UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10–Q~~10-Q



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

For the quarterly period ended March 31, ~~2019~~2020



¨☐	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.)
		(I.R.S. Employer Identification No.)

1 South Second Street

P.O. Box 42

Clearfield, Pennsylvania16830

(Address of principal executive offices)

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



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

Title of Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	CCNE	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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	¨☐	Accelerated ~~filer~~Filer	ý☒

Non-accelerated filer	¨☐	Smaller reporting company	¨☐

		Emerging growth company	¨☐

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

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



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

~~Title of Class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, no par value~~	~~CCNE~~	~~The NASDAQ Stock Market LLC~~

The number of shares outstanding of the issuer’s common stock as of May ~~6, 2019~~5, 2020:

COMMON STOCK, NO PAR VALUE PER SHARE: ~~15,239,371~~15,396,617 SHARES

INDEX

PART I.

FINANCIAL INFORMATION



	Page Number

ITEM 1 – Financial Statements

Consolidated Balance Sheets – March 31, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 (audited)	1

Consolidated Statements of Income – Three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	2

Consolidated Statements of Comprehensive Income – Three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	3

Consolidated Statements of Cash Flows – Three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	4

Consolidated Statements of Changes in Stockholders' Equity - Three months ended March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	5

Notes to Consolidated Financial Statements	6

ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk	3739

ITEM 4 – Controls and Procedures	3840

PART II. OTHER INFORMATION

ITEM 1 – Legal Proceedings	3941

ITEM 1A – Risk Factors	3941

ITEM 2 – ~~Issuer Purchases~~Unregistered Sales of Equity Securities and Use of Proceeds	3942

ITEM 3 – Defaults Upon Senior Securities	3942

ITEM 4 – Mine Safety Disclosures	3942

ITEM 5 – Other Information	3942

ITEM 6 – Exhibits	4043

Signatures	4144

Forward-Looking Statements

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

Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and ~~unknown~~performance of the Corporation, our customers and the global economy and financial markets. The extent to which the COVID-19 pandemic impacts us will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its impact on our customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others. Moreover, investors are cautioned to interpret many of the risks ~~uncertainties~~identified under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and ~~other~~numerous adverse impacts of the COVID-19 pandemic.

Additional factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) changes in general business, industry or economic conditions or competition; (ii) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting ~~principals~~principles or otherwise; (iii) adverse changes or conditions in capital and financial markets; (iv) changes in interest rates; (v) higher than expected costs or other difficulties related to integration of combined or merged businesses; (vi) the ~~inability to realize expected cost savings or achieve other anticipated benefits in connection with~~effects of business combinations and other ~~acquisitions;~~acquisition transactions, including the inability to realize our loan and investment portfolios; (vii) changes in the quality or composition of our loan and investment portfolios; (viii) adequacy of loan loss reserves; (ix) increased competition; (x) loss of certain key officers; (xi) deposit attrition; (xii) rapidly changing technology; (xiii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xiv) changes in the cost of funds, demand for loan products or demand for financial services; and (xv) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Such developments could have an adverse impact on ~~our~~CNB's 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~~CNB undertakes no obligation to publicly update or revise any forward-looking ~~statement,~~statements included in this Quarterly Report on Form 10-Q, whether as a result of new information, future ~~developments~~events or otherwise, except ~~as may be~~to the extent required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed might not occur and you should not put undue reliance on any forward-looking statements.

Part I Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share data


	(unaudited) March 31, 2019			December 31, 2018			(unaudited) March 31, 2020			December 31, 2019
ASSETS
Cash and due from banks	$	52,833		$	43,327		$	58,922		$	42,373
Interest bearing deposits with other banks	2,449			2,236			77,419			150,601
Total cash and cash equivalents	55,282			45,563			136,341			192,974
Securities available for sale	500,608			516,863			570,582			542,313
Trading securities	8,642			7,786			5,507			9,809
Loans held for sale	2,952			367			1,815			930
Loans	2,530,761			2,479,348			2,855,206			2,809,197
Less: unearned discount	(4,671		)	(4,791		)	(4,546		)	(5,162		)
Less: allowance for loan losses	(20,346		)	(19,704		)	(21,915		)	(19,473		)
Net loans	2,505,744			2,454,853			2,828,745			2,784,562
FHLB, other equity, and restricted equity interests	23,129			24,508			27,975			27,868
Premises and equipment, net	51,331			49,920			55,109			54,867
Operating lease assets	16,222			0			18,360			18,422
Bank owned life insurance	56,805			56,443			67,017			66,538
Mortgage servicing rights	1,498			1,495			1,578			1,573
Goodwill	38,730			38,730			38,730			38,730
Core deposit intangible	562			727			77			160
Accrued interest receivable and other assets	25,819			24,266			27,302			24,913
Total Assets	$	3,287,324		$	3,221,521		$	3,779,138		$	3,763,659
LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits	$	345,386		$	356,797		$	376,840		$	382,259
Interest bearing deposits	2,311,973			2,253,989			2,723,376			2,720,068
Total deposits	2,657,359			2,610,786			3,100,216			3,102,327
Short-term borrowings	0			0
FHLB and other long term borrowings	240,005			245,117			225,722			227,907
Subordinated debentures	70,620			70,620			70,620			70,620
Operating lease liabilities	17,109			0			19,397			19,363
Accrued interest payable and other liabilities	27,272			32,168			38,381			38,476
Total liabilities	3,012,365			2,958,691			3,454,336			3,458,693
Common stock, $0 par value; authorized 50,000,000 shares; issued 15,308,378 shares at March 31, 2019 and December 31, 2018	0			0
Common stock, $0 par value; authorized 50,000,000 shares; issued 15,476,736 shares at March 31, 2020 and 15,360,946 shares at December 31, 2019							0			0
Additional paid in capital	97,139			97,602			102,128			99,335
Retained earnings	178,662			171,780			207,698			201,503
Treasury stock, at cost (69,007 shares at March 31, 2019 and 101,097 shares at December 31, 2018)	(1,702		)	(2,556		)
Treasury stock, at cost (80,119 and 112,961 shares for March 31, 2020 and December 31, 2019, respectively)							(2,026		)	(2,811		)
Accumulated other comprehensive income (loss)	860			(3,996		)	17,002			6,939
Total shareholders’ equity	274,959			262,830			324,802			304,966
Total Liabilities and Shareholders’ Equity	$	3,287,324		$	3,221,521		$	3,779,138		$	3,763,659

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data



	Three months ended March 31,				Three months ended March 31,
	2019		2018		2020			2019
INTEREST AND DIVIDEND INCOME:
Loans including fees	$	32,824	$	26,457	$	35,510		$	32,824
Securities:
Taxable	2,978		1,984		3,880			2,978
Tax-exempt	697		694		481			697
Dividends	254		252		219			254
Total interest and dividend income	36,753		29,387		40,090			36,753
INTEREST EXPENSE:
Deposits	6,587		2,924		7,905			6,587
Borrowed funds	1,410		1,488		1,227			1,410
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
Subordinated debentures (includes $21 and $6 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements, respectively)					964			998
Total interest expense	8,995		5,287		10,096			8,995
NET INTEREST INCOME	27,758		24,100		29,994			27,758
PROVISION FOR LOAN LOSSES	1,306		1,631		3,079			1,306
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	26,452		22,469		26,915			26,452
NON-INTEREST INCOME:
Service charges on deposit accounts	1,481		1,247		1,527			1,481
Other service charges and fees	646		618		590			646
Wealth and asset management fees	1,042		1,030		1,293			1,042
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 securities	800		14
Net realized gains on available-for-sale securities (includes $0 and $148 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities, respectively)					0			148
Net realized and unrealized gains (losses) on trading securities					(588		)	800
Mortgage banking	239		208		337			239
Bank owned life insurance	361		400		479			361
Card processing and interchange income	1,029		971		1,128			1,029
Other	407		263		598			407
Total non-interest income	6,153		4,751		5,364			6,153
NON-INTEREST EXPENSES:
Salaries and benefits	10,900		9,535		11,397			10,900
Net occupancy expense	2,866		2,496		3,027			2,866
Amortization of core deposit intangible	165		248		83			165
Data processing	1,185		1,074		1,336			1,185
State and local taxes	768		853		581			768
Legal, professional, and examination fees	553		508		645			553
Advertising	411		597		405			411
FDIC insurance premiums	422		298		619			422
Card processing and interchange expenses	747		734		796			747
Other	3,158		2,656		2,853			3,158
Total non-interest expenses	21,175		18,999		21,742			21,175
INCOME BEFORE INCOME TAXES	11,430		8,221		10,537			11,430
INCOME TAX EXPENSE (includes $30 and ($12) income tax expense (benefit) from reclassification items in 2019 and 2018, respectively)	1,957		1,124
INCOME TAX EXPENSE (includes ($4) and $30 income tax expense from reclassification items, respectively)					1,724			1,957
NET INCOME	$	9,473	$	7,097	$	8,813		$	9,473
EARNINGS PER SHARE:
Basic	$	0.62	$	0.46	$	0.57		$	0.62
Diluted	$	0.62	$	0.46	$	0.57		$	0.62
DIVIDENDS PER SHARE:
Cash dividends per share	$	0.170	$	0.165	$	0.17		$	0.17

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands



	Three Months Ended March 31,						Three months ended March 31,
	2019			2018			2020			2019
NET INCOME	$	9,473		$	7,097		$	8,813		$	9,473
Other comprehensive income (loss), net of tax:
Net change in fair value of interest rate swap agreements designated as cash flow hedges:
Unrealized gain (loss) on interest rate swaps, net of tax of $26 and ($4), respectively	(100		)	16
Reclassification adjustment for losses recognized in earnings, net of tax of ($1) and ($12), respectively	5			46
Unrealized gain (loss) on interest rate swaps, net of tax of $92 and $26, respectively							(346		)	(100		)
Reclassification adjustment for losses recognized in earnings, net of tax of ($4) and ($1), respectively							17			5
	(95		)	62			(329		)	(95		)
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
Unrealized holding gains (losses) arising during the period, net of tax of ($2,763) and ($1,348), respectively							10,392			5,068
Reclassification adjustment for realized gains included in net income, net of tax of $0 and $31, respectively							0			(117		)
	4,951			(3,964		)	10,392			4,951
Other comprehensive income (loss)	4,856			(3,902		)
Other comprehensive income							10,063			4,856
COMPREHENSIVE INCOME	$	14,329		$	3,195		$	18,876		$	14,329

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands



	Three Months Ended March 31,						Three months ended March 31,
	2019			2018			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	9,473		$	7,097		$	8,813		$	9,473
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses	1,306			1,631			3,079			1,306
Depreciation and amortization of premises and equipment, operating leases assets, core deposit intangible, and mortgage servicing rights	1,509			1,236			1,299			1,509
Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income	(409		)	(427		)	(812		)	(409		)
Net realized gains on sales of available-for-sale securities	(148		)	0			0			(148		)
Net realized and unrealized gains on trading securities	(800		)	(14		)
Net realized and unrealized (gains) losses on trading securities							588			(800		)
Proceeds from sale of trading securities	236			0			5,860			236
Purchase of trading securities	(144		)	(92		)	2,000			(144		)
Gain on sale of loans	(84		)	(105		)	(243		)	(84		)
Net gains on dispositions of premises and equipment and foreclosed assets	0			(4		)	(15		)	0
Proceeds from sale of loans	4,569			4,270			8,536			4,569
Origination of loans held for sale	(7,118		)	(4,824		)	(9,412		)	(7,118		)
Income on bank owned life insurance	(361		)	(400		)	(479		)	(361		)
Stock-based compensation expense	592			677			549			592
Changes in:
Accrued interest receivable and other assets	(707		)	(4,137		)	(4,061		)	(707		)
Accrued interest payable, lease liabilities, and other liabilities	(6,520		)	(766		)	(1,285		)	(6,520		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	1,394			4,142			14,417			1,394
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, prepayments and calls of available-for-sale securities	20,152			7,780			27,389			20,152
Proceeds from sales of available-for-sale securities	11,403			0			0			11,403
Purchase of available-for-sale securities	(9,252		)	(21,634		)	(46,882		)	(9,252		)
Loan origination and payments, net	(51,635		)	(130,059		)	(46,383		)	(51,635		)
Redemption (purchase) of FHLB, other equity, and restricted equity interests	1,379			(5,047		)	(107		)	1,379
Purchase of premises and equipment	(2,399		)	(397		)	(1,327		)	(2,399		)
Proceeds from the sale of premises and equipment and foreclosed assets	8			166			145			8
NET CASH USED BY INVESTING ACTIVITIES	(30,344		)	(149,191		)	(67,165		)	(30,344		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Checking, money market and savings accounts	88,105			30,391			888			88,105
Certificates of deposit	(41,532		)	11,849			(2,999		)	(41,532		)
Purchase of treasury stock	(201		)	(448		)	(324		)	(201		)
Cash dividends paid	(2,591		)	(2,523		)	(2,618		)	(2,591		)
Proceeds from stock offering, net of issuance costs							3,353			0
Repayment of long-term borrowings	(5,112		)	(7,554		)	(2,185		)	(5,112		)
Proceeds from long-term borrowings	0			50,000
Net change in short-term borrowings	0			56,593
NET CASH PROVIDED BY FINANCING ACTIVITIES	38,669			138,308			(3,885		)	38,669
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	9,719			(6,741		)	(56,633		)	9,719
CASH AND CASH EQUIVALENTS, Beginning	45,563			35,345			192,974			45,563
CASH AND CASH EQUIVALENTS, Ending	$	55,282		$	28,604		$	136,341		$	55,282
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	8,942		$	5,203		$	9,933		$	8,942
Income taxes	1,250			0			78			1,250
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers to other real estate owned	$	66		$	0		$	165		$	66
Grant of restricted stock awards from treasury stock	$	1,055		$	933		892			1,055
Grant of performance based restricted stock awards from treasury stock							217			0
Right of use assets obtained in exchange for lease liabilities							0			16,478

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

Dollars in thousands, except share and per share data


																Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Share- holders’ Equity
Balance, January 1, 2020																$	99,335		$	201,503		$	(2,811	)	$	6,939		$	304,966
Net income																			8,813									8,813
Other comprehensive income																									10,063			10,063
Restricted stock award grants (35,160 shares)																(892		)				892						0
Performance based restricted stock award grants (8,351 shares)																(217		)				217						0
Stock-based compensation expense																549												549
Issuance of common stock, net of issuance costs (115,790 shares)																3,353												3,353
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (7,211 shares)																						(211		)				(211		)
Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting (3,458 shares)																						(113		)				(113		)
Cash dividends declared ($0.17 per share)																			(2,618		)							(2,618		)
Balance, March 31, 2020																$	102,128		$	207,698		$	(2,026	)	$	17,002		$	324,802
	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		$	97,602		$	171,780		$	(2,556	)	$	(3,996	)	$	262,830
Net income				9,473									9,473						9,473									9,473
Other comprehensive income										4,856			4,856												4,856			4,856
Restricted stock award grants (39,790 shares)	(1,055		)				1,055						0			(1,055		)				1,055						0
Stock-based compensation expense	592												592			592												592
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (7,700 shares)							(201		)				(201		)							(201		)				(201		)
Cash dividends declared ($0.17 per share)				(2,591		)							(2,591		)				(2,591		)							(2,591		)
Balance, March 31, 2019	$	97,139		$	178,662		$	(1,702	)	$	860		$	274,959		$	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 expense	677												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, 2018	96,786			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 March 31, ~~2019~~2020 and for the three month ~~periods~~period ended March 31, ~~2019~~2020 and ~~2018~~2019 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the periods presented. The financial performance reported for CNB Financial Corporation (the “Corporation”) for the three month period ended March 31, ~~2019~~2020 is not necessarily indicative of the results to be expected for the full year. This information should be read in conjunction with the Corporation’s Annual Report on Form 10-K for the period ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Form 10-K”). All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated. Certain amounts appearing in the consolidated financial statements and notes thereto for prior ~~period amounts~~periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.

Risks and Uncertainties

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

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

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

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

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

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

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

Credit: The Corporation is working with customers directly affected by the COVID-19 pandemic. The Corporation is prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic slowdown related to the COVID-19 pandemic, the Corporation is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Corporation could experience further increases in its required allowance for loan losses and record additional provision expense. It is possible that the Corporation's asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are prolonged.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued an Accounting Standards Update ("ASU") 2016-13, "Financial Instruments – Credit Losses" which will require recognition of an entity’s current estimate of all expected credit losses for assets measured at amortized cost. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical credit loss experience, current market conditions, and reasonable and supportable forecast. This eliminates the probable initial recognition threshold in current GAAP. The update will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. In November 2018, the FASB issued ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments – Credit Losses." The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 and should be accounted for in accordance with Topic 842, "Leases." In April 2019, ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” was issued to address certain codification improvements and to provide certain accounting policy electives related to accrued interest as well as disclosure related to credit losses, among other things. In May 2019, ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief,” was issued to provide transition relief in connection with the adoption of ASU 2016-03 whereby entities would have the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis.

The CARES Act provides financial institutions with the option to delay the adoption of ASU No. 2016-13, “Financial Instruments – Credit Losses,” until the earlier of December 31, 2020 or until the national emergency related to the COVID-19 pandemic is terminated. Given the complexity of the processes necessary to properly evaluate, document and implement the current expected credit losses methodology, combined with the extraneous circumstances impacted on its employees, caused by the spread of the coronavirus, the Corporation opted to delay the adoption of ASU No. 2016-13 and recorded its provision for loan losses under the incurred loss model that existed prior to ASU 2016-13.

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

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

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

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

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

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

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

3. BUSINESS COMBINATIONS

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

4. SECURITIES

Securities available for sale at March 31, 2020 and December 31, 2019 are as follows:



	March 31, 2020									December 31, 2019
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. Gov’t sponsored entities	$	119,158	$	6,908	$	0		$	126,066	$	124,189	$	2,924	$	(19	)	$	127,094
State & political subdivisions	99,926		3,664		(298		)	103,292		101,177		3,288		(102		)	104,363
Residential & multi-family mortgage	295,695		12,052		(227		)	307,520		273,404		4,117		(885		)	276,636
Corporate notes & bonds	8,350		12		(740		)	7,622		8,350		14		(282		)	8,082
Pooled SBA	24,168		933		0			25,101		25,063		274		(163		)	25,174
Other	1,020		0		(39		)	981		1,020		0		(56		)	964
Total	$	548,317	$	23,569	$	(1,304	)	$	570,582	$	533,203	$	10,617	$	(1,507	)	$	542,313

At March 31, 2020 and December 31, 2019, there were 0 holdings of securities of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of shareholders’ equity. The Corporation’s residential and multi-family mortgage securities are issued by government sponsored entities.

Trading securities at March 31, 2020 and December 31, 2019 are as follows:



	March 31, 2020		December 31, 2019
Corporate equity securities	$	3,699	$	7,946
Mutual funds	487		807
Certificates of deposit	614		350
Corporate notes and bonds	655		655
U.S. Government sponsored entities	52		51
Total	$	5,507	$	9,809

Securities with unrealized losses at March 31, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

March 31, 2020



	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Gov’t sponsored entities	$	0	$	0		$	0	$	0		$	0	$	0
State & political subdivisions	3,761		(111		)	682		(187		)	4,443		(298		)
Residential & multi-family mortgage	2,382		(63		)	2,822		(164		)	5,204		(227		)
Corporate notes & bonds	0		0			4,848		(740		)	4,848		(740		)
Pooled SBA	0		0			0		0			0		0
Other	0		0			981		(39		)	981		(39		)
	$	6,143	$	(174	)	$	9,333	$	(1,130	)	$	15,476	$	(1,304	)

December 31, 2019



	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Gov’t sponsored entities	$	7,040	$	(3	)	$	14,989	$	(16	)	$	22,029	$	(19	)
State & political subdivisions	826		(5		)	684		(97		)	1,510		(102		)
Residential & multi-family mortgage	41,841		(346		)	32,555		(539		)	74,396		(885		)
Corporate notes & bonds	0		0			4,718		(282		)	4,718		(282		)
Pooled SBA	8,560		(80		)	6,075		(83		)	14,635		(163		)
Other	0		0			964		(56		)	964		(56		)
	$	58,267	$	(434	)	$	59,985	$	(1,073	)	$	118,252	$	(1,507	)

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

At March 31, 2020 and December 31, 2019, management performed an assessment for possible other-than-temporary impairment of the Corporation’s debt securities, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. Based on the results of the assessment, management believes impairment of these debt securities at March 31, 2020 and December 31, 2019 to be temporary.

For the securities that comprise corporate notes and bonds and the securities that are issued by state and political subdivisions, management monitors publicly available financial information, such as filings with the Securities and Exchange Commission, in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management monitors information from quarterly “call” report filings that are used to generate Uniform Bank Performance Reports. All other securities that were in an unrealized loss position at the balance sheet date were reviewed by management, and issuer-specific documents were reviewed as appropriate given the following considerations; the financial condition and near-term prospects of the issuer and whether downgrades by bond rating agencies have occurred, the length of time and extent to which fair value has been less than cost, and whether management does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.

As of March 31, 2020 and December 31, 2019, management concluded that the securities described in the previous paragraph were not other-than-temporarily impaired for the following reasons:

There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.

All contractual interest payments on the securities have been received as scheduled, and no information has come to management’s attention through the processes previously described which would lead to a conclusion that future contractual payments will not be timely received.

The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.

On March 31, 2020 and December 31, 2019, securities carried at $409,616 and $405,200, respectively, were pledged to secure public deposits and for other purposes as provided by law.

The following is a schedule of the contractual maturity of securities available for sale at March 31, 2020:



	Amortized Cost		Fair Value
1 year or less	$	64,728	$	64,979
1 year – 5 years	90,138		93,743
5 years – 10 years	65,049		70,592
After 10 years	7,519		7,666
	227,434		236,980
Residential & multi-family mortgage	295,695		307,520
Pooled SBA	24,168		25,101
Other	1,020		981
Total debt securities	$	548,317	$	570,582

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

Information pertaining to security sales on available for sale securities is as follows:



	Proceeds		Gross Gains		Gross Losses
Three months ended March 31, 2020	$	0	$	0	$	0
Three months ended March 31, 2019	$	11,403	$	152	$	4

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

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

5. LOANS

Total net loans at March 31, 2020 and December 31, 2019 are summarized as follows:



	March 31, 2020			December 31, 2019
Commercial, industrial and agricultural	$	1,090,915		$	1,046,665
Commercial mortgages	846,215			814,002
Residential real estate	814,657			814,030
Consumer	94,425			124,785
Credit cards	8,683			7,569
Overdrafts	311			2,146
Less: unearned discount	(4,546		)	(5,162		)
allowance for loan losses	(21,915		)	(19,473		)
Loans, net	$	2,828,745		$	2,784,562

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

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

Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether to extend credit to a customer, including loan-to-value ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees.

Commercial, industrial and agricultural loans comprised 38% and 37% of the Corporation’s total loan portfolio at March 31, 2020 and December 31, 2019, respectively. Commercial mortgage loans comprised 30% and 29% of the Corporation’s total loan portfolio at March 31, 2020 and December 31, 2019, respectively. Management assigns a risk rating to all commercial loans at loan origination. The loan-to-value policy guidelines for commercial, industrial and agricultural loans are generally a maximum of 80% of the value of business equipment, a maximum of 70% of the value of accounts receivable, and a maximum of 60% of the value of business inventory at loan origination. The loan-to-value policy guideline for commercial mortgage loans is generally a maximum of 85% of the appraised value of the real estate.

Residential real estate loans comprised 29% and 29% of the Corporation’s total loan portfolio at March 31, 2020 and December 31, 2019, respectively. The loan-to-value policy guidelines for residential real estate loans vary depending on the collateral position and the specific type of loan. Higher loan-to-value terms may be approved with the appropriate private mortgage insurance coverage. The Corporation also originates and prices loans for sale into the secondary market. Loans so originated are classified as loans held for sale and are excluded from residential real estate loans reported above. The rationale for these sales is to mitigate interest rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing the loan. The Corporation also offers a variety of unsecured and secured consumer loan and credit card products which represented less than 4% of the total loan portfolio at both March 31, 2020 and December 31, 2019. Terms and collateral requirements vary depending on the size and nature of the loan.

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



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

Transactions in the allowance for loan losses for the three months ended March 31, 2019 were as follows:



	Commercial, Industrial and Agricultural		Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2019	$	7,341	$	7,490		$	2,156		$	2,377		$	103		$	237		$	19,704
Charge-offs	0		(17		)	(98		)	(549		)	(26		)	(128		)	(818		)
Recoveries	4		0			65			46			5			34			154
Provision (benefit) for loan losses	442		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

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 March 31, 2020 and December 31, 2019. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

March 31, 2020



	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	$	3,489	$	1,264	$	51	$	0	$	0	$	0	$	4,804
Collectively evaluated for impairment	7,009		5,912		1,407		2,138		112		183		16,761
Acquired with deteriorated credit quality	0		0		0		0		0		0		0
Modified in a troubled debt restructuring	34		316		0		0		0		0		350
Total ending allowance balance	$	10,532	$	7,492	$	1,458	$	2,138	$	112	$	183	$	21,915
Loans:
Individually evaluated for impairment	$	8,663	$	12,172	$	460	$	0	$	0	$	0	$	21,295
Collectively evaluated for impairment	1,079,220		826,966		814,197		94,425		8,683		311		2,823,802
Acquired with deteriorated credit quality	0		512		0		0		0		0		512
Modified in a troubled debt restructuring	3,032		6,565		0		0		0		0		9,597
Total ending loans balance	$	1,090,915	$	846,215	$	814,657	$	94,425	$	8,683	$	311	$	2,855,206

December 31, 2019



	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	$	645	$	1,264	$	34	$	0	$	0	$	0	$	1,943
Collectively evaluated for impairment	7,614		5,358		1,465		2,411		84		240		17,172
Acquired with deteriorated credit quality	0		0		0		0		0		0		0
Modified in a troubled debt restructuring	28		330		0		0		0		0		358
Total ending allowance balance	$	8,287	$	6,952	$	1,499	$	2,411	$	84	$	240	$	19,473
Loans:
Individually evaluated for impairment	$	8,078	$	2,410	$	465	$	0	$	0	$	0	$	10,953
Collectively evaluated for impairment	1,035,494		804,360		813,565		124,785		7,569		2,146		2,787,919
Acquired with deteriorated credit quality	0		523		0		0		0		0		523
Modified in a troubled debt restructuring	3,093		6,709		0		0		0		0		9,802
Total ending loans balance	$	1,046,665	$	814,002	$	814,030	$	124,785	$	7,569	$	2,146	$	2,809,197

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019:

March 31, 2020



	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial and agricultural	$	7,111	$	7,068	$	3,523
Commercial mortgage	6,542		4,312		1,580
Residential real estate	480		460		51
With no related allowance recorded:
Commercial, industrial and agricultural	4,780		4,627		0
Commercial mortgage	14,666		14,425		0
Residential real estate	0		0		0
Total	$	33,579	$	30,892	$	5,154

December 31, 2019



	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial and agricultural	$	2,657	$	1,476	$	673
Commercial mortgage	6,541		4,349		1,594
Residential real estate	485		465		34
With no related allowance recorded:
Commercial, industrial and agricultural	9,845		9,695		0
Commercial mortgage	4,903		4,770		0
Residential real estate	0		0		0
Total	$	24,431	$	20,755	$	2,301

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, 2020						Three months ended March 31, 2019
	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	$	4,272	$	17	$	17	$	2,158	$	38	$	38
Commercial mortgage	4,331		37		37		7,267		40		40
Residential real estate	463		5		5		0		0		0
With no related allowance recorded:
Commercial, industrial and agricultural	7,161		42		42		3,376		54		54
Commercial mortgage	9,598		158		158		4,065		18		18
Residential real estate	0		0		0		500		7		7
Total	$	25,825	$	259	$	259	$	17,366	$	157	$	157

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2020 and December 31, 2019:



	March 31, 2020				December 31, 2019
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial and agricultural	$	12,144	$	16	$	11,644	$	0
Commercial mortgages	14,237		0		4,533		0
Residential real estate	4,663		0		4,724		59
Consumer	810		0		835		0
Credit cards	0		17		0		2
Total	$	31,854	$	33	$	21,736	$	61

Nonaccrual 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 March 31, 2020 and December 31, 2019 by class of loans.

March 31, 2020



	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	$	2,604	$	6,251	$	4,809	$	13,664	$	1,077,251	$	1,090,915
Commercial mortgages	11,773		179		2,599		14,551		831,664		846,215
Residential real estate	3,285		623		2,601		6,509		808,148		814,657
Consumer	450		238		433		1,121		93,304		94,425
Credit cards	33		33		17		83		8,600		8,683
Overdrafts	0		0		0		0		311		311
Total	$	18,145	$	7,324	$	10,459	$	35,928	$	2,819,278	$	2,855,206

December 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
Commercial, industrial and agricultural	$	1,273	$	548	$	3,784	$	5,605	$	1,041,060	$	1,046,665
Commercial mortgages	162		183		2,594		2,939		811,063		814,002
Residential real estate	3,383		1,270		2,714		7,367		806,663		814,030
Consumer	412		311		415		1,138		123,647		124,785
Credit cards	48		54		2		104		7,465		7,569
Overdrafts	0		0		0		0		2,146		2,146
Total	$	5,278	$	2,366	$	9,509	$	17,153	$	2,792,044	$	2,809,197

Troubled Debt Restructurings

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 March 31, 2020 and December 31, 2019.



	March 31, 2020					December 31, 2019
	Number of Loans	Loan Balance		Specific Reserve		Number of Loans	Loan Balance		Specific Reserve
Commercial, industrial and agricultural	10	$	3,032	$	34	10	$	3,093	$	28
Commercial mortgages	13	6,565		316		13	6,709		330
Residential real estate	0	0		0		0	0		0
Consumer	0	0		0		0	0		0
Credit cards	0	0		0		0	0		0
Total	23	$	9,597	$	350	23	$	9,802	$	358

There were 0 loans modified as troubled debt restructurings during the three months ended March 31, 2020 or 2019, respectively.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were 0 loans modified as troubled debt restructurings for which there was a payment default within a twelve-month cycle following the modification during the period ended March 31, 2020 and March 31, 2019. There were 0 principal balances forgiven in connection with the loan restructurings.

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

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

Credit Quality Indicators

The Corporation 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.

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.

March 31, 2020



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial and agricultural	$	1,049,414	$	13,444	$	28,057	$	0	$	1,090,915
Commercial mortgages	799,848		22,388		23,979		0		846,215
Total	$	1,849,262	$	35,832	$	52,036	$	0	$	1,937,130

December 31, 2019



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial and agricultural	$	1,004,445	$	16,696	$	25,524	$	0	$	1,046,665
Commercial mortgages	780,798		18,837		14,367		0		814,002
Total	$	1,785,243	$	35,533	$	39,891	$	0	$	1,860,667

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 March 31, 2020 and December 31, 2019:



	March 31, 2020						December 31, 2019
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	809,994	$	93,615	$	8,666	$	809,247	$	123,950	$	7,567
Nonperforming	4,663		810		17		4,783		835		2
Total	$	814,657	$	94,425	$	8,683	$	814,030	$	124,785	$	7,569

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 March 31, 2020 and December 31, 2019:



	3/31/2020			12/31/2019
Consumer	$	25,855		$	28,122
Less: unearned discount	(4,546		)	(5,162		)
Total	$	21,309		$	22,960

6. LEASES

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

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



Leases	Classification		March 31, 2020		December 31, 2019
Assets:
Operating lease assets	Operating lease assets	��	$	18,360	$	18,422
Finance lease assets	Premises and equipment, net ⁽¹⁾		483		501
Total leased assets			$	18,843	$	18,923

Liabilities:
Operating lease liabilities	Operating lease liabilities		$	19,397	$	19,363
Finance lease liabilities	Accrued interest payable and other liabilities		609		629
Total leased liabilities			$	20,006	$	19,992

(1) Finance lease assets are recorded net of accumulated amortization of $733 as of March 31, 2020 and $715 as of December 31, 2019.

The components of the Corporation's net lease expense for the three months ended March 31, 2020 and 2019, respectively, were as follows:



		Three months ended March 31,
Lease Cost	Classification	2020			2019
Operating lease cost	Net occupancy expense	$	455		$	405
Variable lease cost	Net occupancy expense	24			34
Finance lease cost:
Amortization of leased assets	Net occupancy expense	18			18
Interest on lease liabilities	Interest expense - borrowed funds	7			8
Sublease income ⁽¹⁾	Net occupancy expense	(21		)	(21		)
Net lease cost		$	483		$	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, 2020:



Maturity of Lease Liabilities as of March 31, 2020	Operating Leases ⁽¹⁾		Finance Leases		Total
2020	$	1,209	$	79	$	1,288
2021	1,636		105		1,741
2022	1,682		105		1,787
2023	1,572		105		1,677
2024	1,538		105		1,643
After 2024	19,373		210		19,583
Total lease payments	27,010		709		27,719
Less: Interest	7,613		100		7,713
Present value of lease liabilities	$	19,397	$	609	$	20,006

Other information related to the Corporation's lease liabilities as of the three months ended March 31, 2020 and 2019, respectively, were as follows:



Lease Term and Discount Rate	March 31, 2020		March 31, 2019
Weighted-average remaining lease term (years)
Operating leases	18.4		17.3
Finance leases	6.8		7.8

Weighted-average discount rate
Operating leases	3.52	%	3.66	%
Finance leases	4.49	%	4.54	%



Other Information	March 31, 2020		March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	212	$	192

7. DEPOSITS

Total deposits at March 31, 2020 and December 31, 2019 are summarized as follows:



	3/31/2020		12/31/2019		Percentage Change
Checking, non-interest bearing	$	376,840	$	382,259	(1.4	)%
Checking, interest bearing	617,864		628,579		(1.7	)%
Savings accounts	1,680,695		1,663,673		1.0	%
Certificates of deposit	424,817		427,816		(0.7	)%
Total	$	3,100,216	$	3,102,327	(0.1	)%

8. STOCK COMPENSATION

The Corporation has a stock incentive plan, which is administered by a committee of the Board of Directors and which permits the Corporation to provide various types of stock-based compensation to its key employees, directors, and/or consultants, including time-based and performance-based shares of restricted stock. The Corporation previously maintained ~~its~~the CNB Financial Corporation 2009 Stock Incentive Plan, which terminated in accordance with its terms on February 10, 2019, and currently maintains ~~its~~the CNB Financial Corporation 2019 Omnibus Incentive Plan (the "2019 Stock Incentive ~~Plan,~~Plan"), which was approved by the Corporation’s shareholders and became effective on April 16, 2019.

For key employees, the vesting of time-based restricted stock is one-third, one-fourth, or one-fifth of the granted restricted shares per year, beginning one year after the grant date, with 100% vesting on the third, fourth or fifth anniversary of the grant date, respectively. Prior to 2018, for non-employee directors, the vesting schedule iswas one-third of the granted restricted shares per year, beginning one year after the grant date, with 100% vested on the third anniversary of the grant date. Beginning in 2018, stock compensation received by non-employee directors vests immediately. At March 31, ~~2019,~~2020, there was no0 unrecognized compensation cost related to stock-based compensation awarded under this plan and, except for the time-based and performance-based restricted stock awards disclosed below and in previous filings, no0 other stock-based compensation was granted during the three month ~~periods~~period ended March 31, ~~2019~~2020 and ~~2018.~~2019.

In addition to the time-based restricted stock disclosed above, the Corporation’s Board of Directors grants performance-based restricted stock awards (“PBRSAs”) to key employees. The number of PBRSAs will depend on certain performance conditions earned over a three year period and are also subject to service-based vesting. In 2020, awards with a maximum of 18,100 shares in aggregate were granted to key employees. In 2019, awards with a maximum of 16,681 shares in aggregate were granted to key employees. In 2018, awards with a maximum of 15,657 shares in aggregate were granted to key employees. ~~In 2017, an award with a maximum of 7,109 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~~time-based, performance-based and director restricted stock awards was ~~$592~~$549 and ~~$677~~$592 for the three months ended March 31, 2020 and 2019, respectively. There was $1,562 and ~~2018, respectively. As of March 31, 2019, there was $1,185~~$1,026 of total unrecognized compensation cost related to unvested restricted stock ~~awards.~~awards, as of March 31, 2020 and December 31, 2019, respectively. The total income tax benefit related to the recognized compensation cost of vested restricted stock awards was $115 and $124 for the three months ended March 31, 2020 and 2019, respectively.

A summary of changes in time-based nonvested restricted stock awards for the three months ended March 31, ~~2019~~2020 follows:



	Shares		Per Share Weighted Average Grant Date Fair Value
Nonvested at beginning of period	58,370		$	24.96
Granted	23,658		29.56
Vested	(26,262	)	24.08
Nonvested at end of period	55,766		$	27.42

Shares
Per Share
Weighted Average
Grant Date Fair
Value
Nonvested at beginning of period 75,889
$ 23.20
Granted 25,940
25.27
Vested (34,060 ) 21.58
Nonvested at end of period 67,769
$ 24.79

The above table excludes ~~13,850~~11,502 shares in restricted stock awards that were granted at a weighted average fair value of ~~$25.27~~$29.56 and immediately vested. Compensation expense resulting from the immediately vested shares was ~~$350~~$340 for the three months ended March 31, ~~2019,~~2020 and is included in the previously disclosed ~~$592~~$549 above.

The fair value of shares vested was ~~$1,227~~$1,101 and ~~$1,462~~$1,227 during the three months ended March 31, 2020 and 2019, respectively.

9. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income, excluding net earnings allocated to participating securities, by the weighted average number of shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per share is computed using the weighted average number of shares determined for the basic computation plus the dilutive effect of potential common shares issuable under certain stock compensation plans. For the three months ended March 31, 2020 and ~~2018, respectively.~~2019, there were 0 outstanding stock options to include in the diluted earnings per share calculations and the impact of performance-based shares was immaterial.

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per 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 March 31,
	2020			2019
Basic earnings per common share computation:
Net income per consolidated statements of income	$	8,813		$	9,473
Net earnings allocated to participating securities	(30		)	(39		)
Net earnings allocated to common stock	$	8,783		$	9,434
Distributed earnings allocated to common stock	$	2,608		$	2,579
Undistributed earnings allocated to common stock	6,175			6,855
Net earnings allocated to common stock	$	8,783		$	9,434
Weighted average common shares outstanding, including shares considered participating securities	15,333			15,229
Less: Average participating securities	(52		)	(62		)
Weighted average shares	15,281			15,167
Basic earnings per common share	$	0.57		$	0.62
Diluted earnings per common share computation:
Net earnings allocated to common stock	$	8,783		$	9,434
Weighted average common shares outstanding for basic earnings per common share	15,281			15,167
Add: Dilutive effects of assumed exercises of stock options	0			0
Weighted average shares and dilutive potential common shares	15,281			15,167
Diluted earnings per common share	$	0.57		$	0.62

3.10. DERIVATIVE INSTRUMENTS

On September 7, 2018, the Corporation executed an interest rate swap agreement with a 5-year term and an effective date of September 15, 2018 in order to hedge cash flows associated with $10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2018 to September 15, 2023 without the exchange of the underlying notional amount. At March 31, 2020, the variable rate on the subordinated debt was 2.29% (LIBOR plus 155 basis points) and the Corporation was paying 4.53% (2.98% fixed rate plus 155 basis points).

As of March 31, 2020 and December 31, 2019, 0 derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Corporation does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

The following tables provide information about the amounts and locations of activity related to the interest rate swaps designated as cash flow hedges within the Corporation’s consolidated balance sheet and statement of income as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019:



		Fair value as of
	Balance Sheet Location	March 31, 2020			December 31, 2019
Interest rate contracts	Accrued interest and other liabilities	$	(901	)	$	(485	)



For the Three Months Ended March 31, 2020	(a)			(b)	(c)			(d)	(e)
Interest rate contracts	$	(329	)	Interest expense – subordinated debentures	$	(21	)	Other income	$	0
For the Three Months Ended March 31, 2019	(a)			(b)	(c)			(d)	(e)
Interest rate contracts	$	(95	)	Interest expense – subordinated debentures	$	(6	)	Other income	$	0


(a)	Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax


(b)	Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)


(c)	Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)


(d)	Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)


(e)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Amounts reported in accumulated other comprehensive income (loss) related to the interest rate swap will be reclassified to interest expense as interest payments are made on the subordinated debentures. Such amounts reclassified from accumulated other comprehensive income (loss) to interest expense in the next twelve months are expected to be $229.

As of March 31, 2020 and December 31, 2019, a cash collateral balance in the amount of $1,050 and $750, respectively, was maintained with a counterparty to the interest rate swaps. These balances are included in interest bearing deposits with other banks on the consolidated balance sheets.

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

The Corporation pledged cash collateral to another financial institution with a balance $4,400 as of March 31, 2020 and $2,000 as of December 31, 2019. This balance is included in interest bearing deposits with other banks on the consolidated balance sheets. The Corporation may require its customers to post cash or securities as collateral on its program of back-to-back swaps depending upon the specific facts and circumstances surrounding each loan and individual swap. In addition, certain language is included in the International Swaps and Derivatives Association agreement and loan documents where, in default situations, the Corporation is permitted to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Corporation may be required to post additional collateral to swap counterparties in the future in proportion to potential increases in unrealized loss positions.

The following table provides information about the amounts and locations of activity related to the back-to-back interest rate swaps within the Corporation’s consolidated balance sheet as of March 31, 2020 and December 31, 2019:



	Notional Amount			Weighted Average Maturity (in years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value
March 31, 2020
3rd Party interest rate swaps	$	35,061		7.5	4.13	%	1 month LIBOR + 2.27%	$	4,461		(a)
Customer interest rate swaps	(35,061		)	7.5	4.13	%	1 month LIBOR + 2.27%	(4,461		)	(b)
December 31, 2019
3rd Party interest rate swaps	$	35,382		7.7	4.13	%	1 month LIBOR + 2.27	$	1,877		(a)
Customer interest rate swaps	(35,382		)	7.7	4.13	%	1 month LIBOR + 2.27	(1,877		)	(b)


(a)	Reported in accrued interest receivable and other assets within the consolidated balance sheets


(b)	Reported in accrued interest payable and other liabilities within the consolidated balance sheets

11. FAIR VALUE

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 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).These models utilize the market approach with standard inputs that include, but are not limited to benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. For certain securities that observable inputs about the specific issuer are not available, fair values are estimated using observable data from other securities presumed to be similar or other market data on other similar securities (Level 3 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 March 31, ~~2019~~2020 and December 31, ~~2018:~~2019:



				Fair Value Measurements at March 31, 2020 Using:
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
Description	Total			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	126,066		$	0	$	126,066		$	0
States and political subdivisions	103,292			0		103,292			0
Residential and multi-family mortgage	307,520			0		307,520			0
Corporate notes and bonds	7,622			0		7,622			0
Pooled SBA	25,101			0		25,101			0
Other	981			981		0			0
Total Securities Available For Sale	$	570,582		$	981	$	569,601		$	0
Interest Rate swaps	$	4,461		$	0	$	4,461		$	0
Trading Securities:
Corporate equity securities	$	3,699		$	3,699	$	0		$	0
Mutual funds	487			487		0			0
Certificates of deposit	614			614		0			0
Corporate notes and bonds	655			655		0			0
U.S. Government sponsored entities	52			0		52			0
Total Trading Securities	$	5,507		$	5,455	$	52		$	0
Liabilities:
Interest rate swaps	$	(5,362	)	$	0	$	(5,362	)	$	0

				Fair Value Measurements at December 31, 2019 Using:
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
Description	Total			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	127,094		$	0	$	127,094		$	0
States and political subdivisions	104,363			0		104,363			0
Residential and multi-family mortgage	276,636			0		273,841			2,795
Corporate notes and bonds	8,082			0		8,082			0
Pooled SBA	25,174			0		25,174			0
Other	964			964		0			0
Total Securities Available For Sale	$	542,313		$	964	$	538,554		$	2,795
Interest Rate swaps	$	1,877		$	0	$	1,877		$	0
Trading Securities:
Corporate equity securities	$	7,946		$	7,946	$	0		$	0
Mutual funds	807			807		0			0
Certificates of deposit	350			350		0			0
Corporate notes and bonds	655			655		0			0
U.S. Government sponsored entities	51			0		51			0
Total Trading Securities	$	9,809		$	9,758	$	51		$	0
Liabilities:
Interest rate swaps	$	(2,362	)	$	0	$	(2,362	)	$	0

Fair Value Measurements at March 31, 2019 Using:
Quoted Prices in
Active Markets
for
Identical Assets Significant Other
Observable Inputs Significant
Unobservable
Inputs
Description Total (Level 1) (Level 2) (Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities 130,375
0
130,375
0
States and political subdivisions 121,090
0
121,090
0
Residential and multi-family mortgage 207,491
0
207,491
0
Corporate notes and bonds 11,904
0
11,904
0
Pooled SBA 28,801
0
28,801
0
Other 947
947
0
0
Total Securities Available For Sale $ 500,608
$ 947
$ 499,661
$ 0
Interest Rate swaps $ 906
$ 0
$ 906
$ 0
Trading Securities:
Corporate equity securities $ 6,947
$ 6,947
0
0
Mutual funds 871
871
0
0
Certificates of deposit 179
179
0
0
Corporate notes and bonds 594
594
0
0
U.S. Government sponsored entities 51
0
51
0
Total Trading Securities $ 8,642
$ 8,591
$ 51
$ 0
Liabilities:
Interest rate swaps $ (1,227 ) $ 0
$ (1,227 ) $ 0

Fair Value Measurements at December 31, 2018 Using:
Quoted Prices in Significant

Active Markets
for
Significant Other Unobservable
Identical Assets Observable Inputs Inputs
Description Total (Level 1) (Level 2) (Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities $ 132,694
$ 0
$ 132,694
$ 0
States and political subdivisions 136,031
0
136,031
0
Residential and multi-family mortgage 206,053
0
206,053
0
Corporate notes and bonds 11,777
0
11,777
0
Pooled SBA 29,374
0
29,374
0
Other 934
934
0
0
Total Securities Available For Sale $ 516,863
$ 934
$ 515,929
$ 0
Interest Rate swaps $ 485
$ 0
$ 485
$ 0
Trading Securities:
Corporate equity securities 5,828
5,828
0
0
Mutual funds 1,058
1,058
0
0
Certificates of deposit 268
268
0
0
Corporate notes and bonds 581
581
0
0
U.S. Government sponsored entities 51
0
51
0
Total Trading Securities $ 7,786
$ 7,735
51
0
Liabilities:
Interest rate swaps $ (686 ) $ 0
$ (686 ) $ 0

Assets and liabilities measured at fair value on a non-recurring basis are as follows at March 31, ~~2019~~2020 and December 31, ~~2018:~~2019:



			Fair Value Measurements at March 31, 2020 Using:
			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
Description	Total		(Level 1)	(Level 2)	(Level 3)
Assets:
Impaired loans:
Commercial, industrial and agricultural	$	5,627	0	0	$	5,627
Commercial mortgages	$	10,909	0	0	$	10,909

			Fair Value Measurements at December 31, 2019 Using
			Quoted Prices in		Significant
			Active Markets for	Significant Other	Unobservable
			Identical Assets	Observable Inputs	Inputs
Description	Total		(Level 1)	(Level 2)	(Level 3)
Assets:
Impaired loans:
Commercial, industrial and agricultural	$	2,910	0	0	$	2,910
Commercial mortgages	$	1,147	0	0	$	1,147

Fair Value Measurements at March 31, 2019 Using:

Quoted Prices in
Active Markets
for
Identical Assets

Significant Other
Observable Inputs

Significant
Unobservable
Inputs
Description Total (Level 1) (Level 2) (Level 3)
Assets:
Impaired loans:
Commercial, industrial, and agricultural $ 540
0
0
$ 540
Commercial mortgages $ 1,166
0
0
$ 1,166

Fair Value Measurements at December 31, 2018 Using
Quoted Prices in Significant

Active Markets
for
Significant Other Unobservable
Identical Assets Observable Inputs Inputs
Description Total (Level 1) (Level 2) (Level 3)
Assets:
Impaired loans:
Commercial, industrial, and agricultural $ 2,055
0
0
$ 2,055
Commercial mortgages $ 679
0
0
$ 679

Impaired loans, measured for impairment using the fair value of collateral for collateral dependent loans, had a recorded investment of $4,244 with a valuation allowance of $2,538 as of March 31, 2019, resulting in a provision for loan losses of $777 for the corresponding three month period. Impaired loans had a recorded investment of $3,918 with a valuation allowance of $1,184 as of December 31, 2018. Impaired loans carried at fair value resulted in a provision for loan losses of $272 for the three months ended 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:~~2020:



	Fair value	Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans – commercial, industrial and agricultural	$~~540~~5,627	~~Valuation of third party appraisal on underlying collateral~~Collateral based measurements	~~Loss severity rates~~Discount to reflect current market conditions and ultimate collectability	~~39%-78% (63%~~0%-100% (22%)
Impaired loans – commercial mortgages	$~~1,166~~10,909	~~Valuation of third party appraisal on underlying collateral~~Collateral based measurements	~~Loss severity rates~~Discount to reflect current market conditions and ultimate collectability	~~15-90% (37%~~25-100% (30%)

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, ~~2018:~~2019:



	Fair value	Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans – commercial, industrial and agricultural	$~~2,055~~2,910	~~Valuation of third party appraisal on underlying collateral~~Collateral based measurements	~~Loss severity rates~~Discount to reflect current market conditions and ultimate collectability	~~20%~~0%-60% ~~(34%~~(54%)
Impaired loans – commercial mortgages	$~~679~~1,147	~~Valuation of third party appraisal on underlying collateral~~Collateral based measurements	~~Loss severity rates~~Discount to reflect current market conditions and ultimate collectability	~~15%-39% (33%~~25%-100% (52%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at March 31, ~~2019:~~2020:


	Carrying			Fair Value Measurement Using:								Total			Carrying			Fair Value Measurement Using:								Total
	Amount			Level 1			Level 2			Level 3		Fair Value			Amount			Level 1			Level 2			Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	55,282		$	55,282		$	0		$	0	$	55,282		$	136,341		$	136,341		$	0		$	0	$	136,341
Securities available for sale	500,608			947			499,661			0		500,608			570,582			981			569,601			0		570,582
Trading securities	8,642			8,591			51			0		8,642			5,507			5,455			52			0		5,507
Loans held for sale	2,952			0			2,957			0		2,957			1,815			0			1,825			0		1,825
Net loans	2,505,744			0			0			2,483,864		2,483,864			2,828,745			0			0			2,789,605		2,789,605
FHLB and other restricted interests	23,129			n/a			n/a			n/a		n/a			27,975			n/a			n/a			n/a		n/a
Interest rate swaps	906			0			906			0		906			4,461			0			4,461			0		4,461
Accrued interest receivable	11,862			7			3,567			8,288		11,862			11,530			6			3,387			8,137		11,530
LIABILITIES
Deposits	$	(2,657,359	)	$	(2,303,454	)	$	(354,791	)	$	0	$	(2,658,245	)	$	(3,100,216	)	$	(2,675,399	)	$	(437,247	)	$	0	$	(3,112,646	)
FHLB and other borrowings	(240,005		)	0			(240,503		)	0		(240,503		)	(225,722		)	0			(233,544		)	0		(233,544		)
Subordinated debentures	(70,620		)	0			(65,325		)	0		(65,325		)	(70,620		)	0			(62,647		)	0		(62,647		)
Interest rate swaps	(1,227		)	0			(1,227		)	0		(1,227		)	(5,362		)	0			(5,362		)	0		(5,362		)
Accrued interest payable	(916		)	0			(916		)	0		(916		)	(1,760		)	0			(1,760		)	0		(1,760		)

The following table presents the carrying amount and fair value of financial instruments at December 31, ~~2018:~~2019:



	Carrying			Fair Value Measurement Using:								Total
	Amount			Level 1			Level 2			Level 3		Fair Value
ASSETS
Cash and cash equivalents	$	192,974		$	192,974		$	0		$	0	$	192,974
Securities available for sale	542,313			964			538,554			2,795		542,313
Trading securities	9,809			9,758			51			0		9,809
Loans held for sale	930			0			933			0		933
Net loans	2,784,562			0			0			2,765,133		2,765,133
FHLB and other restricted interests	27,868			n/a			n/a			n/a		n/a
Interest rate swaps	1,877			0			1,877			0		1,877
Accrued interest receivable	11,486			6			3,238			8,242		11,486
LIABILITIES
Deposits	$	(3,102,327	)	$	(2,674,511	)	$	(432,287	)	$	0	$	(3,106,798	)
FHLB and other borrowings	(227,907		)	0			(230,679		)	0		(230,679		)
Subordinated debentures	(70,620		)	0			(64,084		)	0		(64,084		)
Interest rate swaps	(2,362		)	0			(2,632		)	0		(2,632		)
Accrued interest payable	(1,597		)	0			(1,597		)	0		(1,597		)

Carrying Fair Value Measurement Using: Total
Amount Level 1 Level 2 Level 3 Fair Value
ASSETS
Cash and cash equivalents $ 45,563
$ 45,563
$ 0
$ 0
$ 45,563
Securities available for sale 516,863
934
515,929
0
516,863
Trading securities 7,786
7,735
51
0
7,786
Loans held for sale 367
0
368
0
368
Net loans 2,454,853
0
0
2,433,417
2,433,417
FHLB and other restricted interests 24,508
n/a
n/a
n/a
n/a
Interest rate swaps 485
0
485
0
485
Accrued interest receivable 10,843
6
3,368
7,469
10,843
LIABILITIES
Deposits $ (2,610,786 ) $ (2,215,349 ) $ (397,370 ) $ 0
$ (2,612,719 )
FHLB and other borrowings (245,117 ) 0
(242,592 ) 0
(242,592 )
Subordinated debentures (70,620 ) 0
(65,794 ) 0
(65,794 )
Interest rate swaps (686 ) 0
(686 ) 0
(686 )
Accrued interest payable (863 ) 0
(863 ) 0
(863 )

In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at 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. The fair value of other equity interests is based on the net asset values provided by the underlying investment partnership. ~~Accounting Standards Updated ("ASU")~~ASU 2015-7 removes the requirement to categorize within the fair value hierarchy all investments measured using the net asset value per share practical expedient and related ~~disclosures.In~~disclosures. In addition, other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the disclosures.

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

~~4. SECURITIES~~

~~Securities available for sale at March 31, 2019 and December 31, 2018 are as follows:~~

March 31, 2019 December 31, 2018
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
U.S. Gov’t sponsored entities $ 129,993
$ 1,127
$ (745 ) $ 130,375
$ 134,010
$ 254
$ (1,570 ) $ 132,694
State & political subdivisions 118,673
2,595
(178 ) 121,090
134,662
1,942
(573 ) 136,031
Residential & multi-family mortgage 207,588
1,711
(1,808 ) 207,491
209,126
500
(3,573 ) 206,053
Corporate notes & bonds 12,354
26
(476 ) 11,904
12,356
22
(601 ) 11,777
Pooled SBA 29,186
196
(581 ) 28,801
30,163
135
(924 ) 29,374
Other 1,020
0
(73 ) 947
1,020
0
(86 ) 934
Total $ 498,814
$ 5,655
$ (3,861 ) $ 500,608
$ 521,337
$ 2,853
$ (7,327 ) $ 516,863

At March 31, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of shareholders’ equity. The Corporation’s residential and multi-family mortgage securities are issued by government sponsored entities.

~~Trading securities at March 31, 2019 and December 31, 2018 are as follows:~~

March 31, 2019 December 31, 2018
Corporate equity securities $ 6,947
$ 5,828
Mutual funds 871
1,058
Certificates of deposit 179
268
Corporate notes and bonds 594
581
U.S. Government sponsored entities 51
51
Total $ 8,642
$ 7,786

Securities with unrealized losses at March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

~~March 31, 2019~~

Less than 12 Months 12 Months or More Total
Description of Securities
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
U.S. Gov’t sponsored entities $ 4,963
$ (2 ) $ 69,440
$ (743 ) $ 74,403
$ (745 )
State & political subdivisions 994
(13 ) 10,389
(165 ) 11,383
(178 )
Residential & multi-family mortgage 3,186
(10 ) 87,606
(1,798 ) 90,792
(1,808 )
Corporate notes & bonds 0
0
9,528
(476 ) 9,528
(476 )
Pooled SBA 0
0
19,035
(581 ) 19,035
(581 )
Other 0
0
947
(73 ) 947
(73 )
$ 9,143
$ (25 ) $ 196,945
$ (3,836 ) $ 206,088
$ (3,861 )

~~December 31, 2018~~

Less than 12 Months 12 Months or More Total

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
U.S. Gov’t sponsored entities $ 14,786
$ (41 ) $ 70,676
$ (1,529 ) $ 86,462
$ (1,570 )
State & political subdivisions 13,834
(62 ) 21,080
(511 ) 34,914
(573 )
Residential & multi-family mortgage 69,015
(656 ) 87,286
(2,917 ) 156,301
(3,573 )
Corporate notes & bonds 0
0
9,759
(601 ) 9,759
(601 )
Pooled SBA 760
(7 ) 20,795
(917 ) 21,555
(924 )
Other 0
0
934
(86 ) 934
(86 )
$ 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.~~

At March 31, 2019 and December 31, 2018, management performed an assessment for possible other-than-temporary impairment of the Corporation’s debt securities, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. Based on the results of the assessment, management believes impairment of these debt securities at March 31, 2019 and December 31, 2018 to be temporary.

For the securities that comprise corporate notes and bonds and the securities that are issued by state and political subdivisions, management monitors publicly available financial information, such as filings with the Securities and Exchange Commission, in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management monitors information from quarterly “call” report filings that are used to generate Uniform Bank Performance Reports. All other securities that were in an unrealized loss position at the balance sheet date were reviewed by management, and issuer-specific documents were reviewed as appropriate given the following considerations. 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 March 31, 2019 and December 31, 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.~~

~~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 March 31, 2019 and December 31, 2018, securities carried at $269,591 and $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 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 $31 and $0, respectively.~~

~~The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at March 31, 2019:~~

Amortized
Cost

Fair
Value
1 year or less $ 58,770
$ 58,412
1 year – 5 years 131,226
131,749
5 years – 10 years 65,503
67,547
After 10 years 5,521
5,661
261,020
263,369
Residential and multi-family mortgage 207,588
207,491
Pooled SBA 29,186
28,801
Other 1,020
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 March 31, 2019 and December 31, 2018 are summarized as follows:~~

3/31/2019 12/31/2018
Commercial, industrial, and agricultural $ 950,865
$ 916,297
Commercial mortgages 709,726
697,776
Residential real estate 775,599
771,309
Consumer 86,780
86,035
Credit cards 7,341
7,623
Overdrafts 450
308
Less: unearned discount (4,671 ) (4,791 )
allowance for loan losses (20,346 ) (19,704 )
Loans, net $ 2,505,744
$ 2,454,853

~~At March 31, 2019 and December 31, 2018, net unamortized loan fees of $3,158 and $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 central and northwest Pennsylvania, central and northeast Ohio, and western New York. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer. The Corporation maintains lending policies to control the quality of the loan portfolio. These policies delegate the authority to extend loans under specific guidelines and underwriting standards. These policies are prepared by the Corporation’s management and reviewed and ratified annually by the Corporation’s Board of Directors.

Commercial, industrial, and agricultural loans comprised 38% and 37% of the Corporation’s total loan portfolio at March 31, 2019 and December 31, 2018, respectively. Commercial mortgage loans comprised 28% of the Corporation’s total loan portfolio at both March 31, 2019 and December 31, 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 31% of the Corporation’s total loan portfolio at both March 31, 2019 and December 31, 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 represent less than 4% of the total loan portfolio at both March 31, 2019 and December 31, 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 March 31, 2019 were as follows:~~

Commercial,
Industrial, and
Agricultural

Commercial
Mortgages

Residential
Real
Estate
Consumer
Credit
Cards
Overdrafts Total
Allowance for loan losses, January 1, 2019 $ 7,341
$ 7,490
$ 2,156
$ 2,377
$ 103
$ 237
$ 19,704
Charge-offs 0
(17 ) (98 ) (549 ) (26 ) (128 ) (818 )
Recoveries 4
—
65
46
5
34
154
Provision (benefit) for loan losses 442
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 March 31, 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 (31 ) 0
0
(590 ) (19 ) (86 ) (726 )
Recoveries 68
0
3
49
7
31
158
Provision (benefit) for loan losses 85
1,013
16
427
15
75
1,631
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 March 31, 2019 and December 31, 2018. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

~~March 31, 2019~~

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 $ 330
$ 312
$ 0
$ 0
$ 0
$ 0
$ 642
Collectively evaluated for impairment 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 restructuring 107
4,759
0
0
0
0
4,866
Total ending allowance balance $ 7,787
$ 8,846
$ 1,383
$ 2,040
$ 105
$ 185
$ 20,346
Loans:
Individually evaluated for impairment $ 1,754
$ 1,468
$ 498
$ 0
$ 0
$ 0
$ 3,720
Collectively evaluated for impairment 945,710
698,004
775,101
86,780
7,341
450
2,513,386
Acquired with deteriorated credit quality 0
556
0
0
0
0
556
Modified in a troubled debt restructuring 3,401
9,698
0
0
0
0
13,099
Total ending loans balance $ 950,865
$ 709,726
$ 775,599
$ 86,780
$ 7,341
$ 450
$ 2,530,761

~~December 31, 2018~~

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 impairment 7,183
3,036
2,056
2,377
103
227
14,982
Acquired with deteriorated credit quality 0
0
0
0
0
0
0
Modified in a troubled debt restructuring 104
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 impairment 910,386
685,714
770,807
86,035
7,623
298
2,460,863
Acquired with deteriorated credit quality 0
567
0
0
0
0
567
Modified in a troubled debt restructuring 4,577
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 March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018:

~~March 31, 2019~~

Unpaid Principal
Balance

Recorded
Investment

Allowance for Loan
Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural $ 2,840
$ 1,278
$ 437
Commercial mortgage 8,205
7,824
5,071
Residential real estate 0
0
0
With no related allowance recorded:
Commercial, industrial, and agricultural 4,556
3,877
0
Commercial mortgage 4,225
3,342
0
Residential real estate 498
498
0
Total $ 20,324
$ 16,819
$ 5,508

~~December 31, 2018~~

Unpaid Principal
Balance

Recorded
Investment

Allowance for Loan
Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural $ 3,053
$ 3,037
$ 158
Commercial mortgage 10,799
6,709
4,454
Residential real estate 502
502
100
Overdrafts 10
10
10
With no related allowance recorded:
Commercial, industrial, and agricultural 3,684
2,874
0
Commercial mortgage 5,659
4,786
0
Residential real estate 0
0
0
Overdrafts 0
0
0
Total $ 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 mortgage 7,267
40
40
Residential real estate 0
0
0
With no related allowance recorded:
Commercial, industrial, and agricultural 3,376
54
54
Commercial mortgage 4,065
18
18
Residential real estate 500
7
7
Total $ 17,366
$ 157
$ 157

Three Months Ended March 31, 2018

Average
Recorded
Investment

Interest
Income
Recognized

Cash Basis
Interest
Recognized
With an allowance recorded:
Commercial, industrial, and agricultural $ 1,884
$ 22
$ 22
Commercial mortgage 9,234
18
18
Residential real estate 0
0
0
With no related allowance recorded:
Commercial, industrial, and agricultural 4,600
46
46
Commercial mortgage 3,753
13
13
Residential real estate 0
0
0
Total $ 19,491
$ 99
$ 99

~~The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing interest by class of loans as of March 31, 2019 and December 31, 2018:~~

March 31, 2019 December 31, 2018
Nonaccrual
Past Due
Over 90 Days
Still on Accrual
Nonaccrual
Past Due
Over 90 Days
Still on Accrual
Commercial, industrial, and agricultural $ 3,414
$ 529
$ 2,839
$ 489
Commercial mortgages 7,724
0
7,694
53
Residential real estate 5,821
285
6,023
299
Consumer 491
24
683
44
Credit cards 0
28
0
5
Total $ 17,450
$ 866
$ 17,239
$ 890

~~The following table presents the aging of the recorded investment in past due loans as of March 31, 2019 and December 31, 2018 by class of loans.~~

~~March 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
Commercial, industrial, and agricultural $ 1,917
$ 310
$ 2,834
$ 5,061
$ 945,804
$ 950,865
Commercial mortgages 387
3,532
1,702
5,621
704,105
709,726
Residential real estate 1,453
1,039
3,546
6,038
769,561
775,599
Consumer 286
182
353
821
85,959
86,780
Credit cards 16
33
28
77
7,264
7,341
Overdrafts 0
0
0
0
450
450
Total $ 4,059
$ 5,096
$ 8,463
$ 17,618
$ 2,513,143
$ 2,530,761

~~December 31, 2018~~

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 $ 2,379
$ 16
$ 2,341
$ 4,736
$ 911,561
$ 916,297
Commercial mortgages 858
3,058
297
4,213
693,563
697,776
Residential real estate 4,064
1,319
4,494
9,877
761,432
771,309
Consumer 474
283
367
1,124
84,911
86,035
Credit cards 59
15
5
79
7,544
7,623
Overdrafts 0
0
0
0
308
308
Total $ 7,834
$ 4,691
$ 7,504
$ 20,029
$ 2,459,319
$ 2,479,348

~~Troubled Debt Restructurings~~

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 March 31, 2019 and December 31, 2018.

March 31, 2019 December 31, 2018

Number of
Loans

Loan
Balance

Specific
Reserve

Number of
Loans

Loan
Balance

Specific
Reserve
Commercial, industrial, and agricultural 10
$ 3,401
$ 107
10
$ 4,577
$ 104
Commercial mortgages 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
Total 25
$ 13,099
$ 4,866
25
$ 14,626
$ 4,554

~~There were no loans modified as troubled debt restructurings during the three months ended March 31, 2019 or March 31, 2018.~~

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 March 31, 2019 and December 31, 2018 and no principal balances were forgiven in connection with the loan restructurings.

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

~~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.

~~The Corporation uses the following definitions for risk ratings:~~

~~March 31, 2019~~

Pass
Special
Mention
Substandard Doubtful Total
Commercial, industrial, and agricultural $ 922,618
$ 10,149
$ 18,098
$ 0
$ 950,865
Commercial mortgages 689,587
9,037
11,102
0
709,726
Total $ 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 mortgages 683,413
3,241
11,122
0
697,776
Total $ 1,572,960
$ 13,760
$ 27,353
$ 0
$ 1,614,073

March 31, 2019 December 31, 2018

Residential
Real Estate
Consumer
Credit
Cards

Residential
Real Estate
Consumer
Credit
Cards
Performing $ 769,493
$ 86,265
$ 7,313
$ 764,987
$ 85,308
$ 7,618
Nonperforming 6,106
515
28
6,322
727
5
Total $ 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 March 31, 2019 and December 31, 2018:~~

3/31/2019 12/31/2018
Consumer $ 25,897
$ 26,568
Less: unearned discount (4,671 ) (4,791 )
Total $ 21,226
$ 21,777

~~6. DEPOSITS~~

~~Total deposits at March 31, 2019 and December 31, 2018 are summarized as follows:~~

3/31/2019 12/31/2018 Percentage
Change
Checking, non-interest bearing $ 345,386
$ 356,797
(3.2 )%
Checking, interest bearing 583,653
600,046
(2.7 )%
Savings accounts 1,374,415
1,258,506
9.2 %
Certificates of deposit 353,905
395,437
(10.5 )%
$ 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 months ended March 31, 2019 and 2018, there were no outstanding stock options to include in the diluted earnings per share calculations.

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

Three months ended March 31,
2019 2018
Basic earnings per common share computation:
Net income per consolidated statements of income $ 9,473
$ 7,097
Net earnings allocated to participating securities (39 ) (34 )
Net earnings allocated to common stock $ 9,434
$ 7,063
Distributed earnings allocated to common stock $ 2,579
$ 2,509
Undistributed earnings allocated to common stock 6,855
4,554
Net earnings allocated to common stock $ 9,434
$ 7,063
Weighted average common shares outstanding, including shares considered participating securities 15,229
15,273

Less: Average participating securities (62 ) (72 )
Weighted average shares 15,167
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 share 15,167
15,201
Add: Dilutive effects of assumed exercises of stock options 0
0
Weighted average shares and dilutive potential common shares 15,167
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-year term and an effective date of September 15, 2018 in order to hedge cash flows associated with $10 million of a subordinated note that was issued by the Corporation during 2007 and elected cash flow hedge accounting for the agreement. The Corporation’s objective in using this derivative is to add stability to interest expense and to manage its exposure to interest rate risk. The interest rate swap involves the receipt of variable-rate amounts in exchange for fixed-rate payments from September 15, 2018 to September 15, 2023 without the exchange of the underlying notional amount. At March 31, 2019, the variable rate on the subordinated debt was 4.16% (LIBOR plus 155 basis points) and the Corporation was paying 4.53% (2.98% fixed rate plus 155 basis points).

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-year term and an effective date of September 15, 2013 that expired in 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 involved 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 March 31, 2019 and December 31, 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 March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018:

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 March 31, 2019
(a) (b) (c) (d) (e)
Interest rate contracts $ (95 ) Interest expense –
subordinated debentures $ (6 ) Other
income $ 0
For the Three Months
Ended March 31, 2018
(a) (b) (c) (d) (e)
Interest rate contracts $ 62
Interest expense –
subordinated debentures $ (58 ) Other
income $ 0


~~(a)~~	~~Amount of Gain or (Loss) Recognized in Other Comprehensive Loss on Derivative (Effective Portion), net of tax~~


~~(b)~~	~~Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)~~


~~(c)~~	~~Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)~~


~~(d)~~	~~Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)~~


~~(e)~~	~~Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)~~

Amounts reported in accumulated other comprehensive 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 $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 pledged cash collateral to another financial institution with a balance $950 as of March 31, 2019 and $750 as of December 31, 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.

Notional
Amount

Weighted
Average
Maturity
(in years)

Weighted
Average
Fixed Rate

Weighted Average
Variable Rate

Fair
Value

March 31, 2019
3rd Party interest rate swaps $ 23,014
7.1 3.85 % 1 month LIBOR + 2.24% $ 906
(a)
Customer interest rate swaps (23,014 ) 7.1 3.85 % 1 month LIBOR + 2.24% (906 ) (b)
December 31, 2018
3rd Party interest rate swaps $ 23,152
7.2 3.85 % 1 month LIBOR + 2.24% $ 485
(a)
Customer interest rate swaps (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~~

9.12. REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the ~~Company’s~~Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized within ~~non-interest income.~~Non-Interest Income. The following table presents the Corporation's ~~non-interest income~~Non-Interest Income by revenue stream and reportable segment for the three months ended March 31, ~~2019~~2020 and ~~2018.~~2019. Items outside the scope of ASC 606 are noted as such.


					Three months ended March 31,
	Three Months Ended March 31, 2019		Three Months Ended March 31, 2018		2020		2019
Non-interest Income
Service charges on deposit accounts	$	1,481	$	1,247	$	1,527	$	1,481
Wealth and asset management fees	1,042		1,030		1,293		1,042
Mortgage banking ⁽¹⁾	239		208		337		239
Card processing and interchange income	1,029		971		1,128		1,029
Net gains (losses) on sales of securities ⁽¹⁾	148		0		0		148
Other income	2,214		1,295		1,079		2,214
Total non-interest income	$	6,153	$	4,751	$	5,364	$	6,153


(1)	Not within scope of ASU 2014-9

Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investment securities along with non-interest revenue resulting from security gains, loan servicing, gains on the sale of loans, commitment fees, fees from financial guarantees, certain credit card fees, gains (losses) on sale of other real estate owned not financed by the Corporation, is not within the scope of ASU 2014-9. As a result, no changes were made during the period related to these sources of revenue, which comprised 90.2% and 88.7% of the total revenue of the Corporation for the three months ended March 31, 2019 and 2018, respectively.

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

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

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

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

Other income: The Corporation's other income includes sources such as bank owned life insurance, changes in fair value and realized gains on sales of trading securities, certain service fees, gains (losses) on sales of fixed assets, and gains (losses) on sale of other real estate owned. The service fees are recognized in the same manner as the service charges mentioned above. While gains (losses) on the sale of other real estate owned are ~~generally~~ within the scope of ASU 2014-9 if financed by the Corporation, the Corporation does not finance the sale of ~~transactions~~transactions. The revenue on the sale is recorded upon the transfer of control of the property to the buyer and ~~as such there~~the other real estate owned asset is ~~no change in revenue recognition.~~derecognized.

ITEM 2

~~10. LEASES~~MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITION

AND RESULTSOF OPERATIONS

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.

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 Rate~~	~~March 31, 2019~~
~~Weighted-average remaining lease term (years)~~
~~Operating leases~~	~~17.3~~
~~Finance leases~~	~~7.8~~

~~Weighted-average discount rate~~
~~Operating leases~~	~~3.66~~	%
~~Finance leases~~	~~4.54~~	%

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

~~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. 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 consolidated statement of income during the year ended 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.

~~12. RECENT ACCOUNTING PRONOUNCEMENTS~~

In August 2018, the FASB issued ASU 2018-14, "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." ASU 2018-14 amends ASC 715-20, "Compensation - Retirement Benefits - Defined Benefit Plans - General." The amended guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated Other Comprehensive Income ("OCI") expected to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for the period. The update will be effective for annual reporting periods beginning after December 15, 2020, with early adoption permitted for annual reporting periods beginning after 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 - 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 after 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 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 loss driver analysis with the assistance of software vendor, and is reviewing the assumptions and methods used in the analysis and 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 March 2019, the FASB issued an 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 2019-01 (i) allows the fair value of the underlying asset reported by lessors that are not manufacturers or dealers to continue to be its cost and not fair value as measured under the fair 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 standard on adoption year interim amounts. The amendment will be effective for annual reporting periods beginning after December 15, 2019. Management does not expect the adoption of ASU 2019-01 will have any material impact on the Corporation’s financial statements.

I~~TEM~~ 2

M~~ANAGEMENT~~’S D~~ISCUSSIONAND~~ A~~NALYSIS~~OF F~~INANCIAL~~ C~~ONDITION~~

AND R~~ESULTS~~OF O~~PERATIONS~~

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~~the 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 in the Ohio counties of Ashtabula, Cuyahoga 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 Bank on Buffalo,~~BankOnBuffalo, 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.~~FDIC.

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

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, ~~2018,~~2019, included in its ~~2018~~Annual Report on Form 10-K for the year ended December 31, 2019, and in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for ~~the~~ three months ended March 31, ~~2019~~2020 are not necessarily indicative of the results for the full year ending December 31, ~~2019,~~2020, or any future period. The average balances, average yields, return on average assets, return on average equity, net interest margin and total net loan charge-offs to average loans annualized return calculations were refined. Prior periods were adjusted to be comparative to the current period. The impact of the change was immaterial.

GENERAL OVERVIEW

Management looks to return on average equity, earnings per share, asset quality, and other metrics to measure the performance of the Corporation. The interest rate environment will continue to play an important role in the future earnings of the Corporation. In order to address the ~~flattening yield curve~~challenging interest rate and ~~highly~~ competitive ~~environment,~~environments, the Corporation continues to evaluate, develop and implement strategies necessary to support its ongoing financial performance objectives.

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

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

Implemented communication plans to ensure employees, customers and critical vendors are kept abreast of developments affecting the Corporation's operations;

Restricted all non-essential travel and instituted a mandatory quarantine period for anyone who has ~~remained focused on disciplined loan pricing~~traveled to ~~sustain a strong net interest margin.~~an impacted area;

Temporarily closed all branch lobbies to non-employees, except for certain limited cases by appointment only. The Corporation continues to serve consumer and business customers through its drive-through capabilities, network of ATMs, internet banking, mobile application and telephone customer service capabilities;

Expanded remote-access availability for the Corporation's work-force to work from home or other remote locations. All activities are performed in accordance with the Corporation's compliance and information security policies designed to ensure customer data and other information is properly safeguarded;

Instituted mandatory social distancing policies for those employees not working remotely. Members of branch and operation teams have been split into separate teams to provide a higher level of safety for employees and redundancy for key functions across the Corporation.

Non-interest costs are expected to increase with the growth of the Corporation; however, management’s growth strategies are also expected to result in an increase in earning assets as well as enhanced non-interest income, which is expected to more than offset increases in non-interest expenses in ~~2019~~2020 and beyond. ~~While past~~Although the Corporation's discussion regarding its financial performance distinguishes between certain markets and Private Banking, it does not meet the criteria for discrete segment reporting of its operating results. Management's conclusion was based on the limited level of financial information available to segregate operating results, coupled with the fact that no operating results are ~~not an indication of future earnings, management believes~~available for the ~~Corporation is well positioned~~Corporation's Chief Operating Decision Maker (CODM) to ~~sustain core earnings during 2019.~~review on a regular basis. All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated.

CUSTOMER SUPPORT STRATEGIES AND LOAN PORTFOLIO PROFILE

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

In addition to the participating in the PPP, in the first quarter of 2020 the Corporation deferred loan payments for several of its commercial and consumer customers for a period of up to six months, depending on the financial needs of each customer. As of March 31, 2020, the deferred loan payment commitments were 561 loans, totaling $264 million, comprised of (i) 150 loans, totaling $151 million, for which principal and interest were deferred, and (ii) 411 loans, totaling $113 million, for which principal only was deferred. Loan payment deferrals by loan type were as follows:

Commercial and industrial loans - 233 loans, totaling $103 million;

Commercial real estate loans - 69 loans, totaling $132 million;

Residential mortgage loans - 197 loans, totaling $28 million;

Consumer loans - 62 loans, totaling $720 thousand.

The Corporation tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As a result of the COVID-19 pandemic, the Corporation has determined the Hotels/Motels comprised predominately of major hotel chains and Restaurants/Fast Foods industries to represent a potential higher level of credit risk, as many of these customers have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders as well as travel limitations. At March 31, 2020, the Corporation had limited loan concentrations for these industries as follows:

Hotels/Motels - $180 million, or 6.3%, of total loans outstanding, 97.2% franchised, 91.9% pass-rated;

Restaurants/Fast Foods - $24.0 million or, 0.8%, of total loans outstanding, and 99.7% pass-rated.

The Corporation also monitors closely its commercial acquisition, development and construction (“ADC”) portfolio, and as noted previously, the Corporation has determined the funded portion of this portfolio may represent a higher potential level of credit risk as a result of the COVID-19 pandemic. At March 31, 2020, the Corporation had $131.5 million in funded ADC loans (excluding the previously mentioned Hotels/Motels and Restaurants/Fast Foods), or 4.6% of total loans outstanding, and unfunded commitments for ADC loans of $99.7 million. The ADC portfolio by industry classification (excluding the Hotels/Motels and Restaurants/Fast Foods industries) is as follows:

Multi-family real estate projects - $50.3 million funded with unfunded commitments of $70.9 million;

Real estate developers - $27.8 million funded with unfunded commitments of $6.9 million;

Mixed used real estate projects - $14.0 million funded with unfunded commitments of $15.1 million;

All others - $39.4 million funded with unfunded commitments of $6.8 million.

Another sector facing pressure due to the COVID-19 pandemic is Oil and Gas. The Corporation has a negligible exposure to this sector, as loans outstanding totaled $15.7 million, or 0.6%, of total loans at March 31, 2020.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled ~~$55.3~~$136.3 million at March 31, ~~2019~~2020 compared to ~~$45.6~~$193.0 million at December 31, ~~2018.~~2019. 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,~~customer deposits, Federal Home Loan Bank ("FHLB") financing, and the portions of the securities and loan portfolios that mature within one year. The Corporation expects that these sources of funds will enable it to meet cash obligations and off-balance sheet commitments as they come due. In addition to the above noted liquidity sources, the Corporation maintains access to the Federal Reserve discount window.

SECURITIES

Securities available for sale and trading securities totaled ~~$509.3~~$576 million and ~~$524.6~~$552 million at March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, 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~~provided by the ~~portfolio provides.~~portfolio. As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, the securities portfolio as a percentage of total assets was ~~15.5%~~15.2% and ~~16.3%~~14.7%, respectively. Note 43 to the consolidated financial statements provides more detail concerning the composition of the Corporation’s securities portfolio and the process for evaluating securities for other-than-temporary impairment.

The 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 (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,~~Corporation's total loan portfolio, net of unearned discount, reached $2.9 billion as of ~~$51.5~~March 31, 2020, resulting in an increase of $47 million, or ~~2.1%~~6.7%, on an annualized basis during the first three months of ~~2019.~~2020. Over the same time period, this increase was driven by commercial and industrial loans, which increased $44 million, or 17.0%, on an annualized basis, while commercial real estate loans contributed an increase of $32.2 million, or 15.9%, on an annualized basis. Loan growth during the first three months of 2020 was attributable primarily to our Erie and Buffalo markets, which increased $41.8 million, or 20.8% (annualized), and $18.6 million, or 18.2% (annualized), respectively. 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~~robust credit analysis. ~~The Corporation expects loan demand to be solid and loan balances to grow throughout the remainder of 2019.~~

ALLOWANCE FOR LOAN LOSSES

Pursuant to the CARES Act, financial institutions were given the option to delay the adoption of ASU No. 2016-13, “Financial Instruments – Credit Losses,” until the earlier of December 31, 2020 or until the national emergency related to the COVID-19 pandemic is terminated. Given the complexity of the processes necessary to properly evaluate, document and implement the current expected credit losses methodology, combined with the extraneous circumstances impacted on its employees, caused by the spread of the coronavirus, the Corporation opted to delay the adoption of ASU No. 2016-13.

The allowance for loan losses is considered to be appropriate by management and reflects an adequate reserve for probable, incurred losses. The allowance is established ~~by provisions for losses in~~through provision expense related to the loan portfolio as well as overdrafts in deposit accounts. ~~These provisions are~~Provision expense is charged against current ~~income.~~income in the Statement of 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~~Management’s judgment on the ~~amount deemed appropriate by management to establish an adequate reserve for probable incurred losses. Management’s judgment~~adequacy of the allowance is based on the evaluation of individual loans, the overall risk characteristics of various portfolio segments, ~~past~~historical loss experience, ~~with losses,~~ the impact of economic conditions on borrowers, and other relevant factors.

In determining the allocation of the allowance for loan losses, the Corporation considers economic trends, historical patterns and specific credit reviews. In addition, the Corporation developed a qualitative factor specific to the COVID-19 pandemic as discussed in more detail below.

With regard to the credit reviews, a “watchlist" is evaluated on a monthly basis to determine potential losses within the commercial loan portfolio. The "watchlist" is comprised of all credits risk rated special mention, substandard and doubtful. Consumer and mortgage loans are allocated using historical credit loss experience.

The following table below presents activity within the allowance account for the specified periods:


	Three months ending March 31, 2019			Year ending December 31, 2018			Three months ending March 31, 2018			Three months ending March 31, 2020			Year ending December 31, 2019			Three months ending March 31, 2019
Balance at beginning of period	$	19,704		$	19,693		$	19,693		$	19,473		$	19,704		$	19,704
Charge-offs:
Commercial, industrial, and agricultural	0			(253		)	(31		)
Commercial, industrial and agricultural										(25		)	(205		)	0
Commercial mortgages	(17		)	(3,337		)	0			0			(3,391		)	(17		)
Residential real estate	(98		)	(315		)	0			(143		)	(386		)	(98		)
Consumer	(549		)	(2,279		)	(590		)	(592		)	(2,200		)	(549		)
Credit cards	(26		)	(90		)	(19		)	(31		)	(116		)	(26		)
Overdrafts	(128		)	(319		)	(86		)	(119		)	(453		)	(128		)
	(818		)	(6,593		)	(726		)	(910		)	(6,751		)	(818		)
Recoveries:
Commercial, industrial, and agricultural	4			171			68
Commercial, industrial and agricultural										18			17			4
Commercial mortgages	0			30			0			172			124			0
Residential real estate	65			67			3			3			73			65
Consumer	46			141			49			43			154			46
Credit cards	5			33			7			1			15			5
Overdraft deposit accounts	34			90			31			36			113			34
	154			532			158			273			496			154
Net charge-offs	(664		)	(6,061		)	(568		)	(637		)	(6,255		)	(664		)
Provision for loan losses	1,306			6,072			1,631			3,079			6,024			1,306
Balance at end of period	$	20,346		$	19,704		$	20,756		$	21,915		$	19,473		$	20,346
Loans, net of unearned	$	2,526,090		$	2,474,557		$	2,276,124		$	2,850,660		$	2,804,035		$	2,526,090
Allowance to net loans	0.81		%	0.80		%	0.91		%	0.77		%	0.69		%	0.81		%
Net charge-offs to average loans (annualized)	0.11		%	0.26		%	0.10		%	0.09		%	0.24		%	0.11		%
Nonperforming assets	$	18,790		$	18,547		$	20,419		$	33,533		$	23,430		$	15,661
Nonperforming % of total assets	0.57		%	0.58		%	0.70		%	0.89		%	0.62		%	0.48		%

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 for management to ~~better~~more effectively analyze the entire loan pool. ~~First~~The first step in the evaluation process is a selection of classified loans ~~that is given~~which contain a specific credit loss reserve. The remaining loans are pooled, by category, into ~~these~~the following 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: pass rated (delineated by risk rating), special mention, substandard, ~~doubtful,~~ and ~~pass rated.~~doubtful. Historical loss factors are calculated for each pool, excluding overdrafts, based on a weighted average quarterly loss rate for the ~~previous~~most recent eight quarters, ~~of experience.~~subject to a floor. The homogeneous pools are evaluated ~~by analyzing the historical~~based on a weighted average quarterly loss ~~factors from~~rate for the most ~~previous~~recent eight ~~quarter ends.~~quarters, subject to a floor.

The historical loss factors for both the reviewed and homogeneous pools are adjusted based on ~~these~~the following 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~~developed based upon the experience of the Corporation’s management team, guidance from the regulatory agencies, expertise of aan independent 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 any 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~~considered numerous historical and other factors to ~~analyze~~evaluate the adequacy of the allowance and ~~charges against the~~any resultant provision for loan losses. Management ~~pays~~paid special attention to a section of the analysis that compared and plotted 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. By noting the ~~“spread”~~“spread" at that time, as well as prior periods, management can evaluate the current adequacy of the allowance as well as ~~evaluate~~ trends ~~that~~which may be developing. The volume and composition of the Corporation’s loan portfolio continue to reflect growth in commercial ~~credits including~~loans, primarily commercial real estate, as well as commercial, industrial and agricultural 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.

~~During the first quarter of 2019, the recorded provision for loan losses of $1.3 million was primarily due to a $786 thousand~~The 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.

~~Management believes that~~ the allowance for loan losses from the three months ended December 31, 2019 to the three months ended March 31, 2020 resulted primarily from a $2.5 million increase in specific loan loss reserve related to a secured commercial and industrial loan relationship with a borrower who is ~~reasonable~~now deceased, as discussed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019. In light of new facts that have come to management’s attention, including an evaluation of the borrower’s estate and ~~adequate~~an updated collateral appraisal, management updated the probable loss estimate on this loan relationship, including costs of disposal of the collateral.

The increase in non-performing assets from the three months ended December 31, 2019 is primarily due to ~~absorb~~one commercial real estate loan relationship totaling approximately $9.7 million. During the three months ended March 31, 2020, this loan was downgraded to substandard and placed on non-accrual, as a result of a covenant violation. Management performed an evaluation of the collateral supporting the loan and concluded no specific loan loss reserve was required at the time.

In addition to the specific reserve discussed above, the allowance for loan losses at March 31, 2020 reflected a qualitative factor specifically related to the COVID-19 pandemic and the potential impact this pandemic may have on the national and local economies, and our loan portfolio overall. Management recognizes the degree of uncertainty related to the potential spread of COVID-19 and the related impact it will have on the economy. To quantify the potential impact of the pandemic, management evaluated the Corporation’s historical losses, by loan type, looking back to the recession that began in 2008 and the Corporation's loan portfolio credit quality performance from 2008 to March 31, 2020. A loss assumption commensurate with the highest level of losses by loan type was used to estimate the potential impact on the loan portfolio, specifically loans for which customers were granted payment deferrals, as discussed above. This analysis resulted in a qualitative adjustment of approximately $800 thousand, which was reflected in the Corporation’s provision expense for the three months ended March 31, 2020 and the related allowance for loan losses during the same period. The Corporation will continue to evaluate this factor and update its analysis, as necessary, as developments related to the COVID-19 pandemic and its impact on the economy evolve.

The remaining change in provision for loan losses during the three months ended March 31, 2020, compared to the same period in 2019, reflects routine adjustments to reserves on impaired loans coupled with a lower reserve requirement resulting from a decrease in the Corporation's historical loan portfolio growth.

Management believes the provision for loan losses recorded during the three months ended March 31, 2020, in conjunction with the resultant allowance for loan losses at March 31, 2020 was sufficient to support probable incurred credit losses embedded in its loan portfolio at March 31, ~~2019.~~2020.

~~FUNDING SOURCES~~DEPOSITS

The Corporation considers deposits to be its primary source of funding in support of growth in assets. At March 31, 2020, total deposits of $3.1 billion reflected a decrease of $2.1 million, or 0.1%, on an annualized basis. Total deposits for the three months ended, March 31, 2020 included approximately $21.2 million in timing-related deposit decreases, based on customers’ typical business needs early in the year.

OTHER FUNDING SOURCES

The Corporation also considers other funding sources, such as short-term borrowings and term debt, when evaluating funding ~~sources. Deposits increased $46.6 million from $2.61 billion at~~needs. As of March 31, 2020 and December 31, ~~2018 to $2.66 billion at March 31, 2019.~~2019 there were there were no short-term borrowings from the FHLB.

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

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

The Corporation’s capital ~~continued~~continues to provide a ~~base~~source of strength for ~~profitable growth.~~the Corporation's growth, strategies and profitability. Total shareholders’ equity was ~~$275.0~~$325 million at March 31, ~~2019 and $262.8~~2020, reflecting an increase of $19.8 million, or 6.5%, from $305 million at December 31, ~~2018. In~~2019. During the ~~first~~ three months ~~of 2019,~~ended, March 31, 2020, the Corporation earned ~~$9.5~~$8.8 million and declared dividends of $2.6 million, resulting in a dividend payout ratio of ~~27.4%~~29.7% of net income. In addition, during the same period, accumulated other comprehensive income increased $10.1 million.

Finally, during the fourth quarter of 2019, the Corporation launched an “at the market" offering pursuant to which the Corporation may sell up to $40.0 million in shares of its common stock. At December 31, 2019, the Corporation had sold approximately $1.63 million, or 52,568 shares of common stock, representing a weighted average price of approximately $31.77 per share. At March 31, 2020, the Corporation had sold an additional $3.43 million, or 115,790 shares of common stock, representing a weighted average price of approximately $29.66 per share. Since the inception of the “at the market” offering, the Corporation has sold approximately $5.1 million, or 168,358 shares of common stock, representing a weighted average price of approximately $30.31 per share.

The Corporation has complied with the standards of capital adequacy mandated by government regulations. Bank regulators have established ~~“risk-based”~~“risk-based" capital requirements designed to measure capital adequacy. Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios. A weight category (0% for the lowest risk assets and increasing for each tier of ~~0% (lowest~~higher 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 March 31, ~~2019~~2020 and December 31, ~~2018~~2019 are as follows:


	March 31, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Total risk-based capital ratio	13.18		%	13.21		%	12.66		%	12.51		%
Tier 1 capital ratio	10.35		%	10.33		%	10.15		%	10.03		%
Common equity tier 1 ratio	9.54		%	9.50		%	9.45		%	9.32		%
Leverage ratio	8.01		%	7.87		%	7.85		%	7.86		%
Tangible common equity/tangible assets (1)	7.26		%	7.02		%	7.65		%	7.14		%
Book value per share	$	18.04		$	17.28		$	21.10		$	20.00
Tangible book value per share (1)	$	15.46		$	14.69		$	18.58		$	17.45

(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 other intangible assets from the calculation of stockholders’ equity. Tangible assets is calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding. The Corporation believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. A reconciliation of these non-GAAP financial measures is provided below.


	March 31, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Shareholders’ equity	$	274,959		$	262,830		$	324,802		$	304,966
Less goodwill	38,730			38,730			38,730			38,730
Less core deposit intangible	562			727			77			160
Tangible common equity	$	235,667		$	223,373		$	285,995		$	266,076
Total assets	$	3,287,324		$	3,221,521		$	3,779,138		$	3,763,659
Less goodwill	38,730			38,730			38,730			38,730
Less core deposit intangible	562			727			77			160
Tangible assets	$	3,248,032		$	3,182,064		$	3,740,331		$	3,724,769
Ending shares outstanding	15,239,371			15,207,281			15,396,617			15,247,985
Tangible book value per share	$	15.46		$	14.69		$	18.58		$	17.45
Tangible common equity/tangible assets	7.26		%	7.02		%	7.65		%	7.14		%

LIQUIDITY

Liquidity measures an organization’s ability to meet its cash obligations as they come due. The consolidated statements of cash flows included in the accompanying financial statements provide analysis of the Corporation’s cash and cash equivalents and the sources and uses of cash. Additionally, the portion of the loan portfolio that matures within one year and securities with maturities within one year in the investment portfolio are considered part of the Corporation’s liquid assets. Liquidity 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.

At March 31, 2020, the Corporation’s liquidity position remained strong, as its cash position totaled approximately $136 million. In addition to its cash position, the Corporation’s borrowing capacity with the Federal Home Loan Bank of Pittsburgh at March 31, 2020 totaled approximately $435 million.

Although the COVID-19 pandemic did not have a material impact on the Corporation’s liquidity in the first quarter of 2020, management believes the continuation of the pandemic and its related effect on the U.S. and global economies could introduce added pressure on the Corporation’s liquidity position and financial performance. In an effort to proactively manage against such risks, the Corporation took the following actions during the first quarter of 2020:

As a result of the strong growth in deposits in the fourth quarter of 2019, the Corporation’s liquidity position increased to levels that were significantly higher than its historical levels. During the first quarter of 2020, as the economic and market risk of the COVID-19 pandemic increased, the Corporation shifted its focus to emphasize liquidity management and maintaining its overall liquidity position at elevated levels;

During the first quarter of 2020, management implemented a daily liquidity tracking process aimed at detecting any underlying trends at a regional as well as consolidated level. The process currently in place provides management with an effective tool that can be used to anticipate any potential adverse impact on the Corporation’s ability to meet its cash obligations as they come due;

As part of the daily liquidity monitoring process, the Corporation is continuously evaluating utilization trends in commercial and home equity lines of credit to anticipate any potential additional demands on the Corporation’s cash obligations;

On a daily basis the Corporation is monitoring fluctuations in its deposit portfolio, at a regional level and customer level, if warranted, to better understand any potential change in customer sentiment with respect to their deposits with the Corporation;

Subsequent to March 31, 2020, the Corporation began its participation in the Payroll Protection Program Liquidity Facility (“PPPLF”), with a goal to borrow under this program an amount equivalent to the total amount the Corporation funded under PPP. As required under the PPPLF program, any borrowings under this program are to be repaid commensurate with payments, forgiveness and/or payoffs under the PPP.

OFF-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~~instruments are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off balance sheet risk was as follows at March 31, ~~2019~~2020 and December 31, ~~2018:~~2019:


	March 31, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	47,597	$	183,246	$	46,265	$	191,803	$	32,031	$	106,345	$	21,375	$	184,106
Unused lines of credit	15,956		426,752		14,390		429,456		25,459		490,312		14,637		446,407
Standby letters of credit	10,510		1,473		14,831		1,479		14,659		574		14,503		824

~~Commitments to make loans are generally made for periods of 60 days or less.~~ The fixed rate loan commitments at March 31, ~~2019~~2020 have interest rates ranging from ~~2.45%~~1.00% to 18.00% and maturities ranging from ~~ten~~five months to 35 years. The fixed rate loan commitments at December 31, ~~2018~~2019 have interest rates ranging from ~~2.45%~~2.53% to 18.00% and maturities ranging from one year to 3530 years.

The Corporation makes investments in limited partnerships, including certain small business investment corporations and low income housing partnerships. As of March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, unfunded capital commitments totaled ~~$3,445~~$5,831 and ~~$3,905,~~$5,831, respectively, for the small business investment corporations and ~~$1,434~~$4,190 and ~~$1,434,~~$4,190, respectively, for the low income housing partnerships. At March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, capital contributions to the small business investment corporations were ~~$7,055~~$9,669 and ~~$6,595,~~$9,669, respectively, and capital contributions to the low income housing partnerships were ~~$4,566~~$4,810 and ~~$4,566,~~$4,810, respectively.

CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE THREE MONTHS ENDED

MARCH 31, 2020 AND 2019



	March 31, 2019							March 31, 2018							March 31, 2020							March 31, 2019
	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)	$	414,286		2.85	%	$	2,978	$	292,450		2.69	%	$	1,984	$	491,375		2.88	%	$	3,451	$	411,813		2.86	%	$	2,928
Tax-Exempt (1,2)	98,588			3.46	%	841		97,846			3.51	%	850		71,984			3.35	%	580		98,588			3.48	%	841
Equity Securities (1,2)	18,603			6.02	%	280		29,414			3.97	%	292		13,407			7.23	%	241		18,603			6.10	%	280
Total securities	531,477			3.07	%	4,099		419,710			2.96	%	3,126		576,766			3.04	%	4,272		529,004			3.09	%	4,049
Loans:
Commercial (2)	932,819			5.29	%	12,329		768,968			4.54	%	8,732		1,065,513			4.98	%	13,181		932,819			5.36	%	12,329
Mortgage (2)	1,481,543			4.95	%	18,319		1,356,569			4.69	%	15,901		1,644,978			4.89	%	19,989		1,481,543			5.01	%	18,319
Consumer	87,745			10.92	%	2,395		82,745			9.66	%	1,999		107,194			9.58	%	2,554		88,966			10.92	%	2,395
Total loans (3)	2,502,107			5.28	%	33,043		2,208,282			4.82	%	26,632		2,817,685			5.10	%	35,724		2,503,328			5.35	%	33,043
Other earning assets															110,610			1.56	%	429		2,902			6.99	%	50
Total earning assets	3,033,584			4.89	%	$	37,142	2,627,992			4.53	%	$	29,758	3,505,061			4.65	%	$	40,425	3,035,234			4.96	%	$	37,142
Non interest-bearing assets:
Cash and due from banks	29,970							26,142							35,826							29,545
Premises and equipment	66,376							50,441							73,413							66,376
Other assets	135,995							146,935							151,944							135,995
Allowance for loan losses	(19,866		)					(20,175		)					(19,526		)					(19,866		)
Total non interest-bearing assets	212,475							203,343							241,657							212,050
TOTAL ASSETS	$	3,246,059						$	2,831,335						$	3,746,718						$	3,247,284
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Demand—interest-bearing	$	559,003		0.42	%	$	582	$	568,970		0.37	%	$	523	$	586,496		0.37	%	$	538	$	559,003		0.42	%	$	582
Savings	1,325,893			1.29	%	4,290		917,385			0.51	%	1,171		1,698,923			1.19	%	5,021		1,325,893			1.31	%	4,290
Time	369,621			1.86	%	1,715		375,554			1.31	%	1,230		424,795			2.22	%	2,346		369,621			1.88	%	1,715
Total interest-bearing deposits	2,254,517			1.17	%	6,587		1,861,909			0.63	%	2,924		2,710,214			1.17	%	7,905		2,254,517			1.18	%	6,587
Short-term borrowings	20,462			2.91	%	149		74,112			1.68	%	311		0			0.00	%	0		20,462			2.95	%	149
Long-term borrowings	242,198			2.08	%	1,261		240,601			1.96	%	1,177		226,627			2.18	%	1,227		242,198			2.11	%	1,261
Subordinated debentures	70,620			5.65	%	998		70,620			4.96	%	875		70,620			5.49	%	964		70,620			5.73	%	998
Total interest-bearing liabilities	2,587,797			1.39	%	$	8,995	2,247,242			0.94	%	$	5,287	3,007,461			1.35	%	$	10,096	2,587,797			1.41	%	$	8,995
Demand—non interest-bearing	345,688							311,595							369,838							345,688
Other liabilities	46,401							28,062							56,292							46,401
Total liabilities	2,979,886							2,586,899							3,433,591							2,979,886
Shareholders’ equity	266,173							244,436							313,127							267,398
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,246,059						$	2,831,335						$	3,746,718						$	3,247,284
Interest income/Earning assets				4.89	%	$	37,142				4.53	%	$	29,758				4.65	%	$	40,425				4.96	%	$	37,142
Interest expense/Interest-bearing liabilities				1.39	%	8,995					0.94	%	5,287					1.35	%	10,096					1.41	%	8,995
Net interest spread				3.50	%	$	28,147				3.59	%	$	24,471				3.30	%	$	30,329				3.55	%	$	28,147
Interest income/Earning assets				4.89	%	37,142					4.53	%	29,758					4.65	%	40,425					4.96	%	37,142
Interest expense/Earning assets				1.19	%	8,995					0.80	%	5,287					1.16	%	10,096					1.20	%	8,995
Net interest margin				3.70	%	$	28,147				3.72	%	$	24,471				3.49	%	$	30,329				3.76	%	$	28,147


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


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


(3)	Average outstanding includes the average balance outstanding of all 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.

RESULTSOF OPERATIONS

Three Months Ended March 31, ~~2019~~2020 and ~~2018~~2019

OVERVIEW

~~OVERVIEW OF THE INCOME STATEMENT~~

The Corporation’s operating results for the three months ended March 31, 2020 were impacted by the COVID-19 pandemic. In an effort to proactively support the U.S. economy, the Federal Reserve cut its interest rates by 150 basis points, which resulted in a reduction to the Corporation’s net interest margin and net interest income for the quarter. In addition, the Corporation’s loan and deposit growth for the first quarter of 2020 were adversely impacted by governmental stay-at-home orders as well as travel limitations. Lastly, in an effort to quantify the potential impact of the COVID-19 pandemic on its loan portfolio, the Corporation implemented a qualitative factor specifically related to the pandemic as described in more detail below.

The Corporation had net income of $8.8 million, or $0.57 per diluted share, in the first quarter of 2020, compared to $9.5 million, or $0.62 per diluted share, in the first quarter of 2019, ~~compared~~reflecting decreases of $660 thousand, or 7.0%, and $0.05 per diluted share, or 8.1%, respectively.

As discussed above, under Allowance for Loan Losses, the provision expense of $3.1 million as of March 31, 2020 included: (i) a provision expense of approximately $2.5 million related to ~~$7.1 million~~a specific loan loss reserve for a loan relationship moved to non-accrual last quarter, combined with (ii) a new qualitative factor specifically related to the COVID-19 pandemic of approximately $800 thousand, partially offset by (iii) a lower allowance requirement as a result of lower growth in the ~~first~~commercial and industrial loan portfolio.

Income before provision expense and income tax of $13.6 million, for the quarter ended March 31, 2020, representing an increase of ~~2018. Net~~approximately $880 thousand, or 6.9%, from the same period in 2019.

Total revenue (comprised of net interest income ~~increased $3.7~~plus non-interest income) of $35.4 million ~~or 15.2%, and non-interest income~~for the three months ended March 31, 2020 increased $1.4 million, or ~~29.5%. The provision for loan losses decreased by $325 thousand, or 19.9%~~4.3%, ~~and~~from the comparable period in 2019, while total non-interest ~~expenses increased by $2.2~~expense of $21.7 million ~~or 11.5%. The earnings per diluted share were $0.62~~ for the first quarter of ~~2019 and $0.46~~2020 increased $567 thousand, or 2.7%, from the first quarter of 2019. Provision expense of $3.1 million for the first quarter of ~~2018.~~ 2020 increased $1.8 million, or 135.8%, from the same period in 2019.

The return on average assets and the return on average equity for ~~first~~the first quarter of ~~2019~~2020 were ~~1.17%~~0.95% and ~~14.24%~~11.32%, respectively, ~~as compared to 1.00%~~decreasing from 1.18% and ~~11.61%~~14.37%, respectively, for the first quarter of ~~2018.~~2019. When excluding the impact of goodwill and other intangibles, the return on average tangible equity for the first quarter of 2020 was 12.92%, decreasing from 16.85% for the first quarter of 2019. The overall decrease in profitability, when comparing the first quarter of 2020 to the first quarter of 2019, was primarily due to the higher level of provision expense, as discussed in more detail above. The efficiency ratio of 60.34% for the first quarter of 2020 improved 51 basis points from 60.85% for the comparable period in 2019, as revenue growth of 4.3% outpaced the increase of 2.7% in non-interest expense.

NET INTEREST INCOME AND ~~EXPENSE~~NET INTEREST MARGIN

Net interest income for the three months ended March 31, 2020 increased 8.1% to $30.0 million from the three months ended March 31, 2019, driven by an overall growth of $470 million, or 15.5%, in average earning assets, partially offset by a reduction of 27 basis points in net interest margin on a fully tax-equivalent basis.

Net interest margin on a fully tax equivalent basis was ~~3.70%~~3.49% and ~~3.72%~~3.76% for the quarters ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. The yield on earning assets ~~increased 36~~decreased 31 basis points to ~~4.89%~~4.65% for the quarter ended March 31, ~~2019,~~2020, from ~~4.53%~~4.96% for the quarter ended March 31, ~~2018.~~2019. The cost of interest-bearing liabilities ~~increased 45~~decreased 6 basis points to ~~1.39%~~1.35% for the quarter ended March 31, ~~2019,~~2020 from ~~0.94%~~1.41% for the quarter ended March 31, ~~2018.~~2019. The decrease of 27 basis points in net interest margin during the first quarter of 2020 reflects changes in the interest rate environment, including substantial interest rate reductions by the Federal Reserve in light of the COVID-19 pandemic.

PROVISION FOR LOAN LOSSES

During the quarter ended March 31, ~~2019,~~2020, the Corporation recorded a provision for loan losses of ~~$1.3~~$3.1 million, as compared to a provision for loan losses of $1.6 million for the quarter ended March 31, 2018. Net chargeoffs in the first quarter of 2019 were $664 thousand, compared to net chargeoffs of $568 thousand in the first quarter of 2018. Net chargeoffs of the Bank totaled $230 thousand and $45 thousand during the quarters ended March 31, 2019 and 2018, or 0.04% and 0.01%, respectively, of average Bank loans. Holiday Financial Services Corporation, the Corporation’s consumer discount company, recorded net chargeoffs totaling $434 thousand and $523 thousand during the quarters ended March 31, 2019 and 2018, 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 March 31, 2019.~~

~~NON-INTEREST INCOME~~

Net realized gains on available-for-sale securities were $148 thousand during the quarter ended March 31, 2019. Net realized and unrealized gains on trading securities were $800 thousand during the quarter ended March 31, 2019, compared to $14 thousand during the quarter ended March 31, 2018. Excluding the effects of securities transactions, non-interest income was $5.2$1.3 million for the quarter ended March 31, 2019, ~~compared to $4.7~~as discussed in more detail above under Allowance for Loan Losses.

NON-INTEREST INCOME

Total non-interest income was $5.4 million for the ~~quarter~~three months ended March 31, ~~2018.~~

As2020 a ~~result~~decrease of ~~its organic deposit growth, the Corporation experienced an increase in service charges in deposit accounts of $234~~$789 thousand, or ~~18.8%~~12.8%, from the same period in 2019. Total non-interest income includes net realized and unrealized losses on trading securities, which combined totaled $588 thousand for the ~~first quarter of 2019 compared to the first quarter of 2018. Net income attributable to investments in Small Business Investment Companies was $91 thousand during the quarter~~three months ended March 31, ~~2019~~2020 compared to ~~$12~~net realized and unrealized gains on trading securities and net realized gains on available for sale securities of $948 thousand ~~during~~for the ~~quarter~~three months ended March 31, ~~2018, which is reported as~~2019.

Excluding the items discussed above, non-interest income for the three months ended March 31, 2020 totaled $6.0 million, representing an increase of $747 thousand, or 14.4%, from the same period in 2019, driven primarily by a ~~component of other non-interest~~$251 thousand increase in Wealth and Asset Management fees and a $98 thousand increase in mortgage banking income.

NON-INTEREST EXPENSES

~~Total non-interest expenses were $21.2 million and $19.0 million for~~For the ~~quarters~~three months ended March 31, ~~2019 and 2018, respectively. Salaries and benefits~~2020, total non-interest expense of $21.7 million increased ~~$1.4 million,~~$567 thousand, or ~~14.3%~~2.7%, ~~during~~from the ~~quarter~~three months 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.2019. The ~~remainder of the~~ increase in non-interest expenses was primarily athe result ~~the Corporation's continued~~of expenditures required to support business growth and ~~the servicing of a larger~~ongoing 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~~support. Accordingly, the ratio of non-interest expenses to average assets was ~~2.61% and 2.68% during~~2.33%, for the ~~quarters~~three months ended March 31, ~~2019 and 2018, respectively.~~2020, decreased 31 basis points from 2.64%, during the comparable period in 2019.

INCOME TAX EXPENSE

Income tax expense was $1.7 million during the three months ended March 31, 2020 and $2.0 million during the three months ended March 31, 2019, ~~and $1.1 million during the three months ended March 31, 2018,~~ resulting in effective tax rates of ~~17.1%~~16.4% and ~~13.7% for the periods,~~17.1%, respectively. This increase in the effective tax rate is primarily attributable to a higher percentage of pre-tax net income in the first quarter of 2019 that is not tax-exempt than was recorded in the first quarter of 2018. The effective rates for the periods differed from the federal statutory rate of 21.0% at March 31, ~~2019~~2020 and ~~2018~~2019 principally as a result of tax exempt income from securities and loans, as well as earnings from ~~bank owned~~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),~~Combinations) Note 43 (Securities), and Note 54 (Loans) of the Corporation’s ~~2018~~2019 Annual Report 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 other significant changes in the application of accounting policies since December 31, ~~2018.~~2019.

ITEM 3

I~~TEM~~ 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

Management reviews interest rate risk on a quarterly basis and reports to the ALCO. This review includes earnings shock scenarios whereby interest rates are immediately increased and decreased by 100, 200, 300 and 400 basis points. These scenarios, detailed in the table below, indicate that there would not be a significant variance in net interest income over a one-year period due to interest rate changes; however, actual results could vary significantly. At March 31, ~~2019,~~2020, all interest rate risk levels according to the model were within the tolerance limits of ALCO-approved policy. In addition, the table does not take into consideration changes that management would make to realign its assets and liabilities in the event of an unexpected changing interest rate environment. Due to the current low interest rate environment, the 300 and 400 basis point declining interest rate scenarios have been excluded from the table.


March 31, 2019
March 31, 2020		March 31, 2020
Change in Basis Points	% Change in Net Interest Income		% Change in Net Interest Income
400	9.0%		0.4%
300	7.0%		(1.0)%
200	5.4%		(1.5)%
100	5.2%		(2.9)%
(100)	(3.1)%		(2.6)%
(200)	(4.6)%		(1.6)%

ITEM 4

CONTROLS AND PROCEDURES

The Corporation’s management, under the supervision of and with the participation of the Corporation’s Principal Executive Officer and Principal Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, management, including the Principal Executive Officer and Principal Financial Officer, have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to provide reasonable assurance that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and ~~forms~~forms.

There was no significant change in the Corporation’s internal control over financial reporting that occurred during the quarter ended March 31, ~~2019~~2020 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial ~~reporting~~reporting.

PART II

P~~ART~~ IIOTHER INFORMATION

O~~THER~~ I~~NFORMATION~~

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part I, Item IA of the ~~2018~~2019 Form ~~10-K.~~10-K, with the exception of:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, that are highly uncertain and difficult to predict.

Since first being reported in December 2019, the novel strain of coronavirus (COVID-19) has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

Global health concerns relating to the COVID-19 pandemic outbreak and related government actions taken to reduce the spread of the virus have significantly and adversely affected the macroeconomic environment, and the outbreak has significantly increased economic uncertainty and reduced economic activity. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the pandemic, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion.

The COVID-19 pandemic has adversely impacted and is likely to continue to adversely impact our business, workforce, as well as the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

credit losses resulting from financial stress being experienced by our borrowers as a result of the outbreak and related governmental actions, particularly in the hospitality, energy and restaurant industries, but across other industries as well;

declines in collateral values;

third party disruptions, including outages at network providers and other suppliers;

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and

operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions.

These factors may persist for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 pandemic has subsided.

The COVID-19 pandemic has caused us to modify our business practices (including restricting employee travel and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic or will otherwise be satisfactory to government authorities.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, each of which is highly uncertain and difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the various responsive measures, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the pandemic, including the availability of and access to credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

The ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Nevertheless, any of the negative effects of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our results of operations, financial condition and cash flows. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019.

ITEM 2. ~~ISSUER PURCHASES~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to any purchase of shares of the Corporation’s common stock made by or on behalf of the Corporation for the three months ended March 31, ~~2019.~~2020.

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, 2019 0
$ 0
0
289,731
February 1 – 28, 2019 0
0
0
289,731
March 1 – 31, 2019 0
0
0
289,731



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, 2020	0	$	0	0	249,731
February 1 – 29, 2020	0	0		0	249,731
March 1 – 31, 2020	0	0		0	249,731


(1)	The Corporation’s stock repurchase program, which was ~~announced~~approved by the Corporation's Board of Directors on November 12, 2014, authorizes the repurchase of up to 500,000 shares of common stock. The program will remain in effect until fully utilized or until modified, suspended or terminated. As of March 31, ~~2019,~~2020, there were ~~289,731~~249,731 shares remaining in the program.

Additionally, during the quarter ended March 31, ~~2019,~~2020, 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~~2019 Stock Incentive ~~Plan (the "Plan").~~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~~10.1		~~Second Amended~~Executive Employment Agreement, dated March 23, 2020, by and ~~Restated Articles of Incorporation of~~among CNB Financial Corporation, CNB Bank and Tito L. Lima (incorporated by reference to Exhibit ~~3.1~~10.1 to ~~the~~ Registrant's Current Report on Form 8-K filed on ~~April 18, 2019)~~

~~3.2~~		~~Second Amended and Restated Bylaws of CNB Financial Corporation (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on April 18, 2019)~~March 24, 2020)

~~10.1~~		~~CNB Financial Corporation 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on April 18, 2019)~~

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

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, 2019~~7, 2020						/s/ Joseph B. Bower, Jr.
						Joseph B. Bower, Jr.
						President and Chief Executive Officer
						(Principal Executive Officer)

DATE: May ~~9, 2019~~7, 2020						/s/ ~~Brian W. Wingard~~Tito L. Lima
						~~Brian W. Wingard~~Tito L. Lima
						Treasurer
						(Principal Financial and Accounting Officer)

4144



	Shares		Per Share Weighted Average Grant Date Fair Value
Nonvested at beginning of period	75,889		$	23.20
Granted	25,940		25.27
Vested	(34,060	)	21.58
Nonvested at end of period	67,769		$	24.79



	3/31/2019			12/31/2018
Commercial, industrial, and agricultural	$	950,865		$	916,297
Commercial mortgages	709,726			697,776
Residential real estate	775,599			771,309
Consumer	86,780			86,035
Credit cards	7,341			7,623
Overdrafts	450			308
Less: unearned discount	(4,671		)	(4,791		)
allowance for loan losses	(20,346		)	(19,704		)
Loans, net	$	2,505,744		$	2,454,853



		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



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, 2019	0	$	0	0	289,731
February 1 – 28, 2019	0	0		0	289,731
March 1 – 31, 2019	0	0		0	289,731