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Item 7. Management’s Discussion and Analysis

2021-03-04 compared with 2020-03-05 · 511 added, 205 removed, 284 unchanged (72% of the section changed)

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Credit risk results from loans to customers and the purchase of securities.

The Corporation manages credit risk by following an established credit policy and using a disciplined evaluation of the adequacy of the allowance for loan losses.

The Corporation manages credit risk by following an established credit policy and using a disciplined evaluation of the adequacy of the allowance for credit losses.

Also, the Corporation's investment policy limits the amount of credit risk that may be taken in the securities portfolio.

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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.

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 CNB’s financial condition, liquidity, results of operations, future performance and business.

These forward-looking statements are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are those that are not historical facts.

Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond our control).

Forward-looking statements often include the words “believes," “expects," “anticipates," “estimates," “forecasts," “intends," “plans," “targets," “potentially," “probably," “projects," “outlook" or similar expressions or future conditional verbs such as “may," “will," “should," “would" and “could." Such known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) changes in general business, industry or economic conditions or competition;

(ii) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting principals or otherwise;

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." CNB’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance.

Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Corporation, our customers and the global economy and financial markets.

The COVID-19 pandemic has impacted us and our customers significantly, and the extent that it continues to impact us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its impact on demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies, national and local economic activity, and the pace of recovery when the COVID-19 pandemic subsides, among others.

Moreover, investors are cautioned to interpret many of the risks identified under the section entitled "Risk Factors" in our Form 10-K for the year ended December 31, 2020 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.

Additional factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) changes in general business, industry or economic conditions or competition;

(iii) adverse changes or conditions in capital and financial markets;

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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.

Such developments could have an adverse impact on CNB's financial position and results of operations.

The forward-looking statements contained herein are based upon management’s beliefs and assumptions.

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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.

CNB undertakes no obligation to publicly update or revise any forward-looking statements included in this Annual Report on Form 10-K, whether as a result of new information, future events or otherwise, except to the extent required by law.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed might not occur and you should not put undue reliance on any forward-looking statements.

General Overview

Management considers return on average equity, earnings per share, asset quality, and other relevant metrics as key measures of performance for the Corporation.

This report contains references to financial measures that are not defined in GAAP.

Management uses non-GAAP financial information in its analysis of the Corporation’s performance.

Management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented.

The Corporation’s management believes that investors may use these non-GAAP measures to analyze the Corporation’s financial performance without the impact of unusual items or events that may obscure trends in the Corporation’s underlying performance.

This non-GAAP data should be considered in addition to results prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results.

Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently.

Non-GAAP measures reflected within the discussion below include evaluations on the impact of PPP-related assets, merger costs, branch closure costs and FHLB prepayment penalties on various metrics of the Corporation’s financial performance, including calculations related to:

• Tangible common equity/tangible assets;

• Average loans and average earning assets utilized in the calculation of yield on loans, yield on earning assets and net interest margin;

• Return on average assets, return on average common equity and return on average tangible common equity;

• Efficiency ratio;

• Earnings per share;

• Non-performing assets/total assets and allowance for loan credit/loans.

A reconciliation of these non-GAAP financial measures is provided below in the "Non-GAAP Financial Measures" section.

Management looks to return on average equity, earnings per common share, asset quality, and other metrics to measure the performance of the Corporation.

The interest rate environment will continue to play an important role in the future earnings of the Corporation.

In order to address the flattening yield curve and a highly competitive environment, the Corporation has remained focused on disciplined loan pricing to sustain a strong net interest margin.

In order to address the challenging interest rate and competitive environments, the Corporation continues to evaluate, develop and implement strategies necessary to support its ongoing financial performance objectives.

In addition, the global outbreak of COVID-19 and the public health measures that have been undertaken in response have had, and will continue to have, significant repercussions across regional and global economies and financial markets.

The COVID-19 pandemic, its associated responsive measures and the resulting economic slowdown have disrupted our business and are expected to continue to have a significant impact on our business, financial performance and operating results.

Since we cannot estimate when the COVID-19 pandemic and the associated responsive measures will end, we cannot estimate the ultimate operational and financial impact of COVID-19 on our business.

However, management will continue to proactively implement strategies to mitigate the impact of the pandemic on the Corporation’s business, risk profile and financial performance.

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

Among other things, significant actions taken include:

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

• Restricted all non-essential travel and instituted a mandatory quarantine period for anyone who has traveled to certain impacted areas;

• Temporarily closed all branch lobbies to non-employees, except for certain limited cases by appointment only.

Based on updated governmental guidelines, the Corporation re-opened its branch lobbies, while enforcing safe practices in order to serve its consumer and business customers.

In addition, the Corporation continued to offer its customers alternatives through its drive-through capabilities, network of ATMs, internet banking, mobile application and telephone customer service capabilities;

• Expanded remote-access availability for the Corporation's workforce to work from home or other remote locations.

The Corporation has taken appropriate efforts to ensure that activities are performed in accordance with the Corporation's compliance and information security policies, which are designed to ensure customer data and other information is properly safeguarded;

• Instituted mandatory social distancing policies for those employees not working remotely.

Members of branch and operation teams were split into separate teams to provide a higher level of safety for employees and redundancy for key functions across the Corporation.

Based upon updated governmental guidelines, the Corporation has reintegrated its branch teams and the majority of its operation teams, while continuing to require social distancing, wearing of masks and other appropriate safety precautions;

• To ensure the safety of its customers and employees, the Corporation continues to monitor the COVID-19 pandemic closely and update its response plan accordingly.

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 2021 and beyond.

While past results are not an indication of future earnings, management believes the Corporation is well positioned to sustain core earnings during 2020.

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 to review on a regular basis.

All dollar amounts are stated in thousands, except share and per share data and other amounts as indicated.

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The following table presents ending balances, growth, and the percentage change of certain measures of our financial condition for specified years (dollars in millions):

Total loans, net

Balance $ Change

year % Change

Balance $ Change

year % Change

Total assets $ 4,729.4 $ 965.7 25.7 % $ 3,763.7 $ 542.1 16.8 % $ 3,221.5

Total loans, net of allowance for credit losses 3,337.4 552.9 19.9 % 2,784.6 329.7 13.4 % 2,454.9

Total securities 591.6 39.4 7.1 % 552.1 27.5 5.2 % 524.7

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Total shareholders’ equity 416.1 111.2 36.5 % 305.0 42.1 16.0 % 262.8

The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans.

The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures.

See Note 1, "Summary of Significant Accounting Policies," and Note 4, "Loans," for more information about pooling of loans for the allowance for credit losses.

The following table presents average balances of certain measures of our financial condition and net interest margin for the specified years.

12/31/2020 12/31/2019 12/31/2018

Balance Annual

Rate Interest

Balance Annual

Rate Interest

Balance Annual

Rate Interest

$ 505,770 2.35 % $ 11,510 $ 436,122 2.77 % $ 11,973 $ 365,790 2.62 % $ 9,733

Tax-Exempt (1) (2)

55,460 3.32 % 1,772 85,802 3.40 % 2,867 97,412 3.42 % 3,326

Equity Securities (1) (2))

12,814 5.89 % 755 18,203 6.17 % 1,123 19,133 5.89 % 1,170

Total Securities 574,044 2.53 % 14,037 540,127 2.99 % 15,963 482,335 2.91 % 14,229

Commercial (2)

1,230,615 4.80 % 59,016 987,974 5.35 % 52,868 820,547 4.98 % 40,846

1,783,980 4.76 % 84,857 1,539,208 5.04 % 77,501 1,422,021 4.88 % 69,338

Consumer 100,576 9.71 % 9,766 102,928 10.08 % 10,373 85,776 10.16 % 8,717

Total Loans (3)

3,115,171 4.93 % 153,639 2,630,110 5.35 % 140,742 2,328,344 5.11 % 118,901

Other Earning Assets 402,861 0.21 % 852 24,674 2.02 % 499 4,536 4.14 % 188

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Premises, Equipment and Right of Use Assets 75,516 68,744 49,985

Allowance for Loan Losses

Other Assets 166,511 137,519 133,115

Allowance for Credit Losses (28,962) (20,655) (21,511)

Total Non-Interest Earning Assets 255,066 218,826 193,087

Total Assets $ 4,347,142 $ 3,413,737 $ 3,008,302

Liabilities and Shareholders’ Equity

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Demand – interest bearing $ 755,200 0.24 % $ 1,781 $ 580,244 0.42 % $ 2,455 $ 582,289 0.38 % $ 2,209

Savings 1,923,214 0.66 % 12,775 1,450,653 1.39 % 20,138 1,077,210 0.85 % 9,184

Time 445,408 2.15 % 9,586 371,464 2.05 % 7,609 383,531 1.52 % 5,835

Total interest bearing deposits 3,123,822 0.77 % 24,142 2,402,361 1.26 % 30,202 2,043,030 0.84 % 17,228

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(2) Average yields and interest income are stated on a fully taxable equivalent basis using the Corporation’s marginal federal income tax rate of 21% for the years end December 31, 2020, 2019 and 2018.

Interest income has been increased by $1,476 , $1,448 , and $3,171 for the years ended December 31, 2019 , 2018, and 2017, respectively, as a result of the effect of tax-exempt interest and dividends earned by the Corporation.

Interest income has been increased by $1.4 million, $1.5 million, and $1.4 million for the years ended December 31, 2020, 2019, and 2018, respectively, as a result of the effect of tax-exempt interest and dividends earned by the Corporation.

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

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Included in loan interest income is loan fees of $10,438, $4,048, and $3,935 for the years ended December 31, 2020, 2019, and 2018, respectively.

Loan fees for the year ended December 31, 2020 included $5.1 million in Paycheck Protection Program ("PPP") deferred processing fees.

The following table presents the change in net interest income for the years specified.

Net Interest Income Rate-Volume Variance

For Twelve Months Ended December 31, 2019 over (under) 2018 Due to Change In (1)

Net Interest Income Rate-Volume Variance For Twelve Months Ended December 31, 2020 over (under) 2019 Due to Change In (1)

For Twelve Months Ended December 31, 2019 over (under) 2018 Due to Change In (1)

Volume Rate Net Volume Rate Net

Taxable $ 1,369 $ (1,832) $ (463) $ 1,691 $ 549 $ 2,240

Tax-Exempt (2)

(1,026) (69) (1,095) (440) (19) (459)

Equity Securities (2)

(317) (51) (368) (101) 54 (47)

Total Securities 26 (1,952) (1,926) 1,150 584 1,734

Commercial (2)

11,582 (5,434) 6,148 8,986 3,036 12,022

11,666 (4,310) 7,356 5,888 2,275 8,163

Consumer (226) (381) (607) 1,725 (69) 1,656

Total Loans 23,022 (10,125) 12,897 16,599 5,242 21,841

Other Earning Assets 800 (447) 353 407 (96) 311

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Demand – Interest Bearing $ 413 $ (1,087) $ (674) $ (9) $ 255 $ 246

Savings 3,139 (10,502) (7,363) 5,184 5,770 10,954

Time 1,591 386 1,977 (247) 2,021 1,774

Total Interest Bearing Deposits 5,143 (11,203) (6,060) 4,928 8,046 12,974

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Cash and Cash Equivalents

Cash and cash equivalents totaled $193.0 million at December 31, 2019 compared to $45.6 million at December 31, 2018 .

The significant increase in liquidity is the result of the Corporation's growth in deposits during the same period.

In addition to the Corporation's deposit growth strategies, management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, Federal Home Loan Bank financing, and the portions of the securities and loan portfolios that mature within one year.

Cash and cash equivalents totaled $532.7 million at December 31, 2020, including additional excess liquidity of $483.2 million held at the Federal Reserve.

Cash and cash equivalents totaled $193.0 million at December 31, 2019.

The significant increase in liquidity is the result of the Corporation's growth in deposits during 2020.

In addition to the Corporation's deposit growth strategies, management believes the liquidity needs of the Corporation are satisfied by the current balance of cash and cash equivalents, Federal Home Loan Bank financing availability, 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 available for sale and trading securities totaled $591.6 million and $552.1 million at December 31, 2020 and 2019, respectively.

The Corporation’s objective is to maintain the securities portfolio at a size that ranges between 15% and 20% of total assets in order to appropriately balance the earnings and liquidity that the portfolio provides.

As of December 31, 2019 and 2018 , the securities portfolio as a percentage of total assets was 14.7% and 16.3% , respectively.

Note 3 to the consolidated financial statements provides more detail concerning the composition of the Corporation’s securities portfolio and the process for evaluating securities for other-than-temporary impairment.

The following table sets forth the carrying value of our securities available-for-sale portfolio at year-end December 31, 2019 , 2018 , and 2017 .

December 31, 2019

December 31, 2018

December 31, 2017

Note 3, "Securities," in the consolidated financial statements provides more detail concerning the composition of the Corporation’s securities portfolio and the process for evaluating securities for impairment.

The following table sets forth the carrying value of our debt securities available-for-sale portfolio at year-end December 31, 2020, 2019, and 2018.

December 31, 2020 December 31, 2019 December 31, 2018

Amortized Unrealized Market Amortized Unrealized Market Amortized Unrealized Market

Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value

Securities Available for Sale

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Corporate notes and bonds 15,221 105 (400) 14,926 8,350 14 (282) 8,082 12,356 22 (601) 11,777

The following table sets forth the maturities of investment securities in our available-for-sale portfolio as of December 31, 2019 .

Maturity Distribution of Investment Securities

Pooled SBA 24,975 912 (1) 25,886 25,063 274 (163) 25,174 30,163 135 (924) 29,374

Other 1,020 0 (41) 979 1,020 0 (56) 964 1,020 0 (86) 934

$ 565,493 $ 20,177 $ (762) $ 584,908 $ 533,203 $ 10,617 $ (1,507) $ 542,313 $ 521,337 $ 2,853 $ (7,327) $ 516,863

The following table sets forth the maturities of debt securities in our available-for-sale portfolio as of December 31, 2020.

Maturity Distribution of Debt Securities Available-for-Sale

December 31, 2020

After One But Within

After Five But

One Year After One But Within

Five Years After Five But

Years After Ten

Years Pooled SBA,

Residential and Multi-

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Commercial Mortgage

Securities Available for Sale (2)

Debt Securities Available for Sale (2)

Government Sponsored Entities $ 38,695 1.82 % $ 89,331 1.58 % $ 29,016 2.96 %

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Corporate notes and bonds 2,206 0.91 % 2,180 0.59 % 8,875 3.33 % 1,665 5.18 %

Pooled SBA $ 25,886 2.38 %

Residential and multi-family mortgage 315,192 2.69 %

Other 979 1.63 %

Total $ 53,448 2.17 % $ 112,643 1.88 % $ 66,743 3.07 % $ 10,996 3.39 % $ 341,078 2.67 %

(1) The weighted average yields are based on market value and effective yields weighted for the scheduled maturity with tax-exempt securities adjusted to a taxable-equivalent basis using a tax rate of 21%.

(2) The portfolio contains no holdings of a single issuer that exceeds 10% of shareholders’ equity other than the US Treasury and governmental sponsored entities.

The Corporation generally purchases investment securities over time and does not attempt to “time" its transactions, which allows for more efficient management of fluctuations in the interest rate environment.

The Corporation monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through meetings of the Asset/Liability Committee of the Corporation’s Board of Directors (“ALCO").

The Corporation generally purchases debt securities over time and does not attempt to "time" its transactions, which allows for more efficient management of fluctuations in the interest rate environment.

The Corporation monitors the earnings performance and the effectiveness of the liquidity of the securities portfolio on a regular basis through meetings of 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.

As detailed in the table below, at December 31, 2019 , the Corporation had $2.8 billion in loans outstanding, net of unearned discount, an increase of $329.5 million, or 13% , since December 31, 2018 .

Since 2015, the Corporation's loan portfolio has increased approximately $1.2 billion as a result of management's continued focus on developing and maintaining customer relationships.

As detailed in the tables below, at December 31, 2020, the Corporation had $3.4 billion in loans outstanding, an increase of $567.8 million, or 20%, since December 31, 2019, as a result of $319.1 million of acquired loans from Bank of Akron, net of fair value adjustments, $155.5 million in PPP loans, net of PPP deferred processing fees ("PPP-related loans") and $92.7 million, or 3.3%, of organic growth, primarily from our Cleveland and Buffalo regions.

Since 2016, the Corporation's loan portfolio has increased approximately $1.5 billion, primarily as a result of management's continued focus on developing and maintaining customer relationships coupled with the impact of PPP loans and the acquisition of Bank of Akron in 2020.

Owner-occupied, nonfarm nonresidential properties

Agricultural production and other loans to farmers

Commercial and Industrial

Obligations (other than securities and leases) of states and political subdivisions

Other construction loans and all land development and other land loans 205,734

Multifamily (5 or more) residential properties

Non-owner occupied, nonfarm nonresidential properties

1-4 Family Construction 27,768

Home equity lines of credit 109,444

Residential Mortgages secured by first liens 777,030

Residential Mortgages secured by junior liens 53,726

Other revolving credit plans 25,507

Automobile 25,344

Other consumer 42,792

Credit cards 8,115

Overdrafts 336

Total loans $ 3,371,789

2019 2018 2017 2016

Commercial, industrial and agricultural $ 1,046,665 $ 916,297 $ 704,606 $ 567,800

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Residential real estate 814,030 771,309 713,347 652,883

Consumer 124,785 86,035 80,193 74,816

Credit cards 7,569 7,623 6,753 6,046

Overdrafts 2,146 308 352 595

Gross loans 2,809,197 2,479,348 2,149,848 1,876,966

unearned income 5,162 4,791 3,889 3,430

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The Corporation expects to continue to achieve robust loan growth in 2021 as a result of its diversified markets and its focus on core customer acquisition strategies.

The below table discusses loan maturities and sensitivities to interest rates.

Customer Support Strategies and Loan Portfolio Profile

The Corporation participated in the PPP provided under the auspices of the Small Business Administration ("SBA").

Under this program, the Corporation lent money primarily to its existing loan and/or deposit customers, based on a predetermined SBA-developed formula, intended to incentivize small business owners to retain their employees.

These loans carry a customer rate of 1.00% plus a processing fee that varies depending on the balance of the loan at origination.

As of December 31, 2020, the Corporation had outstanding $159.6 million in PPP loans, or 1,528 PPP loans, at a rate of 1.00% together with deferred PPP processing fees of approximately $4.1 million.

For the three and twelve months ended December 31, 2020, the Corporation recognized $4.5 million and $5.1 million, respectively, in deferred PPP processing fees ("PPP-related fees").

In addition to participating in the PPP, during the year ended December 31, 2020, the Corporation deferred loan payments for several of its commercial and consumer customers, as determined by the financial needs of each customer.

As of December 31, 2020, the COVID-19 related loans with deferred loan payment arrangements, totaled $151.0 million, or 4.5% of total loans outstanding, consisting of 112 loans, totaling $107.2 million, for which principal and interest were deferred, and 55 loans, totaling $43.8 million, for which principal only was deferred.

Loan payment deferrals by loan type were as follows:

• Commercial and industrial loans – 44 loans, totaling $39.1 million;

• Commercial real estate loans – 23 loans, totaling $101.8 million;

• Residential mortgage loans – 88 loans, totaling $9.9 million;

• Consumer loans – 12 loans, totaling $154 thousand.

The Corporation tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure.

As a result of the COVID-19 pandemic, the Corporation has determined the Hotels/Motels and Restaurants/Fast Foods industries represent a potentially higher level of credit risk, as many of these customers have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders as well as travel limitations.

At December 31, 2020, the Corporation had loan concentrations for these industries as follows, excluding PPP-related loans:

• Hotels/Motels – $206.6 million, or 6.42% of total loans outstanding, excluding PPP-related loans;

• Restaurants/Fast Foods – $30.1 million, or 0.94% of total loans outstanding, excluding PPP-related loans.

Maturity Distribution of Loans

A previously mentioned, the loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans.

Commercial and mortgage loans are the largest classification within earning assets, representing 73.7% at December 31, 2020, compared to 79.1% at December 31, 2019.

The following table presents the maturity distribution and rate sensitivity of commercial and mortgage loans at December 31, 2020 and an analysis of these loans that have fixed and variable or floating interest rates.

December 31, 2020

Commercial, industrial and agricultural

Loans With Fixed Interest Rate

Loans With Variable or Floating Interest Rates

Commercial mortgages and residential real estate

or Less One Through

Five Years Over

Five Years Total Gross

Commercial Loans

Loans With Fixed Interest Rate $ 178,005 $ 109,837 $ 147,467 $ 435,309

Loans With Variable or Floating Interest Rates 216,096 140,888 467,948 824,932

$ 394,101 $ 250,725 $ 615,415 $ 1,260,241

Mortgage Loans

Loans With Fixed Interest Rate $ 51,864 $ 168,885 $ 441,179 $ 661,928

Loans With Variable or Floating Interest Rates 134,469 227,535 994,297 1,356,301

$ 186,333 $ 396,420 $ 1,435,476 $ 2,018,229

Loan Concentration

The Corporation monitors loan concentrations by individual industries in order to track potential risk exposures resulting from industry related downturns.

At December 31, 2019 , no concentration existed within our commercial or real estate loan portfolios which exceeded 10% of the total loan portfolio.

At December 31, 2020, no concentration existed within our commercial or mortgage loan portfolios which exceeded 10% of the total loan portfolio.

The Corporation has established written lending policies and procedures that require underwriting standards, loan documentation, and credit analysis standards to be met prior to funding a loan.

Subsequent to the funding of a loan, ongoing review of credits is required.

Credit reviews are performed annually on approximately 65% of the commercial loan portfolio by an outsourced loan review firm.

In addition, classified assets, past due loans and nonaccrual loans are reviewed semiannually by an external independent loan review firm.

Credit reviews are performed quarterly by an outsourced loan review firm and cover approximately 65% of the commercial loan portfolio on an annual basis.

In addition, the external independent loan review firm reviews classified assets, past due loans and nonaccrual loans quarterly.

Note 1, "Summary of Significant Accounting Policies," in the consolidated financial statements provides a discussion of the Corporation's policy for placing loans on nonaccrual status.

The following table presents information concerning loan delinquency and other nonperforming assets at December 31, 2020, 2019, 2018, 2017, and 2016:

2020 2019 2018 2017 2016

Nonaccrual loans $ 30,359 $ 21,736 $ 14,262 $ 15,653 $ 12,510

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Nonperforming TDR loans (1)

4,631 3,592 6,425 8,959 3,120

Total TDR loans $ 15,088 $ 10,951 $ 14,626 $ 17,303 $ 11,830

Total loans, net of unearned income

Nonperforming loans as a percentage of loans, net

Total loans $ 3,371,789 $ 2,804,035 $ 2,474,557 $ 2,145,959 $ 1,873,536

Nonperforming loans as a percentage of loans 0.91 % 0.78 % 0.61 % 0.76 % 0.68 %

Total assets $ 4,729,399 $ 3,763,659 $ 3,221,521 $ 2,768,773 $ 2,573,821

Nonperforming assets as a percentage of total assets 0.67 % 0.62 % 0.48 % 0.61 % 0.53 %

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

Nonperforming assets as a percentage of total assets increased from 0.48%, at December 31, 2018, to 0.62%, at December 31, 2019.

This increase was primarily due to a secured commercial and industrial loan relationship with a borrower, who is now deceased.

The Company is in the process of evaluating the borrower’s estate and although no loss is expected, based on facts and circumstances known to management at the time of this report filing, given the level of uncertainty surrounding this customer relationship management elected to classify this loan as nonaccrual at December 31, 2019.

This loan was current at December 31, 2019.

Management continues to closely monitor nonperforming loans.

See “Allowance for Loan Losses" for further discussion of credit review procedures and changes in nonperforming loans.

Allowance for Loan Losses

The allowance for loan losses is considered to be appropriate by management and reflects an adequate reserve for probable, incurred losses.

The allowance is established through provision expense related to the loan portfolio as well as overdrafts in deposit accounts.

Provision expense is charged against current income in the Statement of Income.

Loans and overdrafts deemed not collectible are charged off against the allowance while any subsequent collections are recorded as recoveries and increase the allowance.

Management’s judgment on the adequacy of the allowance is based on the evaluation of individual loans, the overall risk characteristics of various portfolio segments, historical loss experience, the impact of economic conditions on borrowers, and other relevant factors.

In determining the allocation of the allowance for loan losses, the Corporation considers economic trends, historical patterns and specific credit reviews.

With regard to the credit reviews, a “watchlist" is evaluated on a monthly basis to determine potential losses within the commercial loan portfolio.

Non-performing assets / Total assets, net of PPP-related assets (2)

0.71 % 0.62 % 0.48 % 0.61 % 0.53 %

(1) Nonperforming TDR loans are also included in the balance of nonaccrual loans.

(2) A reconciliation of this non-GAAP financial measures is provided in the "Non-GAAP Financial Measures" section below.

Total non-performing assets were $31.5 million, or 0.67%, of total assets, as of December 31, 2020.

Total assets at December 31, 2020 include approximately $315.1 million in PPP-related assets.

Excluding the PPP-related assets, the ratio of total non-performing assets to total assets was 0.71% as of December 31, 2020 compared to 0.62% as of December 31, 2019.

The increase from December 31, 2019, was primarily due to one commercial real estate loan relationship totaling approximately $8.7 million.

During the three months ended March 31, 2020, this loan was downgraded to substandard and placed on non-accrual as a result of a covenant violation.

Management performed an evaluation of the collateral supporting the loan and concluded to charge-off $1.0 million in the fourth quarter of 2020.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of a borrower to continue to comply with repayment terms because of the borrower’s potential operating or financial difficulties.

Management monitors these "watchlist" loans on a monthly basis to determine potential losses within the commercial loan portfolio.

The "watchlist" is comprised of all credits risk rated special mention, substandard and doubtful.

Consumer and mortgage loans are allocated using historical credit loss experience.

The following table presents activity within the allowance for loan losses during the years ended December 31, 2019 , 2018 , 2017 , 2016 , and 2015 :

Allowance for Credit Losses

The allowance for credit losses on loans represents management’s estimate of expected credit losses over the estimated life of our existing portfolio of loans.

The allowance for credit losses is a valuation account that is deducted from the loan's amortized cost basis to present the net amount expected to be collected on the loans.

The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses on loans at the amount of expected credit losses inherent within the loan portfolio.

Loans are recorded as charge offs against the allowance when management confirms a loan balance is uncollectable.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts, and other significant quantitative and qualitative factors.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors.

For further information on the allowance for credit losses on loans, Note 1, "Summary of Significant Accounting Policies," and Note 4, "Loans," in the consolidated financial statements provides additional disclosure on the allowance for credit losses.

As a result of the adoption of ASC 326 effective January 1, 2020, there is a lack of comparability in both the allowance and provision for credit losses for the periods presented.

Results for reporting periods beginning after January 1, 2020 (as reflected in the table below) are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior fiscal years.

Note 1, "Summary of Significant Accounting Policies," in the consolidated financial statements provides additional disclosure on the adoption of ASC 326.

(Before ASC 326 Adoption) Impact of ASC 326 Adoption Initial Allowance on Loans Purchased with Credit Deterioration (Charge-offs) Recoveries Net (Charge-Offs) Recoveries Provision (Benefit) for Credit Loss Expense Ending Allowance (After ASC 326 Adoption)

$ 190 $ 61 $ 0 $ 0 $ 0 $ 0 $ (30) $ 221

Owner-occupied, nonfarm nonresidential properties

2,390 (754) 82 (61) 12 (49) 2,031 3,700

Agricultural production and other loans to farmers

25 5 0 0 0 0 (6) 24

Commercial and Industrial

4,105 (631) 216 (2,779) 39 (2,740) 5,283 6,233

Obligations (other than securities and leases) of states and political subdivisions

1,022 (231) 0 0 0 0 207 998

41 8 0 0 0 0 19 68

Other construction loans and all land development and other land loans 2,327 780 228 0 125 125 (1,504) 1,956

Multifamily (5 or more) residential properties

1,087 312 24 0 0 0 1,301 2,724

Non-owner occupied, nonfarm nonresidential properties

3,980 2,547 335 (1,522) 52 (1,470) 3,266 8,658

1-4 Family Construction 56 (35) 0 0 0 0 61 82

Home equity lines of credit 180 421 22 (6) 1 (5) 367 985

Residential Mortgages secured by first liens 1,220 1,100 73 (285) 65 (220) 2,366 4,539

Residential Mortgages secured by junior liens 114 135 0 (158) 2 (156) 148 241

Other revolving credit plans 296 378 0 (137) 21 (116) (51) 507

Automobile 156 (96) 0 (29) 2 (27) 99 132

Other consumer 1,960 1,021 0 (1,513) 130 (1,383) 1,364 2,962

Credit cards 84 (58) 0 (153) 14 (139) 179 66

Overdrafts 240 0 0 (435) 185 (250) 254 244

Total loans $ 19,473 $ 4,963 $ 980 $ (7,078) $ 648 $ (6,430) $ 15,354 $ 34,340

Loans $ 3,371,789

Allowance to loans 1.02 %

Allowance to loans, net of PPP-related loans (1)

Percentage of net charge-offs during the period to average loans outstanding 0.21 %

(1) A reconciliation of this non-GAAP financial measures is provided in the "Non-GAAP Financial Measures" section below.

Prior to January 1, 2020, the Corporation calculated the allowance for loan losses using the probable incurred methodology.

The activity in our allowance for loan losses was as follows during the years ended December 31, 2019, 2018, 2017, and 2016:

2019 2018 2017 2016

Balance at beginning of period $ 19,704 $ 19,693 $ 16,330 $ 16,737

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Residential real estate (386) (315) (466) (499)

Consumer (2,200) (2,279) (2,555) (3,324)

Credit cards (116) (90) (144) (96)

Overdrafts (453) (319) (252) (240)

(6,751) (6,593) (4,077) (4,961)

Commercial, industrial, and agricultural 17 171 235 89

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Residential real estate 73 67 78 93

Consumer 154 141 161 122

Credit cards 15 33 27 22

Overdrafts 113 90 87 71

496 532 785 405

Net charge-offs (6,255) (6,061) (3,292) (4,556)

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Percentage of net charge-offs during the period to average loans outstanding 0.24 % 0.26 % 0.16 % 0.27 %

The allowance for loan losses as a percentage of loans decreased from 0.80%, at December 31, 2018, to 0.70% at December 31, 2019, primarily as a result of the write-off of a specific loan relationship which had been fully reserved.

The adequacy of the allowance for loan losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation.

As part of the formal analysis, delinquencies and losses are monitored monthly.

The loan portfolio is divided into several categories in order for management to more effectively analyze the entire loan pool.

The first step in the evaluation process is a selection of classified loans which contain a specific credit loss reserve.

The remaining loans are pooled, by category, into the following segments:

Commercial, industrial, and agricultural

Commercial mortgages

Residential real estate

The reviewed loan pools are further segregated into four categories:

pass rated (delineated by risk rating), special mention, substandard, and doubtful.

Historical loss factors are calculated for each pool, excluding overdrafts, based on a weighted average quarterly loss rate for the most recent eight quarters, subject to a floor.

The homogeneous pools are evaluated based on a weighted average quarterly loss rate for the most recent eight quarters, subject to a floor.

The historical loss factors for both the reviewed and homogeneous pools are adjusted based on the following six qualitative factors:

levels of and trends in delinquencies;

trends in new volume and terms of new loans;

effects of any changes in lending policies and procedures;

experience, ability and depth of management;

national and local economic trends and conditions;

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 an independent third-party loan review provider, and discussions with peers.

The resulting factors are applied to the pool balances in order to estimate the probable risk of loss within each pool.

Prudent business practices dictate that the level of the allowance, as well as any corresponding charges to the provision for loan losses, should be commensurate with identified areas of risk within the loan portfolio and the attendant risks inherent therein.

The quality of the credit risk management function and the overall administration of this vital segment of the Corporation’s assets are critical to the ongoing success of the Corporation.

The previously mentioned analysis considered numerous historical and other factors to evaluate the adequacy of the allowance and any resultant provision for loan losses.

Management paid special attention to a section of the analysis that compared and plotted the actual level of the allowance against the aggregate amount of loans adversely classified in order to compute the estimated probable losses associated with those loans.

By noting the “spread" at that time, as well as prior periods, management can evaluate the current adequacy of the allowance as well as trends which may be developing.

The volume and composition of the Corporation’s loan portfolio continue to reflect growth in commercial loans, primarily commercial real estate, as well as commercial, industrial and agricultural loans.

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

However, management recognizes and considers the fact that risk is more pronounced in these types of credits and is, to a greater degree than with other loans, driven by the economic environment in which the debtor’s business operates.

The allowance for credit losses measured as a percentage of loans as of December 31, 2020 was 1.02%.

Total loans at December 31, 2020 include approximately $155.5 million in PPP-related loans.

Excluding PPP-related loans, the allowance for credit losses measured as a percentage of loans, net of unearned income, was 1.07% as of December 31, 2020 compared to 0.69% as of December 31, 2019.

The increase in the allowance for credit losses from December 31, 2019 to December 31, 2020 resulted primarily from the adoption of CECL, coupled with the impact of ongoing trends in CNB’s loan portfolio and the COVID-19 pandemic.

The adequacy of the allowance for credit losses is subject to a formal analysis by the Credit Administration and Finance Departments of the Corporation.

Note 1, "Summary of Significant Accounting Policies" in the consolidated financial statements provides additional disclosure on the allowance for credit losses.

As a result of the application of these procedures, the allocation of the allowance for credit losses was as follows at December 31, 2020:

Amount % of Loans in each Category

Owner-occupied, nonfarm nonresidential properties

Agricultural production and other loans to farmers

Commercial and Industrial

Obligations (other than securities and leases) of states and political subdivisions

Other construction loans and all land development and other land loans 1,956 6.1 %

Multifamily (5 or more) residential properties

Non-owner occupied, nonfarm nonresidential properties

1-4 Family Construction 82 0.8 %

Home equity lines of credit 985 3.2 %

Residential Mortgages secured by first liens 4,539 23.0 %

Residential Mortgages secured by junior liens 241 1.6 %

Other revolving credit plans 507 0.8 %

Automobile 132 0.8 %

Other consumer 2,962 1.3 %

Credit cards 66 0.2 %

Overdrafts 244 0.0 %

Total loans $ 34,340 100.0 %

As a result of the application of these procedures, the allocation of the allowance for loan losses was as follows at December 31, 2019, 2018, 2017 and 2016:

% of Loans in each Category

2019 2018 2017 2016

Amount % of Loans in each Category Amount % of Loans in each Category Amount % of Loans in each Category Amount % of Loans in each Category

Commercial, industrial, and agricultural $ 8,287 37.26 % $ 7,341 36.96 % $ 6,160 32.77 % $ 5,428 30.25 %

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Residential real estate 1,499 28.98 % 2,156 31.11 % 2,033 33.18 % 1,653 34.78 %

Throughout 2019 , the Corporation evaluated its provision and allowance for loan losses in light of changes in reserves required for impaired loans, changes in nonperforming loans, and growth in loans outstanding.

Note 4 to the consolidated financial statements provides further disclosure of loan balances by portfolio segment as of December 31, 2019 and 2018 , as well as the nature and scope of loans modified in a troubled debt restructuring during 2019 and 2018 and the related effect on provision expense and allowance for loan losses.

During the year ended December 31, 2019 , the Corporation recorded a provision for loan losses of $6.0 million, as compared to a provision for loan losses of $6.1 million for the year ended December 31, 2018 .

Net chargeoffs during the year ended December 31, 2019 were $6.3 million , compared to net chargeoffs of $6.1 million during the year ended December 31, 2018 , and the ratio of net chargeoffs to average loans was 0.24% and 0.26% for the years ended December 31, 2019 and 2018 , respectively.

The Bank's net chargeoffs totaled $4.4 million and $4.2 million during the years ended December 31, 2019 and 2018 , or 0.17% and 0.18% , respectively, of average Bank loans.

Holiday, the Bank's consumer discount company, recorded net chargeoffs totaling $1.9 million during the years ended December 31, 2019 and 2018 .

During the third quarter of 2019, the Bank recorded a chargeoff of the remaining balance of the commercial real estate loan discussed below, which had been previously fully reserved at the time of the charge-off.

Consumer 2,411 4.44 % 2,377 3.47 % 2,179 3.73 % 2,215 3.99 %

Credit Cards 84 0.27 % 103 0.31 % 120 0.31 % 93 0.32 %

Overdrafts 240 0.08 % 237 0.01 % 194 0.02 % 188 0.03 %

Total $ 19,473 100.00 % $ 19,704 100.00 % $ 19,693 100.00 % $ 16,330 100.00 %

Throughout 2020, the Corporation evaluated its provision and allowance for credit losses in light of changes in reserves required for loans individually evaluated and the degree of uncertainty related to the COVID-19 pandemic and its potential impact on the economy.

The Corporation also included a qualitative factor specifically related to the loans deferred due to the COVID-19 pandemic.

As of December 31, 2020, the specific COVID-19 qualitative factor totaled approximately $1.5 million, which was reflected in the Corporation’s provision expense for the twelve months ended December 31, 2020 and the related allowance for credit losses during the same period.

The Corporation will continue to evaluate this factor and update its analysis, as necessary, as developments related to the COVID-19 pandemic and its impact on the economy evolve.

Note 4, "Loans," to the consolidated financial statements provides further disclosure of loan balances by portfolio segment as of December 31, 2020 and 2019, as well as the nature and scope of loans modified in a troubled debt restructuring during 2020 and 2019 and the related effect on provision for credit expense and allowance for credit losses.

During the year ended December 31, 2020, the Corporation recorded a provision for credit losses of $15.4 million, as compared to a provision for loan losses of $6.0 million for the year ended December 31, 2019.

Net chargeoffs during the year ended December 31, 2020 were $6.4 million, compared to net chargeoffs of $6.3 million during the year ended December 31, 2019.

The ratio of net chargeoffs to average loans was 0.21% and 0.24% for the years ended December 31, 2020 and 2019, respectively.

The Bank's net chargeoffs totaled $5.1 million, or 0.17% of average loans, and $4.4 million, or 0.17% of average loans, during the years ended December 31, 2020 and 2019, respectively.

Holiday, the Bank's consumer discount company, recorded net chargeoffs totaling $1.3 million and $1.9 million during the years ended December 31, 2020 and 2019, respectively.

During the second quarter of 2020, the Bank recorded a chargeoff of $2.6 million, related to a secured commercial and industrial loan relationship with a borrower who is now deceased, and a $1.0 million charge-off in the fourth quarter of 2020, related to one commercial real estate loan.

During the third quarter of 2019, the Bank recorded a chargeoff of the remaining balance of the commercial real estate loan, which had been previously fully reserved at the time of the charge-off.

Additionally, during the fourth quarter of 2019, the Bank recorded a partial charged-off of $739 thousand related to one commercial real estate loan, which had been previously fully reserved.

The remaining fully reserved balance on this loan was $681 thousand at December 31, 2019.

In 2018, a commercial real estate loan that was impaired at December 31, 2017 experienced further deterioration in the financial condition of the borrower, resulting in the Corporation recording an additional provision for loan losses of $1.9 million during the year ended December 31, 2018.

During 2018, the Bank further analyzed the ultimate collectability of the principal amount due and recorded a partial chargeoff of the principal balance in the amount of $3.3 million.

As of December 31, 2018, the book balance of this impaired loan was $2.7 million and the specific allowance recorded was $2.4 million.

Management believes the provision for loan losses recorded during the twelve months ended December 31, 2019 and 2018 , in conjunction with the resultant allowance for loan losses at December 31, 2019 and 2018 , were sufficient to support probable incurred credit losses embedded in its loan portfolio at December 31, 2019 and 2018 .

Following the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, all of which have a significant impact on the balance of the allowance for credit losses.

Management believes the provision for credit losses recorded during the twelve months ended December 31, 2020 and 2019, in conjunction with the resultant allowance for credit losses at December 31, 2020 and 2019, were sufficient to support credit losses embedded in its loan portfolio at December 31, 2020 and 2019.

Premises and Equipment

During the years ended December 31, 2020 and 2019, the Corporation invested $5.6 million and $9.0 million, respectively, in its physical infrastructure through the purchase of land, buildings, and equipment.

The year ended December 31, 2020, includes premises and equipment related to the Bank of Akron acquisition.

In 2019, the Corporation primarily invested in the completion of leasehold improvements for a permanent BankOnBuffalo branch in Niagara Falls, New York and infrastructure improvements to the BankOnBuffalo headquarters in Buffalo, New York.

In 2018, the Corporation substantially completed leasehold improvements of a full-service banking facility in Buffalo, New York that also houses the BankOnBuffalo leadership and administrative teams.

The Corporation also invested in leasehold improvements for a temporary BankOnBuffalo branch in Niagara Falls, New York.

Finally, additional office space was constructed in at the main office of ERIEBANK in 2018.

Bank Owned Life Insurance

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Earnings from BOLI assist the Corporation in offsetting its benefit costs.

The Corporation purchased $8.8 million in BOLI during the twelve months ended December 31, 2019 , while it made no such purchases during the twelve months ended December 31, 2018 .

The Corporation made no purchases of BOLI during the twelve months ended December 31, 2020, while it purchased $8.8 million of BOLI during the twelve months ended December 31, 2019.

The year ended December 31, 2020, includes $8.2 million of BOLI related to the Bank of Akron acquisition.

Funding Sources

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Year Ended December 31,

2020 2019 2018

Amount Annual

Demand – Non-Interest Bearing $ 516,724 $ 360,208 $ 327,014

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Time Deposits 445,408 2.15 % 371,464 2.05 % 383,531 1.52 %

Total $ 3,640,546 $ 2,762,569 $ 2,370,044

The maturity of certificates of deposits and other time deposits in denominations of $100,000 or more as of December 31, 2020 is as follows:

Three months or less

Greater than three months and through twelve months

Greater than one year and through three years

Greater than three years

3 months or less $ 18,854

Over 3 through 6 months 29,524

Over 6 through 12 months 68,040

Over 12 months 148,319

Total $ 264,737

Although the Corporation considers short-term borrowings and long-term debt when evaluating funding sources, traditional deposits continue to be the main source for funding.

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Time deposits 476,544 11.4% 427,816 8.2% 395,437

Deposits totaled $3.1 billion at December 31, 2019 , a $491.5 million, or 18.8% , increase from December 31, 2018 as a result of the Corporation’s continued strategic focus on attracting and retaining core customer relationships.

The Corporation’s success continued to be driven primarily by growth in savings deposits, which increased by $405.2 million, or 32.2%, during the same period.

All other deposits categories also continued to demonstrate strong growth trends, in support of the Corporation’s overall long-term customer acquisition strategies.

In 2018, the Corporation was strategically focused on core deposit gathering resulting in new deposit inflow, primarily in savings deposits, which increased $342.9 million.

During the year of 2017, the Corporation ran time deposit specials resulting in the both new deposit inflow and a transfer from savings balances.

Total $ 4,181,744 34.8% $ 3,102,327 18.8% $ 2,610,786

Deposits totaled $4.2 billion at December 31, 2020, a $1.1 billion, or 34.8%, increase from December 31, 2019 as a result of $419.5 million of acquired deposits from Bank of Akron, net of fair value adjustments, an estimated $159.6 million in PPP deposits and $500.3 million, or 16.1%, of organic growth in deposits across all our regions, including our Private Banking division.

Periodically, the Corporation utilizes term borrowings from the FHLB and other lenders to meet funding obligations or match fund certain loan assets.

The terms of these borrowings are detailed in Note 12 to the consolidated financial statements.

There were no short-term borrowings as of December 31, 2019 or 2018 , primarily as a result of the Corporation’s strong deposit growth during the twelve months ended December 31, 2019 and 2018 .

Shareholders’ Equity and Capital Ratios and Metrics

The Corporation’s capital continues to provide a source of strength for the Corporation's growth and strategies and profitability.

During the twelve months ended December 31, 2019 , after-tax earnings for the Corporation totaled $40.1 million, or $2.63 per diluted share, reflecting increases of $6.4 million, or 18.9% , and $0.42 per diluted share, or 19.0% .

During the same period in 2019 , the Corporation declared dividends of $10.4 million, resulting in a dividend payout ratio of 25.8% of after-tax net income.

During the fourth quarter of 2019, the Corporation launched an “at the market" offering pursuant to which the Corporation may sell up to $40.0 million in share of its common stock.

This initiative is currently underway and the Corporation intends to utilize any proceeds from the offering to support its long-term growth strategies.

At December 31, 2019, the Corporation had sold approximately $1.63 million, or 52,568 shares of common stock, representing a weighted average price of approximately $31.77 per share.

In February 2017, the Corporation completed an at-the-market common stock issuance.

A total of 834,896 shares of the Corporation’s common stock were sold at a weighted average price of approximately $23.96, representing gross proceeds to the Corporation of $20.0 million.

Net proceeds from the transaction, after the sales commission and other expenses, were $19.3 million, which will be used for general corporate purposes, including loan growth, additional liquidity, and working capital.

The terms of these borrowings are detailed in Note 12, "Borrowings," to the consolidated financial statements.

There were no FHLB or other long-term borrowings as of December 31, 2020, compared to $227.9 million at December 31, 2019.

As a result of its strong deposit growth, during the third and fourth quarters of 2020, the Corporation prepaid the entire balance of its borrowings from the FHLB.

The combined prepayment penalty associated with these prepayments totaled $7.9 million.

The weighted average rate associated with these borrowings was 2.20%.

Shareholders’ Equity, Capital Ratios and Metrics

The Corporation’s capital continues to provide a source of strength for the Corporation's growth, strategies and profitability.

As of December 31, 2020, CNB’s total shareholders’ equity was $416.1 million, an increase of $111.2 million, or 36.5%, from December 31, 2019 primarily as a result of an increase in additional paid in capital related to the Bank of Akron acquisition, combined with the issuance of preferred equity, an increase in accumulated other comprehensive income and growth in organic earnings, partially offset by the adoption of CECL and payment of common and preferred stock dividends to our shareholders during the twelve months ended December 31, 2020.

During the second quarter of 2020, the Corporation announced the termination of its "at-the-market" equity offering program (the "ATM Program"), pursuant to which the Corporation could offer and sell up to $40 million of its common stock through Keefe, Bruyette & Woods, Inc., the sales agent.

The Corporation elected to terminate the ATM Program due to market conditions and to limit uncertainty and unfavorable dilution for its shareholders during this period of global economic volatility.

Prior to termination, the Corporation had sold 168,358 shares of its common stock, raising approximately $5.1 million in gross proceeds.

On July 17, 2020, the Corporation completed its acquisition of Bank of Akron.

Under the terms of the Merger Agreement, Bank of Akron merged with and into CNB Bank, with CNB Bank as the surviving entity.

Banking offices of Bank of Akron operate under the trade name BankOnBuffalo, a division of CNB Bank.

Based on the elections and proration procedures set forth in the Merger Agreement, the total consideration payable to Bank of Akron shareholders was approximately $40.8 million, comprised of approximately $16.1 million in cash and 1,501,402 shares of the Corporation's common stock, net of fractional shares, valued at $24.7 million based on the July 17, 2020 closing price of $16.43 per share of the Corporation's common stock.

During the three months ended September 30, 2020, the Corporation raised $57.8 million, net of issuance costs, from the issuance of depositary shares, each representing a 1/40th ownership interest in a share of the Corporation's 7.125% Series A fixed rate non-cumulative perpetual preferred stock, no par value, with a liquidation preference of $1,000 per share of preferred stock.

As of December 31, 2020 all of the Corporation’s regulatory capital ratios reflected increases from December 31, 2019.

The Corporation’s Tier 1 Leverage ratio of 8.06% at December 31, 2020, included the impact of average PPP-related loans, of $203.1 million.

As of December 31, 2020, the Corporation’s ratio of Tangible Common Equity to Tangible Assets reflected the impact of approximately $155.5 million in PPP-related loans.

Excluding PPP-related loans, the Corporation’s ratio of Tangible Common Equity to Tangible Assets of 6.93% decreased 21 bps from December 31, 2019, primarily as a result of the impact of the acquisition of Bank of Akron and the adoption of CECL, partially offset by a net increase in earnings, net of common dividends, and an increase in accumulated other comprehensive income.

The Corporation has complied with the standards of capital adequacy mandated by government regulations.

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Risk-based capital ratios reflect the relative risks of various assets banks hold in their portfolios.

A weight category (0% for the lowest risk assets and increasing for each tier of higher risk assets) is assigned to each asset on the balance sheet.

The Corporation’s capital ratios and book value per common share at December 31, 2020 and 2019 are as follows:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Total risk-based capital ratio 14.32 % 12.51 %

2 unchanged sentences

Leverage ratio 8.11 % 7.86 %

Tangible common equity/tangible assets (1)

Book value per share

Tangible book value per share (1)

Tangible common equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts.

Tangible common common equity/tangible assets (1)

6.70 % 7.14 %

Book value per common share $ 21.29 $ 20.00

Tangible book value per common share (1)

$ 18.66 $ 17.45

(1) Tangible common equity, tangible assets and tangible book value per common 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.

Tangible book value per common 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.

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A reconciliation of these non-GAAP financial measures is provided below.

December 31, 2019

December 31, 2018

Shareholders’ equity

Less goodwill

Less core deposit intangible

Tangible common equity

Less goodwill

Less core deposit intangible

Tangible assets

Ending shares outstanding

Tangible book value per share

Tangible common equity/tangible assets

Liquidity measures an organization’s ability to meet its cash obligations as they come due.

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Liquidity is monitored by both management and the Board’s ALCO, which establishes and monitors ranges of acceptable liquidity.

Also, the Bank is a member of FHLB, which provides the Bank with a total borrowing line of approximately $651 million, with approximately $422 million available at December 31, 2019 .

At December 31, 2019 , management considered the Corporation to be in a strong liquidity position, as reflected in cash and cash equivalents totaling $193.0 million, compared to $45.6 million at December 31, 2018 , primarily as a result of the Corporation’s successful execution on its customer acquisition strategies.

The Bank has a borrowing capacity with the FHLB at December 31, 2020 of approximately $797.4 million.

Results of Operations

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Year Ended December 31, 2019

Overview of the Statement of Comprehensive Income

Overview of the Statements of Income and Comprehensive Income

Net income was $32.7 million, or $1.97 per diluted common share, for the year ended December 31, 2020.

Pre-tax pre-provision ("PTPP") income was $55.4 million, for the twelve months ended December 31, 2020.

Excluding after-tax merger costs related to CNB's acquisition of Bank of Akron, FHLB prepayment penalties and branch closure costs totaling a combined $10.2 million, net income was $42.9 million, or $2.60 per diluted common share, for the year ended December 31, 2020, compared to $40.2 million, or $2.64 per diluted share, for the year ended December 31, 2019, reflecting an increase of $2.7 million, or 6.7%, and a decrease of $0.04 per diluted common share, or 1.5%.

For the year ended December 31, 2020, excluding the impact of merger, prepayment penalties and branch closure costs PTPP income was $68.1 million, representing an increase of approximately $13.3 million, or 24.2%, from the same period in 2019.

For the twelve months ended December 31, 2020, return on equity was 9.14%, while return on average common equity was 9.35% and return on average tangible common equity was 10.67%.

Excluding after-tax merger costs, prepayment penalties and branch closure costs, adjusted return on average tangible common equity was 14.10% for the year ended December 31, 2020, compared to 16.34% for the year ended December 31, 2019.

For the twelve months ended December 31, 2020, return on average assets was 0.75%.

Excluding after-tax merger costs, prepayment penalties and branch closure costs, adjusted return on average assets was 0.99% for the year ended December 31, 2020, compared to 1.18% for the year ended December 31, 2019.

As a measure of the Corporation’s efficiency in management of its expenses, the efficiency ratio was 65.10% for twelve months ended December 31, 2020.

Excluding after-tax merger costs, prepayment penalties and branch closure costs, the adjusted efficiency ratio was 57.41% for the twelve months ended December 31, 2020, compared to 60.07% for the comparable period in 2019.

The improvement in efficiency ratio resulted from the impact of PPP-related fees, coupled with an overall lower level of business activity resulting from the pandemic and the Corporation’s internal cost management initiatives focusing on travel restrictions, a hiring freeze, lower marketing expenditures and other expense management initiatives.

Interest Income and Expense

Net interest income for the twelve months ended December 31, 2020 increased 15.9% to $134.7 million from the twelve months ended December 31, 2019, driven by an organic growth of $560.9 million in earning assets, coupled with $336.3 million in PPP-related loans, estimated PPP-related deposits and Paycheck Protection Program Lending Facility ("PPPLF") related assets (collectively the "PPP-related assets").

In addition, the twelve months ended December 31, 2020 included PPP-related fees totaling approximately $5.1 million.

Net interest margin on a fully tax-equivalent basis was 3.34% and 3.69% for the twelve months ended December 31, 2020 and 2019, respectively, Excluding $336.3 million in PPP-related assets, the net interest margin on a fully-tax equivalent basis was 3.50% for the twelve months ended December 31, 2020.

The yield on earning assets of 4.15% for the twelve months ended December 31, 2020 included $336.3 million in PPP-related assets.

Excluding PPP-related assets and PPP-related fees, the yield on earning assets was 4.37% for the twelve months ended December 31, 2020, a decrease of 56 basis points from 4.93% for the twelve months ended December 31, 2019, primarily as a result of the lower interest rate environment.

The cost of interest-bearing liabilities decreased 50 basis points to 0.95% for the twelve months ended December 31, 2020 from 1.45% for the twelve months ended December 31, 2019 primarily as a result of the Corporation’s targeted deposit rate reductions.

Provision for Credit Losses

The Corporation recorded a provision for credit losses of $15.4 million in 2020 compared to $6.0 million in 2019.

Net loan charge-offs were $6.4 million during the year ended December 31, 2020, compared to $6.3 million during the year ended December 31, 2019.

As disclosed in "Allowance for Credit Losses" discussion above, Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts, and other significant qualitative and quantitative factors.

Management believes the charges to the provision in 2020 are appropriate and the allowance for credit losses is adequate to absorb losses in the loan portfolio at December 31, 2020.

Non-Interest Income

Total non-interest income was $28.1 million for the twelve months ended December 31, 2020, an increase of $2.1 million, or 8.0%, from the twelve months ended December 31, 2019.

Total non-interest income includes net realized and unrealized losses on trading securities, which combined totaled $2.5 million for the twelve months ended December 31, 2020 compared to $2.0 million for the twelve months ended December 31, 2019.

The remainder of the $2.1 million increase was primarily due to continued growth in Wealth and Asset Management fees, increased mortgage banking activity coupled with higher card processing and interchange income, partially offset by a decrease in service charges on deposits and other fees resulting from lower business activity and CNB’s response to the pandemic.

Non-Interest Expense

For the twelve months ended December 31, 2020, total non-interest expense was $107.3 million.

Excluding merger costs, prepayment penalties and branch closure costs, total non-interest expense was $94.7 million for the twelve months ended December 31, 2020, an increase of $7.3 million, or 8.4%, from the twelve months ended December 31, 2019, including a $1.6 million impact from the acquisition of Bank of Akron.

The remaining $5.7 million increase was the result of the Corporation’s ongoing investments in technology and other general expenditures to support long-term growth.

The ratio of non-interest expenses to average assets was 2.47% at December 31, 2020.

Excluding merger costs, prepayment penalties and branch closure costs and average PPP-related assets, the ratio of non-interest expenses to average assets was 2.36% at December 31, 2020 compared to 2.56% at December 31, 2019.

Year Ended December 31, 2019 vs.

Year Ended December 31, 2018

Overview of the Statements of Income and Comprehensive Income

The Corporation had net income of $40.1 million for 2019 compared to $33.7 million for 2018, reflecting an increase of $6.4 million, or 18.9%.

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The ratio of non-interest expenses to average assets was 2.56% and 2.64% during the years ended December 31, 2019 and 2018, respectively.

Year Ended December 31, 2018 vs.

Year Ended December 31, 2017

Overview of the Statement of Comprehensive Income

The Corporation had net income of $33.7 million for 2018 compared to $23.9 million for 2017.

Net interest income increased $13.4 million, or 14.7%, and non-interest income decreased $0.7 million, or 3.3%.

The provision for loan losses decreased by $0.6 million, or 8.8%, and non-interest expenses increased by $9.3 million, or 13.3%.

The earnings per diluted share were $2.21 in 2018 and $1.57 in 2017.

The return on assets and the return on equity for 2018 were 1.12% and 13.46% as compared to 0.89% and 9.97% for 2017.

The impact of the reduction in the federal corporate income tax rate to 21.0%, effective January 1, 2018, resulted in a $3.0 million income tax expense in 2017 related to the reduction in the carrying value of the net deferred tax asset.

Interest Income and Expense

Net interest margin on a fully tax equivalent basis was 3.76% and 3.82% for the years ended December 31, 2018 and 2017, respectively.

The yield on earning assets increased 19 basis points to 4.72% for the year ended December 31, 2018 from 4.53% for the year ended December 31, 2017.

The cost of interest-bearing liabilities increased 30 basis points to 1.12% for the year ended December 31, 2018 from 0.82% for the year ended December 31, 2017.

Provision for Loan Losses

The Corporation recorded a provision for loan losses of $6.1 million in 2018 compared to $6.7 million in 2017.

Net loan charge-offs were $6.1 million during the year ended December 31, 2018 compared to $3.3 million during the year ended December 31, 2017.

As disclosed in "Allowance for Loan Losses" above, the Corporation recorded the provision for loan losses based on management’s evaluation of impaired loans and consideration of trends in criticized and classified loans and historical loan losses.

Management believes the charges to the provision in 2018 are appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in our portfolio as of December 31, 2018.

Non-Interest Income

There were no net realized gains on available-for-sale securities during the year ended December 31, 2018 and net realized gains on available-for-sale securities were $1.5 million during the year ended December 31, 2017.

which included gains on the sale of two structured pooled trusted preferred securities of $1.4 million.

In addition, the Corporation realized a gain on the sale of a branch in the second quarter of 2017 of $536 thousand.

Excluding the effects of securities transactions and the gain on sale of a branch, non-interest income was $20.7 million for the year ended December 31, 2018, compared to $19.4 million for the year ended December 31, 2017.

As a result of the Corporation’s continued focus on growing its Private Client Solutions division, wealth and asset management revenues were $4.2 million for the year ended December 31, 2018, an increase of 12.0% from $3.7 million for the year ended December 31, 2017.

In addition, as a result of its organic deposit growth, the Corporation experienced an increase in service charges in deposit accounts of 19.8% for the year ended December 31, 2018 compared to the year ended December 31, 2017.

Similarly, other service charges and fees increased $379 thousand, or 15.4%, during 2018 compared to 2017.

Net income attributable to investments in Small Business Investment Companies was $788 thousand during the year ended December 31, 2018 compared to $235 thousand during the year ended December 31, 2017, which is reported as a component of other non-interest income.

Finally, due to declines in equity markets in 2018, net realized and unrealized gains (losses) on trading securities decreased $1.3 million in 2018 compared to 2017.

Non-Interest Expense

Total non-interest expenses were $79.3 million and $70.0 million for the years ended December 31, 2018 and 2017, respectively.

Salaries and benefits expense increased $5.8 million, or 16.2%, during the year ended December 31, 2018 compared to the year ended December 31, 2017.

As of December 31, 2018, the Corporation had 537 full-time equivalent staff, compared to 512 full-time equivalent staff as of December 31, 2017, an increase of 4.9%.

In addition, as a result of the Corporation exceeding certain growth and profitability targets used in calculating incentive compensation, incentive compensation expense increased by $2.2 million when compared to 2017.

The remainder of the increase in non-interest expenses is primarily a result of the Corporation’s continued growth.

Total households serviced at December 31, 2018 were 63,920, compared to 59,051 households at December 31, 2017, an increase of 8.2%.

The ratio of non-interest expenses to average assets was 2.64% and 2.62% during the years ended December 31, 2018 and 2017, respectively.

Income Tax Expense

Income taxes were $8.6 million in 2019 , compared to $6.5 million in 2018 and $12.4 million in 2017 .

Income tax expense of $7.3 million in 2020, compared to $8.6 million in 2019 and $6.5 million in 2018.

The effective tax rates were 18.3%, 17.6%, and 16.2% for 2020, 2019, and 2018, respectively.

The effective tax rate for the periods differed from the federal statutory rate of 21.0% for 2019 and 2018 and 35.0% for 2017 principally as a result of tax-exempt income from securities and loans as well as earnings from bank owned life insurance.

The higher effective tax rate in 2019 when compared to 2018 is primarily the result of increased revenue from taxable activities in 2019.

The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally as a result of tax-exempt income from securities and loans as well as earnings from bank owned life insurance.

The higher effective tax rate in 2020 when compared to 2019 and 2018 is primarily the result of increased revenue from taxable activities in 2020.

Contractual Obligations and Commitments

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Payments Due In

Reference One

Three Years Three to

Five Years Over

Five Years Total

Deposits without a stated maturity $ 3,705,200 $ 0 $ 0 $ 0 $ 3,705,200

Certificates of deposit 11 212,301 227,575 26,787 9,881 476,544

FHLB and other borrowings

Right of use liabilities 9 1,560 3,211 3,020 19,281 27,072

Subordinated debentures 12 0 0 0 70,620 70,620

The Corporation also has obligations under its postretirement plan for health care and supplemental executive retirement plan as described in Note 13 to the consolidated financial statements.

The Corporation also has obligations under its postretirement plan for health care and supplemental executive retirement plan as described in Note 13, "Employee Benefit Plans," to the consolidated financial statements.

The postretirement benefit payments represent actuarially determined future benefit payments to eligible plan participants.

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Off-Balance Sheet Arrangements

See Note 21 to the consolidated financial statements for information about our off-balance sheet arrangements.

See Note 21,"Off-Balance Sheet Activities," to the consolidated financial statements for information about our off-balance sheet arrangements.

Applications of Critical Accounting Policies

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When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.

The most significant accounting policies used by the Corporation are presented in Note 1 to the consolidated financial statements.

The most significant accounting policies used by the Corporation are presented in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements.

These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements.

A material estimate that is susceptible to significant change is the determination of the allowance for loan losses.

The Corporation’s methodology for determining the allowance for loan losses is described previously in Management’s Discussion and Analysis.

Given the subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions and could therefore calculate a materially different allowance value.

A material estimate that is susceptible to significant change is the determination of the allowance for credit losses.

The Corporation’s methodology for determining the allowance for credit losses is described previously in "Management's Discussion and analysis of Financial Condition and Results of Operations." Given the subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions and could therefore calculate a materially different allowance value.

While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for credit losses.

Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

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Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

Finally, the fair value of assets acquired and liabilities assumed in connection with the acquisition of FC Banc Corp.

and Lake National Bank, including the associated goodwill that was recorded, required the use of material estimates.

Finally, the fair value of assets acquired and liabilities assumed in connection with the acquisition of FC Banc Corp., Lake National Bank and Bank of Akron, including the associated goodwill that was recorded, required the use of material estimates.

Specifically, the fair values of loans, the core deposit intangible asset, premises and equipment, and time deposits were susceptible to estimation and management’s judgment about real estate and equipment values, as well as the amount and timing of future cash flows associated with loans and deposits.

Non-GAAP Financial Measures

The following tables reconcile the non-GAAP financial measures to their most directly comparable measures under GAAP.

Non-GAAP Reconciliations:

December 31, 2020 December 31, 2019

Calculation of tangible book value per share and tangible common equity/tangible assets:

Shareholders' equity $ 416,137 $ 304,966

preferred equity 57,785 0

goodwill 43,749 38,730

core deposit intangible 567 160

Tangible common equity $ 314,036 $ 266,076

Total assets $ 4,729,399 $ 3,763,659

goodwill 43,749 38,730

core deposit intangible 567 160

Tangible assets $ 4,685,083 $ 3,724,769

Ending shares outstanding 16,833,008 15,247,985

Tangible book value per common share $ 18.66 $ 17.45

Tangible common equity/Tangible assets 6.70 % 7.14 %

Calculation of tangible common equity/tangible assets, net of PPP-related loans:

Tangible common equity $ 314,036 $ 266,076

Tangible assets $ 4,685,083 $ 3,724,769

PPP-related loans 155,529 0

Adjusted tangible assets $ 4,529,554 $ 3,724,769

Adjusted tangible common equity/tangible assets 6.93 % 7.14 %

December 31, 2020 December 31, 2019

Calculation of non-performing assets / Total assets, net of PPP-related assets:

Non-performing assets $ 31,546 $ 23,430

Total assets $ 4,729,399 $ 3,763,659

PPP-related loans 155,529 0

estimated PPP deposits held at the Federal Reserve 159,584 0

Adjusted total assets, net of PPP-related assets (non-GAAP) $ 4,414,286 $ 3,763,659

Adjusted non-performing assets / total assets, net of PPP-related assets (non-GAAP) 0.71 % 0.62 %

Calculation of allowance / loans, net of PPP-related loans:

Total allowance for credit losses $ 34,340 $ 19,473

Total loans net of unearned income $ 3,371,789 $ 2,804,035

PPP-related loans 155,529 0

Adjusted total loans, net of unearned income, PPP-related loans (non-GAAP) $ 3,216,260 $ 2,804,035

Adjusted allowance / loans, net of PPP-related loans (non-GAAP) 1.07 % 0.69 %

Non-GAAP Reconciliations:

Twelve Months Ended

Calculation of average total earning assets, net of PPP-related assets:

Average total earning assets $ 4,092,076 $ 3,194,911

average PPP-related loans 150,075 0

estimated average PPP deposits held at the Federal Reserve 154,124 0

average PPPLF deposits held at the Federal Reserve 32,119 0

Adjusted average total earning assets, net of PPP-related assets (non-GAAP) $ 3,755,758 $ 3,194,911

Calculation of average total assets, net of PPP-related assets:

Average total assets $ 4,347,142 $ 3,413,737

average PPP-related loans 150,075 0

estimated average PPP deposits held at the Federal Reserve 154,124 0

average PPPLF deposits held at the Federal Reserve 32,119 0

Adjusted average total assets, net of PPP-related assets (non-GAAP) $ 4,010,824 $ 3,413,737

Calculation of average yield on earning assets, net of unearned income, PPP-related assets and PPP-related fees:

Investment income (tax equivalent) $ 14,037 $ 15,963

loan income (tax equivalent) 153,639 140,742

other earning asset income (tax equivalent) 852 499

PPP-related fees 5,140 0

Total income related to earning assets (tax equivalent) (non-GAAP) $ 163,388 $ 157,204

Adjusted average total earning assets, net of PPP-related assets (non-GAAP) $ 3,755,758 $ 3,194,911

average mark to market adjustment on investments (non-GAAP) 18,884 5,631

Adjusted average total earning assets, net of market to market, PPP-related assets (non-GAAP) $ 3,736,874 3,189,280

Adjusted average yield on earning assets, net of unearned income, PPP-related assets and PPP-related fees (non-GAAP) (annualized) 4.37 % 4.93 %

Twelve Months Ended

Calculation of net interest margin (fully tax equivalent basis):

Interest income (fully tax equivalent basis) (non-GAAP) $ 168,528 $ 157,204

Interest expense (fully tax equivalent basis) (non-GAAP) 32,456 39,530

Net interest income (fully tax equivalent basis) (non-GAAP) $ 136,072 $ 117,674

Average total earning assets $ 4,092,076 $ 3,194,911

average mark to market adjustment on investments 18,884 5,631

Adjusted average total earning assets, net of mark to market (non-GAAP) $ 4,073,192 $ 3,189,280

Net interest margin, fully tax equivalent basis (non-GAAP) (annualized) 3.34 % 3.69 %

Calculation of net interest margin (fully tax equivalent basis), net of PPP-related assets and PPP-related fees:

Net interest income (fully tax equivalent basis) (non-GAAP) $ 136,072 $ 117,674

Recognized PPP-related fees 5,140 0

Adjusted interest income (fully tax equivalent basis), net of PPP-related fees (non-GAAP) $ 130,932 $ 117,674

Adjusted average total earning assets, net of market to market, PPP-related assets (non-GAAP) $ 3,736,874 $ 3,189,280

Net interest margin, fully tax equivalent basis, net of PPP-related assets and PPP-related fees (non-GAAP) (annualized) 3.50 % 3.69 %

Non-GAAP Reconciliations:

Twelve Months Ended

Calculation of adjusted earnings per common share, net of merger costs, prepayment penalties and branch closure costs:

Net earnings allocated to common stock $ 31,496 $ 39,934

Merger costs, prepayment penalties and branch closure costs, after-tax allocated to common stock 10,138 134

Adjusted net earnings allocated to common stock (non-GAAP) $ 41,634 $ 40,068

Weighted average common shares outstanding 16,048 15,219

Average participating shares 48 55

Dilutive shares 0 0

Weighted average shares and dilutive potential common shares 16,000 15,164

Adjusted diluted earnings per common share, net of merger costs, prepayment penalties and branch closure costs $ 2.60 $ 2.64

Calculation of PTPP income:

Net income $ 32,743 $ 40,081

Provision expense 15,354 6,024

Income tax expense 7,347 8,560

PTPP income (non-GAAP) $ 55,444 $ 54,665

Calculation of PTPP income before merger costs, prepayment penalties and branch closure costs:

PTPP income (non-GAAP) $ 55,444 $ 54,665

Merger costs, prepayment penalties and branch closure costs 12,642 170

PTPP before merger costs, prepayment penalties and branch closure costs (non-GAAP) $ 68,086 $ 54,835

Calculation of non-interest expenses excluding merger costs, prepayment penalties and branch closure costs:

Non-interest expense $ 107,326 $ 87,508

Merger costs, prepayment penalties and branch closure costs 12,642 170

Non-interest expense excluding merger costs, prepayment penalties and branch closure costs (non-GAAP) $ 94,684 $ 87,338

Calculation of non-interest expenses excluding merger costs, prepayment penalties and branch closure costs to average assets, net of PPP-related assets:

Non-interest expense excluding merger costs, prepayment penalties and branch closure costs (non-GAAP) $ 94,684 $ 87,338

Adjusted average total assets, net of PPP-related assets (non-GAAP) $ 4,010,824 $ 3,413,737

Non-interest expenses excluding merger costs, prepayment penalties and branch closure costs to average assets, net of PPP-related assets (non-GAAP) 2.36 % 2.56 %

Non-GAAP Reconciliations:

Twelve Months Ended

Calculation of adjusted efficiency ratio, net of merger costs, prepayment penalties and branch closure costs:

Non-interest expense $ 107,326 $ 87,508

core deposit intangible amortization 206 567

merger costs, prepayment penalties and branch closure costs 12,642 170

Adjusted non-interest expense (non-GAAP) $ 94,478 $ 86,771

Non-interest income $ 28,059 $ 25,975

Net interest income $ 134,711 $ 116,198

tax exempt investment and loan income, net of TEFRA (non-GAAP) 5,703 6,664

tax exempt investment and loan income (non-GAAP) (tax-equivalent) 7,490 8,946

Adjusted net interest income (non-GAAP) 136,498 118,480

Adjusted net revenue (non-GAAP) (tax-equivalent) $ 164,557 $ 144,455

Adjusted efficiency ratio, net of merger costs, prepayment penalties and branch closure costs 57.41 % 60.07 %

Calculation of adjusted return on average total assets, net of merger costs, prepayment penalties, branch closure costs and PPP-related assets:

Net income $ 32,743 $ 40,081

merger costs, prepayment penalties and branch closure costs (net of tax) 10,168 134

Adjusted net income (non-GAAP)(net of tax) $ 42,911 $ 40,215

Average total assets $ 4,347,142 $ 3,413,737

Adjusted return on average total assets, net of merger costs, prepayment penalties, branch closure costs and PPP-related assets (non-GAAP)(annualized) 0.99 % 1.18 %

Calculation of adjusted return on average tangible common equity, net of merger costs, prepayment penalties and branch closure costs:

Net income available to common stockholders $ 31,596 $ 40,081

merger costs, prepayment penalties and branch closure costs (net of tax) 10,168 134

Adjusted net income (non-GAAP)(net of tax) $ 41,764 $ 40,215

Average tangible shareholders' common equity $ 296,142 $ 246,161

Adjusted return on average tangible common equity, net of merger costs, prepayment penalties and branch closure costs (non-GAAP)(annualized) 14.10 % 16.34 %

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis