UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~June~~September 30, 2019



☐	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, Pennsylvania 16830

(Address of principal executive offices)

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



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

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

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

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

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



Large Accelerated Filer	☐	Accelerated Filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

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

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

The number of shares outstanding of the issuer’s common stock as of ~~August 5,~~November 4, 2019:

COMMON STOCK, NO PAR VALUE PER SHARE: ~~15,197,983~~15,196,501 SHARES

INDEX

PART I.

FINANCIAL INFORMATION



	Page Number

ITEM 1 – Financial Statements

Consolidated Balance Sheets – ~~June~~September 30, 2019 (unaudited) and December 31, 2018 (audited)	1

Consolidated Statements of Income – Three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (unaudited)	2

Consolidated Statements of Comprehensive Income – Three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (unaudited)	3

Consolidated Statements of Cash Flows – ~~Six~~Nine months ended ~~June~~September 30, 2019 and 2018 (unaudited)	4

Consolidated Statements of Changes in Stockholders' Equity - Three and ~~six~~nine months ended ~~June~~September 30, 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	2728

ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk	3940

ITEM 4 – Controls and Procedures	4041

PART II. OTHER INFORMATION

ITEM 1 – Legal Proceedings	41

ITEM 1A – Risk Factors	4142

ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds	4142

ITEM 3 – Defaults Upon Senior Securities	4142

ITEM 4 – Mine Safety Disclosures	4142

ITEM 5 – Other Information	4142

ITEM 6 – Exhibits	4243

Signatures	4344

Forward-Looking Statements

The information below includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the financial condition, liquidity, results of operations, and future performance of our business. These forward-looking statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond our control). Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would” and “could.” Such known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) changes in general business, industry or economic conditions or competition; (ii) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting 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 business combinations and other acquisitions; (vii) changes in the quality or composition of our loan and investment portfolios; (viii) adequacy of loan loss reserves; (ix) increased competition; (x) loss of certain key officers; (xi) deposit attrition; (xii) rapidly changing technology; (xiii) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xiv) changes in the cost of funds, demand for loan products or demand for financial services; and (xv) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Such developments could have an adverse impact on our financial position and our results of operations.

The forward-looking statements contained herein are based upon management’s beliefs and assumptions. Any forward-looking statement made herein speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Part I Financial Information

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

Dollars in thousands, except share data


	(unaudited) June 30, 2019			December 31, 2018			(unaudited) September 30, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	33,926		$	43,327		$	47,089		$	43,327
Interest bearing deposits with other banks	4,004			2,236			5,072			2,236
Total cash and cash equivalents	37,930			45,563			52,161			45,563
Securities available for sale	533,970			516,863			529,867			516,863
Trading securities	8,904			7,786			9,088			7,786
Loans held for sale	2,032			367			1,279			367
Loans	2,627,269			2,479,348			2,754,569			2,479,348
Less: unearned discount	(4,911		)	(4,791		)	(5,067		)	(4,791		)
Less: allowance for loan losses	(21,437		)	(19,704		)	(20,207		)	(19,704		)
Net loans	2,600,921			2,454,853			2,729,295			2,454,853
FHLB, other equity, and restricted equity interests	24,501			24,508			24,901			24,508
Premises and equipment, net	51,785			49,920			53,647			49,920
Operating lease assets	17,082			0			16,837			0
Bank owned life insurance	57,130			56,443			57,445			56,443
Mortgage servicing rights	1,501			1,495			1,504			1,495
Goodwill	38,730			38,730			38,730			38,730
Core deposit intangible	396			727			257			727
Accrued interest receivable and other assets	26,092			24,266			26,159			24,266
Total Assets	$	3,400,974		$	3,221,521		$	3,541,170		$	3,221,521
LIABILITIES AND SHAREHOLDERS’ EQUITY
Non-interest bearing deposits	$	352,570		$	356,797		$	370,761		$	356,797
Interest bearing deposits	2,382,192			2,253,989			2,504,834			2,253,989
Total deposits	2,734,762			2,610,786			2,875,595			2,610,786
Short-term borrowings	52,907			0			18,016			0
FHLB and other long term borrowings	204,877			245,117			230,085			245,117
Subordinated debentures	70,620			70,620			70,620			70,620
Operating lease liabilities	17,862			0			17,696			0
Accrued interest payable and other liabilities	33,331			32,168			32,125			32,168
Total liabilities	3,114,359			2,958,691			3,244,137			2,958,691
Common stock, $0 par value; authorized 50,000,000 shares; issued 15,308,378 shares at June 30, 2019 and December 31, 2018	0			0
Common stock, $0 par value; authorized 50,000,000 shares; issued 15,308,378 shares at September 30, 2019 and December 31, 2018							0			0
Additional paid in capital	97,414			97,602			97,690			97,602
Retained earnings	185,838			171,780			193,612			171,780
Treasury stock, at cost (110,395 shares at June 30, 2019 and 101,097 shares at December 31, 2018)	(2,735		)	(2,556		)
Treasury stock, at cost (112,807 shares at September 30, 2019 and 101,097 shares at December 31, 2018)							(2,799		)	(2,556		)
Accumulated other comprehensive income (loss)	6,098			(3,996		)	8,530			(3,996		)
Total shareholders’ equity	286,615			262,830			297,033			262,830
Total Liabilities and Shareholders’ Equity	$	3,400,974		$	3,221,521		$	3,541,170		$	3,221,521

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data



	Three months ended June 30,				Six months ended June 30,				Three Months Ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
INTEREST AND DIVIDEND INCOME:
Loans including fees	$	34,295	$	28,975	$	67,119	$	55,432	$	36,165	$	30,385	$	103,284	$	85,817
Securities:
Taxable	3,155		2,180		6,133		4,164		3,093		2,698		9,226		6,862
Tax-exempt	584		683		1,281		1,377		562		677		1,843		2,054
Dividends	248		261		502		513		265		280		767		793
Total interest and dividend income	38,282		32,099		75,035		61,486		40,085		34,040		115,120		95,526
INTEREST EXPENSE:
Deposits	7,201		3,687		13,788		6,611		7,798		4,812		21,586		11,423
Borrowed funds	1,292		1,604		2,702		3,092		1,399		1,334		4,101		4,426
Subordinated debentures (includes $14, $46, $20 and $105 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements, respectively)	995		982		1,993		1,857
Subordinated debentures (includes $11, $44, $31 and $149 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements, respectively)									987		1,016		2,980		2,873
Total interest expense	9,488		6,273		18,483		11,560		10,184		7,162		28,667		18,722
NET INTEREST INCOME	28,794		25,826		56,552		49,926		29,901		26,878		86,453		76,804
PROVISION FOR LOAN LOSSES	1,788		1,905		3,094		3,536		2,118		1,095		5,212		4,631
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	27,006		23,921		53,458		46,390		27,783		25,783		81,241		72,173
NON-INTEREST INCOME:
Service charges on deposit accounts	1,569		1,271		3,050		2,518		1,676		1,584		4,726		4,102
Other service charges and fees	748		723		1,394		1,341		761		732		2,155		2,073
Wealth and asset management fees	1,202		1,090		2,244		2,120		1,238		1,031		3,482		3,151
Net realized gains on available-for-sale securities (includes $0, $0, $148 and $0 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities, respectively)	0		0		148		0		0		0		148		0
Net realized and unrealized gains on trading securities	654		237		1,454		251		197		421		1,651		672
Mortgage banking	370		310		609		518		408		283		1,017		801
Bank owned life insurance	326		339		687		739		315		335		1,002		1,074
Card processing and interchange income	1,221		1,103		2,250		2,074		1,195		1,066		3,445		3,140
Other	702		533		1,109		796		486		481		1,595		1,277
Total non-interest income	6,792		5,606		12,945		10,357		6,276		5,933		19,221		16,290
NON-INTEREST EXPENSES:
Salaries and benefits	11,507		10,131		22,407		19,666		11,633		11,429		34,040		31,095
Net occupancy expense	2,695		2,634		5,561		5,130		2,683		2,650		8,244		7,780
Amortization of core deposit intangible	166		248		331		496		139		222		470		718
Data processing	1,437		1,147		2,622		2,221		1,329		1,149		3,951		3,370
State and local taxes	954		833		1,722		1,686		956		808		2,678		2,494
Legal, professional, and examination fees	570		550		1,123		1,058		702		603		1,825		1,661
Advertising	473		581		884		1,178		626		554		1,510		1,732
FDIC insurance premiums	373		378		795		676		107		361		902		1,037
Card processing and interchange expenses	684		638		1,431		1,372		749		767		2,180		2,139
Other	3,125		2,403		6,283		5,059		2,520		2,251		8,803		7,310
Total non-interest expenses	21,984		19,543		43,159		38,542		21,444		20,794		64,603		59,336
INCOME BEFORE INCOME TAXES	11,814		9,984		23,244		18,205		12,615		10,922		35,859		29,127
INCOME TAX EXPENSE (includes ($3), ($10), $27 and ($22) income tax expense from reclassification items, respectively)	2,047		1,543		4,004		2,667
INCOME TAX EXPENSE (includes ($2), ($9), $25 and ($31) income tax expense from reclassification items, respectively)									2,258		1,686		6,262		4,353
NET INCOME	$	9,767	$	8,441	$	19,240	$	15,538	$	10,357	$	9,236	$	29,597	$	24,774
EARNINGS PER SHARE:
Basic	$	0.64	$	0.55	$	1.26	$	1.02	$	0.68	$	0.60	$	1.94	$	1.62
Diluted	$	0.64	$	0.55	$	1.26	$	1.02	$	0.68	$	0.60	$	1.94	$	1.62
DIVIDENDS PER SHARE:
Cash dividends per share	$	0.170	$	0.165	$	0.340	$	0.330	$	0.17	$	0.17	$	0.51	$	0.50

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands



	Three months ended June 30,						Six months ended June 30,						Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
NET INCOME	$	9,767		$	8,441		$	19,240		$	15,538		$	10,357		$	9,236		$	29,597		$	24,774
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 $46, $0, $72 and ($4), respectively	(173		)	1			(273		)	16
Reclassification adjustment for losses recognized in earnings, net of tax of ($3), ($10), ($4) and ($22), respectively	11			36			16			83
Unrealized gain (loss) on interest rate swaps, net of tax of $14, $0, $87 and ($4), respectively													(54		)	1			(326		)	16
Reclassification adjustment for losses recognized in earnings, net of tax of ($2), ($9), ($7) and ($31), respectively													9			35			24			118
	(162		)	37			(257		)	99			(45		)	36			(302		)	134
Net change in unrealized gains on securities available for sale:
Unrealized holding gains (losses) arising during the period, net of tax of ($1,433), $303, ($2,781) and $1,356, respectively	5,400			(1,140		)	10,468			(5,104		)
Unrealized holding gains (losses) arising during the period, net of tax of ($659), $653, ($3,441) and $2,010, respectively													2,477			(2,459		)	12,945			(7,562		)
Reclassification adjustment for realized gains included in net income, net of tax of $0, 0$, $31 and $0, respectively	0			0			(117		)	0			0			0			(117		)	0
	5,400			(1,140		)	10,351			(5,104		)	2,477			(2,459		)	12,828			(7,562		)
Other comprehensive income (loss)	5,238			(1,103		)	10,094			(5,005		)	2,432			(2,423		)	12,526			(7,428		)
COMPREHENSIVE INCOME	$	15,005		$	7,338		$	29,334		$	10,533		$	12,789		$	6,813		$	42,123		$	17,346

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands



	Six months ended June 30,						Nine months ended September 30,
	2019			2018			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	19,240		$	15,538		$	29,597		$	24,774
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses	3,094			3,536			5,212			4,631
Depreciation and amortization of premises and equipment, operating leases assets, core deposit intangible, and mortgage servicing rights	2,848			2,464			4,156			3,661
Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income	(341		)	38			(540		)	(472		)
Net realized gains on sales of available-for-sale securities	(148		)	0			(148		)	0
Net realized and unrealized gains on trading securities	(1,454		)	(251		)	(1,651		)	(672		)
Proceeds from sale of trading securities	699			0			764			434
Purchase of trading securities	(363		)	(144		)	(415		)	(1,499		)
Gain on sale of loans	(401		)	(323		)	(696		)	(510		)
Net gains on dispositions of premises and equipment and foreclosed assets	(118		)	(217		)	(353		)	(285		)
Proceeds from sale of loans	17,330			10,084			29,729			18,811
Origination of loans held for sale	(18,594		)	(10,774		)	(30,107		)	(18,404		)
Income on bank owned life insurance	(687		)	(739		)	(1,002		)	(1,074		)
Stock-based compensation expense	867			949			1,109			1,218
Changes in:
Accrued interest receivable and other assets	(1,746		)	(4,378		)	(895		)	(5,755		)
Accrued interest payable, lease liabilities, and other liabilities	(1,611		)	2,153			(3,278		)	2,627
NET CASH PROVIDED BY OPERATING ACTIVITIES	18,615			17,936			31,482			27,485
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, prepayments and calls of available-for-sale securities	40,287			21,880			63,835			44,605
Proceeds from sales of available-for-sale securities	11,403			0			11,403			0
Purchase of available-for-sale securities	(55,987		)	(70,013		)	(72,542		)	(167,473		)
Loan origination and payments, net	(148,670		)	(189,994		)	(279,901		)	(241,895		)
Redemption (purchase) of FHLB, other equity, and restricted equity interests	7			(1,172		)	(393		)	(2,319		)
Purchase of premises and equipment	(3,900		)	(896		)	(6,720		)	(1,373		)
Proceeds from the sale of premises and equipment and foreclosed assets	385			538			725			597
NET CASH USED BY INVESTING ACTIVITIES	(156,475		)	(239,657		)	(283,593		)	(367,858		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Checking, money market and savings accounts	164,286			220,951			286,141			329,925
Certificates of deposit	(40,310		)	12,799			(21,332		)	24,639
Purchase of treasury stock	(1,234		)	(454		)	(1,319		)	(454		)
Cash dividends paid	(5,182		)	(5,046		)	(7,765		)	(7,645		)
Repayment of long-term borrowings	(40,240		)	(15,131		)	(45,385		)	(22,732		)
Proceeds from long-term borrowings	0			50,000			30,353			50,000
Net change in short-term borrowings	52,907			(34,416		)	18,016			(32,205		)
NET CASH PROVIDED BY FINANCING ACTIVITIES	130,227			228,703			258,709			341,528
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(7,633		)	6,982			6,598			1,155
CASH AND CASH EQUIVALENTS, Beginning	45,563			35,345			45,563			35,345
CASH AND CASH EQUIVALENTS, Ending	$	37,930		$	42,327		$	52,161		$	36,500
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	18,356		$	11,406		$	28,304		$	17,722
Income taxes	2,691			2,250			5,014			4,250
SUPPLEMENTAL NONCASH DISCLOSURES:
Transfers to other real estate owned	$	256		$	3		$	1,473		$	228
Grant of restricted stock awards from treasury stock	$	1,055		$	933		$	1,076		$	933

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			Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Share- holders’ Equity
Balance, April 1, 2019	$	97,139	$	178,662		$	(1,702	)	$	860		$	274,959
Balance, July 1, 2019															$	97,414		$	185,838		$	(2,735	)	$	6,098		$	286,615
Net income			9,767									9,767						10,357									10,357
Other comprehensive income									5,238			5,238												2,432			2,432
Forfeiture of restricted stock award grants (2,699 shares)															55						(71		)				(16		)
Performance based restricted stock award grants (798 shares)															(21		)				21						0
Stock-based compensation expense	275											275			242												242
Purchase of treasury stock (40,000 shares)						(994		)				(994		)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (1,388 shares)						(39		)				(39		)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (217 shares)																					(6		)				(6		)
Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting (294 shares)																					(8		)				(8		)
Cash dividends declared ($0.17 per share)			(2,591		)							(2,591		)				(2,583		)							(2,583		)
Balance, June 30, 2019	$	97,414	$	185,838		$	(2,735	)	$	6,098		$	286,615
Balance, September 30, 2019															$	97,690		$	193,612		$	(2,799	)	$	8,530		$	297,033

Balance, April 1, 2018	$	96,786	$	152,872		$	(602	)	$	(4,245	)	$	244,811
Balance, July 1, 2018															$	97,059		$	158,790		$	(608	)	$	(5,348	)	$	249,893
Net income			8,441									8,441						9,236									9,236
Other comprehensive loss									(1,103		)	(1,103		)										(2,423		)	(2,423		)
Forfeiture of restricted stock award grants (130 shares)	1					(4		)				(3		)
Stock-based compensation expense	272											272			269												269
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (79 shares)						(2		)				(2		)
Cash dividends declared ($0.165 per share)			(2,523		)							(2,523		)				(2,599		)							(2,599		)
Balance, June 30, 2018	$	97,059	$	158,790		$	(608	)	$	(5,348	)	$	249,893
Balance, September 30, 2018															$	97,328		$	165,427		$	(608	)	$	(7,771	)	$	254,376


	Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Share- holders’ Equity			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				19,240									19,240						29,597									29,597
Other comprehensive income										10,094			10,094												12,526			12,526
Forfeiture of restricted stock award grants (2,699 shares)																55						(71		)				(16		)
Restricted stock award grants (39,790 shares)	(1,055		)				1,055						0			(1,055		)				1,055						0
Performance based restricted stock award grants (798 shares)																(21		)				21						0
Stock-based compensation expense	867												867			1,109												1,109
Purchase of treasury stock (40,000 shares)							(994		)				(994		)							(994		)				(994		)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (9,088 shares)							(240		)				(240		)
Cash dividends declared ($0.34 per share)				(5,182		)							(5,182		)
Balance, June 30, 2019	$	97,414		$	185,838		$	(2,735	)	$	6,098		$	286,615
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (9,305 shares)																						(246		)				(246		)
Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting (294 shares)																						(8		)				(8		)
Cash dividends declared ($0.51 per share)																			(7,765		)							(7,765		)
Balance, September 30, 2019																$	97,690		$	193,612		$	(2,799	)	$	8,530		$	297,033

Balance, January 1, 2018	$	97,042		$	148,298		$	(1,087	)	$	(343	)	$	243,910		$	97,042		$	148,298		$	(1,087	)	$	(343	)	$	243,910
Net income				15,538									15,538						24,774									24,774
Other comprehensive loss										(5,005		)	(5,005		)										(7,428		)	(7,428		)
Forfeiture of restricted stock award grants (130 shares)	1						(4		)				(3		)	1						(4		)				(3		)
Restricted stock award grants (37,708 shares)	(933		)				933						0			(933		)				933						0
Stock-based compensation expense	949												949			1,218												1,218
Purchase of treasury stock (10,769 shares)							(286		)				(286		)							(286		)				(286		)
Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting (6,119 shares)							(164		)				(164		)							(164		)				(164		)
Cash dividends declared ($0.33 per share)				(5,046		)							(5,046		)
Balance, June 30, 2018	$	97,059		$	158,790		$	(608	)	$	(5,348	)	$	249,893
Cash dividends declared ($0.50 per share)																			(7,645		)							(7,645		)
Balance, September 30, 2018																$	97,328		$	165,427		$	(608	)	$	(7,771	)	$	254,376

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

2. STOCK COMPENSATION

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

For key employees, the vesting of time-based restricted stock is one-third, one-fourth, or one-fifth of the granted restricted shares per year, beginning one year after the grant date, with 100% vesting on the third, fourth or fifth anniversary of the grant date, respectively. Prior to 2018, for non-employee directors, the vesting schedule was one-third of the granted restricted shares per year, beginning one year after the grant date, with 100% vested on the third anniversary of the grant date. Beginning in 2018, stock compensation received by non-employee directors vests immediately. At ~~June~~September 30, 2019, 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 or ~~six~~nine month periods ended ~~June~~September 30, 2019 and 2018.

In addition to the time-based restricted stock disclosed above, the Corporation’s Board of Directors grants performance-based restricted stock awards (“PBRSAs”) to key employees. The number of PBRSAs will depend on certain performance conditions and are also subject to service-based vesting. In 2019, awards with a maximum of 16,681 shares in aggregate were granted to key employees. In 2018, awards with a maximum of 15,657 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. In the third quarter of 2019, a key employee retired resulting in 241 and 557 shares vesting related to their 2019 and 2018 PBRSA, respectively, in accordance with their agreement.

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 time-based, performance-based and director restricted stock awards was ~~$275~~$242 and ~~$867~~$1,109 for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~$272~~$269 and ~~$949~~$1,218 for the three and ~~six~~nine months ended ~~June~~September 30, 2018. There was ~~$911~~$640 and $775 of total unrecognized compensation cost related to unvested restricted stock awards, as of ~~June~~September 30, 2019 and December 31, 2018, respectively. The total income tax benefit related to the recognized compensation cost of vested restricted stock awards was ~~$58~~$51 and ~~$182~~$233 for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~$57~~$56 and ~~$199~~$256 for the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively.

A summary of changes in time-based nonvested restricted stock awards for the three months ended ~~June~~September 30, 2019 follows:


	Shares		Per Share Weighted Average Grant Date Fair Value		Shares		Per Share Weighted Average Grant Date Fair Value
Nonvested at beginning of period	67,769		$	24.79	64,158		$	24.87
Forfeited					(2,699	)	24.85
Vested	(3,611	)	23.42		(639	)	23.53
Nonvested at end of period	64,158		$	24.87	60,820		$	24.88

A summary of changes in time-based nonvested restricted stock awards for the ~~six~~nine months ended ~~June~~September 30, 2019 follows:


	Shares		Per Share Weighted Average Grant Date Fair Value		Shares		Per Share Weighted Average Grant Date Fair Value
Nonvested at beginning of period	75,889		$	23.20	75,889		$	23.20
Granted	25,940		25.27		25,940		25.27
Forfeited					(2,699	)	24.85
Vested	(37,671	)	21.76		(38,310	)	21.79
Nonvested at end of period	64,158		$	24.87	60,820		$	24.88

The above table excludes 13,850 shares in restricted stock awards that were granted at a weighted average fair value of $25.27 and immediately vested. Compensation expense resulting from the immediately vested shares was $0 and $350 for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and is included in the previously disclosed ~~$275~~$242 and ~~$867~~$1,109 above, respectively.

The fair value of shares vested was ~~$101~~$18 and ~~$1,328~~$1,346 during the three and ~~six~~nine months ended ~~June~~September 30, 2019 and $9$8 and ~~$1,471~~$1,479 for the three and ~~six~~nine months ended ~~June~~September 30, 2018.

3. FAIR VALUE

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has also been established which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three levels of inputs are used to measure fair value:

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

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

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

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

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

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

Assets and liabilities measured at fair value on a recurring basis are as follows at ~~June~~September 30, 2019 and December 31, 2018:


				Fair Value Measurements at June 30, 2019 Using:										Fair Value Measurements at September 30, 2019 Using:
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
Description	Total			(Level 1)		(Level 2)			(Level 3)		Total			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	140,727		$	0	$	140,727		$	0	$	138,768		$	0	$	138,768		$	0
States and political subdivisions	119,454			0		119,454			0		115,064			0		115,064			0
Residential and multi-family mortgage	233,064			0		233,064			0		240,966			0		240,966			0
Corporate notes and bonds	11,889			0		11,889			0		7,003			0		7,003			0
Pooled SBA	27,876			0		27,876			0		27,101			0		27,101			0
Other	960			960		0			0		965			965		0			0
Total Securities Available For Sale	$	533,970		$	960	$	533,010		$	0	$	529,867		$	965	$	528,902		$	0
Interest Rate swaps	$	1,802		$	0	$	1,802		$	0	$	2,572		$	0	$	2,572		$	0
Trading Securities:
Corporate equity securities	$	7,155		$	7,155	$	0		$	0	$	7,259		$	7,259	$	0		$	0
Mutual funds	916			916		0			0		911			911		0			0
Certificates of deposit	179			179		0			0		210			210		0			0
Corporate notes and bonds	603			603		0			0		657			657		0			0
U.S. Government sponsored entities	51			0		51			0		51			0		51			0
Total Trading Securities	$	8,904		$	8,853	$	51		$	0	$	9,088		$	9,037	$	51		$	0
Liabilities:
Interest rate swaps	$	(2,328	)	$	0	$	(2,328	)	$	0	$	(3,155	)	$	0	$	(3,155	)	$	0

				Fair Value Measurements at December 31, 2018 Using:										Fair Value Measurements at December 31, 2018 Using:
				Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs					Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Significant Unobservable Inputs
Description	Total			(Level 1)		(Level 2)			(Level 3)		Total			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities Available For Sale:
U.S. Government sponsored entities	$	132,694		$	0	$	132,694		$	0	$	132,694		$	0	$	132,694		$	0
States and political subdivisions	136,031			0		136,031			0		136,031			0		136,031			0
Residential and multi-family mortgage	206,053			0		206,053			0		206,053			0		206,053			0
Corporate notes and bonds	11,777			0		11,777			0		11,777			0		11,777			0
Pooled SBA	29,374			0		29,374			0		29,374			0		29,374			0
Other	934			934		0			0		934			934		0			0
Total Securities Available For Sale	$	516,863		$	934	$	515,929		$	0	$	516,863		$	934	$	515,929		$	0
Interest Rate swaps	$	485		$	0	$	485		$	0	$	485		$	0	$	485		$	0
Trading Securities:
Corporate equity securities	$	5,828		$	5,828	$	0		$	0	$	5,828		$	5,828	$	0		$	0
Mutual funds	1,058			1,058		0			0		1,058			1,058		0			0
Certificates of deposit	268			268		0			0		268			268		0			0
Corporate notes and bonds	581			581		0			0		581			581		0			0
U.S. Government sponsored entities	51			0		51			0		51			0		51			0
Total Trading Securities	$	7,786		$	7,735	$	51		$	0	$	7,786		$	7,735	$	51		$	0
Liabilities:
Interest rate swaps	$	(686	)	$	0	$	(686	)	$	0	$	(686	)	$	0	$	(686	)	$	0

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


			Fair Value Measurements at June 30, 2019 Using:						Fair Value Measurements at September 30, 2019 Using:
			Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
Description	Total		(Level 1)	(Level 2)	(Level 3)		Total		(Level 1)	(Level 2)	(Level 3)
Assets:
Impaired loans:
Commercial, industrial, and agricultural	$	631	0	0	$	631	$	687	0	0	$	687
Commercial mortgages	$	933	0	0	$	933	$	1,089	0	0	$	1,089

			Fair Value Measurements at December 31, 2018 Using						Fair Value Measurements at December 31, 2018 Using
			Quoted Prices in		Significant				Quoted Prices in		Significant
			Active Markets for	Significant Other	Unobservable				Active Markets for	Significant Other	Unobservable
			Identical Assets	Observable Inputs	Inputs				Identical Assets	Observable Inputs	Inputs
Description	Total		(Level 1)	(Level 2)	(Level 3)		Total		(Level 1)	(Level 2)	(Level 3)
Assets:
Impaired loans:
Commercial, industrial, and agricultural	$	2,055	0	0	$	2,055	$	2,055	0	0	$	2,055
Commercial mortgages	$	679	0	0	$	679	$	679	0	0	$	679

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 ~~June~~September 30, 2019:



	Fair value	Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans – commercial, industrial, and agricultural	$~~631~~687	Valuation of third party appraisal on underlying collateral	Loss severity rates	48%-61% ~~(58%~~(54%)
Impaired loans – commercial mortgages	$~~933~~1,089	Valuation of third party appraisal on underlying collateral	Loss severity rates	~~0-100% (66%~~25-100% (58%)

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:



	Fair value	Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Impaired loans – commercial, industrial, and agricultural	$2,055	Valuation of third party appraisal on underlying collateral	Loss severity rates	20%-60% (34%)
Impaired loans – commercial mortgages	$679	Valuation of third party appraisal on underlying collateral	Loss severity rates	15%-39% (33%)

Fair Value of Financial Instruments

The following table presents the carrying amount and fair value of financial instruments at ~~June~~September 30, 2019:


	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	$	37,930		$	37,930		$	0		$	0	$	37,930		$	52,161		$	52,161		$	0		$	0	$	52,161
Securities available for sale	533,970			960			533,010			0		533,970			529,867			965			528,902			0		529,867
Trading securities	8,904			8,853			51			0		8,904			9,088			9,037			51			0		9,088
Loans held for sale	2,032			0			2,037			0		2,037			1,279			0			1,282			0		1,282
Net loans	2,600,921			0			0			2,578,210		2,578,210			2,729,295			0			0			2,705,463		2,705,463
FHLB and other restricted interests	24,501			n/a			n/a			n/a		n/a			24,901			n/a			n/a			n/a		n/a
Interest rate swaps	1,802			0			1,802			0		1,802			2,572			0			2,572			0		2,572
Accrued interest receivable	12,020			6			3,310			8,704		12,020			11,679			6			3,486			8,187		11,679
LIABILITIES
Deposits	$	(2,734,762	)	$	(2,379,635	)	$	(355,750	)	$	0	$	(2,735,385	)	$	(2,875,595	)	$	(2,501,490	)	$	(374,987	)	$	0	$	(2,876,477	)
FHLB and other borrowings	(257,784		)	0			(260,361		)	0		(260,361		)	(248,101		)	0			(252,312		)	0		(252,312		)
Subordinated debentures	(70,620		)	0			(64,791		)	0		(64,791		)	(70,620		)	0			(64,382		)	0		(64,382		)
Interest rate swaps	(2,328		)	0			(2,328		)	0		(2,328		)	(3,155		)	0			(3,155		)	0		(3,155		)
Accrued interest payable	(990		)	0			(990		)	0		(990		)	(1,712		)	0			(1,712		)	0		(1,712		)

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


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

In accordance with our adoption of Accounting Standards Update ("ASU") 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at ~~June~~September 30, 2019 and December 31, 2018 represent an approximation of exit price; however, an actual exit price may differ.

4. SECURITIES

Securities available for sale at ~~June~~September 30, 2019 and December 31, 2018 are as follows:


	June 30, 2019									December 31, 2018									September 30, 2019									December 31, 2018
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair		Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value		Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. Gov’t sponsored entities	$	138,235	$	2,633	$	(141	)	$	140,727	$	134,010	$	254	$	(1,570	)	$	132,694	$	135,215	$	3,620	$	(67	)	$	138,768	$	134,010	$	254	$	(1,570	)	$	132,694
State & political subdivisions	116,140		3,387		(73		)	119,454		134,662		1,942		(573		)	136,031		111,468		3,687		(91		)	115,064		134,662		1,942		(573		)	136,031
Residential & multi-family mortgage	229,925		4,086		(947		)	233,064		209,126		500		(3,573		)	206,053		236,241		5,362		(637		)	240,966		209,126		500		(3,573		)	206,053
Corporate notes & bonds	12,352		16		(479		)	11,889		12,356		22		(601		)	11,777		7,350		14		(361		)	7,003		12,356		22		(601		)	11,777
Pooled SBA	27,671		373		(168		)	27,876		30,163		135		(924		)	29,374		26,810		361		(70		)	27,101		30,163		135		(924		)	29,374
Other	1,020		0		(60		)	960		1,020		0		(86		)	934		1,020		0		(55		)	965		1,020		0		(86		)	934
Total	$	525,343	$	10,495	$	(1,868	)	$	533,970	$	521,337	$	2,853	$	(7,327	)	$	516,863	$	518,104	$	13,044	$	(1,281	)	$	529,867	$	521,337	$	2,853	$	(7,327	)	$	516,863

At ~~June~~September 30, 2019 and December 31, 2018, there were no0 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 ~~June~~September 30, 2019 and December 31, 2018 are as follows:


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Corporate equity securities	$	7,155	$	5,828	$	7,259	$	5,828
Mutual funds	916		1,058		911		1,058
Certificates of deposit	179		268		210		268
Corporate notes and bonds	603		581		657		581
U.S. Government sponsored entities	51		51		51		51
Total	$	8,904	$	7,786	$	9,088	$	7,786

Securities with unrealized losses at ~~June~~September 30, 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:

~~June~~September 30, 2019


	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Gov’t sponsored entities	$	0	$	0		$	35,941	$	(141	)	$	35,941	$	(141	)	$	9,045	$	(7	)	$	23,954	$	(60	)	$	32,999	$	(67	)
State & political subdivisions	870		0			732		(73		)	1,602		(73		)	0		0			714		(91		)	714		(91		)
Residential & multi-family mortgage	8,001		(57		)	51,298		(890		)	59,299		(947		)	15,527		(67		)	35,984		(570		)	51,511		(637		)
Corporate notes & bonds	0		0			9,522		(479		)	9,522		(479		)	0		0			4,639		(361		)	4,639		(361		)
Pooled SBA	0		0			13,975		(168		)	13,975		(168		)	9,118		(20		)	6,576		(50		)	15,694		(70		)
Other	0		0			960		(60		)	960		(60		)	0		0			965		(55		)	965		(55		)
	$	8,871	$	(57	)	$	112,428	$	(1,811	)	$	121,299	$	(1,868	)	$	33,690	$	(94	)	$	72,832	$	(1,187	)	$	106,522	$	(1,281	)

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	)	$	85,462	$	(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	)	$	308,925	$	(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 ~~June~~September 30, 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 ~~June~~September 30, 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~~considerations; the financial condition and near-term prospects of the issuer and whether downgrades by bond rating agencies have ~~occurred. Management also considers~~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 ~~June~~September 30, 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.

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 ~~June~~September 30, 2019 and December 31, 2018, securities carried at ~~$261,059~~$257,233 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 June 30, 2019 $ 0
$ 0
$ 0
Three months ended June 30, 2018 $ 0
$ 0
$ 0
Six months ended June 30, 2019 $ 11,403
$ 152
$ 4
Six months ended June 30, 2018 $ 0
$ 0
$ 0



	Proceeds		Gross Gains		Gross Losses
Three months ended September 30, 2019	$	0	$	0	$	0
Three months ended September 30, 2018	$	0	$	0	$	0
Nine months ended September 30, 2019	$	11,403	$	152	$	4
Nine months ended September 30, 2018	$	0	$	0	$	0

The tax provision related to these net realized gains was $0 and $31 during the three and ~~six~~nine months ended ~~June~~September 30, 2019.

The following is a schedule of the contractual maturity of securities available for sale at ~~June~~September 30, 2019:


	Amortized Cost		Fair Value		Amortized Cost		Fair Value
1 year or less	$	76,122	$	75,987	$	71,463	$	71,468
1 year – 5 years	113,884		115,445		108,190		110,168
5 years – 10 years	71,326		75,086		68,636		73,242
After 10 years	5,395		5,552		5,744		5,957
	266,727		272,070		254,033		260,835
Residential and multi-family mortgage	229,925		233,064		236,241		240,966
Pooled SBA	27,671		27,876		26,810		27,101
Other	1,020		960		1,020		965
Total debt securities	$	525,343	$	533,970	$	518,104	$	529,867

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 ~~June~~September 30, 2019 and December 31, 2018 are summarized as follows:


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Commercial, industrial, and agricultural	$	993,629		$	916,297		$	1,033,631		$	916,297
Commercial mortgages	750,334			697,776			788,974			697,776
Residential real estate	786,354			771,309			802,331			771,309
Consumer	89,331			86,035			121,598			86,035
Credit cards	7,284			7,623			7,393			7,623
Overdrafts	337			308			642			308
Less: unearned discount	(4,911		)	(4,791		)	(5,067		)	(4,791		)
allowance for loan losses	(21,437		)	(19,704		)	(20,207		)	(19,704		)
Loans, net	$	2,600,921		$	2,454,853		$	2,729,295		$	2,454,853

At ~~June~~September 30, 2019 and December 31, 2018, net unamortized loan fees of ~~$3,374~~$3,447 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.

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 ~~June~~September 30, 2019 and December 31, 2018, respectively. Commercial mortgage loans comprised 29% and 28% of the Corporation’s total loan portfolio at ~~June~~September 30, 2019 and December 31, 2018, 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 ~~75%~~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 ~~30%~~29% and 31% of the Corporation’s total loan portfolio at ~~June~~September 30, 2019 and December 31, 2018, 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%5% of the total loan portfolio at both ~~June~~September 30, 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 ~~June~~September 30, 2019 were as follows:


	Commercial,Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total			Commercial,Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, April 1, 2019	$	7,787	$	8,846	$	1,383		$	2,040		$	105		$	185		$	20,346
Allowance for loan losses, July 1, 2019																				$	8,108		$	9,538		$	1,403		$	2,141		$	87		$	160		$	21,437
Charge-offs	0		0		(146		)	(513		)	(26		)	(88		)	(773		)	(160		)	(2,650		)	(38		)	(547		)	(3		)	(113		)	(3,511		)
Recoveries	4		16		2			28			1			25			76			5			65			5			58			6			24			163
Provision (benefit) for loan losses	317		676		164			586			7			38			1,788			997			30			116			693			15			267			2,118
Allowance for loan losses, June 30, 2019	$	8,108	$	9,538	$	1,403		$	2,141		$	87		$	160		$	21,437
Allowance for loan losses, September 30, 2019																				$	8,950		$	6,983		$	1,486		$	2,345		$	105		$	338		$	20,207

Transactions in the allowance for loan losses for the ~~six~~nine months ended ~~June~~September 30, 2019 were as follows:


	Commercial,Industrial, and Agricultural		Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total			Commercial,Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2019	$	7,341	$	7,490		$	2,156		$	2,377		$	103		$	237		$	19,704		$	7,341		$	7,490		$	2,156		$	2,377		$	103		$	237		$	19,704
Charge-offs	0		(2		)	(244		)	(1,062		)	(52		)	(216		)	(1,576		)	(160		)	(2,652		)	(282		)	(1,609		)	(55		)	(329		)	(5,087		)
Recoveries	8		1			67			74			6			59			215			13			66			72			132			12			83			378
Provision (benefit) for loan losses	759		2,049			(576		)	752			30			80			3,094			1,756			2,079			(460		)	1,445			45			347			5,212
Allowance for loan losses, June 30, 2019	$	8,108	$	9,538		$	1,403		$	2,141		$	87		$	160		$	21,437
Allowance for loan losses, September 30, 2019																					$	8,950		$	6,983		$	1,486		$	2,345		$	105		$	338		$	20,207

Transactions in the allowance for loan losses for the three months ended ~~June~~September 30, 2018 were as follows:


	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total			Commercial, Industrial, and Agricultural			Commercial Mortgages		Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, April 1, 2018	$	6,282	$	10,020	$	2,052		$	2,065		$	123		$	214		$	20,756
Allowance for loan losses, July 1, 2018																				$	7,143		$	10,615	$	1,900		$	2,156		$	101		$	207		$	22,122
Charge-offs	0		0		(77		)	(551		)	(26		)	(56		)	(710		)	(30		)	0		(212		)	(469		)	(8		)	(94		)	(813		)
Recoveries	94		0		9			35			17			16			171			3			0		55			28			3			17			106
Provision (benefit) for loan losses	767		595		(84		)	607			(13		)	33			1,905			(536		)	682		235			608			11			95			1,095
Allowance for loan losses, June 30, 2018	$	7,143	$	10,615	$	1,900		$	2,156		$	101		$	207		$	22,122
Allowance for loan losses, September 30, 2018																				$	6,580		$	11,297	$	1,978		$	2,323		$	107		$	225		$	22,510

Transactions in the allowance for loan losses for the ~~six~~nine months ended ~~June~~September 30, 2018 were as follows:


	Commercial, Industrial, and Agricultural			Commercial Mortgages		Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total			Commercial, Industrial, and Agricultural			Commercial Mortgages		Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2018	$	6,160		$	9,007	$	2,033		$	2,179		$	120		$	194		$	19,693		$	6,160		$	9,007	$	2,033		$	2,179		$	120		$	194		$	19,693
Charge-offs	(31		)	0		(77		)	(1,141		)	(45		)	(142		)	(1,436		)	(61		)	0		(289		)	(1,610		)	(53		)	(236		)	(2,249		)
Recoveries	162			0		12			84			24			47			329			165			0		67			112			27			64			435
Provision (benefit) for loan losses	852			1,608		(68		)	1,034			2			108			3,536			316			2,290		167			1,642			13			203			4,631
Allowance for loan losses, June 30, 2018	$	7,143		$	10,615	$	1,900		$	2,156		$	101		$	207		$	22,122
Allowance for loan losses, September 30, 2018																					$	6,580		$	11,297	$	1,978		$	2,323		$	107		$	225		$	22,510

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 ~~June~~September 30, 2019 and December 31, 2018. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

~~June~~September 30, 2019


	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total		Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	222	$	664	$	0	$	0	$	0	$	0	$	886	$	766	$	2,054	$	29	$	0	$	0	$	0	$	2,849
Collectively evaluated for impairment	7,795		4,154		1,403		2,141		87		160		15,740		8,148		4,405		1,457		2,345		105		338		16,798
Acquired with deteriorated credit quality	0		0		0		0		0		0		0		0		0		0		0		0		0		0
Modified in a troubled debt restructuring	91		4,720		0		0		0		0		4,811		36		524		0		0		0		0		560
Total ending allowance balance	$	8,108	$	9,538	$	1,403	$	2,141	$	87	$	160	$	21,437	$	8,950	$	6,983	$	1,486	$	2,345	$	105	$	338	$	20,207
Loans:
Individually evaluated for impairment	$	1,666	$	1,435	$	472	$	0	$	0	$	0	$	3,573	$	2,898	$	3,110	$	489	$	0	$	0	$	0	$	6,497
Collectively evaluated for impairment	988,617		738,828		785,882		89,331		7,284		337		2,610,279		1,027,732		780,484		801,842		121,598		7,393		642		2,739,691
Acquired with deteriorated credit quality	0		545		0		0		0		0		545		0		534		0		0		0		0		534
Modified in a troubled debt restructuring	3,346		9,526		0		0		0		0		12,872		3,001		4,846		0		0		0		0		7,847
Total ending loans balance	$	993,629	$	750,334	$	786,354	$	89,331	$	7,284	$	337	$	2,627,269	$	1,033,631	$	788,974	$	802,331	$	121,598	$	7,393	$	642	$	2,754,569

December 31, 2018


	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total		Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	54	$	4	$	100	$	0	$	0	$	10	$	168	$	54	$	4	$	100	$	0	$	0	$	10	$	168
Collectively evaluated for impairment	7,183		3,036		2,056		2,377		103		227		14,982		7,183		3,036		2,056		2,377		103		227		14,982
Acquired with deteriorated credit quality	0		0		0		0		0		0		0		0		0		0		0		0		0		0
Modified in a troubled debt restructuring	104		4,450		0		0		0		0		4,554		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	$	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	$	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		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		0		567		0		0		0		0		567
Modified in a troubled debt restructuring	4,577		10,049		0		0		0		0		14,626		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	$	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 ~~June~~September 30, 2019 and December 31, 2018 and for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018:

~~June~~September 30, 2019


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	2,829	$	1,268	$	313	$	3,021	$	1,691	$	802
Commercial mortgage	8,179		7,790		5,384		8,055		6,258		2,578
Residential real estate	0		0		0		489		489		29
With no related allowance recorded:
Commercial, industrial, and agricultural	4,493		3,744		0		5,258		4,208		0
Commercial mortgage	4,084		3,171		0		1,423		1,698		0
Residential real estate	492		472		0		0		0		0
Total	$	20,077	$	16,445	$	5,697	$	18,246	$	14,344	$	3,409

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 June 30, 2019						Three months ended June 30, 2018						Three months ended September 30, 2019						Three months ended September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,273	$	27	$	27	$	3,838	$	21	$	21	$	1,480	$	32	$	32	$	3,460	$	11	$	11
Commercial mortgage	7,807		46		46		8,738		56		56		7,024		12		12		9,042		37		37
Residential real estate	0		0		0		0		0		0		245		8		8		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural	3,811		32		32		5,326		45		45		3,977		42		42		5,569		69		69
Commercial mortgage	3,257		20		20		5,490		33		33		2,435		29		29		5,153		20		20
Residential real estate	485		4		4		0		0		0		236		0		0		0		0		0
Total	$	16,633	$	129	$	129	$	23,392	$	155	$	155	$	15,397	$	123	$	123	$	23,224	$	137	$	137


	Six months ended June 30, 2019						Six months ended June 30, 2018						Nine months ended September 30, 2019						Nine months ended September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,861	$	65	$	65	$	3,197	$	43	$	43	$	1,819	$	74	$	74	$	2,672	$	54	$	54
Commercial mortgage	7,441		86		86		9,069		74		74		7,145		100		100		9,147		111		111
Residential real estate	0		0		0		0		0		0		122		8		8		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural	3,499		86		86		5,045		91		91		3,676		128		128		5,084		160		160
Commercial mortgage	3,767		38		38		4,463		46		46		3,250		62		62		4,511		66		66
Residential real estate	490		11		11		0		0		0		368		11		11		0		0		0
Total	$	17,058	$	286	$	286	$	21,774	$	254	$	254	$	16,380	$	383	$	383	$	21,414	$	391	$	391

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 ~~June~~September 30, 2019 and December 31, 2018:


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	3,263	$	248	$	2,076	$	487	$	3,994	$	443	$	2,076	$	487
Commercial mortgages	6,219		0		6,329		53		5,299		0		6,329		53
Residential real estate	4,824		195		5,187		299		4,779		62		5,187		299
Consumer	554		—		670		43		737		0		670		43
Credit cards	0		21		0		5		0		45		0		5
Total	$	14,860	$	464	$	14,262	$	887	$	14,809	$	550	$	14,262	$	887

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 ~~June~~September 30, 2019 and December 31, 2018 by class of loans.

~~June~~September 30, 2019


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total		30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	3,221	$	2,607	$	2,983	$	8,811	$	984,818	$	993,629	$	1,508	$	2,041	$	4,080	$	7,629	$	1,026,002	$	1,033,631
Commercial mortgages	904		5,283		4,111		10,298		740,036		750,334		230		0		1,868		2,098		786,876		788,974
Residential real estate	3,704		774		2,757		7,235		779,119		786,354		2,759		759		2,415		5,933		796,398		802,331
Consumer	460		153		284		897		88,434		89,331		472		230		317		1,019		120,579		121,598
Credit cards	105		5		21		131		7,153		7,284		53		48		45		146		7,247		7,393
Overdrafts	0		0		0		0		337		337		0		0		0		0		642		642
Total	$	8,394	$	8,822	$	10,156	$	27,372	$	2,599,897	$	2,627,269	$	5,022	$	3,078	$	8,725	$	16,825	$	2,737,744	$	2,754,569

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	$	2,339	$	9	$	2,264	$	4,612	$	911,685	$	916,297
Commercial mortgages	758		3,055		283		4,096		693,680		697,776
Residential real estate	3,982		1,257		3,988		9,227		762,082		771,309
Consumer	470		282		363		1,115		84,920		86,035
Credit cards	59		15		5		79		7,544		7,623
Overdrafts	0		0		0		0		308		308
Total	$	7,608	$	4,618	$	6,903	$	19,129	$	2,460,219	$	2,479,348

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 ~~June~~September 30, 2019 and December 31, 2018.


	June 30, 2019					December 31, 2018					September 30, 2019					December 31, 2018
	Number of Loans	Loan Balance		Specific Reserve		Number of Loans	Loan Balance		Specific Reserve		Number of Loans	Loan Balance		Specific Reserve		Number of Loans	Loan Balance		Specific Reserve
Commercial, industrial, and agricultural	10	$	3,346	$	91	10	$	4,577	$	104	10	$	3,197	$	38	10	$	4,577	$	104
Commercial mortgages	15	9,526		4,720		15	10,049		4,450		13	7,002		536		15	10,049		4,450
Residential real estate	0	0		0		0	0		0		0	0		0		0	0		0
Consumer	0	0		0		0	0		0		0	0		0		0	0		0
Credit cards	0	0		0		0	0		0		0	0		0		0	0		0
Total	25	$	12,872	$	4,811	25	$	14,626	$	4,554	23	$	10,199	$	574	25	$	14,626	$	4,554

There was 1 loan modified as troubled debt restructurings during the three and nine months ended September 30, 2019 and 4 loans modified as troubled debt restructurings during the nine months ended September 30, 2018. There were no loans modified as troubled debt restructurings during the three ~~and six~~ months ended ~~June 30, 2019 and four loans modified as troubled debt restructurings during the three and six months ended June~~September 30, 2018.


	Three and six months ended June 30, 2018					Three and nine months ended September 30, 2019					Nine months ended September 30, 2018
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural	0	$	0	$	0	0	$	0	$	0	0	$	0	$	0
Commercial mortgages	4	1,091		1,091		1	383		383		4	1,091		1,091
Residential real estate	0	0		0		0	0		0		0	0		0
Consumer	0	0		0		0	0		0		0	0		0
Credit cards	0	0		0		0	0		0		0	0		0
Total	4	$	1,091	$	1,091	1	$	383	$	383	4	$	1,091	$	1,091

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no0 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 ~~June~~September 30, 2019 and ~~June~~September 30, 2018. There were no0 principal balances ~~were~~ 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.

~~June~~September 30, 2019


	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	952,065	$	23,169	$	18,395	$	0	$	993,629	$	997,103	$	19,197	$	17,331	$	0	$	1,033,631
Commercial mortgages	730,455		8,935		10,944		0		750,334		770,873		9,753		8,348		0		788,974
Total	$	1,682,520	$	32,104	$	29,339	$	0	$	1,743,963	$	1,767,976	$	28,950	$	25,679	$	0	$	1,822,605

December 31, 2018



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	890,360	$	10,484	$	15,453	$	0	$	916,297
Commercial mortgages	684,806		3,236		9,734		0		697,776
Total	$	1,575,166	$	13,720	$	25,187	$	0	$	1,614,073

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate, consumer, and credit card loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential, consumer, and credit card loans based on payment activity as of ~~June~~September 30, 2019 and December 31, 2018:


	June 30, 2019						December 31, 2018						September 30, 2019						December 31, 2018
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	781,335	$	88,777	$	7,263	$	765,823	$	85,322	$	7,618	$	797,490	$	120,861	$	7,348	$	765,823	$	85,322	$	7,618
Nonperforming	5,019		554		21		5,486		713		5		4,841		737		45		5,486		713		5
Total	$	786,354	$	89,331	$	7,284	$	771,309	$	86,035	$	7,623	$	802,331	$	121,598	$	7,393	$	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 ~~June~~September 30, 2019 and December 31, 2018:


	6/30/2019			12/31/2018			9/30/2019			12/31/2018
Consumer	$	26,898		$	26,568		$	27,664		$	26,568
Less: unearned discount	(4,911		)	(4,791		)	(5,067		)	(4,791		)
Total	$	21,987		$	21,777		$	22,597		$	21,777

6. DEPOSITS

Total deposits at ~~June~~September 30, 2019 and December 31, 2018 are summarized as follows:


	6/30/2019		12/31/2018		Percentage Change		9/30/2019		12/31/2018		Percentage Change
Checking, non-interest bearing	$	352,570	$	356,797	(1.2	)%	$	370,761	$	356,797	3.9	%
Checking, interest bearing	597,558		600,046		(0.4	)%	593,057		600,046		(1.2	)%
Savings accounts	1,429,507		1,258,506		13.6	%	1,537,672		1,258,506		22.2	%
Certificates of deposit	355,127		395,437		(10.2	)%	374,105		395,437		(5.4	)%
	$	2,734,762	$	2,610,786	4.7	%
Total							$	2,875,595	$	2,610,786	10.1	%

7. 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 and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, there were no0 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 June 30,						Six months ended June 30,						Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Basic earnings per common share computation:
Net income per consolidated statements of income	$	9,767		$	8,441		$	19,240		$	15,538		$	10,357		$	9,236		$	29,597		$	24,774
Net earnings allocated to participating securities	(40		)	(39		)	(78		)	(73		)	(37		)	(40		)	(114		)	(113		)
Net earnings allocated to common stock	$	9,727		$	8,402		$	19,162		$	15,465		$	10,320		$	9,196		$	29,483		$	24,661
Distributed earnings allocated to common stock	$	2,580		$	2,510		$	5,160		$	5,019		$	2,573		$	2,586		$	7,734		$	7,607
Undistributed earnings allocated to common stock	7,147			5,892			14,002			10,446			7,747			6,610			21,749			17,054
Net earnings allocated to common stock	$	9,727		$	8,402		$	19,162		$	15,465		$	10,320		$	9,196		$	29,483		$	24,661
Weighted average common shares outstanding, including shares considered participating securities	15,230			15,286			15,230			15,279			15,197			15,285			15,218			15,281
Less: Average participating securities	(62		)	(69		)	(62		)	(70		)	(51		)	(60		)	(58		)	(67		)
Weighted average shares	15,168			15,217			15,168			15,209			15,146			15,225			15,160			15,214
Basic earnings per common share	$	0.64		$	0.55		$	1.26		$	1.02		$	0.68		$	0.60		$	1.94		$	1.62
Diluted earnings per common share computation:
Net earnings allocated to common stock	$	9,727		$	8,402		$	19,162		$	15,465		$	10,320		$	9,196		$	29,483		$	24,661
Weighted average common shares outstanding for basic earnings per common share	15,168			15,217			15,168			15,209			15,146			15,225			15,160			15,214
Add: Dilutive effects of assumed exercises of stock options	0			0			0			0			0			0			0			0
Weighted average shares and dilutive potential common shares	15,168			15,217			15,168			15,209			15,146			15,225			15,160			15,214
Diluted earnings per common share	$	0.64		$	0.55		$	1.26		$	1.02		$	0.68		$	0.60		$	1.94		$	1.62

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 ~~June~~September 30, 2019, the variable rate on the subordinated debt was ~~3.96%~~3.67% (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 the 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 ~~June~~September 30, 2019 and December 31, 2018, no0 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 ~~June~~September 30, 2019 and December 31, 2018 and for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018:

Fair value as of

Balance Sheet
Location
June 30, 2019 December 31, 2018
Interest rate contracts
Accrued interest and
other liabilities
$ (526 ) $ (201 )



		Fair value as of
	Balance Sheet Location	September 30, 2019			December 31, 2018
Interest rate contracts	Accrued interest and other liabilities	$	(583	)	$	(201	)


For the Three Months Ended June 30, 2019	(a)			(b)	(c)			(d)	(e)
For the Three Months Ended September 30, 2019											(a)			(b)	(c)			(d)	(e)
Interest rate contracts	$	(162	)	Interest expense – subordinated debentures	$	(14	)	Other income	$	0	$	(45	)	Interest expense – subordinated debentures	$	(11	)	Other income	$	0
For the Six Months Ended June 30, 2019	(a)			(b)	(c)			(d)	(e)
For the Nine Months Ended September 30, 2019											(a)			(b)	(c)			(d)	(e)
Interest rate contracts	$	(257	)	Interest expense – subordinated debentures	$	(20	)	Other income	$	0	$	(302	)	Interest expense – subordinated debentures	$	(31	)	Other income	$	0
For the Three Months Ended June 30, 2018	(a)			(b)	(c)			(d)	(e)
For the Three Months Ended September 30, 2018											(a)			(b)	(c)			(d)	(e)
Interest rate contracts	$	37		Interest expense – subordinated debentures	$	(46	)	Other income	$	0	$	36		Interest expense – subordinated debentures	$	(44	)	Other income	$	0
For the Six Months Ended June 30, 2018	(a)			(b)	(c)			(d)	(e)
For the Nine Months Ended September 30, 2018											(a)			(b)	(c)			(d)	(e)
Interest rate contracts	$	99		Interest expense – subordinated debentures	$	(105	)	Other income	$	0	$	134		Interest expense – subordinated debentures	$	(149	)	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 ~~$58.~~

$86.

As of ~~June~~September 30, 2019 and December 31, 2018, a cash collateral balance in the amount of ~~$600~~$750 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 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 ~~$1,850~~$3,000 as of ~~June~~September 30, 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 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 ~~June~~September 30, 2019 and December 31, 2018:


	Notional Amount			Weighted Average Maturity (in years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value				Notional Amount			Weighted Average Maturity (in years)	Weighted Average Fixed Rate		Weighted Average Variable Rate	Fair Value
June 30, 2019
September 30, 2019
3rd Party interest rate swaps	$	35,956		8.2	4.13	%	1 month LIBOR + 2.27%	$	1,802		(a)	$	35,702		8.0	4.13	%	1 month LIBOR + 2.27%	$	2,572		(a)
Customer interest rate swaps	(35,956		)	8.2	4.13	%	1 month LIBOR + 2.27%	(1,802		)	(b)	(35,702		)	8.0	4.13	%	1 month LIBOR + 2.27%	(2,572		)	(b)
December 31, 2018
3rd Party interest rate swaps	$	23,152		7.2	3.85	%	1 month LIBOR + 2.24%	$	485		(a)	$	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)	(23,152		)	7.2	3.85	%	1 month LIBOR + 2.24	(485		)	(b)


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


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

9. REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following table presents the Corporation's non-interest income by revenue stream and reportable segment for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. Items outside the scope of ASC 606 are noted as such.


	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Non-interest Income
Service charges on deposit accounts	$	1,569	$	1,271	$	3,050	$	2,518	$	1,676	$	1,584	$	4,726	$	4,102
Wealth and asset management fees	1,202		1,090		2,244		2,120		1,238		1,031		3,482		3,151
Mortgage banking ⁽¹⁾	370		310		609		518		408		283		1,017		801
Card processing and interchange income	1,221		1,103		2,250		2,074		1,195		1,066		3,445		3,140
Net gains (losses) on sales of securities ⁽¹⁾	0		0		148		0		0		0		148		0
Other income	2,430		1,832		4,644		3,127		1,759		1,969		6,403		5,096
Total non-interest income	$	6,792	$	5,606	$	12,945	$	10,357	$	6,276	$	5,933	$	19,221	$	16,290

(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 and gains (losses) on sale of other real estate owned not financed by the Corporation, are 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 89.5% and ~~89.8%~~89.7% of the total revenue of the Corporation for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~88.9%~~89.0% and ~~88.8%~~88.9% for the three and ~~six~~nine months ended ~~June~~September 30, 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, certain service fees, gains (losses) on sales of fixed assets, and gains (losses) on sale of other real estate owned. The service fees are recognized in the same manner as the service charges mentioned above. While gains on the sale of other real estate owned are generally within the scope of ASU 2014-9, the Corporation does not finance the sale of transactions and as such there is no change in revenue recognition.

10. LEASES

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

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

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


Leases	Classification	June 30, 2019		Classification	September 30, 2019
Assets:
Operating lease assets	Operating lease assets	$	17,082	Operating lease assets	$	16,837
Finance lease assets	Premises and equipment, net ⁽¹⁾	536		Premises and equipment, net ⁽¹⁾	519
Total leased assets		$	17,618		$	17,356

Liabilities:
Operating lease liabilities	Operating lease liabilities	$	17,862	Operating lease liabilities	$	17,696
Finance lease liabilities	Accrued interest payable and other liabilities	666		Accrued interest payable and other liabilities	648
Total leased liabilities		$	18,528		$	18,344

(1) Finance lease assets are recorded net of accumulated amortization of ~~$680~~$697 as of ~~June~~September 30, 2019.

The components of the Corporation's net lease expense for the three and ~~six~~nine months ended ~~June~~September 30, 2019 were as follows:


		Three months ended June 30,			Six months ended June 30,				Three months ended September 30,			Nine months ended September 30,
Lease Cost	Classification	2019			2019			Classification	2019			2019
Operating lease cost	Net occupancy expense	$	400		$	805		Net occupancy expense	$	423		$	1,228
Variable lease cost	Net occupancy expense	15			49			Net occupancy expense	33			82
Finance lease cost:
Amortization of leased assets	Net occupancy expense	18			36			Net occupancy expense	18			54
Interest on lease liabilities	Interest expense - borrowed funds	8			16			Interest expense - borrowed funds	7			23
Sublease income ⁽¹⁾	Net occupancy expense	(20		)	(41		)	Net occupancy expense	(21		)	(62		)
Net lease cost		$	421		$	865			$	460		$	1,325

(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 ~~June~~September 30, 2019:


Maturity of Lease Liabilities as of June 30, 2019	Operating Leases ⁽¹⁾		Finance Leases		Total
Maturity of Lease Liabilities as of September 30, 2019							Operating Leases ⁽¹⁾		Finance Leases		Total
2019	$	678	$	52	$	730	$	339	$	26	$	365
2020	1,430		105		1,535		1,430		105		1,535
2021	1,483		105		1,588		1,483		105		1,588
2022	1,537		105		1,642		1,538		105		1,643
2023	1,458		105		1,563		1,458		105		1,563
After 2023	17,938		315		18,253		17,932		315		18,247
Total lease payments	24,524		787		25,311		24,180		761		24,941
Less: Interest	6,662		121		6,783		6,484		113		6,597
Present value of lease liabilities	$	17,862	$	666	$	18,528	$	17,696	$	648	$	18,344

(1) Operating lease payments include payments related to options to extend lease terms that are reasonably certain of being exercised and exclude $3,173 of legally binding minimum lease payments for leases signed, but not yet commenced.

Other information related to the Corporation's lease liabilities as of the ~~six~~nine months ended ~~June~~September 30, 2019 was as follows:



Lease Term and Discount Rate	~~June~~September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	~~17.1~~16.9
Finance leases	~~7.5~~7.3

Weighted-average discount rate
Operating leases	~~3.61~~3.60	%
Finance leases	4.54	%


Other Information	June 30, 2019		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	409	$	557
Leased assets obtained in exchange from new operating lease liabilities	17,586		17,674

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 and the cumulative expense that has been recorded as of ~~June~~September 30, 2019 is $246, of which $96 was ~~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~~remainder of the total assessed balance of $1,163 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 the appeal was denied. The Corporation is in the process of appealing the assessment to the Pennsylvania Board of Finance and Revenue. 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 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. 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 Corporation has formed a committee comprised of individuals from different disciplines, including credit administration, finance, commercial lending, loan servicing and information technology, to evaluate the requirements of the new standard and the impact it will have on current processes. Management continues to work through their implementation plan, including ~~refinement of model assumptions,~~ parallel testing, documentation of processes and internal controls and policy development with the assistance of third-parties. In addition, management has engaged a ~~third-party.~~third-party to perform a model validation. 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 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 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.

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of financial results. The Corporation’s subsidiary, CNB Bank (the “Bank”), provides financial services to individuals and businesses primarily within its primary market area of the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson, and McKean. As ERIEBANK, a division of the Bank, the Bank operates in the Pennsylvania counties of Crawford, Erie, and Warren and the Ohio counties of Ashtabula and Lake. As FCBank, a division of the Bank, the Bank operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware, and Franklin. As Bank on Buffalo, a division of the 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.

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 Risk Management, Inc. is a Delaware-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products. Holiday Financial Services Corporation (“Holiday”), incorporated in Pennsylvania, offers small balance secured and unsecured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics. 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, included in its 2018 Form 10-K, and in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2019 are not necessarily indicative of the results for the full year ending December 31, 2019, 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 ~~has remained focused on disciplined loan pricing~~continues to ~~sustain a strong net interest margin.~~evaluate, develop and implement strategies necessary to support its ongoing financial performance objectives.

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

CASH AND CASH EQUIVALENTS

Cash and cash equivalents totaled ~~$37.9~~$52.2 million at ~~June~~September 30, 2019 compared to $45.6 million at December 31, 2018. Cash and cash equivalents fluctuate based on the timing and amount of liquidity events that occur in the normal course of business.

Management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, 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.

SECURITIES

Securities available for sale and trading securities totaled ~~$542.9~~$539 million and ~~$524.6~~$525 million at ~~June~~September 30, 2019 and December 31, 2018, respectively. The Corporation’s objective is to maintain the securities portfolio at a size that ranges between 15% and 20% of total assets in order to appropriately balance the earnings and liquidity provided by the portfolio. As of ~~June~~September 30, 2019 and December 31, 2018, the securities portfolio as a percentage of total assets was ~~16.0%~~15.2% and 16.3%, respectively. Note 4 to the consolidated financial statements provides more detail concerning the composition of the Corporation’s securities portfolio and the process for evaluating securities for other-than-temporary impairment.

The 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

Corporation's total loan portfolio, net of unearned discount, reached ~~$2.6~~$2.7 billion as of ~~June~~September 30, 2019, resulting in an increase of ~~$148~~$275 million, or ~~12.0%~~14.9%, on an annualized basis during the first ~~six~~nine months of 2019. Over the same time period, this increase was driven by commercial and industrial loans, which increased ~~$77.3~~$117 million, or ~~17.0%~~17.1%, on an annualized basis, while commercial real estate loans contributed an increase of ~~$52.6~~$91.2 million, or ~~15.2%~~17.5%, on an annualized basis. Loan growth during the first ~~six~~nine months of 2019 was attributable primarily to Private Banking and our Buffalo market, which increased ~~$21.1~~$63.1 million, or ~~23.2%~~46.1% (annualized), and ~~$61.0~~$129 million, or ~~47.6%~~66.9% (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 robust credit analysis. The Corporation expects continued strong loan demand through the remainder of 2019.

ALLOWANCE FOR LOAN LOSSES

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

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


	Six months ending June 30, 2019			Year ending December 31, 2018			Six months ending June 30, 2018			Nine months ending September 30, 2019			Year ending December 31, 2018			Nine months ending September 30, 2018
Balance at beginning of period	$	19,704		$	19,693		$	19,693		$	19,704		$	19,693		$	19,693
Charge-offs:
Commercial, industrial, and agricultural	0			(253		)	(31		)	(160		)	(253		)	(61		)
Commercial mortgages	(2		)	(3,337		)	0			(2,652		)	(3,337		)	0
Residential real estate	(244		)	(315		)	(77		)	(282		)	(315		)	(289		)
Consumer	(1,062		)	(2,279		)	(1,141		)	(1,609		)	(2,279		)	(1,610		)
Credit cards	(52		)	(90		)	(45		)	(55		)	(90		)	(53		)
Overdrafts	(216		)	(319		)	(142		)	(329		)	(319		)	(236		)
	(1,576		)	(6,593		)	(1,436		)	(5,087		)	(6,593		)	(2,249		)
Recoveries:
Commercial, industrial, and agricultural	8			171			162			13			171			165
Commercial mortgages	1			30			0			66			30			0
Residential real estate	67			67			12			72			67			67
Consumer	74			141			84			132			141			112
Credit cards	6			33			24			12			33			27
Overdraft deposit accounts	59			90			47			83			90			64
	215			532			329			378			532			435
Net charge-offs	(1,361		)	(6,061		)	(1,107		)	(4,709		)	(6,061		)	(1,814		)
Provision for loan losses	3,094			6,072			3,536			5,212			6,072			4,631
Balance at end of period	$	21,437		$	19,704		$	22,122		$	20,207		$	19,704		$	22,510
Loans, net of unearned	$	2,622,358		$	2,474,557		$	2,335,292		$	2,749,502		$	2,474,557		$	2,386,955
Allowance to net loans	0.82		%	0.80		%	0.95		%	0.73		%	0.80		%	0.94		%
Net charge-offs to average loans (annualized)	0.11		%	0.26		%	0.10		%	0.24		%	0.26		%	0.11		%
Nonperforming assets	$	15,764		$	15,567		$	23,451		$	16,832		$	15,567		$	21,175
Nonperforming % of total assets	0.46		%	0.48		%	0.78		%	0.48		%	0.48		%	0.68		%

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

Reviewed

Commercial, industrial, and agricultural

Commercial mortgages

Homogeneous

Residential real estate

Consumer

Credit cards

Overdrafts

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

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

The analysis also considers numerous historical and other factors to analyze the adequacy of the allowance for loan losses and charges against the provision for loan losses. Management pays special attention to a section of the analysis that compares and plots the actual level of the allowance for loan losses against the aggregate amount of loans adversely classified in order to compute the estimated probable losses associated with those loans. By noting the “spread” at that time, as well as for prior periods, management can evaluate the current adequacy of the allowance as well as evaluate any developing trends. The volume and composition of the Corporation’s loan portfolio continue to reflect growth in commercial credits, most significantly in commercial and industrial loans and commercial real estate loans.

As mentioned in the “Loans” section of this analysis, management considers commercial lending to be a competitive advantage for the Corporation and continues to focus on this area as part of its strategic growth initiatives. However, management also 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.

InDuring the ~~first six~~nine months ended September 30, 2019, provision for loan losses totaled $5.2 million, compared to $4.6 million for the comparable period in 2018. The third quarter of 2019 includes a provision expense of $2.1 million, which includes $1.4 million related to one commercial real estate loan ~~that~~relationship, resulting in the loan being fully reserved. Management believes this was ~~impaired at year end 2018 experienced~~an appropriate step to take this quarter in light of further deterioration of the underlying performance of the business, including management’s concern regarding an increased lack of communication from the customer and uncertainty related to the fair value of the underlying collateral, resulting in an ~~additional~~elevated potential risk for full recovery of principal and interest as contractually required. The remaining change in provision for loan losses ~~of $664 thousand. As of June 30, 2019,~~during the ~~outstanding principal balance of the loan, net of the reserve recorded on this loan, is $771 thousand. The allowance for loans collectively evaluated for impairment was 0.60% at June~~nine months ended September 30, 2019, compared to ~~0.64% at June 30, 2018. This decrease was due~~the same period in 2018, reflects routine adjustments to ~~organic growth the loan portfolio,~~reserves on impaired loans coupled with ~~a continued strong credit quality risk profile and lower historical~~increases in general loan loss ~~levels.~~reserves resulting from growth in the Corporation’s loan portfolio.

Management believes that the allowance for loan losses is reasonable and adequate to absorb probable incurred losses in its portfolio at ~~June~~September 30, 2019.

DEPOSITS

The Corporation considers deposits to be its primary source of funding in support of growth in assets. At ~~June~~September 30, 2019, total deposits of ~~$2.7~~$2.9 billion reflected an increase of ~~$124~~$265 million, or ~~9.6%~~13.6%, on an annualized basis, during the first ~~six~~nine months of 2019. Growth in deposits was driven by targeted customer acquisition strategies aimed at core deposits ~~that,~~which, over time, tend to be a more stable source of funding. As a result of our customer acquisition strategies, during the first ~~six month~~nine months of 2019 Private Banking contributed to an increase in total deposits of ~~$47.0~~$85.8 million, or ~~25.8%~~31.2%, on an annualized basis, while the deposit portfolio in our Buffalo market grew ~~$102~~$192 million, or ~~81.7%~~102.3%, on an annualized basis.

OTHER FUNDING SOURCES

The Corporation also considers other funding sources, such as short-term borrowings and term debt when evaluating funding needs. During the first ~~six~~nine months of 2019, short-term borrowings from the FHLB increased to ~~$52.9~~$18.0 million, from zero at December 31, 2018, as a supplemental funding source for the Corporation.

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

SHAREHOLDERS’ EQUITY AND CAPITAL RATIOS AND METRICS

The Corporation’s capital continued to provide a source of strength for its growth. Total shareholders’ equity was ~~$286.6~~$297 million at ~~June~~September 30, 2019, reflecting an increase of ~~$23.8~~$34.2 million, or ~~9.0%~~13.0%, from ~~$262.8~~$263 million at December 31, 2018. In the first ~~six~~nine months of 2019, the Corporation earned ~~$19.2~~$29.6 million and declared dividends of ~~$5.2~~$7.8 million, resulting in a dividend payout ratio of ~~26.9%~~26.2% of net income. In addition, during the first ~~six~~nine months of 2019, accumulated OCI increased ~~$10.1~~$12.5 million, partially offset by an increase of ~~$179~~$243 thousand in treasury stock primarily as a result of the repurchase of 40,000 shares ~~repurchased.~~of common stock.

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

The Corporation’s capital ratios, book value per share and tangible book value per share as of ~~June~~September 30, 2019 and December 31, 2018 are as follows:


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Total risk-based capital ratio	13.00		%	13.21		%	12.61		%	13.21		%
Tier 1 capital ratio	10.23		%	10.33		%	10.02		%	10.33		%
Common equity tier 1 ratio	9.45		%	9.50		%	9.28		%	9.50		%
Leverage ratio	8.00		%	7.87		%	7.95		%	7.87		%
Tangible common equity/tangible assets (1)	7.36		%	7.02		%	7.37		%	7.02		%
Book value per share	$	18.86		$	17.28		$	19.55		$	17.28
Tangible book value per share (1)	$	16.28		$	14.69		$	16.98		$	14.69

(1)

Tangible common equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of goodwill and 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.


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Shareholders’ equity	$	286,615		$	262,830		$	297,033		$	262,830
Less goodwill	38,730			38,730			38,730			38,730
Less core deposit intangible	396			727			257			727
Tangible common equity	$	247,489		$	223,373		$	258,046		$	223,373
Total assets	$	3,400,974		$	3,221,521		$	3,541,170		$	3,221,521
Less goodwill	38,730			38,730			38,730			38,730
Less core deposit intangible	396			727			257			727
Tangible assets	$	3,361,848		$	3,182,064		$	3,502,183		$	3,182,064
Ending shares outstanding	15,197,983			15,207,281			15,195,571			15,207,281
Tangible book value per share	$	16.28		$	14.69		$	16.98		$	14.69
Tangible common equity/tangible assets	7.36		%	7.02		%	7.37		%	7.02		%

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.

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 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 credit policies used for evaluating loans are the same as the policies used to make such commitments, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off balance sheet risk was as follows at ~~June~~September 30, 2019 and December 31, 2018:


	June 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	42,370	$	192,131	$	46,265	$	191,803	$	32,706	$	175,015	$	46,265	$	191,803
Unused lines of credit	13,562		430,159		14,390		429,456		16,997		445,311		14,390		429,456
Standby letters of credit	12,705		1,073		14,831		1,479		14,300		1,074		14,831		1,479

The fixed rate loan commitments at ~~June~~September 30, 2019 have interest rates ranging from 2.45% to 18.00% and maturities ranging from ~~ten~~seven months to 35 years. The fixed rate loan commitments at December 31, 2018 have interest rates ranging from 2.45% to 18.00% and maturities ranging from one year to 35 years.

The Corporation makes investments in limited partnerships, including certain small business investment corporations and low income housing partnerships. As of ~~June~~September 30, 2019 and December 31, 2018, unfunded capital commitments totaled ~~$3,322~~$7,360 and $3,905, respectively, for the small business investment corporations and ~~$1,252~~$4,252 and $1,434, respectively, for the low income housing partnerships. At ~~June~~September 30, 2019 and December 31, 2018, capital contributions to the small business investment corporations were ~~$7,178~~$8,140 and $6,595, respectively, and capital contributions to the low income housing partnerships were $4,748 and $4,566, respectively.

CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE THREE MONTHS ENDED ~~JUNE~~

SEPTEMBER 30, 2019 AND 2018



	June 30, 2019							June 30, 2018							September 30, 2019							September 30, 2018
	Average Balance			Annual Rate		Interest Inc./Exp.		Average Balance			Annual Rate		Interest Inc./Exp.		Average Balance			Annual Rate		Interest Inc./Exp.		Average Balance			Annual Rate		Interest Inc./Exp.
ASSETS:
Securities:
Taxable (1)	$	435,180		2.91	%	$	3,155	$	332,683		2.58	%	$	2,180	$	452,933		2.76	%	$	3,093	$	395,390		2.67	%	$	2,698
Tax-Exempt (1,2)	84,267			3.44	%	705		95,907			3.52	%	833		83,060			3.33	%	680		95,190			3.44	%	824
Equity Securities (1,2)	17,860			6.15	%	274		20,122			6.00	%	301		18,533			6.27	%	293		18,101			6.79	%	310
Total securities	537,307			3.10	%	4,134		448,712			2.93	%	3,314		554,526			2.97	%	4,066		508,681			2.95	%	3,832
Loans:
Commercial (2)	969,330			5.37	%	12,980		792,980			4.94	%	9,775		1,011,725			5.28	%	13,477		823,602			5.17	%	10,726
Mortgage (2)	1,505,532			5.07	%	19,032		1,430,327			4.85	%	17,279		1,567,186			5.13	%	20,248		1,436,023			4.93	%	17,859
Consumer	90,957			11.03	%	2,501		83,911			10.02	%	2,096		104,779			10.06	%	2,657		86,998			10.28	%	2,255
Total loans (3)	2,565,819			5.39	%	34,513		2,307,218			5.07	%	29,150		2,683,690			5.38	%	36,382		2,346,623			5.21	%	30,840
Total earning assets	3,103,126			5.00	%	$	38,647	2,755,930			4.72	%	$	32,464	3,238,216			4.97	%	$	40,448	2,855,304			4.81	%	$	34,672
Non interest-bearing assets:
Cash and due from banks	43,941							32,351							32,092							45,479
Premises and equipment	68,086							50,106							69,526							49,665
Other assets	136,782							132,664							137,546							134,307
Allowance for loan losses	(20,566		)					(21,233		)					(21,958		)					(22,333		)
Total non interest-bearing assets	228,243							193,888							217,206							207,118
TOTAL ASSETS	$	3,331,369						$	2,949,818						$	3,455,422						$	3,062,422
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Demand—interest-bearing	$	586,111		0.43	%	$	622	$	590,575		0.37	%	$	539	$	585,048		0.43	%	$	630	$	586,708		0.36	%	$	535
Savings	1,401,924			1.37	%	4,804		1,007,013			0.72	%	1,801		1,477,377			1.41	%	5,250		1,159,897			0.96	%	2,805
Time	350,594			2.03	%	1,775		377,915			1.43	%	1,347		361,765			2.10	%	1,918		377,932			1.55	%	1,472
Total interest-bearing deposits	2,338,629			1.24	%	7,201		1,975,503			0.75	%	3,687		2,424,190			1.28	%	7,798		2,124,537			0.90	%	4,812
Short-term borrowings	4,899			3.19	%	39		53,708			1.98	%	265		38,702			2.43	%	237		1,727			2.30	%	10
Long-term borrowings	236,742			2.12	%	1,253		260,927			2.06	%	1,339		210,189			2.19	%	1,162		253,376			2.07	%	1,324
Subordinated debentures	70,620			5.65	%	995		70,620			5.58	%	982		70,620			5.54	%	987		70,620			5.71	%	1,016
Total interest-bearing liabilities	2,650,890			1.44	%	$	9,488	2,360,758			1.07	%	$	6,273	2,743,701			1.47	%	$	10,184	2,450,260			1.16	%	$	7,162
Demand—non interest-bearing	355,058							313,400							366,424							329,057
Other liabilities	46,518							28,291							52,387							29,785
Total liabilities	3,052,466							2,702,449							3,162,512							2,809,102
Shareholders’ equity	278,903							247,369							292,910							253,320
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,331,369						$	2,891,824						$	3,455,422						$	3,062,422
Interest income/Earning assets				5.00	%	$	38,647				4.72	%	$	32,464				4.97	%	$	40,448				4.81	%	$	34,672
Interest expense/Interest-bearing liabilities				1.44	%	9,488					1.07	%	6,273					1.47	%	10,184					1.16	%	7,162
Net interest spread				3.56	%	$	29,159				3.65	%	$	26,191				3.50	%	$	30,264				3.65	%	$	27,510
Interest income/Earning assets				5.00	%	38,647					4.72	%	32,464					4.97	%	40,448					4.81	%	34,672
Interest expense/Earning assets				1.23	%	9,488					0.91	%	6,273					1.25	%	10,184					1.00	%	7,162
Net interest margin				3.77	%	$	29,159				3.81	%	$	26,191				3.72	%	$	30,264				3.81	%	$	27,510


(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.

CONSOLIDATED YIELD COMPARISONS

AVERAGE BALANCES AND NET INTEREST MARGIN FOR THE ~~SIX~~NINE MONTHS ENDED ~~JUNE~~

SEPTEMBER 30, 2019 AND 2018



	June 30, 2019							June 30, 2018							September 30, 2019							September 30, 2018
	Average Balance			Annual Rate		Interest Inc./Exp.		Average Balance			Annual Rate		Interest Inc./Exp.		Average Balance			Annual Rate		Interest Inc./Exp.		Average Balance			Annual Rate		Interest Inc./Exp.
ASSETS:
Securities:
Taxable (1)	$	424,788		2.90	%	$	6,133	$	325,103		2.55	%	$	4,164	$	434,265		2.85	%	$	9,226	$	348,789		2.59	%	$	6,862
Tax-Exempt (1,2)	91,388			3.48	%	1,546		96,870			3.56	%	1,683		88,581			3.41	%	2,226		96,304			3.49	%	2,506
Equity Securities (1,2)	18,228			6.13	%	554		19,937			6.00	%	593		18,331			6.18	%	847		19,316			6.09	%	880
Total securities	534,404			3.11	%	8,233		441,910			2.92	%	6,440		541,177			3.06	%	12,299		464,409			2.92	%	10,248
Loans:
Commercial (2)	951,175			5.38	%	25,365		781,040			4.78	%	18,507		971,580			5.34	%	38,841		795,383			4.87	%	28,962
Mortgage (2)	1,493,604			5.04	%	37,295		1,394,064			4.80	%	33,180		1,518,400			5.07	%	57,541		1,408,204			4.85	%	51,053
Consumer	89,966			10.97	%	4,896		83,168			9.93	%	4,095		94,954			10.64	%	7,555		84,453			10.05	%	6,349
Total loans (3)	2,534,745			5.37	%	67,556		2,258,272			4.98	%	55,782		2,584,934			5.38	%	103,937		2,288,040			5.05	%	86,364
Total earning assets	3,069,149			4.98	%	$	75,789	2,700,182			4.64	%	$	62,222	3,126,111			4.98	%	$	116,236	2,752,449			4.68	%	$	96,612
Non interest-bearing assets:
Cash and due from banks	36,994							28,653							35,344							34,326
Premises and equipment	67,237							50,347							68,009							50,117
Other assets	136,406							131,160							136,792							132,224
Allowance for loan losses	(20,218		)					(20,599		)					(20,804		)					(21,183		)
Total non interest-bearing assets	220,419							189,561							219,341							195,484
TOTAL ASSETS	$	3,289,568						$	2,889,743						$	3,345,452						$	2,947,933
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Demand—interest-bearing	$	572,632		0.42	%	$	1,204	$	577,719		0.37	%	$	1,062	$	576,816		0.43	%	$	1,834	$	580,748		0.37	%	$	1,596
Savings	1,364,118			1.34	%	9,094		961,240			0.62	%	2,972		1,402,286			1.37	%	14,344		1,028,187			0.75	%	5,778
Time	360,055			1.95	%	3,490		378,398			1.37	%	2,577		360,631			2.00	%	5,408		378,241			1.43	%	4,049
Total interest-bearing deposits	2,296,805			1.21	%	13,788		1,917,357			0.70	%	6,611		2,339,733			1.23	%	21,586		1,987,176			0.77	%	11,423
Short-term borrowings	12,637			3.00	%	188		64,630			1.80	%	576		21,421			2.65	%	425		43,432			1.80	%	586
Long-term borrowings	239,455			2.12	%	2,514		250,141			2.03	%	2,516		229,592			2.14	%	3,676		251,231			2.04	%	3,840
Subordinated debentures	70,620			5.69	%	1,993		70,620			5.30	%	1,857		70,620			5.64	%	2,980		70,620			5.44	%	2,873
Total interest-bearing liabilities	2,619,517			1.42	%	$	18,483	2,302,748			1.01	%	$	11,560	2,661,366			1.44	%	$	28,667	2,352,459			1.06	%	$	18,722
Demand—non interest-bearing	350,399							313,028							355,799							318,430
Other liabilities	46,460							28,365							48,455							28,842
Total liabilities	3,016,376							2,644,141							3,065,620							2,699,731
Shareholders’ equity	273,192							245,602							279,832							248,202
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,289,568						$	2,891,824						$	3,345,452						$	2,947,933
Interest income/Earning assets				4.98	%	$	75,789				4.64	%	$	62,222				4.98	%	$	116,236				4.68	%	$	96,612
Interest expense/Interest-bearing liabilities				1.42	%	18,483					1.01	%	11,560					1.44	%	28,667					1.06	%	18,722
Net interest spread				3.56	%	$	57,306				3.63	%	$	50,662				3.54	%	$	87,569				3.62	%	$	77,890
Interest income/Earning assets				4.98	%	75,789					4.64	%	62,222					4.98	%	116,236					4.68	%	96,612
Interest expense/Earning assets				1.21	%	18,483					0.86	%	11,560					1.23	%	28,667					0.91	%	18,722
Net interest margin				3.77	%	$	57,306				3.78	%	$	50,662				3.75	%	$	87,569				3.77	%	$	77,890


(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.

RESULTS OF OPERATIONS

Three Months Ended ~~June~~September 30, 2019 and 2018

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of ~~$9.8~~$10.4 million, or ~~$0.64~~$0.68 per diluted share, in the ~~second~~third quarter of 2019, compared to ~~$8.4~~$9.2 million, or ~~$0.55~~$0.60 per diluted share, in the ~~second~~third quarter of 2018, reflecting increases of ~~$1.3~~$1.1 million, or ~~15.7%~~12.1%, and ~~$0.09~~$0.08 per diluted share, or ~~16.4%~~13.3%. The increases in earnings and earnings per diluted share are the result of a continued strong financial performance driven by organic growth. Total revenue (comprised of net interest income plus non-interest income) of ~~$35.6~~$36.2 million for the three months ended ~~June~~September 30, 2019 increased ~~$4.2~~$3.4 million, or ~~13.2%~~10.3%, from the comparable period in 2018, while total non-interest expense of ~~$22.0~~$21.4 million for the ~~second~~third quarter of 2019 increased ~~$2.4~~$0.7 million, or ~~12.5%~~3.1%, from the ~~second~~third quarter of 2018. Provision expense of ~~$1.8~~$2.1 million for the ~~second~~third quarter of 2019 ~~decreased $117 thousand,~~increased $1.0 million, or ~~6.1%~~93.4%, from the same period in 2018.

The return on average assets and the return on average equity for the ~~second~~third quarter of 2019 were ~~1.18%~~1.19% and ~~14.05%~~14.03%, respectively, ~~increasing~~decreasing from ~~1.15%~~1.20% and ~~13.69%~~14.47%, respectively, for the ~~second~~third quarter of 2018. ~~Similarly,~~When excluding the impact of goodwill and other intangibles, the return on average tangible equity for the third quarter of 2019 was 16.19%, decreasing from 17.16% for the third quarter of 2018. The efficiency ratio of ~~61.06%~~58.31% for the ~~second~~third quarter of 2019 improved ~~six~~415 basis points from ~~61.12%~~62.46% for the comparable period in 2018. ~~The Corporation’s financial~~As reflected in its performance ratios, the Corporation has continued to ~~reflect a~~ focus on profitability, ~~based on~~driven by organic growth in its diversified markets, coupled with efficient management of expenses and strong credit quality.

NET INTEREST MARGIN

Net interest margin on a fully tax equivalent basis was ~~3.77%~~3.72% and 3.81% for the quarters ended ~~June~~September 30, 2019 and 2018, respectively. The yield on earning assets increased 2816 basis points to ~~45.00%~~4.97% for the quarter ended ~~June~~September 30, 2019, from 4.72% for the quarter ended ~~June~~September 30, 2018. The cost of interest-bearing liabilities increased 3731 basis points to ~~1.44%~~1.47% for the quarter ended ~~June~~September 30, 2019 from ~~1.07%~~1.16% for the quarter ended ~~June~~September 30, 2018. The decrease of ~~four~~nine basis points in net interest margin ~~was a net result~~during the third quarter of 2019 reflects changes in the ~~successful execution on our focus to attract and retain core customers, as a primary source of funding of organic loan growth.~~interest rate environment.

PROVISION FOR LOAN LOSSES

During the quarter ended ~~June~~September 30, 2019, the Corporation recorded a provision for loan losses of ~~$1.8~~$2.1 million, as compared to a provision for loan losses of ~~$1.9~~$1.1 million for the quarter ended ~~June~~September 30, 2018. The third quarter of 2019 included a provision expense totaling $1.4 million related to one commercial real estate loan relationship, resulting in the loan being fully reserved. Management believes this was an appropriate step to take in light of further deterioration on the underlying performance of the business and increased potential risk of full recovery of principal and interest as contractually required, including management’s concerns with an increasing lack of communication from the borrower and uncertainty related to the fair value of the underlying collateral. Net chargeoffs in the ~~second~~third quarter of 2019 were ~~$697 thousand,~~$3.3 million, compared to net chargeoffs of ~~$539~~$707 thousand in the ~~second~~third quarter of 2018. Net chargeoffs of the Bank totaled ~~$245 thousand~~$2.9 million and ~~$94~~$297 thousand during the quarters ended ~~June~~September 30, 2019 and 2018, or ~~0.04%~~0.43% and ~~0.02%~~0.05%, respectively, of average Bank loans. Holiday recorded net chargeoffs totaling ~~$452~~$483 thousand and ~~$445~~$410 thousand during the quarters ended ~~June~~September 30, 2019 and 2018, respectively. At the Bank during the third quarter, management charged-off an impaired, fully reserved, commercial mortgage loan of $2.6 million. The loan had been impaired and non-accrual for a few years and operations of the underlying property continued to deteriorate making any value from liquidation unlikely.

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 ~~June~~September 30, 2019.

NON-INTEREST INCOME

There were no net realized gains on available-for-sale securities during the ~~quarter~~quarters ended ~~June~~September 30, ~~2019.~~2019 and 2018. Net realized and unrealized gains on trading securities were ~~$654~~$197 thousand during the quarter ended ~~June~~September 30, 2019, compared to ~~$237~~$421 thousand during the quarter ended ~~June~~September 30, 2018.

Excluding the effects of securities gains discussed above, non-interest income was $6.1 million for the quarter ended September 30, 2019, compared to $5.5 million for the quarter ended September 30, 2018, reflecting an increase of $567 thousand, or 10.3%.

The increase in non-interest income was driven mostly by Wealth and Asset Management fees increasing $207 thousand, or 20.1%, primarily as a result of growth in assets under management, coupled with an increase of $125 thousand, or 44.2%, in mortgage banking fees. Finally, as a result of the continued organic deposit growth service charges on deposit accounts increased $92 thousand, or 5.8%, in the third quarter of 2019 compared to the third quarter of 2018.

NON-INTEREST EXPENSES

Total non-interest expenses were $21.4 million and $20.8 million for the quarters ended September 30, 2019 and 2018, respectively. Salaries and benefits expense increased $204 thousand, or 1.8%, during the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018, primarily as a result of the expansion of staffing levels in several areas, including business development, risk management and customer service personnel. The remainder of the increase in non-interest expenses was primarily a result of the Corporation's continued growth and the servicing of a larger customer base. Total households serviced at September 30, 2019 were 67,623, compared to 62,854 households at September 30, 2018, reflecting an increase of 7.6% resulting from our core deposit growth strategies in the Private Banking division and the Buffalo market, thereby further enhancing their value contributions to the Corporation. Accordingly, the ratio of non-interest expenses to average assets was 2.46% and 2.69% during the quarters ended September 30, 2019 and 2018, respectively. Going forward, we intend to continue to invest in risk management and customer service resources to support the Corporation’s growth.

INCOME TAX EXPENSE

Income tax expense was $2.3 million during the three months ended September 30, 2019 and $1.7 million during the three months ended September 30, 2018, resulting in effective tax rates of 17.9% and 15.4%, respectively. The increase in the effective tax rate is primarily attributable to the Corporation’s growth being generated by taxable activities. The effective rates for the periods differed from the federal statutory rate of 21.0% at September 30, 2019 and 2018 principally as a result of tax exempt income from securities and loans, as well as earnings from bank owned life insurance.

RESULTSOF OPERATIONS

Nine Months Ended September 30, 2019 and 2018

OVERVIEW OF THE INCOME STATEMENT

The Corporation had net income of $29.6 million, or $1.94 per diluted share, for the nine months ended September 30, 2019, compared to $24.8 million, or $1.62 per diluted share, for the comparable period in 2018, reflecting increases of $4.8 million, or 19.5%, and $0.32 per diluted share, or 19.8%, respectively. The increase in earnings and earnings per diluted share are the result of continued strong financial performance driven by organic growth. Total revenue of $105.7 million for the nine months ended September 30, 2019 increased $12.6 million, or 13.5%, from the comparable period in 2018, while total non-interest expense of $64.6 million for the first nine months of 2019 increased $5.3 million, or 8.9%, from the comparable period of 2018. Provision for loan losses of $5.2 million for the first nine months of 2019 increased $581 thousand, or 12.5%, from the comparable period in 2018.

The return on average assets and the return on average equity for the nine months ended September 30, 2019 were 1.18% and 14.14%, respectively, increasing from 1.12% and 13.35%, respectively, for the nine months ended September 30, 2018. When excluding the impact of goodwill and other intangibles, the return on average tangible equity for the nine months ended September 30, 2019 was 16.45%, increasing from 15.91% for the comparable period in 2018. The efficiency ratio of 60.46% for the first nine months of 2019 improved 190 basis points from 62.36% for the first nine months of 2018.

NET INTEREST MARGIN

Net interest margin on a fully tax equivalent basis was 3.75% and 3.77% for the nine months ended September 30, 2019 and 2018, respectively. The yield on earning assets increased 30 basis points to 4.98% for the nine months ended September 30, 2019, from 4.68% for the nine months ended September 30, 2018. The cost of interest-bearing liabilities increased 38 basis points to 1.44% for the nine months ended September 30, 2019 from 1.06% for the nine months ended September 30, 2018.

PROVISION FOR LOAN LOSSES

During the nine months ended September 30, 2019, the Corporation recorded a provision for loan losses of $5.2 million, as compared to a provision for loan losses of $4.6 million for the nine months ended September 30, 2018. Net chargeoffs in the first nine months of 2019 were $4.7 million, compared to net chargeoffs of $1.8 million in the first nine months of 2018. Net chargeoffs of the Bank totaled $3.3 million and $436 thousand during the nine months ended September 30, 2019 and 2018, or 0.17% and 0.03%, respectively, of average Bank loans. Holiday recorded net chargeoffs totaling $1.4 million during the nine months ended September 30, 2019 and 2018, respectively. Please refer to "Provision for Loan Losses" above for the three months ended September 30, 2019 and 2018 for additional detail on provision expense and net charge-offs.

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

NON-INTEREST INCOME

Net realized gains on available-for-sale securities were $148 thousand and zero during the nine months ended September 30, 2019 and 2018, respectively. Net realized and unrealized gains on trading securities were $1.7 million during the nine months ended September 30, 2019, compared to $672 thousand during the nine months ended September 30, 2018, as a result of improvements in equity markets and a $463 thousand gain on sale of a restricted equity security (Visa Class B stock).

The Corporation ~~had~~ received 2,905 shares ~~for~~of Visa Class B stock ~~pursuant to~~in Visa's 2007 initial public offering. The carrying value of the shares was zero, which represented the Corporation's cost basis. Class B shares are subject to restrictions on transfer, essentially limiting their transferability to other owners of Class B shares. In the second quarter of 2019, the Corporation sold all of its Visa Class B stock.

Excluding the effects of securities ~~transactions~~gains discussed above, non-interest income was ~~$6.1~~$17.4 million for the ~~quarter~~nine months ended ~~June~~September 30, 2019, compared to ~~$5.4~~$15.6 million for the ~~quarter~~nine months ended ~~June~~September 30, ~~2018, reflecting an increase~~2018.

As a result of ~~$769 thousand, or 14.3%.~~

~~This increase was driven primarily from~~its organic deposit growth, ~~resulting~~the Corporation experienced an increase in service charges in deposit accounts ~~increasing $298~~of $624 thousand, or ~~23.4%~~15.2%, in the ~~second quarter~~first nine months of 2019 compared to the ~~second quarter~~first nine months of ~~2018.~~ 2018, while card processing and interchange income increased $305 thousand, or 9.7%, during the same period. Similarly, wealth and asset management fees increased $331 thousand, or 10.5%, during the same period, primarily as a result of growth in assets under management.

Finally, other non-interest income increased ~~$169~~$318 thousand, or ~~31.7%~~24.9%, in the ~~second quarter~~first nine months of 2019 compared to the ~~second quarter~~first nine months of 2018 due to ~~a net increase~~fluctuations in various fee income categories. within other non-interest income.

NON-INTEREST EXPENSES

Total non-interest expenses were ~~$22.0~~$64.6 million and ~~$19.5~~$59.3 million for the ~~quarters~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. Salaries and benefits expense increased ~~$1.4~~$2.9 million, or ~~13.6%~~9.5%, during the ~~quarter~~nine months ended ~~June~~September 30, 2019 compared to the ~~quarter~~nine months ended ~~June~~September 30, 2018, primarily as a result of the expansion of staffing levels in several areas, including business development, risk management and customer service personnel. The remainder of the increase in non-interest expenses was primarily a result the Corporation's continued growth and the servicing of a larger customer base. Total households serviced at June 30, 2019 were 66,251, compared to 61,354 households at June 30, 2018, an increase of 8.0% resulting from our core deposit growth strategies in Private Banking and the Buffalo market, further enhancing their value contributions to the Corporation. The ratio of non-interest expenses to average assets was ~~2.65%~~2.58% and ~~2.66%~~2.69% during the ~~quarters~~nine months ended ~~June~~September 30, 2019 and 2018, respectively. ~~Going forward, we intend to continue to invest in risk management and customer service resources to support the Corporation’s growth.~~

INCOME TAX EXPENSE

Income tax expense was ~~$2.0~~$6.3 million during the ~~three~~nine months ended ~~June~~September 30, 2019 and ~~$1.5~~$4.4 million during the ~~three~~nine months ended ~~June~~September 30, 2018, resulting in effective tax rates of ~~17.3%~~17.5% and ~~15.5%~~14.9%, respectively. The increase in the effective tax rate is primarily attributable to the Corporation’s growth being generated primarily by taxable activities. The effective tax rates for the periods differed from the federal statutory rate of 21.0% at ~~June 30, 2019 and 2018 principally as a result of tax exempt income from securities and loans, as well as earnings from bank owned life insurance.~~

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

~~Six Months Ended June 30, 2019 and 2018~~

~~OVERVIEW OF THE INCOME STATEMENT~~

The Corporation had net income of $19.2 million, or $1.26 per diluted share, for the six months ended June 30, 2019, compared to $15.5 million, or $1.02 per diluted share, for the comparable period in 2018, reflecting increases of $3.7 million, or 23.8%, and $0.24 per diluted share, or 23.5%, respectively. The increase in earnings and earnings per diluted share are the result of a continued strong financial performance driven by organic growth. Total revenue of $69.5 million for the six months ended June 30, 2019 increased $9.2 million, or 15.3%, from the comparable period in 2018, while total non-interest expense of $43.2 million for the first six months of 2019 increased $4.6 million, or 12.0%, from the second quarter of 2018. Provision for loan losses of $3.1 million for the first six months of 2019 decreased $442 thousand, or 12.5%, from the comparable period in 2018.

The return on average assets and the return on average equity for the six months ended June 30, 2019 were 1.18% and 14.20%, respectively, increasing from 1.08% and 12.76%, respectively, for the six months ended June 30, 2018. The efficiency ratio of 61.59% for the first six months of 2019 improved 71 basis points from 62.30% for the first six months of 2018.

~~NET INTEREST MARGIN~~

Net interest margin on a fully tax equivalent basis was 3.77% and 3.78% for the six months ended June 30, 2019 and 2018, respectively. The yield on earning assets increased 34 basis points to 4.98% for the six months ended June 30, 2019, from 4.64% for the six months ended June 30, 2018. The cost of interest-bearing liabilities increased 41 basis points to 1.42% for the six months ended June 30, 2019 from 1.01% for the six months ended June 30, 2018.

~~PROVISION FOR LOAN LOSSES~~

During the six months ended June 30, 2019, the Corporation recorded a provision for loan losses of $3.1 million, as compared to a provision for loan losses of $3.5 million for the six months ended June 30, 2018. Net chargeoffs in the first six months of 2019 were $1.4 million, compared to net chargeoffs of $1.1 million in the first six months of 2018. Net chargeoffs of the Bank totaled $475 thousand and $139 thousand during the six months ended June 30, 2019 and 2018, or 0.04% and 0.01%, respectively, of average Bank loans. Holiday recorded net chargeoffs totaling $886 thousand and $968 thousand during the six months ended June 30, 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 June 30, 2019.~~

~~NON-INTEREST INCOME~~

Net realized gains on available-for-sale securities were $148 thousand and zero during the six months ended June 30, 2019 and 2018, respectively. Net realized and unrealized gains on trading securities were $1.5 million during the six months ended June 30, 2019, compared to $251 thousand during the six months ended June 30, 2018, as a result of improvements in equity markets and a $463 thousand gain on sale of a restricted equity security (Visa Class B stock).

The Corporation had received 2,905 shares for Visa Class B stock pursuant to Visa's 2007 initial public offering. The carrying value of the shares was zero, which represented the Corporation's cost basis. Class B shares are subject to restrictions on transfer, essentially limiting their transferability to other owners of Class B shares. In the second quarter of 2019, the Corporation sold all of its Visa Class B stock.

~~Excluding the effects of securities transactions, non-interest income was $11.3 million for the six months ended June 30, 2019, compared to $10.1 million for the six months ended June 30, 2018.~~

As a result of its organic deposit growth, the Corporation experienced an increase in service charges in deposit accounts of $532 thousand, or 21.1%, in the first six months of 2019 compared to the first six months of 2018. Finally, other non-interest income increased $313 thousand, or 39.3% in the first six months of 2019 compared to the first six months of 2018 due to fluctuations in various fee income categories within other non-interest income.

~~NON-INTEREST EXPENSES~~

Total non-interest expenses were $43.2 million and $38.5 million for the six months ended June 30, 2019 and 2018, respectively. Salaries and benefits expense increased $2.7 million, or 13.9%, during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily as a result of the expansion of staffing levels in several areas, including business development, risk management and customer service personnel. The remainder of the increase in non-interest expenses was primarily a result the Corporation's continued growth and the servicing of a larger customer base. Total households serviced at June 30, 2019 were 66,251, compared to 61,354 households at June 30, 2018, an increase of 8.0%. The ratio of non-interest expenses to average assets was 2.65% and 2.69% during the six months ended June 30, 2019 and 2018, respectively.

~~INCOME TAX EXPENSE~~

Income tax expense was $4.0 million during the six months ended June 30, 2019 and $2.7 million during the six months ended June 30, 2018, resulting in effective tax rates of 17.2% and 14.6%, respectively. The increase in the effective tax rate is primarily attributable to the Corporation’s growth being generated by taxable activities. The effective rates for the periods differed from the federal statutory rate of 21.0% at JuneSeptember 30, 2019 and 2018 principally as a result of tax exempt income from securities and loans, as well as earnings from bank owned life insurance.

CRITICAL ACCOUNTING POLICIES

The Corporation’s accounting and reporting policies are in accordance with GAAP and conform to general practices within the financial services industry. Accounting and reporting practices for the allowance for loan losses and fair value of securities are deemed critical since they involve the use of estimates and require significant management judgments. In addition, the fair value of assets acquired and liabilities assumed in connection with business combinations, including the associated goodwill that was recorded, required the use of material estimates. Application of assumptions different than those used by management could result in material changes in the Corporation’s financial position or results of operations. Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combination and Branch Sale), Note 4 (Securities) and Note 5 (Loans) of the Corporation’s 2018 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. As of January 1, 2019, the Corporation adopted certain accounting standard updates related to accounting for leases (Topic 842 - Leases), primarily ASU 2016-02 and subsequent updates. Please refer to Note 10 (Leases) above for additional detail on the requirements and impact to the Corporation's financial statements. There have been no other significant changes in the application of accounting policies since December 31, 2018.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The principal purpose of asset/liability management is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Net interest income is enhanced by increasing the net interest margin and 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 ~~June~~September 30, 2019, 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
September 30, 2019		September 30, 2019
Change in Basis Points	% Change in Net Interest Income		% Change in Net Interest Income
400	8.9%		9.7%
300	6.6%		6.9%
200	4.8%		4.4%
100	4.3%		3.3%
(100)	(4.8)%		(7.3)%
(200)	(6.6)%		(8.1)%

ITEM 4

CONTROLS AND PROCEDURES

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

There was no significant change in the Corporation’s internal control over financial reporting that occurred during the quarter ended ~~June~~September 30, 2019 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

The following table provides information with respect to any purchase of shares of the Corporation’s common stock made by or on behalf of the Corporation for the three months ended ~~June~~September 30, 2019.

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or approximate dollar value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1 – 30, 2019 0
$ 0
0
289,731
May 1 – 31, 2019 0
0
0
289,731
June 1 – 30, 2019 40,000
24.80
40,000
249,731



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)
July 1 – 31, 2019	0	$	0	0	249,731
August 1 – 31, 2019	0	0		0	249,731
September 1 – 30, 2019	0	0		0	249,731


(1)	The Corporation’s stock repurchase program, which was announced on November 12, 2014, authorizes the repurchase of up to 500,000 shares of common stock. The program will remain in effect until fully utilized or until modified, suspended or terminated. As of ~~June~~September 30, 2019, there were 249,731 shares remaining in the program.

Additionally, during the quarter ended ~~June~~September 30, 2019, certain employees surrendered shares of common stock owned by them to satisfy their statutory minimum U.S. federal and state tax obligations associated with the vesting of shares of restricted common stock issued under the 2019 Stock Incentive 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~~		~~Second Amended and Restated Articles of Incorporation of CNB Financial Corporation (incorporated by reference to Exhibit 3.1 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)~~

~~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: ~~August 8,~~November 6, 2019						/s/ Joseph B. Bower, Jr.
						Joseph B. Bower, Jr.
						President and Chief Executive Officer
						(Principal Executive Officer)

DATE: ~~August 8,~~November 6, 2019						/s/ Tito L. Lima
						Tito L. Lima
						Treasurer
						(Principal Financial and Accounting Officer)

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