UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–Q

For the quarterly period ended September 30, 2017March 31, 2018

or

For the transition period from                    to                    

Commission File Number000-13396

CNB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

1 South Second Street

P.O. Box 42

Clearfield, Pennsylvania 16830

(Address of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒    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 RegulationS-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, anon-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 Rule12b-2 of the Exchange Act.:

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 Rule12b-2 of the Exchange Act).    ☐    Yes    ☒    No

The number of shares outstanding of the issuer’s common stock as of November 6, 2017May 1, 2018

COMMON STOCK NO PAR VALUE PER SHARE: 15,283,64715,285,639 SHARES

INDEX

PART I.

FINANCIAL INFORMATION

Forward-Looking Statements

This quarterly report on form10-Q 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, future performance and 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) continued relationships with major customers; (xii) deposit attrition; (xiii) rapidly changing technology; (xiv) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xv) changes in the cost of funds, demand for loan products or demand for financial services; (xvi) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices; and (xvii) our success at managing the foregoing items. Some of these and other factors are discussed in our annual and quarterly reports filed with the Securities and Exchange Commission (SEC). Such factors 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

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

		Three months ended
		March 31,
		2018				2017
INTEREST AND DIVIDEND INCOME:
Loans including fees		$	26,457			$	21,970
Securities:
Taxable			1,984				2,191
Tax-exempt			694				800
Dividends			252				143
Total interest and dividend income			29,387				25,104
INTEREST EXPENSE:
Deposits			2,924				2,121
Borrowed funds			1,488				809
Subordinated debentures (includes $58 and $76 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2018 and 2017, respectively)			875				972
Total interest expense			5,287				3,902
NET INTEREST INCOME			24,100				21,202
PROVISION FOR LOAN LOSSES			1,631				1,016
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			22,469				20,186
NON-INTEREST INCOME:
Service charges on deposit accounts			1,247				1,090
Other service charges and fees			618				529
Wealth and asset management fees			1,030				871
Net realized gains onavailable-for-sale securities (includes $0 and $1,383 accumulated other comprehensive income reclassifications for net realized gains onavailable-for-sale securities in 2018 and 2017, respectively)			0				1,383
Net realized and unrealized gains on trading securities			14				188
Mortgage banking			208				184
Bank owned life insurance			400				352
Card processing and interchange income			971				878
Other			263				298
Totalnon-interest income			4,751				5,773
NON-INTEREST EXPENSES:
Salaries and benefits			9,535				9,005
Net occupancy expense			2,496				2,540
Amortization of core deposit intangible			248				331
Data processing			1,074				961
State and local taxes			853				739
Legal, professional, and examination fees			508				549
Advertising			597				413
FDIC insurance premiums			298				204
Card processing and interchange expenses			734				422
Other			2,656				1,870
Totalnon-interest expenses			18,999				17,034
INCOME BEFORE INCOME TAXES			8,221				8,925
INCOME TAX EXPENSE (includes $12 and $457 income tax expense from reclassification items in 2018 and 2017, respectively)			1,124				2,445
NET INCOME		$	7,097			$	6,480
EARNINGS PER SHARE:
Basic		$	0.46			$	0.43
Diluted		$	0.46			$	0.43
DIVIDENDS PER SHARE:
Cash dividends per share		$	0.165			$	0.165

See Notes to Consolidated Financial Statements

2

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Dollars in thousands, except per share data

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

Dollars in thousands

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Dollars in thousands

See Notes to Consolidated Financial Statements

CNB FINANCIAL CORPORATION

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

In the opinion of management of the registrant, the accompanying consolidated financial statements as of September 30, 2017March 31, 2018 and for the three and nine month periods ended September 30,March 31, 2018 and 2017 and 2016 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial condition and the results of operations for the periods presented. The financial performance reported for CNB Financial Corporation (the “Corporation”) for the three and nine month periodsperiod ended September 30, 2017March 31, 2018 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 Form10-K for the period ended December 31, 20162017 (the “2016“2017 Form10-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.

The Corporation has a stock incentive plan for key employees and independent directors. The stock incentive plan, which is administered by a committee of the Board of Directors, provides for aggregate grants of up to 500,000 shares of common stock in the form of nonqualified options or restricted stock. For key employees, the plan vesting is either one-third or one-fourth of the granted options or restricted stock per year, beginning one year after the grant date, with 100% vestedvesting on the third or fourth anniversary of the grant date. Fordate, respectively. Prior to 2018, for independent directors, the vesting schedule isone-third of the granted options or restricted stock 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 independent directors vests immediately. At September 30, 2017,March 31, 2018, there was no unrecognized compensation cost related to nonvested stock options granted under this plan and no stock options were granted during the three and nine month periods ended September 30, 2017March 31, 2018 and 2016.2017.

On February 14, 2017,In addition to the time-based restricted stock disclosed above, the Corporation’s Board of Directors grantedgrants performance-based restricted stock awards (“PBRSAs”) with a maximum of 10,000 shares to an employee.key employees. The number of PBRSAs will depend on certain performance conditions and are also subject to service-based vesting. In 2018, awards with a maximum of 15,702 shares in aggregate were granted to key employees. In 2017, an award with a maximum of 10,000 shares was granted to a key employee.

Compensation expense for the restricted stock awards is recognized over the requisite service period noted above based on the fair value of the shares at the date of grant. Nonvested restricted stock awards are recorded as a reduction of additionalpaid-in-capital in shareholders’ equity until earned. Compensation expense resulting from these restricted stock awards was $204$674 and $600$189 for the three and nine months ended September 30,March 31, 2018 and 2017, and $216 and $628 for the three and nine months ended September 30, 2016.respectively. As of September 30, 2017,March 31, 2018, there was $1,578$1,584 of total unrecognized compensation cost related to unvested restricted stock awards.

A summary of changes in time-based nonvested restricted stock awards for the three months ended September 30, 2017March 31, 2018 follows:

						Per Share Weighted Average
		Shares				Grant Date Fair Value
Nonvested at beginning of period			99,233			$	20.68
Forfeited			(135	)			25.92
Vested			(250	)			18.58
Nonvested at end of period			98,848				20.68

A summary of changes in nonvested restricted stock awardsThe above table excludes 15,600 shares that were granted and immediately vested. Compensation expense resulting from the immediately vested shares was $385 for the ninethree months ended September 30, 2017 follows:March 31, 2018, and is included in the previously disclosed $674 above.

The fair value of shares vested was $6$1,462 and $3$917 during the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. The fair value of shares vested was $929 and $559 during the nine months ended September 30, 2017 and 2016, respectively.

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 structured pooled trust preferred securities are priced using Level 3 inputs. The decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely, and the once-active market has become comparatively inactive. The Corporation engaged a third party consultant who has developed a model for pricing

these securities. Information such as historical and current performance of the underlying collateral, deferral and default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies are utilized in determining the security valuation. Due to market conditions as well as the limited trading activity of these types of securities, the market value of the Corporation’s structured pooled trust preferred securities are highly sensitive to assumption changes and market volatility.

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

Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2017March 31, 2018 and December 31, 2016:2017:

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2017March 31, 2018 and 2016:2017:

The table below presents a reconciliation of the fair value of securities available for sale measured on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017 and 2016:

		2018				2017
Balance, January 1		$	0			$	2,049
Total gains:
Included in other comprehensive income (unrealized)			0				134
Sale ofavailable-for-sale securities			0				(2,183	)
Balance, March 31		$	0			$	0

The following table presents quantitative information about Level 3 fair value measurements at December 31, 2016:

		Fair value				Valuation Technique		Unobservable Inputs		Input Utilized
Pooled trust preferred		$	2,049			Discounted cash flow		Collateral default rate		0.5% in 2016 and thereafter
								Yield (weighted average)		10%
								Prepayment speed		2.0% constant prepayment rate in 2016 and thereafter