311,973
 2,253,989
Total deposits2,522,379
 2,167,815
2,657,359
 2,610,786
Short-term borrowings2,211
 34,416
0
 0
FHLB and other long term borrowings250,211
 222,943
240,005
 245,117
Subordinated debentures70,620
 70,620
70,620
 70,620
Operating lease liabilities17,109
 0
Accrued interest payable and other liabilities29,516
 29,069
27,272
 32,168
Total liabilities2,874,937
 2,524,863
3,012,365
 2,958,691
Common stock, $0 par value; authorized 50,000,000 shares; issued 15,308,378 shares at September 30, 2018 and December 31, 2017
 
Common stock, $0 par value; authorized 50,000,000 shares; issued 15,308,378 shares at March 31, 2019 and December 31, 20180
 0
Additional paid in capital97,328
 97,042
97,139
 97,602
Retained earnings165,427
 148,298
178,662
 171,780
Treasury stock, at cost (22,948 shares at September 30, 2018 and 43,638 shares at December 31, 2017)(608) (1,087)
Accumulated other comprehensive loss(7,771) (343)
Treasury stock, at cost (69,007 shares at March 31, 2019 and 101,097 shares at December 31, 2018)(1,702) (2,556)
Accumulated other comprehensive income (loss)860
 (3,996)
Total shareholders’ equity254,376
 243,910
274,959
 262,830
Total Liabilities and Shareholders’ Equity$3,129,313
 $2,768,773
$3,287,324
 $3,221,521
      
See Notes to Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Dollars in thousands, except per share data
    
 Three months ended September 30,
 2018 2017
INTEREST AND DIVIDEND INCOME:   
Loans including fees$30,385
 $25,215
Securities:   
Taxable2,698
 1,970
Tax-exempt677
 692
Dividends280
 192
Total interest and dividend income34,040
 28,069
INTEREST EXPENSE:   
Deposits4,812
 2,345
Borrowed funds1,334
 1,225
Subordinated debentures (includes $44 and $71 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2018 and 2017, respectively)1,016
 982
Total interest expense7,162
 4,552
NET INTEREST INCOME26,878
 23,517
PROVISION FOR LOAN LOSSES1,095
 1,400
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES25,783
 22,117
NON-INTEREST INCOME:   
Service charges on deposit accounts1,584
 1,244
Other service charges and fees732
 587
Wealth and asset management fees1,031
 952
Net realized gains on available-for-sale securities (includes $0 and $5 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2018 and 2017, respectively)
 5
Net realized and unrealized gains on trading securities421
 160
Mortgage banking283
 237
Bank owned life insurance335
 592
Card processing and interchange income1,066
 942
Other481
 313
Total non-interest income5,933
 5,032
NON-INTEREST EXPENSES:   
Salaries and benefits11,429
 9,101
Net occupancy expense2,650
 2,219
Amortization of core deposit intangible222
 305
Data processing1,149
 1,031
State and local taxes808
 710
Legal, professional, and examination fees603
 561
Advertising554
 495
FDIC insurance premiums361
 295
Card processing and interchange expenses767
 541
Other2,251
 2,360
Total non-interest expenses20,794
 17,618
INCOME BEFORE INCOME TAXES10,922
 9,531
INCOME TAX EXPENSE (includes $(9) and $(23) income tax expense from reclassification items in 2018 and 2017, respectively)1,686
 2,285
NET INCOME$9,236
 $7,246
EARNINGS PER SHARE:   
Basic0.60
 0.47
Diluted0.60
 0.47
DIVIDENDS PER SHARE:   
Cash dividends per share$0.170
 $0.165
    
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Dollars in thousands, except per share data
      
Nine months ended September 30,Three months ended
March 31,
2018 20172019 2018
INTEREST AND DIVIDEND INCOME:      
Loans including fees$85,817
 $71,100
$32,824
 $26,457
Securities:      
Taxable6,862
 6,286
2,978
 1,984
Tax-exempt2,054
 2,266
697
 694
Dividends793
 524
254
 252
Total interest and dividend income95,526
 80,176
36,753
 29,387
INTEREST EXPENSE:      
Deposits11,423
 6,709
6,587
 2,924
Borrowed funds4,426
 2,819
1,410
 1,488
Subordinated debentures (includes $149 and $220 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2018 and 2017, respectively)2,873
 2,940
Subordinated debentures (includes $6 and $58 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2019 and 2018, respectively)998
 875
Total interest expense18,722
 12,468
8,995
 5,287
NET INTEREST INCOME76,804
 67,708
27,758
 24,100
PROVISION FOR LOAN LOSSES4,631
 3,550
1,306
 1,631
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES72,173
 64,158
26,452
 22,469
NON-INTEREST INCOME:      
Service charges on deposit accounts4,102
 3,499
1,481
 1,247
Other service charges and fees2,073
 1,675
646
 618
Wealth and asset management fees3,151
 2,775
1,042
 1,030
Net realized gains on available-for-sale securities (includes $0 and $1,543 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2018 and 2017, respectively)
 1,543
Net realized gains on available-for-sale securities (includes $148 and $0 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2019 and 2018, respectively)148
 0
Net realized and unrealized gains on trading securities672
 475
800
 14
Mortgage banking801
 668
239
 208
Bank owned life insurance1,074
 1,308
361
 400
Card processing and interchange income3,140
 2,790
1,029
 971
Gain on sale of branch
 536
Other1,277
 625
407
 263
Total non-interest income16,290
 15,894
6,153
 4,751
NON-INTEREST EXPENSES:      
Salaries and benefits31,095
 27,008
10,900
 9,535
Net occupancy expense7,780
 7,016
2,866
 2,496
Amortization of core deposit intangible718
 967
165
 248
Data processing3,370
 3,011
1,185
 1,074
State and local taxes2,494
 2,063
768
 853
Legal, professional, and examination fees1,661
 1,776
553
 508
Advertising1,732
 1,527
411
 597
FDIC insurance premiums1,037
 869
422
 298
Card processing and interchange expenses2,139
 1,577
747
 734
Other7,310
 6,635
3,158
 2,656
Total non-interest expenses59,336
 52,449
21,175
 18,999
INCOME BEFORE INCOME TAXES29,127
 27,603
11,430
 8,221
INCOME TAX EXPENSE (includes $(31) and $463 income tax expense from reclassification items in 2018 and 2017, respectively)4,353
 7,194
INCOME TAX EXPENSE (includes $30 and ($12) income tax expense (benefit) from reclassification items in 2019 and 2018, respectively)1,957
 1,124
NET INCOME$24,774
 $20,409
$9,473
 $7,097
EARNINGS PER SHARE:      
Basic$1.62
 $1.34
$0.62
 $0.46
Diluted$1.62
 $1.34
$0.62
 $0.46
DIVIDENDS PER SHARE:      
Cash dividends per share$0.500
 $0.495
$0.170
 $0.165
      
See Notes to Consolidated Financial Statements


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Dollars in thousands
        
 Three months ended September 30, Nine months ended September 30,
 2018 2017 2018 2017
NET INCOME$9,236
 $7,246
 $24,774
 $20,409
Other comprehensive income (loss), net of tax:       
Net change in fair value of interest rate swap agreements designated as cash flow hedges:       
Unrealized gain (loss) on interest rate swaps, net of tax of $0 for the three months ended September 30, 2018 and 2017, and ($4) and $1 for the nine months ended September 30, 2018 and 20171
 
 16
 (2)
Reclassification adjustment for losses recognized in earnings, net of tax of ($9) and ($25) for the three months ended September 30, 2018 and 2017, and ($31) and ($77) for the nine months ended September 30, 2018 and 201735
 46
 118
 143
 36
 46
 134
 141
Net change in unrealized gains on securities available for sale:       
Unrealized gains on other-than-temporarily impaired securities available for sale:       
Unrealized losses arising during the period, net of tax of $0 for the three months ended September 30, 2018 and 2017, and $0 and ($47) for the nine months ended September 30, 2018 and 2017
 
 
 87
Reclassification adjustment for realized gains included in net income, net of tax of $0 for the three months ended September 30, 2018 and 2017, and $0 and $484 for the nine months ended September 30, 2018 and 2017
 
 
 (899)
 
 
 
 (812)
Unrealized gains on other securities available for sale:       
Unrealized (losses) gains arising during the period, net of tax of $653 and $433 for the three months ended September 30, 2018 and 2017, and $2,010 and ($1,111) for the nine months ended September 30, 2018 and 2017(2,459) (814) (7,562) 2,059
Reclassification adjustment for realized gains included in net income, net of tax of $0 and $2 for the three months ended September 30, 2018 and 2017, and $0 and $56 for the nine months ended September 30, 2018 and 2017
 (3) 
 (104)
 (2,459) (817) (7,562) 1,955
Other comprehensive income (loss)(2,423) (771) (7,428) 1,284
COMPREHENSIVE INCOME$6,813
 $6,475
 $17,346
 $21,693
        
    
 Three Months Ended March 31,
 2019 2018
NET INCOME$9,473
 $7,097
Other comprehensive income (loss), net of tax:   
Net change in fair value of interest rate swap agreements designated as cash flow hedges:   
Unrealized gain (loss) on interest rate swaps, net of tax of $26 and ($4), respectively(100) 16
Reclassification adjustment for losses recognized in earnings, net of tax of ($1) and ($12), respectively5
 46
 (95) 62
Net change in unrealized gains on securities available for sale:   
Unrealized holding gains (losses) arising during the period, net of tax of ($1,348) and $1,053, respectively
5,068
 (3,964)
Reclassification adjustment for realized gains included in net income, net of tax of $31 and $0, respectively(117) 0
 4,951
 (3,964)
Other comprehensive income (loss)4,856
 (3,902)
COMPREHENSIVE INCOME$14,329
 $3,195
    
See Notes to Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Dollars in thousands
      
Nine months ended September 30,Three Months Ended March 31,
2018 20172019 2018
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income$24,774
 $20,409
$9,473
 $7,097
Adjustments to reconcile net income to net cash provided by operations:      
Provision for loan losses4,631
 3,550
1,306
 1,631
Depreciation and amortization of premises and equipment, core deposit intangible, and mortgage servicing rights3,661
 3,974
Depreciation and amortization of premises and equipment, operating leases assets, core deposit intangible, and mortgage servicing rights1,509
 1,236
Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income(472) (980)(409) (427)
Net realized gains on sales of available-for-sale securities
 (1,543)(148) 0
Net realized and unrealized gains on trading securities(672) (475)(800) (14)
Proceeds from sale of trading securities434
 402
236
 0
Purchase of trading securities(1,499) (1,050)(144) (92)
Gain on sale of branch
 (536)
Gain on sale of loans(510) (253)(84) (105)
Net gains on dispositions of premises and equipment and foreclosed assets(285) (64)0
 (4)
Proceeds from sale of loans18,811
 17,978
4,569
 4,270
Origination of loans held for sale(18,404) (20,001)(7,118) (4,824)
Income on bank owned life insurance(1,074) (1,308)(361) (400)
Stock-based compensation expense1,219
 600
592
 677
Changes in:      
Accrued interest receivable and other assets(5,756) 2,829
(707) (4,137)
Accrued interest payable and other liabilities2,627
 (3,604)
Accrued interest payable, lease liabilities, and other liabilities(6,520) (766)
NET CASH PROVIDED BY OPERATING ACTIVITIES27,485
 19,928
1,394
 4,142
CASH FLOWS FROM INVESTING ACTIVITIES:      
Proceeds from maturities, prepayments and calls of available-for-sale securities44,605
 59,347
20,152
 7,780
Proceeds from sales of available-for-sale securities
 15,374
11,403
 0
Purchase of available-for-sale securities(167,473) (3,620)(9,252) (21,634)
Purchase of BOLI policies
 (10,000)
Proceeds from death benefit of BOLI policies
 893
Net cash received from sale of branch
 1,079
Loan origination and payments, net(241,895) (226,078)(51,635) (130,059)
Purchase of FHLB, other equity, and restricted equity interests(2,319) (6,959)
Redemption (purchase) of FHLB, other equity, and restricted equity interests1,379
 (5,047)
Purchase of premises and equipment(1,373) (3,718)(2,399) (397)
Proceeds from the sale of premises and equipment and foreclosed assets597
 563
8
 166
NET CASH USED IN INVESTING ACTIVITIES(367,858) (173,119)
NET CASH USED BY INVESTING ACTIVITIES(30,344) (149,191)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net change in:      
Checking, money market and savings accounts329,925
 35,303
88,105
 30,391
Certificates of deposit24,639
 8,864
(41,532) 11,849
Purchase of treasury stock(454) (1,360)(201) (448)
Cash dividends paid(7,645) (7,572)(2,591) (2,523)
Proceeds from stock offering, net of issuance costs
 19,294
Repayment of long-term borrowings(22,732) (42,505)(5,112) (7,554)
Proceeds from long-term borrowings50,000
 140,000
0
 50,000
Net change in short-term borrowings(32,205) 7,659
0
 56,593
NET CASH PROVIDED BY FINANCING ACTIVITIES341,528
 159,683
38,669
 138,308
NET INCREASE IN CASH AND CASH EQUIVALENTS1,155
 6,492
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS9,719
 (6,741)
CASH AND CASH EQUIVALENTS, Beginning35,345
 29,183
45,563
 35,345
CASH AND CASH EQUIVALENTS, Ending$36,500
 $35,675
$55,282
 $28,604
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:      
Cash paid during the period for:      
Interest$18,456
 $12,699
$8,942
 $5,203
Income taxes$4,250
 $6,000
1,250
 0
SUPPLEMENTAL NONCASH DISCLOSURES:      
Transfers to other real estate owned$228
 $239
$66
 $0
Grant of restricted stock awards from treasury stock$933
 $943
$1,055
 $933
Net assets transferred for sale of branch, excluding cash and cash equivalents$
 $543


   
See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)
Dollars in thousands, except share and per share data
 Additional
Paid-In
Capital
 Retained
Earnings
 Treasury
Stock
 Accumulated
Other
Comprehensive
Income (Loss)
 Total
Share-
holders’
Equity
Balance, January 1, 2019$97,602
 $171,780
 $(2,556) $(3,996) $262,830
Net income  9,473
     9,473
Other comprehensive income      4,856
 4,856
Restricted stock award grants (39,790 shares)(1,055)   1,055
   0
Stock-based compensation expense592
       592
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (7,700 shares)    (201)   (201)
Cash dividends declared ($0.17 per share)  (2,591)     (2,591)
Balance, March 31, 2019$97,139
 $178,662
 $(1,702) $860
 $274,959
          
Balance, January 1, 2018$97,042
 $148,298
 $(1,087) $(343) $243,910
Net income  7,097
     7,097
Other comprehensive loss      (3,902) (3,902)
Restricted stock award grants (37,708 shares)(933)   933
   0
Stock-based compensation expense677
       677
Purchase of treasury stock (10,769 shares)    (286)   (286)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (6,040 shares)    (162)   (162)
Cash dividends declared ($0.165 per share)  (2,523)     (2,523)
Balance, March 31, 201896,786
 152,872
 (602) (4,245) 244,811
          
See Notes to Consolidated Financial Statements


CNB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.    BASIS OF PRESENTATION

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

In the opinion of management of the registrant, the accompanying consolidated financial statements as of September 30, 2018March 31, 2019 and for the three and nine month periods ended September 30,March 31, 2019 and 2018 and 2017 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the periods presented. The financial performance reported for CNB Financial Corporation (the “Corporation”) for the three and nine month periodsperiod ended September 30, 2018March 31, 2019 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the period ended December 31, 20172018 (the “2017“2018 Form 10-K”). All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated. Certain prior period amounts have been reclassified to conform to the current period presentation.


2.    STOCK COMPENSATION

The Corporation has a stock incentive plan for key employees and independent directors. The stock incentive plan, which is administered by a committee of the Board of Directors provides for aggregate grantsand which permits the Corporation to provide various types of upstock-based compensation to 500,000its key employees, directors, and/or consultants, including time-based and performance-based shares of common stock in the form of non-qualified options or restricted stock.  The Corporation previously maintained its 2009 Stock Incentive Plan, which terminated in accordance with its terms on February 10, 2019, and currently maintains its 2019 Stock Incentive Plan, which was approved by the Corporation’s shareholders and became effective on April 16, 2019. 

For key employees, the plan vesting of time-based restricted stock is either one-third, one-fourth, or one-fourthone-fifth of the granted options or restricted stockshares per year, beginning one year after the grant date, with 100% vesting on the third, fourth or fourthfifth anniversary of the grant date, respectively. Prior to 2018, for independentnon-employee directors, the vesting schedule wasis one-third of the granted options or restricted stockshares per year, beginning one year after the grant date, with 100% vested on the third anniversary of the grant date. Beginning in 2018, stock compensation received by independentnon-employee directors vests immediately. At September 30, 2018,March 31, 2019, there was no unrecognized compensation cost related to nonvested stock options grantedstock-based compensation awarded under this plan and, except for the time-based and performance-based restricted stock awards disclosed below and in previous filings, no stock options wereother stock-based compensation was granted during the three and nine month periods ended September 30, 2018March 31, 2019 and 2017.2018.
In addition to the time-based restricted stock disclosed above, the Corporation’s Board of Directors grants performance-based restricted stock awards (“PBRSAs”) to key employees. The number of PBRSAs will depend on certain performance conditions and are also subject to service-based vesting. In 2019, awards with a maximum of 16,681 shares in aggregate were granted to key employees. In 2018, awards with a maximum of 15,70215,657 shares in aggregate were granted to key employees. In 2017, an award with a maximum of 10,0007,109 shares was granted to a key employee.
Compensation expense for the restricted stock awards is recognized over the requisite service period noted above based on the fair value of the shares at the date of grant. Nonvested restricted stock awards are recorded as a reduction of additional paid-in-capital in shareholders’ equity until earned. Compensation expense resulting from these restricted stock awards was $268$592 and $1,219$677 for the three and nine months ended September 30,March 31, 2019 and 2018, and $204 and $600 for the three and nine months ended September 30, 2017.respectively. As of September 30, 2018,March 31, 2019, there was $1,042$1,185 of total unrecognized compensation cost related to unvested restricted stock awards.
A summary of changes in time-based nonvested restricted stock awards for the three months ended September 30, 2018 follows:
 Shares Per Share
Weighted Average
Grant Date Fair 
Value
Nonvested at beginning of period76,045
 $23.09
Vested(250) 18.58
Nonvested at end of period75,795
 $23.11







A summary of changes in time-based nonvested restricted stock awards for the ninethree months ended September 30, 2018March 31, 2019 follows:
Shares Per Share
Weighted Average
Grant Date Fair 
Value
Shares 
Per Share
Weighted Average
Grant Date Fair 
Value
Nonvested at beginning of period94,472
 $20.79
75,889
 $23.20
Granted22,108
 26.92
25,940
 25.27
Forfeited(130) 26.29
Vested(40,655) 19.66
(34,060) 21.58
Nonvested at end of period75,795
 $23.11
67,769
 $24.79

The above tables exclude 15,600table excludes 13,850 shares in restricted stock awards that were granted at a weighted average fair value of $25.27 and immediately vested. Compensation expense resulting from the immediately vested shares was $0 and $385$350 for the three and nine months ended September 30, 2018,March 31, 2019, and is included in the previously disclosed $1,219 of stock-based compensation expense for the nine months ended September 30, 2018.

$592 above.
The fair value of shares vested was $8$1,227 and $1,479$1,462 during the three and nine months ended September 30,March 31, 2019 and 2018, and $6 and $929 during the three and nine months ended September 30, 2017.respectively.


3.    FAIR VALUE
Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has also been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs are used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of most trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

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

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals prepared by third-parties. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also adjusts appraised values based on the length of time that has passed since the appraisal date and other factors. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.





Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2018March 31, 2019 and December 31, 2017:
   Fair Value Measurements at September 30, 2018 Using
   
Quoted Prices in
Active Markets 
for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
DescriptionTotal (Level 1) (Level 2) (Level 3)
Assets:       
Securities Available For Sale:       
U.S. Government sponsored entities$145,509
 $
 $145,509
 $
States and political subdivisions138,395
 
 138,395
 
Residential and multi-family mortgage194,635
 
 194,635
 
Corporate notes and bonds12,036
 
 12,036
 
Pooled SBA30,833
 
 30,833
 
2018:
 
 Fair Value Measurements at March 31, 2019 Using: 
  Quoted Prices in
Active Markets 
for
Identical Assets
 Significant Other
Observable Inputs
 Significant
Unobservable
Inputs
DescriptionTotal (Level 1) (Level 2) (Level 3)
Assets:       
Securities Available For Sale:       
U.S. Government sponsored entities130,375
 0
 130,375
 0
States and political subdivisions121,090
 0
 121,090
 0
Residential and multi-family mortgage207,491
 0
 207,491
 0
Corporate notes and bonds11,904
 0
 11,904
 0
Pooled SBA28,801
 0
 28,801
 0
Other926
 926
 
 
947
 947
 0
 0
Total Securities Available For Sale$522,334
 $926
 $521,408
 $
$500,608
 $947
 $499,661
 $0
Interest Rate swaps$191
 $
 $191
 $
$906
 $0
 $906
 $0
Trading Securities:              
Corporate equity securities$6,643
 $6,643
 
 
$6,947
 $6,947
 0
 0
Mutual funds1,687
 1,687
 
 
871
 871
 0
 0
Certificates of deposit228
 228
 
 
179
 179
 0
 0
Corporate notes and bonds278
 278
 
 
594
 594
 0
 0
U.S. Government sponsored entities51
 
 51
 
51
 0
 51
 0
Total Trading Securities$8,887
 $8,836
 $51
 $
$8,642
 $8,591
 $51
 $0
Liabilities,       
Liabilities:       
Interest rate swaps$(182) $
 $(182) $
$(1,227) $0
 $(1,227) $0
              
  Fair Value Measurements at December 31, 2017 Using  Fair Value Measurements at December 31, 2018 Using:
  Quoted Prices in   Significant  Quoted Prices in   Significant
  
Active Markets 
for
 Significant Other Unobservable  
Active Markets 
for
 Significant Other Unobservable
  Identical Assets Observable Inputs Inputs  Identical Assets Observable Inputs Inputs
DescriptionTotal (Level 1) (Level 2) (Level 3)Total (Level 1) (Level 2) (Level 3)
Assets:              
Securities Available For Sale:              
U.S. Government sponsored entities$108,148
 $
 $108,148
 $
$132,694
 $0
 $132,694
 $0
States and political subdivisions137,723
 
 137,723
 
136,031
 0
 136,031
 0
Residential and multi-family mortgage109,636
 
 109,636
 
206,053
 0
 206,053
 0
Corporate notes and bonds17,200
 
 17,200
 
11,777
 0
 11,777
 0
Pooled SBA36,040
 
 36,040
 
29,374
 0
 29,374
 0
Other962
 962
 
 
934
 934
 0
 0
Total Securities Available For Sale$409,709
 $962
 $408,747
 $
$516,863
 $934
 $515,929
 $0
Interest Rate swaps$149
 $
 $149
 $
$485
 $0
 $485
 $0
Trading Securities:              
Corporate equity securities5,125
 5,125
 
 
5,828
 5,828
 0
 0
Mutual funds1,499
 1,499
 
 
1,058
 1,058
 0
 0
Certificates of deposit220
 220
 
 
268
 268
 0
 0
Corporate notes and bonds254
 254
 
 
581
 581
 0
 0
U.S. Government sponsored entities52
 
 52
 
51
 0
 51
 0
Total Trading Securities$7,150
 $7,098
 52
 
$7,786
 $7,735
 51
 0
Liabilities,       
Liabilities:       
Interest rate swaps$(310) $
 $(310) $
$(686) $0
 $(686) $0


The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2018 and 2017:
 2018 2017
Balance, January 1$
 $2,049
Total gains:   
Included in other comprehensive income (unrealized)
 134
Sale of available-for-sale securities
 (2,183)
Balance, September 30$
 $

The Corporation did not have any Level 3 securities during the three months ended September 30, 2018 and 2017.

Assets and liabilities measured at fair value on a non-recurring basis are as follows at September 30, 2018March 31, 2019 and December 31, 2017:

2018:
  Fair Value Measurements at September 30, 2018 Using  Fair Value Measurements at March 31, 2019 Using:
  
Quoted Prices in
Active Markets 
for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
  
Quoted Prices in
Active Markets 
for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
DescriptionTotal (Level 1) (Level 2) (Level 3)Total (Level 1) (Level 2) (Level 3)
Assets:              
Impaired loans:              
Commercial, industrial, and agricultural$540
 0
 0
 $540
Commercial mortgages$324
 
 
 $324
$1,166
 0
 0
 $1,166
              
  Fair Value Measurements at December 31, 2017 Using  Fair Value Measurements at December 31, 2018 Using
  Quoted Prices in   Significant  Quoted Prices in   Significant
  
Active Markets 
for
 Significant Other Unobservable  
Active Markets 
for
 Significant Other Unobservable
  Identical Assets Observable Inputs Inputs  Identical Assets Observable Inputs Inputs
DescriptionTotal (Level 1) (Level 2) (Level 3)Total (Level 1) (Level 2) (Level 3)
Assets:              
Impaired loans:              
Commercial, industrial, and agricultural$2,055
 0
 0
 $2,055
Commercial mortgages$11
 
 
 $11
$679
 0
 0
 $679
Impaired loans, measured for impairment using the fair value of collateral for collateral dependent loans, had a recorded investment of $1,310$4,244 with a valuation allowance of $986$2,538 as of September 30, 2018,March 31, 2019, resulting in a provision (benefit) for loan losses of $(634) and $352$777 for the corresponding three and nine month periods ended September 30, 2018.period. Impaired loans had a recorded investment of $646$3,918 with a valuation allowance of $635$1,184 as of December 31, 2017.2018. Impaired loans carried at fair value resulted in a negative provision for loan losses of $(22) and $(395)$272 for the three and nine month periodsmonths ended September 30, 2017.March 31, 2018.

The estimated fair values of impaired collateral dependent loans, such as commercial or residential mortgages, are determined primarily through third-party appraisals. When a collateral dependent loan, such as a commercial or residential mortgage loan, becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal, and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral and a further reduction for estimated costs to sell the property is applied, which results in an amount that is considered to be the estimated fair value. If a loan becomes impaired and the appraisal of related loan collateral is outdated, management applies an appropriate adjustment factor based on its experience with current valuations of similar collateral in determining the loan’s estimated fair value and resulting allowance for loan losses. Third-party appraisals are not customarily obtained in respect of unimpaired loans, unless in management’s view changes in circumstances warrant obtaining an updated appraisal.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2019:
Fair
value
Valuation TechniqueUnobservable Inputs
Range
(Weighted Average)
Impaired loans – commercial, industrial, and agricultural
$540Valuation of third party appraisal on underlying collateralLoss severity rates39%-78% (63%)
Impaired loans – commercial mortgages$1,166Valuation of third party appraisal on underlying collateralLoss severity rates15-90% (37%)





The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30,December 31, 2018:
 
Fair
value
 Valuation Technique Unobservable Inputs Weighted Average (Range)
Impaired loans – commercial mortgages$324
 Valuation of third party appraisal on underlying collateral Loss severity rates 15% (10-15%)
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2017:
 
Fair
value
 Valuation Technique Unobservable Inputs Weighted Average (Range)
Impaired loans – commercial mortgages$11
 Valuation of third party appraisal on underlying collateral Loss severity rates 10% (10%)
Fair
value
Valuation TechniqueUnobservable Inputs
Range
(Weighted Average)
Impaired loans – commercial, industrial, and agricultural$2,055Valuation of third party appraisal on underlying collateralLoss severity rates20%-60% (34%)
Impaired loans – commercial mortgages$679Valuation of third party appraisal on underlying collateralLoss severity rates15%-39% (33%)
Fair Value of Financial Instruments
The following table presents the carrying amount and fair value of financial instruments at September 30, 2018:
March 31, 2019:
Carrying Fair Value Measurement Using: TotalCarrying Fair Value Measurement Using: Total
Amount Level 1 Level 2 Level 3 Fair ValueAmount Level 1 Level 2 Level 3 Fair Value
ASSETS                  
Cash and cash equivalents$36,500
 $36,500
 $
 $
 $36,500
$55,282
 $55,282
 $0
 $0
 $55,282
Securities available for sale522,334
 926
 521,408
 
 522,334
500,608
 947
 499,661
 0
 500,608
Trading securities8,887
 8,836
 51
 
 8,887
8,642
 8,591
 51
 0
 8,642
Loans held for sale775
 
 775
 
 775
2,952
 0
 2,957
 0
 2,957
Net loans2,364,445
 
 
 2,334,576
 2,334,576
2,505,744
 0
 0
 2,483,864
 2,483,864
FHLB and other restricted interests16,885
 n/a
 n/a
 n/a
 n/a
23,129
 n/a
 n/a
 n/a
 n/a
Other equity interests6,951
       6,951
Interest rate swaps191
 
 191
 
 191
906
 0
 906
 0
 906
Accrued interest receivable11,221
 7
 3,748
 7,466
 11,221
11,862
 7
 3,567
 8,288
 11,862
LIABILITIES                  
Deposits$(2,522,379) $(2,132,769) $(391,848) $
 $(2,524,617)$(2,657,359) $(2,303,454) $(354,791) $0
 $(2,658,245)
FHLB and other borrowings(252,422) 
 (248,986) 
 (248,986)(240,005) 0
 (240,503) 0
 (240,503)
Subordinated debentures(70,620) 
 (68,202) 
 (68,202)(70,620) 0
 (65,325) 0
 (65,325)
Interest rate swaps(182) 
 (182) 
 (182)(1,227) 0
 (1,227) 0
 (1,227)
Accrued interest payable(820) 
 (820) 
 (820)(916) 0
 (916) 0
 (916)










The following table presents the carrying amount and fair value of financial instruments at December 31, 2017:
2018:
Carrying Fair Value Measurement Using: TotalCarrying Fair Value Measurement Using: Total
Amount Level 1 Level 2 Level 3 Fair ValueAmount Level 1 Level 2 Level 3 Fair Value
ASSETS                  
Cash and cash equivalents$35,345
 $35,345
 $
 $
 $35,345
$45,563
 $45,563
 $0
 $0
 $45,563
Securities available for sale409,709
 962
 408,747
 
 409,709
516,863
 934
 515,929
 0
 516,863
Trading securities7,150
 7,098
 52
 
 7,150
7,786
 7,735
 51
 0
 7,786
Loans held for sale852
 
 853
 
 853
367
 0
 368
 0
 368
Net loans2,126,266
 
 
 2,126,824
 2,126,824
2,454,853
 0
 0
 2,433,417
 2,433,417
FHLB and other restricted interests17,035
 n/a
 n/a
 n/a
 n/a
24,508
 n/a
 n/a
 n/a
 n/a
Other equity interests4,482
       4,482
Interest rate swaps149
 
 149
 
 149
485
 0
 485
 0
 485
Accrued interest receivable9,254
 6
 2,651
 6,597
 9,254
10,843
 6
 3,368
 7,469
 10,843
LIABILITIES                  
Deposits$(2,167,815) $(1,802,844) $(362,756) $
 $(2,165,600)$(2,610,786) $(2,215,349) $(397,370) $0
 $(2,612,719)
FHLB and other borrowings(257,359) 
 (257,361) 
 (257,361)(245,117) 0
 (242,592) 0
 (242,592)
Subordinated debentures(70,620) 
 (63,575) 
 (63,575)(70,620) 0
 (65,794) 0
 (65,794)
Interest rate swaps(310) 
 (310) 
 (310)(686) 0
 (686) 0
 (686)
Accrued interest payable(554) 
 (554) 
 (554)(863) 0
 (863) 0
 (863)

The methods utilized to estimate the fair value of financial instruments at December 31, 2017 did not necessarily represent an exit price. In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at September 30,March 31, 2019 and December 31, 2018 represent an approximation of exit price; however, an actual exit price may differ.


While estimates of fair value are based on management’s judgment of the most appropriate factors as of the balance sheet date, there is no assurance that the estimated fair values would have been realized if the assets had been disposed of or the liabilities settled at that date, since market values may differ depending on various circumstances. The estimated fair values would also not apply to subsequent dates. OtherThe fair value of other equity interests fair value is based on the net asset values provided by the underlying investment partnership. ASUAccounting Standards Updated ("ASU") 2015-7 removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related disclosures.
Indisclosures.In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures.

Also, non-financial assets such as, among other things, the estimated earnings power of core deposits, the earnings potential of trust accounts, the trained workforce, and customer goodwill, which typically are not recognized on the balance sheet, may have value but are not included in the fair value disclosures.


4.    SECURITIES
Securities available for sale at September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
September 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Amortized Unrealized Fair Amortized Unrealized FairAmortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses ValueCost Gains Losses Value Cost Gains Losses Value
U.S. gov’t sponsored entities$148,034
 $178
 $(2,703) $145,509
 $108,578
 $478
 $(908) $108,148
U.S. Gov’t sponsored entities$129,993
 $1,127
 $(745) $130,375
 $134,010
 $254
 $(1,570) $132,694
State & political subdivisions137,848
 1,643
 (1,096) 138,395
 134,428
 3,609
 (314) 137,723
118,673
 2,595
 (178) 121,090
 134,662
 1,942
 (573) 136,031
Residential & multi-family mortgage199,968
 76
 (5,409) 194,635
 111,214
 304
 (1,882) 109,636
207,588
 1,711
 (1,808) 207,491
 209,126
 500
 (3,573) 206,053
Corporate notes & bonds12,358
 31
 (353) 12,036
 17,610
 52
 (462) 17,200
12,354
 26
 (476) 11,904
 12,356
 22
 (601) 11,777
Pooled SBA32,079
 66
 (1,312) 30,833
 36,260
 355
 (575) 36,040
29,186
 196
 (581) 28,801
 30,163
 135
 (924) 29,374
Other1,020
 
 (94) 926
 1,020
 
 (58) 962
1,020
 0
 (73) 947
 1,020
 0
 (86) 934
Total$531,307
 $1,994
 $(10,967) $522,334
 $409,110
 $4,798
 $(4,199) $409,709
$498,814
 $5,655
 $(3,861) $500,608
 $521,337
 $2,853
 $(7,327) $516,863

At September 30, 2018March 31, 2019 and December 31, 2017,2018, there were no holdings of securities of any one issuer, other than the U.S. governmentGovernment sponsored entities, in an amount greater than 10% of shareholders’ equity. The Corporation’s residential and multi-family mortgage securities are issued by government sponsored entities.
Trading securities at September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
September 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Corporate equity securities$6,643
 $5,125
$6,947
 $5,828
Mutual funds1,687
 1,499
871
 1,058
Certificates of deposit228
 220
179
 268
Corporate notes and bonds278
 254
594
 581
U.S. government sponsored entities51
 52
U.S. Government sponsored entities51
 51
Total$8,887
 $7,150
$8,642
 $7,786








Securities with unrealized losses at September 30, 2018March 31, 2019 and December 31, 2017,2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
September 30, 2018
March 31, 2019
Less than 12 Months 12 Months or More TotalLess than 12 Months 12 Months or More Total
Description of Securities
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. gov’t sponsored entities$63,025
 $(736) $70,211
 $(1,967) $133,236
 $(2,703)
U.S. Gov’t sponsored entities$4,963
 $(2) $69,440
 $(743) $74,403
 $(745)
State & political subdivisions45,113
 (617) 7,907
 (479) 53,020
 (1,096)994
 (13) 10,389
 (165) 11,383
 (178)
Residential & multi-family mortgage106,762
 (2,196) 62,880
 (3,213) 169,642
 (5,409)3,186
 (10) 87,606
 (1,798) 90,792
 (1,808)
Corporate notes & bonds5,229
 (29) 4,676
 (324) 9,905
 (353)0
 0
 9,528
 (476) 9,528
 (476)
Pooled SBA7,326
 (106) 19,377
 (1,206) 26,703
 (1,312)0
 0
 19,035
 (581) 19,035
 (581)
Other
 
 926
 (94) 926
 (94)0
 0
 947
 (73) 947
 (73)
$227,455
 $(3,684) $165,977
 $(7,283) $393,432
 $(10,967)$9,143
 $(25) $196,945
 $(3,836) $206,088
 $(3,861)
December 31, 20172018
Less than 12 Months 12 Months or More TotalLess than 12 Months 12 Months or More Total
Description of Securities
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. gov’t sponsored entities$55,696
 $(540) $34,754
 $(368) $90,450
 $(908)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
U.S. Gov’t sponsored entities$14,786
 $(41) $70,676
 $(1,529) $86,462
 $(1,570)
State & political subdivisions15,890
 (69) 4,104
 (245) 19,994
 (314)13,834
 (62) 21,080
 (511) 34,914
 (573)
Residential and multi-family mortgage30,144
 (153) 63,699
 (1,729) 93,843
 (1,882)
Residential & multi-family mortgage69,015
 (656) 87,286
 (2,917) 156,301
 (3,573)
Corporate notes & bonds5,005
 (9) 9,042
 (453) 14,047
 (462)0
 0
 9,759
 (601) 9,759
 (601)
Pooled SBA
 
 22,270
 (575) 22,270
 (575)760
 (7) 20,795
 (917) 21,555
 (924)
Other
 
 962
 (58) 962
 (58)0
 0
 934
 (86) 934
 (86)
$106,735
 $(771) $134,831
 $(3,428) $241,566
 $(4,199)$98,395
 $(766) $210,530
 $(6,561) $309,925
 $(7,327)
The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.


A roll-forwardAt March 31, 2019 and December 31, 2018, management performed an assessment for possible other-than-temporary impairment of the other-than-temporaryCorporation’s debt securities, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. Based on the results of the assessment, management believes impairment amount relatedof these debt securities at March 31, 2019 and December 31, 2018 to credit losses for the three and nine months ended September 30, 2018 and 2017 is as follows:
 2018 2017
Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in earnings, beginning of period$
 $2,071
Credit losses previously recognized on securities sold during the period
 (2,071)
Additional credit loss for which other-than-temporary impairment was not previously recognized
 
Additional credit loss for which other-than-temporary impairment was previously recognized
 
Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in earnings, end of period$
 $
be temporary.
For the securities that comprise corporate notes and bonds and the securities that are issued by state and political subdivisions, management monitors publicly available financial information, such as filings with the SEC,Securities and Exchange Commission, in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management monitors information from quarterly “call” report filings that are used to generate Uniform Bank Performance Reports. All other securities that were in an unrealized loss position at the balance sheet date were reviewed by management, and issuer-specific documents were reviewed as appropriate given the following considerations:considerations. When reviewing securities for other-than-temporary impairment, management considers the financial condition and near-term prospects of the issuer and whether downgrades by bond rating agencies have occurred. Management also considers the length of time and extent to which fair value has been less than cost, and whether management does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.
As of September 30, 2018March 31, 2019 and December 31, 2017,2018, management concluded that the securities described in the previous paragraph were not other-than-temporarily impaired for the following reasons:
 
There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.
All contractual interest payments on the securities have been received as scheduled, and no information has come to management’s attention through the processes previously described which would lead to a conclusion that future contractual payments will not be timely received.
The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.

On September 30, 2018March 31, 2019 and December 31, 2017,2018, securities carried at $311,336$269,591 and $319,575,$290,717, respectively, were pledged to secure public deposits and for other purposes as provided by law.
Information pertaining to security sales on available for sale securities is as follows:
 Proceeds 
Gross
Gains
 
Gross
Losses
Three months ended September 30, 2018$
 $
 $
Three months ended September 30, 2017$7,757
 $76
 $(71)
Nine months ended September 30, 2018$
 $
 $
Nine months ended September 30, 2017$15,374
 $1,614
 $(71)
 Proceeds 
Gross
Gains
 
Gross
Losses
Three months ended March 31, 2019$11,403
 $152
 $4
Three months ended March 31, 2018$0
 $0
 $0
The tax provision related to these net realized gains was $2$31 and $540 during the three and nine months ended September 30, 2017.


$0, respectively.
The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at September 30, 2018:
March 31, 2019:
Amortized
Cost
 
Fair
Value
Amortized
Cost
 
Fair
Value
1 year or less$58,844
 $58,554
$58,770
 $58,412
1 year – 5 years164,854
 163,471
131,226
 131,749
5 years – 10 years70,767
 70,223
65,503
 67,547
After 10 years3,775
 3,692
5,521
 5,661
298,240
 295,940
261,020
 263,369
Residential and multi-family mortgage199,968
 194,635
207,588
 207,491
Pooled SBA32,079
 30,833
29,186
 28,801
Other securities1,020
 926
Total securities$531,307
 $522,334
Other1,020
 947
Total debt securities$498,814
 $500,608

Mortgage and asset backed securities and pooled SBA securities are not due at a single date; periodic payments are received based on the payment patterns of the underlying collateral.


5.    LOANS
Total net loans at September 30, 2018March 31, 2019 and December 31, 20172018 are summarized as follows:
September 30, 2018 December 31, 20173/31/2019 12/31/2018
Commercial, industrial, and agricultural$853,495
 $749,138
$950,865
 $916,297
Commercial mortgages683,979
 600,065
709,726
 697,776
Residential real estate760,342
 713,347
775,599
 771,309
Consumer85,888
 80,193
86,780
 86,035
Credit cards7,434
 6,753
7,341
 7,623
Overdrafts325
 352
450
 308
Less: unearned discount(4,508) (3,889)(4,671) (4,791)
allowance for loan losses(22,510) (19,693)(20,346) (19,704)
Loans, net$2,364,445
 $2,126,266
$2,505,744
 $2,454,853
At September 30, 2018March 31, 2019 and December 31, 2017,2018, net unamortized loan fees of $3,331$3,158 and $2,574,$3,175, respectively, have been included in the carrying value of loans.

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


Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether to extend credit to a customer, including loan-to-value ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees.
Commercial, industrial, and agricultural loans comprised 36%38% and 35%37% of the Corporation’s total loan portfolio at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. Commercial mortgage loans comprised 29% and 28% of the Corporation’s total loan portfolio at September 30, 2018both March 31, 2019 and December 31, 2017, respectively.2018. Management assigns a risk rating to all commercial loans at loan origination. The loan-to-value policy guidelines for commercial, industrial, and agricultural loans are generally a maximum of 80% of the value of business equipment, a maximum of 75% of the value of accounts receivable, and a maximum of 60% of the value of business inventory at loan origination. The loan-to-value policy guideline for commercial mortgage loans is generally a maximum of 85% of the appraised value of the real estate.


Residential real estate loans comprised 32% and 33%31% of the Corporation’s total loan portfolio at September 30, 2018both March 31, 2019 and December 31, 2017, respectively.2018. The loan-to-value policy guidelines for residential real estate loans vary depending on the collateral position and the specific type of loan. Higher loan-to-value terms may be approved with the appropriate private mortgage insurance coverage. The Corporation also originates and prices loans for sale into the secondary market. Loans so originated are classified as loans held for sale and are excluded from residential real estate loans reported above. The rationale for these sales is to mitigate interest rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing the loan. The Corporation also offers a variety of unsecured and secured consumer loan and credit card products which representedrepresent less than 10%4% of the total loan portfolio at
both September 30, 2018March 31, 2019 and December 31, 2017.2018. Terms and collateral requirements vary depending on the size and nature of the loan.
Transactions in the allowance for loan losses for the three months ended September 30, 2018March 31, 2019 were as follows:
 
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses, July 1, 2018$7,143
 $10,615
 $1,900
 $2,156
 $101
 $207
 $22,122
Charge-offs(30) 
 (212) (469) (8) (94) (813)
Recoveries3
 
 55
 28
 3
 17
 106
Provision (benefit) for loan losses(536) 682
 235
 608
 11
 95
 1,095
Allowance for loan losses, September 30, 2018$6,580
 $11,297
 $1,978
 $2,323
 $107
 $225
 $22,510
Transactions in the allowance for loan losses for the nine months ended September 30, 2018 were as follows:
 
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses, January 1, 2018$6,160
 $9,007
 $2,033
 $2,179
 $120
 $194
 $19,693
Charge-offs(61) 
 (289) (1,610) (53) (236) (2,249)
Recoveries165
 
 67
 112
 27
 64
 435
Provision for loan losses316
 2,290
 167
 1,642
 13
 203
 4,631
Allowance for loan losses, September 30, 2018$6,580
 $11,297
 $1,978
 $2,323
 $107
 $225
 $22,510
 
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses, January 1, 2019$7,341
 $7,490
 $2,156
 $2,377
 $103
 $237
 $19,704
Charge-offs0
 (17) (98) (549) (26) (128) (818)
Recoveries4
 
 65
 46
 5
 34
 154
Provision (benefit) for loan losses442
 1,373
 (740) 166
 23
 42
 1,306
Allowance for loan losses, March 31, 2019$7,787
 $8,846
 $1,383
 $2,040
 $105
 $185
 $20,346
Transactions in the allowance for loan losses for the three months ended September 30, 2017March 31, 2018 were as follows:
 
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses, July 1, 2017$5,563
 $7,641
 $1,670
 $2,068
 $142
 $185
 $17,269
Charge-offs(20) (22) (130) (703) (39) (63) (977)
Recoveries36
 3
 
 96
 8
 14
 157
Provision (benefit) for loan losses(223) 472
 468
 627
 
 56
 1,400
Allowance for loan losses, September 30, 2017$5,356
 $8,094
 $2,008
 $2,088
 $111
 $192
 $17,849
Transactions in the allowance for loan losses for the nine months ended September 30, 2017 were as follows:
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses, January 1, 2017$5,428
 $6,753
 $1,653
 $2,215
 $93
 $188
 $16,330
Allowance for loan losses, January 1, 2018$6,160
 $9,007
 $2,033
 $2,179
 $120
 $194
 $19,693
Charge-offs(50) (22) (328) (1,969) (111) (192) (2,672)(31) 0
 0
 (590) (19) (86) (726)
Recoveries167
 197
 73
 110
 23
 71
 641
68
 0
 3
 49
 7
 31
 158
Provision (benefit) for loan losses(189) 1,166
 610
 1,732
 106
 125
 3,550
85
 1,013
 16
 427
 15
 75
 1,631
Allowance for loan losses, September 30, 2017$5,356
 $8,094
 $2,008
 $2,088
 $111
 $192
 $17,849
Allowance for loan losses, March 31, 2018$6,282
 $10,020
 $2,052
 $2,065
 $123
 $214
 $20,756

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on the Corporation’s impairment method as of September 30, 2018March 31, 2019 and December 31, 2017.2018. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.
September 30, 2018March 31, 2019
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses:                          
Ending allowance balance attributable to loans:                          
Individually evaluated for impairment$
 $1
 $
 $
 $
 $
 $1
$330
 $312
 $0
 $0
 $0
 $0
 $642
Collectively evaluated for impairment6,343
 5,062
 1,978
 2,323
 107
 225
 16,038
7,350
 3,775
 1,383
 2,040
 105
 185
 14,838
Acquired with deteriorated credit quality
 
 
 
 
 
 
0
 0
 0
 0
 0
 0
 0
Modified in a troubled debt restructuring237
 6,234
 
 
 
 
 6,471
107
 4,759
 0
 0
 0
 0
 4,866
Total ending allowance balance$6,580
 $11,297
 $1,978
 $2,323
 $107
 $225
 $22,510
$7,787
 $8,846
 $1,383
 $2,040
 $105
 $185
 $20,346
Loans:                          
Individually evaluated for impairment$1,500
 $467
 $
 $
 $
 $
 $1,967
$1,754
 $1,468
 $498
 $0
 $0
 $0
 $3,720
Collectively evaluated for impairment847,197
 669,989
 760,342
 85,888
 7,434
 325
 2,371,175
945,710
 698,004
 775,101
 86,780
 7,341
 450
 2,513,386
Acquired with deteriorated credit quality
 577
 
 
 
 
 577
0
 556
 0
 0
 0
 0
 556
Modified in a troubled debt restructuring4,798
 12,946
 
 
 
 
 17,744
3,401
 9,698
 0
 0
 0
 0
 13,099
Total ending loans balance$853,495
 $683,979
 $760,342
 $85,888
 $7,434
 $325
 $2,391,463
$950,865
 $709,726
 $775,599
 $86,780
 $7,341
 $450
 $2,530,761









December 31, 20172018
 
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses:             
Ending allowance balance attributable to loans:             
Individually evaluated for impairment$47
 $
 $
 $
 $
 $
 $47
Collectively evaluated for impairment5,868
 3,563
 2,033
 2,179
 120
 194
 13,957
Acquired with deteriorated credit quality
 
 
 
 
 
 
Modified in a troubled debt restructuring245
 5,444
 
 
 
 
 5,689
Total ending allowance balance$6,160
 $9,007
 $2,033
 $2,179
 $120
 $194
 $19,693
Loans:             
Individually evaluated for impairment$1,187
 $51
 $
 $
 $
 $
 $1,238
Collectively evaluated for impairment742,738
 586,845
 713,347
 80,193
 6,753
 352
 2,130,228
Acquired with deteriorated credit quality
 1,079
 
 
 
 
 1,079
Modified in a troubled debt restructuring5,213
 12,090
 
 
 
 
 17,303
Total ending loans balance$749,138
 $600,065
 $713,347
 $80,193
 $6,753
 $352
 $2,149,848


 
Commercial,
Industrial, and
Agricultural
 
Commercial
Mortgages
 
Residential
Real
Estate
 Consumer 
Credit
Cards
 Overdrafts Total
Allowance for loan losses:             
Ending allowance balance attributable to loans:             
Individually evaluated for impairment$54
 $4
 $100
 $0
 $0
 $10
 $168
Collectively evaluated for impairment7,183
 3,036
 2,056
 2,377
 103
 227
 14,982
Acquired with deteriorated credit quality0
 0
 0
 0
 0
 0
 0
Modified in a troubled debt restructuring104
 4,450
 0
 0
 0
 0
 4,554
Total ending allowance balance$7,341
 $7,490
 $2,156
 $2,377
 $103
 $237
 $19,704
Loans:             
Individually evaluated for impairment$1,334
 1,446
 502
 0
 0
 10
 $3,292
Collectively evaluated for impairment910,386
 685,714
 770,807
 86,035
 7,623
 298
 2,460,863
Acquired with deteriorated credit quality0
 567
 0
 0
 0
 0
 567
Modified in a troubled debt restructuring4,577
 10,049
 0
 0
 0
 0
 14,626
Total ending loans balance$916,297
 697,776
 771,309
 86,035
 7,623
 308
 $2,479,348
The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of September 30, 2018March 31, 2019 and December 31, 20172018 and for the three and nine months ended September 30, 2018March 31, 2019 and 2017:2018:
September 30, 2018March 31, 2019
Unpaid Principal
Balance
 
Recorded
Investment
 
Allowance for Loan
Losses Allocated
Unpaid Principal
Balance
 
Recorded
Investment
 
Allowance for Loan
Losses Allocated
With an allowance recorded:          
Commercial, industrial, and agricultural$1,096
 $1,096
 $237
$2,840
 $1,278
 $437
Commercial mortgage9,717
 8,991
 6,235
8,205
 7,824
 5,071
Residential real estate
 
 
0
 0
 0
With no related allowance recorded:          
Commercial, industrial, and agricultural5,918
 5,202
 
4,556
 3,877
 0
Commercial mortgage5,464
 4,422
 
4,225
 3,342
 0
Residential real estate
 
 
498
 498
 0
Total$22,195
 $19,711
 $6,472
$20,324
 $16,819
 $5,508








December 31, 20172018
Unpaid Principal
Balance
 
Recorded
Investment
 
Allowance for Loan
Losses Allocated
Unpaid Principal
Balance
 
Recorded
Investment
 
Allowance for Loan
Losses Allocated
With an allowance recorded:          
Commercial, industrial, and agricultural$1,915
 $1,915
 $292
$3,053
 $3,037
 $158
Commercial mortgage9,940
 9,731
 5,444
10,799
 6,709
 4,454
Residential real estate
 
 
502
 502
 100
Overdrafts10
 10
 10
With no related allowance recorded:          
Commercial, industrial, and agricultural5,264
 4,485
 
3,684
 2,874
 0
Commercial mortgage3,211
 2,410
 
5,659
 4,786
 0
Residential real estate
 
 
0
 0
 0
Overdrafts0
 0
 0
Total$20,330
 $18,541
 $5,736
$23,707
 $17,918
 $4,722
The unpaid principal balance of impaired loans includes the Corporation’s recorded investment in the loan and amounts that have been charged off.
 Three Months Ended March 31, 2019
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Cash Basis
Interest
Recognized
With an allowance recorded:     
Commercial, industrial, and agricultural$2,158
 $38
 $38
Commercial mortgage7,267
 40
 40
Residential real estate0
 0
 0
With no related allowance recorded:     
Commercial, industrial, and agricultural3,376
 54
 54
Commercial mortgage4,065
 18
 18
Residential real estate500
 7
 7
Total$17,366
 $157
 $157
Three months ended September 30, 2018 Three months ended September 30, 2017Three Months Ended March 31, 2018
Average
Recorded
Investment
 Interest
Income
Recognized
 Cash Basis
Interest
Recognized
 Average
Recorded
Investment
 Interest
Income
Recognized
 Cash Basis
Interest
Recognized
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Cash Basis
Interest
Recognized
With an allowance recorded:                
Commercial, industrial, and agricultural$3,460
 $11
 $11
 $1,190
 $20
 $20
$1,884
 $22
 $22
Commercial mortgage9,042
 37
 37
 9,724
 77
 77
9,234
 18
 18
Residential real estate
 
 
 
 
 
0
 0
 0
With no related allowance recorded:                
Commercial, industrial, and agricultural5,569
 69
 69
 2,142
 23
 23
4,600
 46
 46
Commercial mortgage5,153
 20
 20
 4,981
 33
 33
3,753
 13
 13
Residential real estate
 
 
 
 
 
0
 0
 0
Total$23,224
 $137
 $137
 $18,037
 $153
 $153
$19,491
 $99
 $99



 Nine months ended September 30, 2018 Nine months ended September 30, 2017
 Average
Recorded
Investment
 Interest
Income
Recognized
 Cash Basis
Interest
Recognized
 Average
Recorded
Investment
 Interest
Income
Recognized
 Cash Basis
Interest
Recognized
With an allowance recorded:           
Commercial, industrial, and agricultural$2,672
 $54
 $54
 $1,413
 $56
 $56
Commercial mortgage9,147
 111
 111
 12,497
 293
 293
Residential real estate
 
 
 
 
 
With no related allowance recorded:           
Commercial, industrial, and agricultural5,084
 160
 160
 1,927
 73
 73
Commercial mortgage4,511
 66
 66
 2,490
 100
 100
Residential real estate
 
 
 
 
 
Total$21,414
 $391
 $391
 $18,327
 $522
 $522




The following table presents the recorded investment in non-accrualnonaccrual loans and loans past due over 90 days still accruing interest by class of loans as of September 30, 2018March 31, 2019 and December 31, 2017:
2018:
September 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Non-accrual 
Past Due
Over 90 Days
Still on Accrual
 Non-accrual 
Past Due
Over 90 Days
Still on Accrual
Nonaccrual 
Past Due
Over 90 Days
Still on Accrual
 Nonaccrual 
Past Due
Over 90 Days
Still on Accrual
Commercial, industrial, and agricultural$3,824
 $265
 $1,869
 $78
$3,414
 $529
 $2,839
 $489
Commercial mortgages10,151
 
 11,065
 
7,724
 0
 7,694
 53
Residential real estate4,767
 1,488
 5,470
 338
5,821
 285
 6,023
 299
Consumer140
 82
 828
 17
491
 24
 683
 44
Credit cards
 26
 
 44
0
 28
 0
 5
Total$18,882
 $1,861
 $19,232
 $477
$17,450
 $866
 $17,239
 $890
Non-accrualNonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
The following table presents the aging of the recorded investment in past due loans as of September 30, 2018March 31, 2019 and December 31, 20172018 by class of loans.
September 30, 2018March 31, 2019
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
89 Days
Past Due
 
Total
Past Due
 
Loans Not
Past Due
 Total
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
89 Days
Past Due
 
Total
Past Due
 
Loans Not
Past Due
 Total
Commercial, industrial, and agricultural$76
 $587
 $1,557
 $2,220
 $851,275
 $853,495
$1,917
 $310
 $2,834
 $5,061
 $945,804
 $950,865
Commercial mortgages614
 
 58
 672
 683,307
 683,979
387
 3,532
 1,702
 5,621
 704,105
 709,726
Residential real estate2,039
 844
 4,937
 7,820
 752,522
 760,342
1,453
 1,039
 3,546
 6,038
 769,561
 775,599
Consumer526
 605
 830
 1,961
 83,927
 85,888
286
 182
 353
 821
 85,959
 86,780
Credit cards30
 33
 26
 89
 7,345
 7,434
16
 33
 28
 77
 7,264
 7,341
Overdrafts
 
 
 
 325
 325
0
 0
 0
 0
 450
 450
Total$3,285
 $2,069
 $7,408
 $12,762
 $2,378,701
 $2,391,463
$4,059
 $5,096
 $8,463
 $17,618
 $2,513,143
 $2,530,761


December 31, 20172018
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
89 Days
Past Due
 
Total
Past Due
 
Loans Not
Past Due
 Total
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater Than
89 Days
Past Due
 
Total
Past Due
 
Loans Not
Past Due
 Total
Commercial, industrial, and agricultural$2,745
 $646
 $748
 $4,139
 $744,999
 $749,138
$2,379
 $16
 $2,341
 $4,736
 $911,561
 $916,297
Commercial mortgages233
 
 292
 525
 599,540
 600,065
858
 3,058
 297
 4,213
 693,563
 697,776
Residential real estate2,290
 1,494
 4,655
 8,439
 704,908
 713,347
4,064
 1,319
 4,494
 9,877
 761,432
 771,309
Consumer454
 307
 812
 1,573
 78,620
 80,193
474
 283
 367
 1,124
 84,911
 86,035
Credit cards31
 10
 44
 85
 6,668
 6,753
59
 15
 5
 79
 7,544
 7,623
Overdrafts
 
 
 
 352
 352
0
 0
 0
 0
 308
 308
Total$5,753
 $2,457
 $6,551
 $14,761
 $2,135,087
 $2,149,848
$7,834
 $4,691
 $7,504
 $20,029
 $2,459,319
 $2,479,348
Troubled Debt Restructurings
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of September 30, 2018 and December 31, 2017 and no principal balances were forgiven in connection with the loan restructurings.

In order to determine whether a borrower is experiencing financial difficulty, the Corporation performs an evaluation using its internal underwriting policies of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring.

Generally, non-performing troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
The terms of certain loans have been modified as troubled debt restructurings. The modification of the terms of such loans included either or both of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.




The following table presents the number of loans, loan balances, and specific reserves for loans that have been restructured in a troubled debt restructuring as of September 30, 2018March 31, 2019 and December 31, 2017.2018.
September 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Number of
Loans
 
Loan
Balance
 
Specific
Reserve
 
Number of
Loans
 
Loan
Balance
 
Specific
Reserve
Number of
Loans
 
Loan
Balance
 
Specific
Reserve
 
Number of
Loans
 
Loan
Balance
 
Specific
Reserve
Commercial, industrial, and agricultural11
 $4,798
 $237
 11
 $5,213
 $245
10
 $3,401
 $107
 10
 $4,577
 $104
Commercial mortgages13
 12,946
 6,234
 9
 12,090
 5,444
15
 9,698
 4,759
 15
 10,049
 4,450
Residential real estate
 
 
 
 
 
0
 0
 0
 0
 0
 0
Consumer
 
 
 
 
 
0
 0
 0
 0
 0
 0
Credit cards
 
 
 
 
 
0
 0
 0
 0
 0
 0
Total24
 $17,744
 $6,471
 20
 $17,303
 $5,689
25
 $13,099
 $4,866
 25
 $14,626
 $4,554









The following table presents information associated with the loans that were modified as troubled debt restructurings during the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017. There were no loans modified as troubled debt restructurings during the three months ended September 30,March 31, 2019 or March 31, 2018.
 Nine months ended September 30, 2018 Three and Nine months ended September 30, 2017
 Number of
Loans
 Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of
Loans
 Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural
 $
 $
 2
 $324
 $379
Commercial mortgages4
 1,091
 1,091
 2
 6,227
 6,276
Residential real estate
 
 
 
 
 
Consumer
 
 
 
 
 
Credit cards
 
 
 
 
 
Total4
 $1,091
 $1,091
 4
 $6,551
 $6,655

TheA loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.  All loans modified in troubled debt restructurings described above increasedare performing in accordance with their modified terms as of March 31, 2019 and December 31, 2018 and no principal balances were forgiven in connection with the allowance for loan losses by $113 and resultedrestructurings.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in charge-offspayment default on any of zero duringits debt in the nine months ended September 30, 2018.foreseeable future without a loan modification. This evaluation is performed using the Corporation’s internal underwriting policies. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring.

Generally, nonperforming troubled debt restructurings described above increasedare restored to accrual status when the allowanceobligation is brought current, has performed in accordance with the contractual terms for loan losses by $169a reasonable period of time (generally six months) and $1,324 during the threeultimate collectability of the total contractual principal and nine months ended September 30, 2017, respectively.interest is no longer in doubt.
Credit Quality Indicators

The Corporation classifies commercial, industrial, and agricultural loans and commercial mortgage loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans with outstanding balances greater than $1 million are analyzed at least semiannually and loans with outstanding balances of less than $1 million are analyzed at least annually.

The Corporation uses the following definitions for risk ratings:

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

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

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

Loans not rated as special mention, substandard, or doubtful are considered to be pass rated loans. All loans included in the following tables have been assigned a risk rating within 12 months of the balance sheet date.
September 30, 2018
 Pass 
Special
Mention
 Substandard Doubtful Total
Commercial, industrial, and agricultural$827,425
 $10,304
 $15,766
 $
 $853,495
Commercial mortgages665,896
 3,309
 14,774
 
 683,979
Total$1,493,321
 $13,613
 $30,540
 $
 $1,537,474





DecemberMarch 31, 20172019
Pass 
Special
Mention
 Substandard Doubtful TotalPass 
Special
Mention
 Substandard Doubtful Total
Commercial, industrial, and agricultural$713,102
 $16,726
 $19,310
 $
 $749,138
$922,618
 $10,149
 $18,098
 $0
 $950,865
Commercial mortgages581,631
 4,419
 14,015
 
 600,065
689,587
 9,037
 11,102
 0
 709,726
Total$1,294,733
 $21,145
 $33,325
 $
 $1,349,203
$1,612,205
 $19,186
 $29,200
 $0
 $1,660,591
December 31, 2018
 Pass 
Special
Mention
 Substandard Doubtful Total
Commercial, industrial, and agricultural$889,547
 $10,519
 $16,231
 $0
 $916,297
Commercial mortgages683,413
 3,241
 11,122
 0
 697,776
Total$1,572,960
 $13,760
 $27,353
 $0
 $1,614,073
The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate, consumer, and credit card loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential, consumer, and credit card loans based on payment activity as of September 30, 2018March 31, 2019 and December 31, 2017:2018:
September 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Residential
Real Estate
 Consumer 
Credit
Cards
 
Residential
Real Estate
 Consumer 
Credit
Cards
Residential
Real Estate
 Consumer 
Credit
Cards
 
Residential
Real Estate
 Consumer 
Credit
Cards
Performing$754,087
 $85,666
 $7,408
 $707,539
 $79,348
 $6,709
$769,493
 $86,265
 $7,313
 $764,987
 $85,308
 $7,618
Nonperforming6,255
 222
 26
 5,808
 845
 44
6,106
 515
 28
 6,322
 727
 5
Total$760,342
 $85,888
 $7,434
 $713,347
 $80,193
 $6,753
$775,599
 $86,780
 $7,341
 $771,309
 $86,035
 $7,623
The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”) are considered to be subprime loans. Holiday is a subsidiary that offers small balance unsecured and secured loans primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics than are typical in the Bank’s consumer loan portfolio.
Holiday’s loan portfolio is summarized as follows at September 30, 2018March 31, 2019 and December 31, 2017:2018:
September 30, 2018 December 31, 20173/31/2019 12/31/2018
Consumer$25,242
 $23,428
$25,897
 $26,568
Less: unearned discount(4,508) (3,889)(4,671) (4,791)
Total$20,734
 $19,539
$21,226
 $21,777


6. DEPOSITS
Total deposits at September 30, 2018March 31, 2019 and December 31, 20172018 are summarized as follows:
September 30, 2018 December 31, 2017 
Percentage
Change
3/31/2019 12/31/2018 Percentage
Change
Checking, non-interest bearing$345,154
 $321,858
 7.2%$345,386
 $356,797
 (3.2)%
Checking, interest bearing599,668
 565,399
 6.1%583,653
 600,046
 (2.7)%
Savings accounts1,187,947
 915,587
 29.7%1,374,415
 1,258,506
 9.2 %
Certificates of deposit389,610
 364,971
 6.8%353,905
 395,437
 (10.5)%
$2,522,379
 $2,167,815
 16.4%$2,657,359
 $2,610,786
 1.8 %






7.    EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares issuable under certain stock compensation plans. For the three and nine months ended September 30,March 31, 2019 and 2018, and 2017, there were no outstanding stock options to include in the diluted earnings per share calculations.
Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Corporation has determined that its outstanding unvested stock awards are participating securities.


The computation of basic and diluted earnings per share is shown below:
Three months ended September 30, Nine months ended September 30,Three months ended March 31,
2018 2017 2018 20172019 2018
Basic earnings per common share computation:          
Net income per consolidated statements of income$9,236
 $7,246
 $24,774
 $20,409
$9,473
 $7,097
Net earnings allocated to participating securities(40) (40) (113) (120)(39) (34)
Net earnings allocated to common stock$9,196
 $7,206
 $24,661
 $20,289
$9,434
 $7,063
Distributed earnings allocated to common stock$2,586
 $2,506
 $7,607
 $7,521
$2,579
 $2,509
Undistributed earnings allocated to common stock6,610
 4,700
 17,054
 12,768
6,855
 4,554
Net earnings allocated to common stock$9,196
 $7,206
 $24,661
 $20,289
$9,434
 $7,063
Weighted average common shares outstanding, including shares considered participating securities15,285
 15,285
 15,281
 15,188
15,229
 15,273
Less: Average participating securities(60) (78) (67) (84)
Weighted average shares15,225
 15,207
 15,214
 15,104
Basic earnings per common share$0.60
 $0.47
 $1.62
 $1.34
Diluted earnings per common share computation:       
Net earnings allocated to common stock$9,196
 $7,206
 $24,661
 $20,289
Weighted average shares and dilutive potential common shares15,225
 15,207
 15,214
 15,104
Diluted earnings per common share$0.60
 $0.47
 $1.62
 $1.34
Less: Average participating securities(62) (72)
Weighted average shares15,167
 15,201
Basic earnings per common share$0.62
 $0.46
Diluted earnings per common share computation:   
Net earnings allocated to common stock$9,434
 $7,063
Weighted average common shares outstanding for basic earnings per common share15,167
 15,201
Add: Dilutive effects of assumed exercises of stock options0
 0
Weighted average shares and dilutive potential common shares15,167
 15,201
Diluted earnings per common share$0.62
 $0.46


8.    DERIVATIVE INSTRUMENTS

On September 7, 2018, the Corporation executed an interest rate swap agreement with a 5 year5-year term and an effective date of September 15, 2018 in order to hedge cash flows associated with $10,000$10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation'sCorporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2018 to September 15, 2023 without the exchange of the underlying notional amount. At September 30, 2018,March 31, 2019, the variable rate on the subordinated debt was 3.88%4.16% (LIBOR plus 155 basis points) and the Corporation was paying 4.53% (2.98% fixed rate plus 155 basis points).
On
In order to hedge cash flows associated with $10 million of a subordinated note discussed above, on May 3, 2011, the Corporation executed an interest rate swap agreement with a 5 year5-year term and an effective date of September 15, 2013 that expired in order to hedge cash flows associated with $10,000 of a subordinated note discussed above.September 2018. The Corporation’s objective in using this derivative was to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involvesinvolved the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2013 to September 15, 2018 without exchange of the underlying notional amount.
As of September 30, 2018March 31, 2019 and December 31, 2017,2018, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Corporation does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.


The following tables provide information about the amounts and locations of activity related to the interest rate swaps designated as cash flow hedges within the Corporation’s consolidated balance sheet and statement of income as of September 30, 2018March 31, 2019 and December 31, 20172018 and for the three and nine months ended September 30, 2018March 31, 2019 and 2017:2018:
   Fair value as of
 
Balance Sheet
Location
 September 30, 2018 December 31, 2017
Interest rate contracts
Accrued interest and
other liabilities
 $9
 $(161)

   Fair value as of
 
Balance Sheet
Location
 3/31/2019 12/31/2018
Interest rate contracts
Accrued interest and
other liabilities
 $(321) $(201)

For the Three Months Ended September 30, 2018(a) (b) (c) (d) (e)
For the Three Months
Ended March 31, 2019
(a) (b) (c) (d) (e)
Interest rate contracts$36
 Interest expense –
subordinated debentures
 $(44) Other
income
 $
$(95) Interest expense –
subordinated debentures
 $(6) Other
income
 $0
For the Nine Months Ended September 30, 2018(a) (b) (c) (d) (e)
For the Three Months
Ended March 31, 2018
(a) (b) (c) (d) (e)
Interest rate contracts$134
 Interest expense –
subordinated debentures
 $(149) Other
income
 $
$62
 Interest expense –
subordinated debentures
 $(58) Other
income
 $0
For the Three Months Ended September 30, 2017(a) (b) (c) (d) (e)
Interest rate contracts$46
 Interest expense –
subordinated debentures
 $(71) Other
income
 $
For the Nine Months Ended September 30, 2017(a) (b) (c) (d) (e)
Interest rate contracts$141
 Interest expense –
subordinated debentures
 $(220) Other
income
 $
 
(a)Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax
(b)Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(c)Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)
(d)Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
(e)Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Amounts reported in accumulated other comprehensive loss related to the interest rate swap will be reclassified to interest expense as interest payments are made on the subordinated debentures. Such amounts reclassified from accumulated other comprehensive loss to interest expense in the next twelve months are expected to be $65.$36.
As of March 31, 2019 and December 31, 2018, a cash collateral balance in the amount of $400 and $200, respectively, was maintained with a counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheet.

The Corporation has entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Corporation enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. Concurrently, the Corporation agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Corporation’s customers to effectively convert a variable rate loan to a fixed rate. Because the Corporation acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not impact the Corporation’s results of operations.
The Corporation pledged cash collateral to another financial institution with a balance $950 as of March 31, 2019 and $750 as of both September 30, 2018 and December 31, 2017.2018. This balance is included in interest bearing deposits with other banks on the consolidated balance sheets. The Corporation does not require its customers to post cash or securities as collateral on its program of back-to-back swaps. However, certain language is included in the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Corporation is permitted to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Corporation may be required to post additional collateral to swap counterparties in the future in proportion to potential increases in unrealized loss positions.




The following table provides information about the amounts and locations of activity related to the back-to-back interest rate swaps within the Corporation’s consolidated balance sheet as of September 30, 2018March 31, 2019 and December 31, 2017:2018:
Notional
Amount
 
Weighted
Average
Maturity
(in years)
 
Weighted
Average
Fixed Rate
 
Weighted Average
Variable Rate
 
Fair
Value
 
Notional
Amount
 
Weighted
Average
Maturity
(in years)
 
Weighted
Average
Fixed Rate
 
Weighted Average
Variable Rate
 
Fair
Value
 
September 30, 2018      
March 31, 2019      
3rd Party interest rate swaps$22,278
 7.7 3.88% 1 month LIBOR + 1.23% $(182) (a) $23,014
 7.1 3.85% 1 month LIBOR + 2.24% $906
 (a) 
Customer interest rate swaps(22,278) 7.7 3.88% 1 month LIBOR + 1.23% 182
 (b) (23,014) 7.1 3.85% 1 month LIBOR + 2.24% (906) (b) 
December 31, 2017      
December 31, 2018      
3rd Party interest rate swaps$11,848
 8.0 4.51% 1 month LIBOR + 2.37% $149
 (a) $23,152
 7.2 3.85% 1 month LIBOR + 2.24% $485
 (a) 
Customer interest rate swaps(11,848) 8.0 4.51% 1 month LIBOR + 2.37% (149) (b) (23,152) 7.2 3.85% 1 month LIBOR + 2.24 (485) (b) 
(a)Reported in accrued interest receivable and other assets within the consolidated balance sheets
(b)Reported in accrued interest payable and other liabilities within the consolidated balance sheets



9.    REVENUE FROM CONTRACTS WITH CUSTOMERS
The Corporation adopted Accounting Standards Update (ASU) 2014-9, “Revenue from Contracts with Customers (Topic 606)” using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASU 2014-9 while prior period amounts continue to be reported in accordance with legacy GAAP. The adoption of ASU 2014-9 did not result in a change to the accounting for any
All of the in-scopeCompany’s revenue streams;from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Corporation's non-interest income by revenue stream and reportable segment for the three months ended March 31, 2019 and 2018. Items outside the scope of ASC 606 are noted as such, no cumulative effect adjustment was recorded.such.
 Three Months Ended March 31, 2019 Three Months Ended March 31, 2018
Non-interest Income   
Service charges on deposit accounts$1,481
 $1,247
Wealth and asset management fees1,042
 1,030
Mortgage banking (1)
239
 208
Card processing and interchange income1,029
 971
Net gains (losses) on sales of securities (1)
148
 0
Other income2,214
 1,295
Total non-interest income$6,153
 $4,751

(1)Not within scope of ASU 2014-9

Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investment securities along with non-interest revenue resulting from security gains, loan servicing, gains on the sale of loans, commitment fees, fees from financial guarantees, certain credit cardscard fees, gains (losses) on sale of other real estate owned not financed by the Corporation, is not within the scope of (ASU)ASU 2014-9. As a result, no changes were made during the period related to these sources of revenue, which comprised 90.8%90.2% and 90.7%88.7% of the total revenue of the Corporation for the three and nine months ended September 30,March 31, 2019 and 2018, respectively.
The following tables depict the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three and nine months ended September 30, 2018 and 2017.
 Three Months Ended September 30, 2018 Three Months Ended September 30, 2017
Non-interest Income   
Service charges on deposit accounts$1,584
 $1,244
Wealth and asset management fees1,031
 952
Mortgage banking (1)283
 237
 Card processing and interchange income1,066
 942
Net realized gains on available-for-sale securities (1)
 5
Other income1,969
 1,652
Total non-interest income$5,933
 $5,032
(1)Not within scope of ASU 2014-9
 Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017
Non-interest Income   
Service charges on deposit accounts$4,102
 $3,499
Wealth and asset management fees3,151
 2,775
Mortgage banking (1)801
 668
Card processing and interchange income3,140
 2,790
Net realized gains on available-for-sale securities (1)
 1,543
Other income5,096
 4,619
Total non-interest income$16,290
 $15,894
(1)Not within scope of ASU 2014-9
The types of non-interest income within the scope of the standard that isare material to the consolidated financial statements are services charges on deposit accounts, wealth and asset management fee income, and card processing and interchange income, and other income.

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






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

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

Other income: The Corporation's other income includes sources such as bank owned life insurance, certain service fees, gains (losses) on sales of fixed assets, and gains (losses) on sale of other real estate owned. The service fees are recognized in the same manner as the service charges mentioned above. While gains on the sale of other real estate owned are generally within the scope of (ASU)ASU 2014-9, the Corporation does not finance the sale of transactions and as such there is no change in revenue recognition.

10.    LEASES

As of January 1, 2019, the Corporation adopted certain accounting standard updates related to accounting for leases (Topic 842 - Leases), primarily Accounting Standards Update ("ASU") 2016-02 and subsequent updates. This guidance requires a lessee to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model. The Corporation adopted the provisions of ASU 2016-02 on January 1, 2019, and elected several practical expedients made available by the FASB. Specifically, the Corporation elected the transition practical expedient to not recast comparative periods upon the adoption of the new guidance. In addition, the Corporation elected to apply certain practical adoption expedients provided under the updates whereby we did not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) initial direct costs for any existing leases. As a result, the Corporation recognized approximately $12.5 million of right of use assets, approximately $800 thousand in prepaid rent, and $13.3 million of related lease liabilities as of January 1, 2019.

Operating lease assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease cost, which is comprised of amortization of the operating lease asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the consolidated statements of income.

The Corporation leases certain full-serve branch offices, land and equipment. Leases with an initial term of twelve months or less are not recorded on the balance sheet. Most leases include one or more options to renew and the exercise of the lease renewal options are at the Corporation's sole discretion. Certain lease agreements of the Corporation include rental payments adjusted periodically for changes in the consumer price index.

Leases Classification March 31, 2019
Assets:    
Operating lease assets Operating lease assets $16,222
Finance lease assets 
Premises and equipment, net (1)
 554
Total leased assets   $16,776
     
Liabilities:    
Operating lease liabilities Operating lease liabilities $17,109
Finance lease liabilities Accrued interest payable and other liabilities 685
Total leased liabilities   $17,794
(1) Finance lease assets are recorded net of accumulated amortization of $662 as of March 31, 2019.

The components of the Corporation's net lease expense for the three months ended March 31, 2019 were as follows:
    Three Months Ended
Lease Cost Classification March 31, 2019
Operating lease cost Net occupancy expense $405
Variable lease cost Net occupancy expense 34
Finance lease cost:    
Amortization of leased assets Net occupancy expense 18
Interest on lease liabilities Interest expense - borrowed funds 8
Sublease income (1)
 Net occupancy expense (21)
Net lease cost   $444
(1) Sublease income excludes rental income from owned properties.

The following table sets forth future minimum rental payments under noncancelable leases with terms in excess of one year as of March 31, 2019:
Maturity of Lease Liabilities as of March 31, 2019 
Operating Leases (1)
 Finance Leases Total
2019 $1,309
 $79
 $1,388
2020 1,405
 105
 1,510
2021 1,458
 105
 1,563
2022 1,478
 105
 1,583
2023 1,413
 105
 1,518
After 2023 16,623
 315
 16,938
Total lease payments 23,686
 814
 24,500
Less: Interest 6,577
 129
 6,706
Present value of lease liabilities $17,109
 $685
 $17,794
(1) Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude $2,960 of legally binding minimum lease payments for leases signed, but not yet commenced.

Other information related to the Corporation's lease liabilities as of and for the three months ended March 31, 2019 was as follows:
Lease Term and Discount RateMarch 31, 2019
Weighted-average remaining lease term (years)
Operating leases17.3
Finance leases7.8
Weighted-average discount rate
Operating leases3.66%
Finance leases4.54%

Other Information March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities  
Operating cash flows from operating leases $192
Leased assets obtained in exchange from new operating lease liabilities 16,478


10.


11.    CONTINGENCY

On March 28, 2018, the Corporation received a notice of assessment from the Pennsylvania Department of Revenue that reported a sales tax assessment amount of $824 plus interest and penalties of $339 resulting in a total assessed balance of
$1,163. $1,163. The notice of assessment covers the period from January 1, 2013 through July 31, 2016. The Corporation has evaluated the specific items on which sales tax has been assessed in conjunction with its legal counsel and has determined that it is probable that the Corporation has some liability based on a review of the Pennsylvania tax laws that apply to the assessed items. The Corporation’s reasonable estimate of this liability is $96, which has been accrued and previously reported in state and local tax expense in the accompanying consolidated statement of income forduring the nine monthsyear ended September 30,December 31, 2018. The remaining balance that has not been accrued relates primarily to sales tax assessments associated with data processing and banking equipment maintenance, which the Corporation’s management and legal counsel have concluded were improperly assessed based on current Pennsylvania sales tax law. The Corporation appealed the notice of assessment to the Pennsylvania Board of Appeals and is awaiting a decision. The ultimate resolution of this matter, which may take in excess of one year, could result in an additional expense up to the total amount assessed.


11.12.    RECENT ACCOUNTING PRONOUNCEMENTS

In August 2018, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standard Update ("ASU")ASU 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 amends ASC 715-20, "Compensation - Retirement Benefits - Defined Benefit Plans - General." The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated Other Comprehensive Income ("OCI") expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The update will be effective for annual reporting periods beginning after December 15, 2020, with early adoption permitted for annual reporting periods beginning ​afterafter December 15, 2019. Management is currently evaluating the impact of the adoption of ASU 2018-14 on the Corporation’s footnote disclosures included in the financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-ChangesFramework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The update will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual


reporting periods beginning ​afterafter December 15, 2018. Management is currently evaluating the impact of the adoption of ASU 2018-13 on the Corporation’s footnote disclosures included in the financial statements.

In January 2017, the FASB issued an update (ASU 2017-04, Intangibles – Goodwill and Other) which is intended to simplify the measurement of goodwill in periods following the date on which the goodwill is initially recorded. Under the amendments in this update, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. A public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a material effect on the Corporation’s financial statements.
In August 2016, the FASB issued an update (ASU 2016-15, Statement of Cash Flows) which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update apply to all entities, including business entities and not-for-profit entities that are required to present a statement of cash flows, and are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-15 did not have a material effect on the Corporation’s financial statements.
In June 2016, the FASB issued an update (ASU 2016-13, Financial Instruments – Credit Losses) which will require recognition of an entity’s current estimate of all expected credit losses for assets measured at amortized cost. The amendments in ASU 2016-13 eliminate the probable initial recognition threshold in current GAAP. In addition, the amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually, such as loans. The update will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. The Corporation has formed a committee comprised of individuals from different disciplines, including credit administration, finance, loan servicing and information technology, to evaluate the requirements of the new standard and the impact it will have on current processes. Management has performed a data gaploss driver analysis with the assistance of software vendor, and is reviewing the assumptions and methods used in the analysis and is developing analytical approaches to determine CECL model inputs. The Corporation has also engaged a software vendor to assist in implementing a CECL production platform.results. The new guidance is expected to be heavily influenced by an assessment of the composition, characteristics, and credit quality of the Corporation's loan and investment securities portfolio as well as the economic conditions in effect at the adoption date. The impact to the financial statements is yet to be determined.








In February 2016,March 2019, the FASB issued ASU 2016-02, “Leasesan amendment (ASU 2019-01, Leases (Topic 842).” Codification Improvements) which provides clarifications to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing essential information about leasing transactions. Specifically, ASU 2016-02 requires a lessee2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to recognizecontinue to be its cost and not fair value as measured under the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified assetfair value definition, (ii) allows for the cash flows received for sales-type and direct financing leases to continue to be presented as results from investing, and (iii) clarifies that entities do not have to disclose the effect of the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.standard on adoption year interim amounts. The updateamendment will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted.2019. Management is currently evaluating the impact ofdoes not expect the adoption of ASU 2016-02 on the Corporation’s financial statements and anticipates an increase in the Corporation’s assets and liabilities of approximately $15 million.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 provides updated accounting and reporting requirements for both public and non-public entities. The most significant provisions that2019-01 will impact the Corporation are: 1) equity securities available for sale will be measured at fair value, with the changes in fair value recognized in the income statement; 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the balance sheet; 3) utilization of exit price notion when measuring the fair value of financial instruments for disclosure purposes; 4) require separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. The update was effective on January 1, 2018, using a cumulative-effect adjustment to the balance sheet as of the beginning of the year, but resulted in the use of an exit price, rather than an entrance price, to determine fair value of loans not measured at fair value on a non-recurring basis. The adoption of ASU 2016-01 on January 1, 2018 did not have aany material effectimpact on the Corporation’s financial statements.


ITEM 2
MANAGEMENTS 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, CNB Bank (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. As ERIEBANK, a division of CNB Bank, the Bank operates in the Pennsylvania counties of Crawford, Erie, and Warren and the Ohio counties of Ashtabula and Lake. As FCBank, a division of CNB Bank, the Bank operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware, and Franklin. As BankOnBuffalo,Bank on Buffalo, a division of CNB Bank, 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 Federal Deposit Insurance Corporation. The financial condition and results of operations of

In addition to the Bank, the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance.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. Holiday Financial Services Corporation (“Holiday”), incorporated in Pennsylvania, offers small balance secured and unsecured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics. CNB Risk Management, Inc., incorporated in Delaware, insures against risks unique to theThe financial condition and results of operations of the Corporation.Corporation and its consolidated subsidiaries are not necessarily indicative of future performance.

When we use the terms “we”, “us” and “our”, we mean CNB Financial Corporation and its subsidiaries. Management’s discussion and analysis should be read in conjunction with the Corporation’s consolidated financial statements and related notes.

The following discussion should be read in conjunction with the Corporation’s Consolidated Financial Statements and Notes thereto, for the year ended December 31, 2017,2018, included in its 20172018 Form 10-K, and in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three and nine months ended September 30, 2018March 31, 2019 are not necessarily indicative of the results for the full year ending December 31, 2018,2019, or any future period. All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated.

GENERAL OVERVIEW

Management concentrates onlooks 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. During the past several years, inIn order to address the historic lows on interest rates that are primarily tied to short-term rates, such as the Prime Rate,flattening yield curve and highly competitive environment, the Corporation has takenremained focused on disciplined loan pricing to sustain a variety of measures including instituting rate floors on our commercial lines of credit and home equity lines.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 also 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 20182019 and beyond. While past results are not an indication of future earnings, management believes the Corporation is well-positionedwell positioned to sustain core earnings during 2018.2019. All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated.
CNB Risk Management, Inc., a wholly-owned subsidiary of the Corporation which was formed and began operations on June 1, 2018, 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. CNB Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CNB Risk Management, Inc. is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.
CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled $36.5$55.3 million at September 30, 2018March 31, 2019 compared to $35.3$45.6 million at December 31, 2017.2018. 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 ("FHLB") financing, and the portions of the securities and loan portfolios that mature within one year. The Corporation expects that these sources of funds will enable it to meet cash obligations and off-balance sheet commitments as they come due.









SECURITIES

Securities available for sale and trading securities increased by $112.6totaled $509.3 million or 27.5% sinceand $524.6 million at March 31, 2019 and December 31, 2017.2018, 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 September 30, 2018March 31, 2019 and December 31, 2017,2018, the securities portfolio as a percentage of total assets was 17.0%15.5% and 15.1%16.3%, respectively. The footnotesNote 4 to the consolidated financial statements  provideprovides more detail concerning the composition of the Corporation’s securities portfolio and the process for evaluating securities for other-than-temporary impairment.

The Corporation generally buys into the market over time and does not attempt to “time” its transactions. In doing this, the highs and lows of the market are averaged into the portfolio and the overall effect of different rate environments is minimized.

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”). The ALCO also reviews and manages interest rate risk for the Corporation. Through active balance sheet management and analysis of the securities portfolio, a sufficient level of liquidity is maintained to satisfy depositor requirements and various credit needs of our customers.

LOANS

The Corporation experienced an increase in loans, net of unearned discount, of $241.0$51.5 million, or 11.2%2.1%, during the first ninethree months of 2018. The Corporation’s newest division, BankOnBuffalo, headquartered in northwestern New York, had an increase in loans of $113.8 million during the first nine months of 2018.2019. Lending efforts consist principally of commercial and retail lending, which includes single family residential mortgages and other consumer loans. The Corporation views commercial lending as its competitive advantage and continues to focus on this area by hiring and retaining experienced loan officers and supporting them with quality credit analysis. The Corporation expects loan demand to be solid and loan balances to grow throughout the remainder of 2018.2019.

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.


























The following table below presents activity within the allowance account for the specified periods:
Nine months ended September 30, 2018 Year ended December 31, 2017 Nine months ended September 30, 2017
Three months ending
March 31, 2019
 
Year ending
December 31, 2018
 
Three months ending
March 31, 2018
Balance at beginning of period$19,693
 $16,330
 $16,330
$19,704
 $19,693
 $19,693
Charge-offs:          
Commercial, industrial, and agricultural(61) (544) (50)0
 (253) (31)
Commercial mortgages
 (116) (22)(17) (3,337) 0
Residential real estate(289) (466) (328)(98) (315) 0
Consumer(1,610) (2,555) (1,969)(549) (2,279) (590)
Credit cards(53) (144) (111)(26) (90) (19)
Overdrafts(236) (252) (192)(128) (319) (86)
(2,249) (4,077) (2,672)(818) (6,593) (726)
Recoveries:          
Commercial, industrial, and agricultural165
 235
 167
4
 171
 68
Commercial mortgages
 197
 197
0
 30
 0
Residential real estate67
 78
 73
65
 67
 3
Consumer112
 161
 110
46
 141
 49
Credit cards27
 27
 23
5
 33
 7
Overdraft deposit accounts64
 87
 71
34
 90
 31
435
 785
 641
154
 532
 158
Net charge-offs(1,814) (3,292) (2,031)(664) (6,061) (568)
Provision for loan losses4,631
 6,655
 3,550
1,306
 6,072
 1,631
Balance at end of period$22,510
 $19,693
 $17,849
$20,346
 $19,704
 $20,756
Loans, net of unearned$2,386,955
 $2,145,959
 $2,098,574
$2,526,090
 $2,474,557
 $2,276,124
Allowance to net loans0.94% 0.92% 0.85%0.81% 0.80% 0.91%
Net charge-offs to average loans (annualized)0.11% 0.16% 0.14%0.11% 0.26% 0.10%
Nonperforming assets$21,175
 $20,427
 $20,583
$18,790
 $18,547
 $20,419
Nonperforming % of total assets0.68% 0.74% 0.75%0.57% 0.58% 0.70%

The adequacy of the allowance for loan losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation. As part of the formal analysis, delinquencies and losses are monitored monthly. The loan portfolio is divided into several categories in order to better analyze the entire pool. First is a selection of classified loans that is given a specific reserve. The remaining loans are pooled, by category, into these segments:

Reviewed
 
Commercial, industrial, and agricultural
Commercial mortgages

Homogeneous
 
Residential real estate
Consumer
Credit cards
Overdrafts

The reviewed loan pools are further segregated into four categories: special mention, substandard, doubtful, and pass rated. Historical loss factors are calculated for each pool, excluding overdrafts, based on the previous eight quarters of experience. The homogeneous pools are evaluated by analyzing the historical loss factors from the most previous eight quarter ends.








The historical loss factors for both the reviewed and homogeneous pools are adjusted based on the followingthese six qualitative factors:
 
levels of and trends in delinquencies, non-accrual loans, and classified loans;
trends in volume and terms of loans;
effects of any changes in lending policies and procedures;
experience and ability of management;
national and local economic trends and conditions; and
concentrations of credit.


The methodology described above was created using the experience of the Corporation’s management team, guidance from the regulatory agencies, expertise of a third-party loan review provider, and discussions with peers. The resulting factors are applied to the pool balances in order to estimate the probable risk of loss within each pool. Prudent business practices dictate that the level of the allowance, as well as corresponding charges to the provision for loan losses, should be commensurate with identified areas of risk within the loan portfolio and the attendant risks inherent therein. The quality of the credit risk management function and the overall administration of this vital segment of the Corporation’s assets are critical to the ongoing success of the Corporation.

The previously mentioned analysis also considers numerous historical and other factors to analyze the adequacy of the allowance and current period charges against the provision for loan losses. Management usespays special attention to a section of the analysis to comparethat compared and plotplotted the actual level of the allowance against the aggregate amount of loans adversely classified in order to compute the estimated probable losses associated with those loans. Management then determinesBy noting the “spread” at that time, as well as prior periods, management can evaluate the current adequacy of the allowance and evaluatesas well as evaluate trends that may be developing. The volume and composition of the Corporation’s loan portfolio continue to reflect growth in commercial credits including commercial real estate loans.

As mentioned in the Loans“Loans” section of this analysis, management considers commercial lending to be a competitive advantage and continues to focus on this area as part of its strategic growth initiatives. However, management recognizes and considers the fact that risk is more pronounced in these types of credits and is, to a greater degree than with other loans, driven by the economic environment in which the debtor’s business operates.
In
During the first nine monthsquarter of 2018, one commercial real estate loan that was impaired at year end 2017 experienced further deterioration in2019, the financial condition of the borrower, resulting in an additionalrecorded provision for loan losses of $623$1.3 million was primarily due to a $786 thousand increase in specific reserves, and net charge offs of $664 thousand. The allowance for loans collectively evaluated for impairment was 0.59% at March 31, 2019, compared to 0.61% at March 31, 2018. The decrease was due to the continued strong credit quality and historical loss trends.
In the second quarter of 2018, CNB identified a commercial and industrial relationship that, while performing in accordance with its contractual terms and current with scheduled principal and interest payments, filed for bankruptcy. As a result, CNB recorded a specific loan loss reserve for this impaired loan of $758 thousand as of June 30, 2018.  During the quarter ended September 30, 2018, the customer sold its business and CNB received full repayment of the outstanding principal balance of $5.5 million along with previously outstanding interest and fees totaling $127 thousand.
Management believes that the allowance for loan losses is reasonable and adequate to absorb probable incurred losses in the Corporation’sits portfolio at September 30, 2018.March 31, 2019.

FUNDING SOURCES

The Corporation considers deposits, short-term borrowings, and term debt when evaluating funding sources. Deposits increased $354.6$46.6 million from $2.17$2.61 billion at December 31, 20172018 to $2.52$2.66 billion at September 30, 2018 primarily resulting from a deposit growth strategy in the western New York market and from the Private Client Solutions division.March 31, 2019.

Periodically, the Corporation utilizes term borrowings from the Federal Home Loan Bank (“FHLB”)FHLB and other lenders to meet funding needs.obligations or match fund certain loan assets. Management plans to maintain access to short-term and long-term borrowings as an available funding source.

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

The Corporation’s capital continued to provide a base for profitable growth through September 30, 2018.growth. Total shareholders’ equity was $254.4$275.0 million at September 30, 2018March 31, 2019 and $243.9$262.8 million at December 31, 2017.2018. In the first ninethree months of 2018,2019, the Corporation earned $24.8$9.5 million and declared dividends of $7.6$2.6 million, resulting in a dividend payout ratio of 30.9%27.4% of net income.

The Corporation has complied with the standards of capital adequacy mandated by government regulations. Bank regulators have established “risk-based” capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category of 0% (lowest risk assets), 20%, 50%, 100%, or 150% (highest risk assets), is assigned to each asset on the balance sheet.





The Corporation’s capital ratios, book value per share and tangible book value per share as of September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
September 30, 2018
 December 31, 2017
March 31, 2019 December 31, 2018
Total risk-based capital ratio13.66% 14.32%13.18% 13.21%
Tier 1 capital ratio10.54% 10.97%10.35% 10.33%
Common equity tier 1 ratio9.68% 10.00%9.54% 9.50%
Leverage ratio8.06% 8.45%8.01% 7.87%
Tangible common equity/tangible assets (1)6.95% 7.46%7.26% 7.02%
Book value per share$16.64
 $15.98
$18.04
 $17.28
Tangible book value per share (1)$14.05
 $13.33
$15.46
 $14.69
 
(1)Tangible common equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and core deposit intangiblesother intangible assets from the calculation of shareholders’stockholders’ equity. Tangible assets is calculated by excluding the balance of goodwill and core deposit intangiblesother intangible assets from the calculation of total assets. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding. The Corporation believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition because they are additional measures used to assess capital adequacy.condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. A reconciliation of these non-GAAP financial measures is provided below.


September 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Shareholders’ equity$254,376
 $243,910
$274,959
 $262,830
Less goodwill38,730
 38,730
38,730
 38,730
Less core deposit intangible907
 1,625
562
 727
Tangible common equity$214,739
 $203,555
$235,667
 $223,373
   
Total assets$3,129,313
 $2,768,773
$3,287,324
 $3,221,521
Less goodwill38,730
 38,730
38,730
 38,730
Less core deposit intangible907
 1,625
562
 727
Tangible assets$3,089,676
 $2,728,418
$3,248,032
 $3,182,064
   
Ending shares outstanding15,285,430
 15,264,740
15,239,371
 15,207,281
   
Tangible book value per share$14.05
 $13.33
$15.46
 $14.69
Tangible common equity/tangible assets6.95% 7.46%7.26% 7.02%


LIQUIDITY

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

OFF BALANCEOFF-BALANCE SHEET ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, risk participation agreements, letters of credit, and overdraft protection, are issued to meet customer financing needs. These financial instrucments are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off balanceOff-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.




The contractual amount of financial instruments with off balance sheet risk was as follows at September 30, 2018March 31, 2019 and December 31, 2017:2018:
September 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Fixed Rate Variable Rate Fixed Rate Variable RateFixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans$54,735
 $178,461
 $49,622
 $191,864
$47,597
 $183,246
 $46,265
 $191,803
Unused lines of credit15,968
 459,815
 16,342
 414,885
15,956
 426,752
 14,390
 429,456
Standby letters of credit14,604
 1,439
 13,706
 1,524
10,510
 1,473
 14,831
 1,479

Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments at September 30,March 31, 2019 have interest rates ranging from 2.45% to 18.00% and maturities ranging from ten months to 35 years. The fixed rate loan commitments at December 31, 2018 have interest rates ranging from 2.45% to 18.00% and maturities ranging from 12 months to 35 years. The fixed rate loan commitments at December 31, 2017 have interest rates ranging from 1.00% to 18.00% and maturities ranging from 8 monthsone year to 35 years.

The Corporation makes investments in limited partnerships, including certain small business investment corporations and low income housing partnerships. As of September 30, 2018March 31, 2019 and December 31, 2017,2018, unfunded capital commitments totaled $1.4 million$3,445 and $3.5 million,$3,905, respectively, for the small business investment corporations and $3.5 million$1,434 and $2.5 million$1,434, respectively, for the low income housing partnerships, respectively.partnerships. At September 30, 2018March 31, 2019 and December 31, 2017,2018, capital contributions to the small business investment corporations were $6.6 million$7,055 and $4.5 million,$6,595, respectively, and capital contributions to the low income housing partnerships were $5.0 million$4,566 and $3.5 million,$4,566, respectively.



RESULTSOF OPERATIONS
Three Months Ended September 30, 2018 and 2017
OVERVIEW OF THE INCOME STATEMENT
The Corporation had net income of $9.2 million in the third quarter of 2018 and $7.2 million in the third quarter of 2017. The earnings per diluted share were $0.60 in the third quarter of 2018 and $0.47 in the third quarter of 2017. The annualized return on assets and return on equity for the third quarter of 2018 are 1.20% and 14.59% compared to 1.06% and 11.88% for the third quarter of 2017.
INTEREST INCOME AND EXPENSE
Net interest margin on a fully tax equivalent basis was 3.79% and 3.82% for the quarters ended September 30, 2018 and 2017, respectively. The yield on earning assets increased 20 basis points to 4.78% for the quarter ended September 30, 2018 from 4.58% for the quarter ended September 30, 2017. The cost of interest-bearing liabilities increased 35 basis points to 1.22% for the quarter ended September 30, 2018 from 0.87% for the quarter ended September 30, 2017.
Total interest and dividend income increased by 21.3% to $34.0 million for the quarter ended September 30, 2018 from $28.1 million for the quarter ended September 30, 2017. Net interest income increased by 14.3% to $26.9 million for the quarter ended September 30, 2018 from $23.5 million for the quarter ended September 30, 2017.
PROVISION FOR LOAN LOSSES
During the quarter ended September 30, 2018, the Corporation recorded a provision for loan losses of $1.1 million, as compared to a provision for loan losses of $1.4 million for the quarter ended September 30, 2017. Net chargeoffs in the third quarter of 2018 were $707 thousand, compared to net chargeoffs of $820 thousand in the third quarter of 2017. CNB Bank net chargeoffs totaled $297 thousand and $334 thousand during the quarters ended September 30, 2018 and 2017, respectively, or 0.05% and 0.06%, respectively, of average CNB Bank loans. Holiday Financial Services Corporation is the Corporation’s consumer discount company and recorded net chargeoffs totaling $410 thousand and $486 thousand during the quarters ended September 30, 2018 and 2017, respectively.
Management believes the provision for loan losses was appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in our portfolio as of September 30, 2018.
NON-INTEREST INCOME
Net realized and unrealized gains on trading securities were $421 thousand during the quarter ended September 30, 2018, compared to $160 thousand during the quarter ended September 30, 2017. Excluding the effects of securities transactions, non-interest income was $5.5 million for the quarter ended September 30, 2018, compared to $4.9 million for the quarter ended September 30, 2017.
As a result of the Corporation’s continued focus on growing its Private Client Solutions division, wealth and asset management revenues were $1.0 million during the quarter ended September 30, 2018, an increase of 8.3% from $952 thousand during the quarter ended September 30, 2017. In addition, as a result of its organic deposit growth, the Corporation experienced an increase in service charges in deposit accounts of 27.3% in the third quarter of 2018 compared to the third quarter of 2017. Similarly, other service charges and fees increased $145 thousand, or 24.7%, in the third quarter of 2018 compared to the the third quarter of 2017. Income from investments in Small Business Investment Companies was $253 thousand in the third quarter of 2018 compared to $0 thousand in the third quarter of 2017, which is reported as a component of other non-interest income.

NON-INTEREST EXPENSES
Total non-interest expenses were $20.8 million and $17.6 million during the quarters ended September 30, 2018 and 2017, respectively. Salaries and benefits expense increased $2.3 million, or 25.6%, during the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017. As of September 30, 2018, the Corporation had 534 full-time equivalent staff, compared to 490 full-time equivalent staff as of September 30, 2017, an increase of 9.0%. The remainder of the increase in non-interest expenses is primarily a result of the Corporation’s continued growth and the servicing of a larger customer base. Total households serviced at September 30, 2018 were 63,619, compared to 59,026 households at September 30, 2017, an increase of 7.8%.



INCOME TAX EXPENSE
As a result of the enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017, income tax expense decreased $599 thousand, or 26.2%, during the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017. The Corporation’s effective tax rate was 15.4% in the third quarter of 2018 compared to 24.0% in the third quarter of 2017.
The effective rates for the periods differed from the federal statutory rate of 21.0% at September 30, 2018 and 35.0% at September 30, 2017 principally as a result of tax exempt income from securities and loans as well as earnings from bank owned life insurance.


CONSOLIDATED YIELD COMPARISONS
AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE NINETHREE MONTHS ENDED
Dollars in thousands
                        
 September 30, 2018 September 30, 2017 March 31, 2019 March 31, 2018
 
Average
Balance
 
Annual
Rate
 
Interest
Inc./Exp.
 
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) $349,464
 2.58% $6,862
 $328,947
 2.56% $6,286
 $414,286
 2.85% $2,978
 $292,450
 2.69% $1,984
Tax-Exempt (1,2) 98,243
 3.42% 2,507
 112,581
 4.12% 3,415
 98,588
 3.46% 841
 97,846
 3.51% 850
Equity Securities (1,2) 29,755
 4.10% 915
 25,988
 3.64% 710
 18,603
 6.02% 280
 29,414
 3.97% 292
Total securities 477,462
 2.84% 10,284
 467,516
 2.99%
10,411
 531,477
 3.07% 4,099
 419,710
 2.96% 3,126
Loans:                        
Commercial (2) 795,383
 4.86% 28,964
 624,835
 4.94% 23,132
 932,819
 5.29% 12,329
 768,968
 4.54% 8,732
Mortgage (2) 1,407,672
 4.86% 51,034
 1,287,359
 4.49% 43,317
 1,481,543
 4.95% 18,319
 1,356,569
 4.69% 15,901
Consumer 85,088
 9.95% 6,350
 80,212
 9.44% 5,682
 87,745
 10.92% 2,395
 82,745
 9.66% 1,999
Total loans (3) 2,288,143
 5.03% 86,348
 1,992,406
 4.83% 72,131
 2,502,107
 5.28% 33,043
 2,208,282
 4.82% 26,632
Total earning assets 2,765,605
 4.65% 96,632
 2,459,922
 4.48% 82,542
 3,033,584
 4.89% $37,142
 2,627,992
 4.53% $29,758
Non interest-bearing assets:                        
Cash and due from banks 34,177
     28,282
     29,970
     26,142
    
Premises and equipment 49,978
     50,287
     66,376
     50,441
    
Other assets 124,446
     136,815
     135,995
     146,935
    
Allowance for loan losses (21,306)     (17,086)     (19,866)     (20,175)    
Total non interest-bearing assets 187,295
     198,298
     212,475
     203,343
    
TOTAL ASSETS $2,952,900
     $2,658,220
     $3,246,059
     $2,831,335
    
LIABILITIES AND SHAREHOLDERS’ EQUITY:                        
Demand—interest-bearing $583,031
 0.36% $1,596
 $550,619
 0.35% $1,449
 $559,003
 0.42% $582
 $568,970
 0.37% $523
Savings 1,028,791
 0.75% 5,778
 962,488
 0.48% 3,454
 1,325,893
 1.29% 4,290
 917,385
 0.51% 1,171
Time 377,774
 1.43% 4,049
 231,305
 1.04% 1,806
 369,621
 1.86% 1,715
 375,554
 1.31% 1,230
Total interest-bearing deposits 1,989,596
 0.77% 11,423
 1,744,412
 0.51% 6,709
 2,254,517
 1.17% 6,587
 1,861,909
 0.63% 2,924
Short-term borrowings 46,238
 1.69% 586
 137,991
 1.05% 1,082
 20,462
 2.91% 149
 74,112
 1.68% 311
Long-term borrowings 250,166
 2.05% 3,840
 143,797
 1.61% 1,737
 242,198
 2.08% 1,261
 240,601
 1.96% 1,177
Subordinated debentures 70,620
 5.42% 2,873
 70,620
 5.55% 2,940
 70,620
 5.65% 998
 70,620
 4.96% 875
Total interest-bearing liabilities 2,356,620
 1.06% $18,722
 2,096,820
 0.79% $12,468
 2,587,797
 1.39% $8,995
 2,247,242
 0.94% $5,287
Demand—non interest-bearing 319,003
     296,517
     345,688
     311,595
    
Other liabilities 28,633
     27,943
     46,401
     28,062
    
Total liabilities 2,704,256
     2,421,280
     2,979,886
     2,586,899
    
Shareholders’ equity 248,644
     236,940
     266,173
     244,436
    
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $2,952,900
     $2,658,220
     $3,246,059
     $2,831,335
    
Interest income/Earning assets   4.65% $96,632
   4.48% $82,542
   4.89% $37,142
   4.53% $29,758
Interest expense/Interest-bearing liabilities   1.06% 18,722
   0.79% 12,468
   1.39% 8,995
   0.94% 5,287
Net interest spread   3.59% $77,910
   3.69% $70,074
   3.50% $28,147
   3.59% $24,471
Interest income/Earning assets   4.65% 96,632
   4.48% 82,542
   4.89% 37,142
   4.53% 29,758
Interest expense/Earning assets   0.90% 18,722
   0.68% 12,468
   1.19% 8,995
   0.80% 5,287
Net interest margin   3.75% $77,910
   3.80% $70,074
   3.70% $28,147
   3.72% $24,471
 
(1)Includes unamortized discounts and premiums. Average balance is computed using the carrying valueamortized cost of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.
(2)Average yields are stated on a fully taxable equivalent basis.
(3)Average outstanding includes the average balance outstanding of all non-accrual loans. Loans consist of the average of total loans less average unearned income. The amount of loan fees included in the interest income on loans is not material.




RESULTS OF OPERATIONS
NineThree Months Ended September 30,March 31, 2019 and 2018 and 2017

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $24.8$9.5 million in the first quarter of 2019 compared to $7.1 million in the first quarter of 2018. Net interest income increased $3.7 million, or 15.2%, and non-interest income increased $1.4 million, or 29.5%. The provision for the nine months ended September 30, 2018loan losses decreased by $325 thousand, or 19.9%, and $20.4non-interest expenses increased by $2.2 million, for the same period in 2017.or 11.5%. The earnings per diluted share were $1.62$0.62 for the nine months ended September 30, 2018first quarter of 2019 and $1.34$0.46 for the nine months ended September 30, 2017.first quarter of 2018. The annualized return on average assets and the return on average equity for the nine months ended September 30, 2018 are 1.12%first first quarter of 2019 were 1.17% and 13.28%14.24%, respectively, as compared to 1.02%1.00% and 11.48%11.61%, respectively, for the same period in 2017.first quarter of 2018.

INTEREST INCOME AND EXPENSE

Net interest margin on a fully tax equivalent basis was 3.75%3.70% and 3.80%3.72% for the nine monthsquarters ended September 30,March 31, 2019 and 2018, and 2017, respectively. The yield on earning assets increased 1736 basis points to 4.65%4.89% for the nine monthsquarter ended September 30, 2018March 31, 2019, from 4.48%4.53% for the nine monthsquarter ended September 30, 2017.March 31, 2018. The cost of interest-bearing liabilities increased 2745 basis points to 1.06%1.39% for the nine monthsquarter ended September 30, 2018March 31, 2019,  from 0.79%0.94% for the nine monthsquarter ended September 30, 2017.March 31, 2018.
Total interest and dividend income increased by 19.1% to $95.5 million for the nine months ended September 30, 2018 from $80.2 million for the nine months ended September 30, 2017. Net interest income increased by 13.4% to $76.8 million for the nine months ended September 30, 2018 from $67.7 million for the nine months ended September 30, 2017.
PROVISION FOR LOAN LOSSES

During the nine monthsquarter ended September 30, 2018,March 31, 2019, the Corporation recorded a provision for loan losses of $4.6$1.3 million, as compared to a provision for loan losses of $3.6$1.6 million for the nine monthsquarter ended September 30, 2017.March 31, 2018. Net chargeoffs forin the nine months ended September 30, 2018first quarter of 2019 were $1.8 million,$664 thousand, compared to net chargeoffs of $2.0 million for$568 thousand in the nine months ended September 30, 2017. CNBfirst quarter of 2018. Net chargeoffs of the Bank net chargeoffs totaled $436$230 thousand and $392$45 thousand during the the nine monthsquarters ended September 30,March 31, 2019 and 2018, or 0.04% and 2017, respectively, or 0.02% and 0.02%0.01%, respectively, of average CNB Bank loans. Holiday isFinancial Services Corporation, the Corporation’s consumer discount company, and recorded net chargeoffs totaling $1.4 million$434 thousand and $1.6 million$523 thousand during the nine monthsquarters ended September 30,March 31, 2019 and 2018, and 2017, respectively.

Management believes the provision for loan losses was appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in our portfolio as of September 30, 2018.March 31, 2019.

NON-INTEREST INCOME

Net realized gains on available-for-sale securities were $0$148 thousand during the nine monthsquarter ended September 30, 2018, compared to $1.5 million during the nine months ended September 30, 2017.March 31, 2019. Net realized and unrealized gains on trading securities were $672$800 thousand during the nine monthsquarter ended September 30, 2018,March 31, 2019, compared to $475$14 thousand during the nine monthsquarter ended September 30, 2017. In addition, the Corporation realized a gain on the sale of a branch in the second quarter of 2017 of $536 thousand.March 31, 2018. Excluding the effects of securities transactions, and the gain on sale of a branch, non-interest income was $15.6$5.2 million for the nine monthsquarter ended September 30, 2018,March 31, 2019, compared to $13.3$4.7 million for the nine monthsquarter ended September 30, 2017.March 31, 2018.

As a result of the Corporation’s continued focus on growing its Private Client Solutions division, wealth and asset management revenues were $3.2 million during the nine months ended September 30, 2018, an increase of 13.5% from $2.8 million during the nine months ended September 30, 2017. In addition, as a result of its organic deposit growth, the Corporation experienced an increase in service charges in deposit accounts of 17.2% in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Similarly, other service charges and fees increased $398$234 thousand, or 23.8%18.8%, in the first nine monthsquarter of 20182019 compared to the first nine monthsquarter of 2017.2018. Net income (loss) attributable to investments in Small Business Investment Companies was $558$91 thousand induring the nine monthsquarter ended September 30, 2018March 31, 2019 compared to $(37)$12 thousand induring the nine monthsquarter ended September 30, 2017,March 31, 2018, which is reported as a component of other non-interest income.

NON-INTEREST EXPENSES

Total non-interest expenses were $21.2 million and $19.0 million for the quarters ended March 31, 2019 and 2018, respectively. Salaries and benefits expense increased $1.4 million, or 14.3%, during the quarter ended March 31, 2019 compared to the quarter ended March 31, 2018, primarily as a result of the expansion of staffing levels in several areas during the past twelve months, including business development, risk management, and customer service personnel. The remainder of the increase in non-interest expenses was primarily a result the Corporation's continued growth and the servicing of a larger customer base. Total households serviced at March 31, 2019 were 65,081, compared to 59,267 households at March 31, 2018, an increase of 9.8%. The ratio of non-interest expenses to average assets was 2.61% and 2.68% during the quarters ended March 31, 2019 and 2018, respectively.








INCOME TAX EXPENSE

NON-INTEREST EXPENSES
Total non-interest expenses were $59.3 million and $52.4Income tax expense was $2.0 million during the ninethree months ended September 30, 2018March 31, 2019 and 2017, respectively. Salaries and benefits expense increased $4.1$1.1 million or 15.1%, during the ninethree months ended September 30,March 31, 2018, compared toresulting in effective tax rates of 17.1% and 13.7% for the nine months ended September 30, 2017. As of September 30, 2018, the Corporation had 534 full-time equivalent staff, compared to 490 full-time equivalent staff as of September 30, 2017, an increase of 9.0%. The remainder of theperiods, respectively. This increase in non-interest expenses is primarily a result of the Corporation’s continued growth. Total households serviced at September 30, 2018 were 63,619, compared to 59,026 households at September 30, 2017, an increase of 7.8%.
The ratio of non-interest expenses to average assets was 2.68% and 2.63% during the nine months ended September 30, 2018 and 2017, respectively.
INCOME TAX EXPENSE
As a result of the enactment of the Tax Cuts and Jobs Act in the fourth quarter of 2017, income tax expense decreased $2.8 million, or 39.5%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The Corporation’s effective tax rate was 14.9%is primarily attributable to a higher percentage of pre-tax net income in the nine months ended September 30, 2018 compared to 26.1%first quarter of 2019 that is not tax-exempt than was recorded in the nine months ended September 30, 2017.
first quarter of 2018. The effective rates for the periods differed from the federal statutory rate of 21.0% at September 30,March 31, 2019 and 2018 and 35.0% at September 30, 2017 principally as a result of tax exempt income from securities and loans as well as earnings from bank owned life insurance.

CRITICAL ACCOUNTING POLICIES

The Corporation’s accounting and reporting policies are in accordance with GAAP and conform to general practices within the financial services industry. Accounting and reporting practices for the allowance for loan losses and fair value of securities are deemed critical since they involve the use of estimates and require significant management judgments. In addition, the fair value of assets acquired and liabilities assumed in connection with business combinations, including the associated goodwill that was recorded, required the use of material estimates. Application of assumptions different than those used by management could result in material changes in the Corporation’s financial position or results of operations. Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combination and Branch Sale), Note 4 (Securities), and Note 5 (Loans) of the Corporation’s 20172018 Form 10-K provide additional detail with regard to the Corporation’s accounting for the allowance for loan losses, the fair value of securities, business combinations and loans. There have been no significant changes in the application of accounting policies since December 31, 2017.2018.


ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a financial institution, the Corporation’s primary source of market risk is interest rate risk, which is the exposure to fluctuations in the Corporation’s future earnings resulting from changes in interest rates. This exposure is correlated to the repricing characteristics of the Corporation’s portfolio of assets and liabilities. Each asset or liability reprices either at maturity or during the life of the instrument.

The principal purpose of asset/liability management is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Net interest income is enhanced by increasing the net interest margin and by the growth in earning assets. As a result, the primary goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.

The Corporation uses an asset-liability management model to measure the effect of interest rate changes on its net interest income. The Corporation’s management also reviews asset-liability maturity gap and repricing analyses regularly. The Corporation does not always attempt to achieve a precise match between interest sensitive assets and liabilities because it believes that an actively managed amount of interest rate risk is inherent and appropriate in the management of the Corporation’s profitability.

Asset-liability modeling techniques and simulation involve assumptions and estimates that inherently cannot be measured with precision. Key assumptions in these analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude, and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of the Corporation’s interest rate risk position over time.

Management reviews interest rate risk on a quarterly basis and reports to the ALCO. This review includes earnings shock scenarios whereby interest rates are immediately increased and decreased by 100, 200, 300, and 400 basis points. These scenarios, detailed in the table below, indicate that there would not be a significant variance in net interest income over a one-year period due to interest rate changes; however, actual results could vary significantly. Based on the most recent data available as of September 30, 2018,At March 31, 2019, all interest rate risk levels according to the model were within the tolerance limits of ALCO approvedALCO-approved policy. In addition, the table does not take into consideration changes that management would make to realign its assets and liabilities in the event of an unexpected change in thechanging interest rate environment. Due to the current low interest rate environment, the -300300 and -400400 basis point declining interest rate scenarios have been excluded from the table.
September 30, 2018
Change in
Basis Points
 
% Change in Net
Interest Income
400 9.5%
300 7.8%
200 6.5%
100 6.5%
(100) (0.9)%
(200) (2.7)%

March 31, 2019
Change in
Basis Points
 
% Change in Net
Interest Income
400 9.0%
300 7.0%
200 5.4%
100 5.2%
(100) (3.1)%
(200) (4.6)%

ITEM 4

CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation was carried out
The Corporation’s management, under the supervision of and with the participation of the Corporation’s management, including the ChiefPrincipal Executive Officer and Principal Financial Officer, has carried out an evaluation of the design and effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) (“Exchange Act”). Based on their evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effectiveas defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this quarterly reportreport. Based upon that evaluation, management, including the Principal Executive Officer and Principal Financial Officer, have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensureprovide reasonable assurance that all material information required to be disclosed byin reports the Corporation in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in SECthe Securities and Exchange Commission’s rules and forms. forms

There werewas no changessignificant change in the Corporation’s internal control over financial reporting that occurred during the period covered by this quarterly reportquarter ended March 31, 2019 that havehas materially affected, or arethat is reasonably likely to materially affect, the Corporation’sour internal control over financial reporting.reporting


PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS – None

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 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item IA of the 20172018 Form 10-K.

ITEM 2. 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 three months ended September 30, 2018.March 31, 2019.
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 (1)
July 1 - 31, 2018
$

369,860
August 1 - 31, 2018


369,860
September 1 - 30, 2018


369,860
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 (1)
January 1 – 31, 20190
 $0
 0
 289,731
February 1 – 28, 20190
 0
 0
 289,731
March 1 – 31, 20190
 0
 0
 289,731
 
(1)The Corporation’s stock repurchase program, which was announced on November 12, 2014, authorizes the repurchase of up to 500,000 shares of common stock. The program will remain in effect until fully utilized or until modified, suspended or terminated. As of September 30, 2018,March 31, 2019, there were 369,860289,731 shares remaining in the program.

Additionally, during the quarter ended March 31, 2019, certain employees surrendered shares of common stock owned by them to satisfy their statutory minimum U.S. federal and state tax obligations associated with the vesting of shares of restricted common stock issued under the CNB Financial Corporation 2009 Stock Incentive Plan (the "Plan").

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.
ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS
Exhibit No.  Description
  
3.1  
  
3.2  
10.1
  
31.1  
  
31.2  
  
32.1  
  
32.2  
  
101.INS  XBRL Instance Document
  
101.SCH  XBRL Taxonomy Extension Schema Document
  
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEF  XBRL Taxonomy Extension Definitions Linkbase Document
  
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
  
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
      CNB FINANCIAL CORPORATION
      (Registrant)
    
DATE: May 9, 2019November 8, 2018    /s/ Joseph B. Bower, Jr.
      Joseph B. Bower, Jr.
      President and DirectorChief Executive Officer
      (Principal Executive Officer)
    
DATE: May 9, 2019November 8, 2018    /s/ Brian W. Wingard
      Brian W. Wingard
      Treasurer
      (Principal Financial and Accounting Officer)


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