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Item 7. Management’s Discussion and Analysis

2022-03-03 compared with 2021-03-04 · 525 added, 500 removed, 295 unchanged (78% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the consolidated financial statements of the Corporation is presented to provide insight into management’s assessment of financial results.

The Corporation’s subsidiary, the Bank, provides financial services to individuals and businesses primarily within its primary market area of the Pennsylvania counties of Blair, Cambria, Cameron, Centre, Clearfield, Crawford, Elk, Indiana, Jefferson, and McKean.

ERIEBANK, a division of the Bank, operates in the Pennsylvania counties of Crawford, Erie, and Warren and in the Ohio counties of Ashtabula, Cuyahoga, and Lake.

FCBank, a division of the Bank, operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware, and Franklin.

BankOnBuffalo, a division of the Bank, operates in Erie and Niagara counties, New York.

The Bank is subject to regulation, supervision and examination by the Pennsylvania State Department of Banking as well as the FDIC.

CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities.

CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products.

CNB Risk Management, Inc., incorporated in Delaware, is a captive insurance company that insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace.

Holiday, incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.

The financial condition and results of operations of the Corporation and its consolidated subsidiaries are not necessarily indicative of future performance.

Management’s discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes.

Risk identification and management are essential elements for the successful management of the Corporation.

In the normal course of business, the Corporation is subject to various types of risk, including interest rate, credit, and liquidity risk.

These risks are controlled through policies and procedures established by the Corporation.

Interest rate risk is the sensitivity of net interest income and the market value of financial instruments to the direction and frequency of changes in interest rates.

Interest rate risk results from various repricing frequencies and the maturity structure of the financial instruments owned by the Corporation.

The Corporation uses its asset-liability management policy and systems to control, monitor and manage interest rate risk.

Credit risk represents the possibility that a customer may not perform in accordance with contractual terms.

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 credit losses.

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

Liquidity risk represents the inability to generate or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and obligations to depositors.

The Corporation has established guidelines within its asset-liability management policy to manage liquidity risk.

These guidelines include contingent funding alternatives.

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented to provide insight into management’s assessment of financial results and should be read in conjunction with the following parts of this Form 10-K:

Part I, Item 1 “Business,” Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” and Part II, Item 8 “Financial Statements and Supplementary Data.”

Dollar amounts in tables are stated in thousands, except for per share amounts.

Forward-Looking Statements and Factors that Could Affect Future Results

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.

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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.

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 our customers and demand for financial services, the actions governments, businesses and individuals take in response to the pandemic, the direct and indirect economic effects of the pandemic and containment measures, treatment developments, public adoption rates of COVID-19 vaccines, including booster shots, and their effectiveness against emerging variants of COVID-19, such as the Delta and Omicron variants, 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 Part I, "Item 1A.

Risk Factors" in this Annual Report on Form 10-K 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;

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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

The Corporation is a financial holding company registered under the BHC Act.

It was incorporated under the laws of the Commonwealth of Pennsylvania in 1983 for the purpose of engaging in the business of a financial holding company.

ERIEBANK, a division of the Bank, operates in the Pennsylvania counties of Crawford, Erie, and Warren and in the Ohio counties of Ashtabula, Cuyahoga, and Lake.

FCBank, a division of the Bank, operates in the Ohio counties of Crawford, Richland, Ashland, Wayne, Marion, Morrow, Knox, Delaware, and Franklin.

BankOnBuffalo, a division of the Bank, operates in New York counties of Erie and Niagara.

Ridge View Bank, a division of the Bank, operates in Roanoke, Virginia.

In addition to the Bank, the Corporation has four other subsidiaries.

CNB Securities Corporation is incorporated in Delaware and currently maintains investments in debt and equity securities.

CNB Insurance Agency, incorporated in Pennsylvania, provides for the sale of nonproprietary annuities and other insurance products.

Holiday, incorporated in Pennsylvania, offers small balance unsecured loans and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics.

COVID-19 Considerations

The global outbreak of COVID-19 and the public health measures that have been undertaken in response have had, and 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 while continuing to monitor and update the Corporation's quarantine protocols based on governmental guidelines;

• Enforcing safe practices in branch lobbies order to serve consumer and business customers and continued to offer the Corporation's customers alternatives through its drive-through capabilities, network of ATMs, internet banking, mobile application and telephone customer service capabilities;

• Continued 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.

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-GAAP Financial Information

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

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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:

Non-GAAP measures reflected within the discussion below include:

• Tangible book value per share;

• Tangible equity/tangible assets;

• 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;

• Pre-provision net revenue ("PPNR");

• Non-interest income excluding realized gains on available for sale securities;

• Net interest margin (fully tax equivalent basis);

• Efficiency ratio;

• Earnings per share;

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

• Return on average tangible equity;

• Return on average tangible common equity

In addition, non-GAAP evaluations on the impact of PPP-related loans (as defined below), merger costs, branch closure costs and Federal Home Loan Bank of Pittsburgh ("FHLB") prepayment penalties on various metrics of the Corporation’s financial performance include calculations related to return on average equity, return on average tangible equity, return on average tangible common equity, tangible equity/tangible assets, tangible common equity/tangible assets and allowance for credit losses/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.

Management considers return on average assets, return on average equity, earnings per common share, asset quality, and other metrics as key measures of the financial 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 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.

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.

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.

• 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.

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.

Financial Condition

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year % Change

Balance $ Change

year % Change

Total assets $ 5,328.9 $ 4,729.4 $ 599.5 12.7 %

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Total shareholders’ equity 442.8 416.1 26.7 6.4 %

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

Total earning assets 4,092,076 4.14 % $ 168,528 3,194,911 4.93 % $ 157,204 2,815,215 4.73 % $ 133,318

Non-Interest Earning Assets

Cash & Due From Banks 42,001 33,218 31,498

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

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

Interest Bearing Deposits

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

Short-term borrowings 0 0.00 % 0 16,022 2.65 % 425 37,363 1.91 % 713

Long-term borrowings 221,436 2.05 % 4,534 229,377 2.15 % 4,924 250,242 2.06 % 5,143

Subordinated Debentures 70,620 5.35 % 3,780 70,620 5.63 % 3,979 70,620 5.47 % 3,866

Total interest bearing liabilities 3,415,878 0.95 % $ 32,456 2,718,380 1.45 % $ 39,530 2,401,255 1.12 % $ 26,950

Demand – non-interest bearing 516,724 360,208 327,014

Other liabilities 56,377 49,825 29,537

Total Liabilities 3,988,979 3,128,413 2,757,806

Shareholders’ Equity 358,163 285,324 250,496

Total Liabilities and Shareholders’ Equity $ 4,347,142 $ 3,413,737 $ 3,008,302

Interest Income/Earning Assets 4.14 % $ 168,528 4.93 % $ 157,204 4.73 % $ 133,318

Interest Expense/Interest Bearing Liabilities 0.95 % 32,456 1.45 % 39,530 1.12 % 26,950

Net Interest Spread 3.19 % $ 136,072 3.48 % $ 117,674 3.61 % $ 106,368

Interest Income/Earning Assets 4.14 % $ 168,528 4.93 % $ 157,204 4.73 % $ 133,318

Interest Expense/Earning Assets 0.80 % 32,456 1.24 % 39,530 0.96 % 26,950

Net Interest Margin 3.34 % $ 136,072 3.69 % $ 117,674 3.77 % $ 106,368

(1) Includes unamortized discounts and premiums.

Average balance is computed using the amortized cost of securities.

The average yield has been computed using the historical amortized cost average balance for available for sale securities.

(2) Average yields 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 $1.4 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.

Loans consist of the average of total loans less average unearned income.

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, 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

Total Earning Assets $ 23,848 $ (12,524) $ 11,324 $ 18,156 $ 5,730 $ 23,886

Liabilities and Shareholders’ Equity

Interest Bearing Deposits

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

Short-Term Borrowings 0 (425) (425) (566) 278 (288)

Long-Term Borrowings (163) (227) (390) (448) 229 (219)

Subordinated Debentures 0 (199) (199) 0 113 113

Total Interest Bearing Liabilities $ 4,980 $ (12,054) $ (7,074) $ 3,914 $ 8,666 $ 12,580

Change in Net Interest Income $ 18,868 $ (470) $ 18,398 $ 14,242 $ (2,936) $ 11,306

(1) The change in interest due to both volume and rate have been allocated entirely to volume changes.

(2) Changes in interest income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% for the year ended December 31, 2020 and December 31, 2019.

Cash and Cash Equivalents

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Cash and cash equivalents totaled $532.7 million at December 31, 2020.

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 increase in liquidity was primarily the result of the impact of government stimulus initiatives and organic growth in deposits.

In addition to the Corporation's deposit growth strategies, management believes the liquidity needs of the Corporation are satisfied primarily by the current balance of cash and cash equivalents, customer deposits, FHLB borrowing capacity, and the portions of the securities and loan portfolios that mature within one year.

The Corporation expects that these sources of funds will support both existing operations, future loan and investment portfolio growth and off-balance sheet commitments as they come due.

Securities available for sale and equity securities totaled $707.6 million and $591.6 million at December 31, 2021 and 2020, respectively.

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

Government Sponsored Entities $ 150,404 $ 6,698 $ (60) $ 157,042 $ 124,189 $ 2,924 $ (19) $ 127,094 $ 134,010 $ 254 $ (1,570) $ 132,694

State and Political Subdivisions 67,819 3,186 (122) 70,883 101,177 3,288 (102) 104,363 134,662 1,942 (573) 136,031

Residential and multi-family mortgage 306,054 9,276 (138) 315,192 273,404 4,117 (885) 276,636 209,126 500 (3,573) 206,053

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

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

The increase of approximately $116.0 million, or 20%, from December 31, 2020 to December 31, 2021, resulted primarily from the Corporation’s liquidity strategy implemented in 2021.

This strategy focused on deploying excess liquidity earning a relatively modest level of interest at the Federal Reserve towards investment securities that met the Corporation’s risk profile parameters for investments.

The following tables summarize the maturity distribution schedule with corresponding weighted-average yields of securities available for sale as of December 31, 2021.

Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%.

Mortgage-backed securities are included in maturity categories based on their stated maturity date.

December 31, 2021

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Years After Ten

Years Pooled SBA,

Residential and Multi-

Family Mortgage and

Commercial Mortgage

Debt Securities Available for Sale (2)

Government Sponsored Entities $ 7,328 1.97 % $ 60,354 1.57 % $ 44,066 1.83 % $ 0 0.00 % $ 111,748 1.70 %

State and Political Subdivisions $ 3,139 3.00 % $ 26,223 2.85 % $ 51,851 2.22 % $ 22,497 2.33 % 103,710 2.43 %

Residential and multi-family mortgage $ 0 0.00 % $ 28,439 2.88 % $ 41,051 2.09 % $ 365,147 1.38 % 434,637 1.55 %

Corporate notes and bonds $ 661 0.38 % $ 2,946 0.62 % $ 24,457 3.92 % $ 0 0.00 % 28,064 3.49 %

Pooled SBA $ 0 0.00 % $ 359 5.15 % $ 12,449 2.73 % $ 6,224 1.78 % 19,032 2.46 %

Residential and multi-family mortgage 315,192 2.69 %

Other 979 1.63 %

Total $ 11,128 2.17 % $ 118,321 2.16 % $ 173,874 2.37 % $ 393,868 1.44 % $ 697,191 1.81 %

(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 portfolio contains no holdings of a single issuer that exceeds 10% of shareholders’ equity other than the U.S.

Treasury and governmental sponsored entities.

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's strategy given the current environment is to focus on lower risk securities, shorter durations that complement the current portfolio investment ladder, and consistent reinvestment of cash flows to replace lower earning assets.

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.

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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 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.

Note 4, "Loans," in the consolidated financial statements provides more detail concerning the loan portfolio of the Corporation.

At December 31, 2021, loans totaled $3.6 billion, an increase of $263.0 million, or 7.8%, compared to December 31, 2020.

As further discussed below, during the second quarter of 2020, the Corporation began originating loans to qualified small businesses under the Paycheck Protection Program ("PPP") administered by the Small Business Administration ("SBA") under the provisions of the CARES Act.

Excluding the impact of PPP loans, net of PPP deferred processing fees (such loans, the "PPP-related loans"), the Corporation's loan portfolio increased $373.3 million, or 11.6%, from December 31, 2020.

The growth was primarily driven by the Corporation's ongoing expansion in the Cleveland and Ridge View regions, combined with continued strong growth in its Private Banking division, coupled with increased lending opportunities in other regions of the Corporation.

Included in the loan growth discussed above, and as part of the liquidity management strategies first implemented by the Corporation in 2020, the year ended December 31, 2021 reflected an increase in syndicated lending activities of $103.7 million from December 31, 2020.

The syndicated loan portfolio totaled $125.8 million, or 3.5% of total loans, excluding PPP-related loans, at December 31, 2021.

The Corporation internally underwrites each syndicated loan individually and considers these loans as an alternative to purchasing investment securities.

While the overall strategy is to redeploy lower earning assets towards a higher profitability loan with a risk profile that meets the underwriting policies, the Corporation does not expect this type of activity to become a significant component of its business.

Loan Origination/Risk Management

The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.

Management reviews and approves these policies and procedures on a regular basis.

A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans.

Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The Corporation has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans.

Variable rate loans are generally underwritten at the fully indexed rate.

Loan underwriting policies and procedures have not changed materially between any periods presented.

As discussed more fully above, syndicated loan purchases are underwritten utilizing the same process as the Corporation’s originated loans.

The Corporation has begun to explore the credit and reputational risks associated with climate change and their potential impact on the foregoing, while closely monitoring regulatory developments on climate risk.

This includes, among other things, researching and developing a formalized approach to considering climate change related risks in the Corporation's underwriting processes.

This approach will be impacted, in part, by the accessibility and reliability of both customer climate risk data and climate risk data in general.

One of the objectives of these efforts is to enable the Corporation to better understand the climate change related risks associated with the Corporation's customers' business activities and to be able to monitor their response to those risks and their ultimate impact on the Corporation's customers.

Although it is possible that the on-going effects of COVID-19 could continue to impact demand for our loan products, the Corporation expects to continue to achieve robust loan growth in 2022 as a result of its diversified markets and its focus on core customer acquisition strategies.

Customer Support Strategies and Loan Portfolio Profile

As of December 31, 2021, the Corporation had outstanding $47.1 million in PPP loans at a rate of 1.00%, representing 446 PPP loan relationships, and deferred PPP processing fees of approximately $1.9 million.

For the twelve months ended December 31, 2021, the Corporation recognized $8.7 million in deferred PPP processing fees ("PPP-related fees").

The outstanding balance of PPP loans at December 31, 2021 included loans from the two different origination years:

(i) $199 thousand, or seven loans from the Corporation's participation in the PPP in 2020, and (ii) $46.9 million, or 439 loans, from the Corporation’s participation in the PPP in 2021.

In accordance with the CARES Act, the Corporation also deferred loan payments for its commercial and consumer customers, as determined on a case-by-case basis by the financial needs of each customer.

As of December 31, 2021, there were five loans with deferred loan payment arrangements totaling $397 thousand, compared to $151.0 million, or 167 loans, at December 31, 2020.

Maturities and Sensitivities of Loans to Changes in Interest Rate

The following table presents the maturity distribution of the Corporation's loan portfolio at December 31, 2021.

The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

December 31, 2021

or Less After One,

Five Years After Five but Within Fifteen Years After

Fifteen Years Total

Loans with Fixed Interest Rate

$ 99 $ 1,667 $ 1,611 $ 935 $ 4,312

Owner-occupied, nonfarm nonresidential properties

5,277 19,399 19,807 9,056 53,539

Agricultural production and other loans to farmers

0 284 0 0 284

Commercial and Industrial

15,621 224,510 62,089 185 302,405

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

2,679 4,559 50,807 39,902 97,947

21 1,125 871 295 2,312

Other construction loans and all land development and other land loans (1)

10,243 10,878 7,319 1,790 30,230

Multifamily (5 or more) residential properties

1,452 56,949 3,090 4,753 66,244

Non-owner occupied, nonfarm nonresidential properties

25,595 63,094 18,319 6,798 113,806

1-4 Family Construction (1)

2,482 0 652 4,951 8,085

Home equity lines of credit 1 102 701 518 1,322

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Overdrafts 0 0 0 0 0

Total loans $ 3,371,789

Total $ 73,588 $ 458,738 $ 473,202 $ 185,556 $ 1,191,084

Loans with Variable or Floating Interest Rate

$ 451 $ 2,544 $ 9,010 $ 7,451 $ 19,456

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

Commercial mortgages 814,002 697,776 644,597 574,826

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

Total loans net of unearned $ 2,804,035 $ 2,474,557 $ 2,145,959 $ 1,873,536

The Corporation has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans.

Variable rate loans are generally underwritten at the fully indexed rate.

Loan underwriting policies and procedures have not changed materially between any periods presented.

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.

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

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

Owner-occupied, nonfarm nonresidential properties

11,800 30,222 283,777 55,334 381,133

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

Agricultural production and other loans to farmers

829 0 266 0 1,095

Commercial and Industrial

196,459 120,532 87,633 1,960 406,584

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

0 1,660 17,244 24,036 42,940

2,174 2,911 1,647 4,935 11,667

Other construction loans and all land development and other land loans (1)

60,175 110,199 88,427 9,838 268,639

Multifamily (5 or more) residential properties

16,311 48,928 66,351 18,309 149,899

Non-owner occupied, nonfarm nonresidential properties

68,275 137,110 288,479 55,392 549,256

1-4 Family Construction (1)

7,382 1,287 3,526 17,542 29,737

Home equity lines of credit 4,786 6,761 73,563 18,085 103,195

Residential Mortgages secured by first liens 6,976 14,721 154,116 263,664 439,477

Residential Mortgages secured by junior liens 1,098 113 2,318 206 3,735

Other revolving credit plans 2,992 1,930 21,102 449 26,473

Automobile 0 0 0 0 0

Other consumer 1 46 78 84 209

Credit cards 9,935 0 0 0 9,935

Overdrafts 278 0 0 0 278

Total $ 389,922 $ 478,964 $ 1,097,537 $ 477,285 $ 2,443,708

1 1-4 family construction loans and other construction loans and all land development and other land loans segments include loans that are construction to permanent loans in which the loan segment will change when the construction period has concluded.

The Corporation generally structures commercial loans with shorter-term maturities in order to match our funding sources and to enable us to effectively manage the loan portfolio by providing the flexibility to respond to liquidity needs, changes in interest rates and changes in underwriting standards and loan structures, among other things.

Due to the shorter-term nature of such loans, from time to time in the ordinary course of business and without any contractual obligation on our part, we will renew/extend maturing lines of credit or refinance existing loans at their maturity dates.

Loan Concentration

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 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.

At December 31, 2021, no industry concentration existed which exceeded 10% of the total loan portfolio.

The following table presents information concerning loan delinquency and other nonperforming assets at December 31, 2021 and 2020:

2020 2019 2018 2017 2016

December 31, 2021 December 31, 2020

Nonaccrual loans $ 19,420 $ 30,359

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Nonperforming TDR loans (1)

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

Total TDR loans $ 16,606 $ 15,088

Total loans $ 3,634,792 $ 3,371,789

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

Nonaccrual loans as a percentage of loans 0.53 % 0.90 %

Total assets $ 5,328,939 $ 4,729,399

Nonperforming assets as a percentage of total assets 0.38 % 0.67 %

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

0.71 % 0.62 % 0.48 % 0.61 % 0.53 %

Allowance for credit losses on loans $ 37,588 $ 34,340

Ratio of allowance for credit losses on loans to nonaccrual loans 193.55 % 113.11 %

(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.

Total nonperforming assets were $20.3 million, or 0.38%, of total assets, as of December 31, 2021, reflecting a substantial decrease when compared to nonperforming assets of $31.5 million, or 0.67%, as of December 31, 2020.

The reduction in nonperforming assets resulted primarily from the resolution of an $8.7 million commercial real estate loan relationship with no additional loss to the Corporation.

In addition, the fourth quarter of 2021 included the resolution of a $1.4 million nonperforming commercial real estate loan relationship with no loss to the Corporation.

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 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.

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.

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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)

As discussed in Note 1, "Summary of Significant Accounting Policies," in the consolidated financial statements, the Corporation's policies and procedures related to accounting for credit losses changed on January 1, 2020 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses.

The amount of each allowance account represents management's best estimate of current expected credit losses (“CECL”) on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument.

Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts.

While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors.

While management utilizes its best judgment and information available, the ultimate adequacy of the Corporation's allowance accounts is dependent upon a variety of factors beyond the Corporation's control, including the performance of the Corporation's portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.

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

For additional information regarding the Corporation's accounting policies related to credit losses, refer to Note 1, "Summary of Significant Accounting Policies," and Note 4, "Loans" in the consolidated financial statements.

The table below provides an allocation of the allowance for credit losses on loans by loan portfolio segment at December 31, 2021 and 2020;

however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments.

December 31, 2021

Amount of Allowance Allocated Percent of Loans in Each Category to Total Loans Total Loans Ratio of Allowance Allocated to Loans in Each Category

$ 151 0.7 % $ 23,768 0.64 %

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Total loans $ 37,588 100.0 % $ 3,634,792 1.03 %

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:

Excluding PPP loans, net of deferred processing fees $ 37,588 $ 3,589,589 1.05 %

1 PPP loans, net of deferred PPP processing fees, those disbursed in 2021, are included in the Commercial and Industrial classification.

December 31, 2020

Amount of Allowance Allocated Percent of Loans in Each Category to Total Loans Total Loans Ratio of Allowance Allocated to Loans in Each Category

$ 221 0.7 % $ 23,316 0.95 %

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

Commercial, industrial, and agricultural (205) (253) (544) (601)

Commercial mortgages (3,391) (3,337) (116) (201)

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

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

Owner-occupied, nonfarm nonresidential properties

3,700 12.1 % 407,924 0.91 %

Agricultural production and other loans to farmers

24 0.1 % 2,664 0.90 %

Commercial and Industrial 1

6,233 19.7 % 663,550 0.94 %

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

998 3.9 % 132,818 0.75 %

68 0.4 % 11,961 0.57 %

Other construction loans and all land development and other land loans 1,956 6.1 % 205,734 0.95 %

Multifamily (5 or more) residential properties

2,724 6.3 % 212,815 1.28 %

Non-owner occupied, nonfarm nonresidential properties

8,658 19.0 % 640,945 1.35 %

1-4 Family Construction 82 0.8 % 27,768 0.30 %

Home equity lines of credit 985 3.2 % 109,444 0.90 %

Residential Mortgages secured by first liens 4,539 23.0 % 777,030 0.58 %

Residential Mortgages secured by junior liens 241 1.6 % 53,726 0.45 %

Other revolving credit plans 507 0.8 % 25,507 1.99 %

Automobile 132 0.8 % 25,344 0.52 %

Other consumer 2,962 1.3 % 42,792 6.92 %

Credit cards 66 0.2 % 8,115 0.81 %

Overdrafts 244 0.0 % 336 72.62 %

Total loans $ 34,340 100.0 % $ 3,371,789 1.02 %

Excluding PPP loans, net of deferred processing fees $ 34,340 $ 3,216,260 1.07 %

1 PPP loans, net of deferred PPP processing fees, those disbursed in 2020, are included in the Commercial and Industrial classification.

The allowance for credit losses measured as a percentage of loans was 1.03% as of December 31, 2021, compared to 1.02% as of December 2020.

The allowance for credit losses measured as a percentage of loans, net of PPP-related loans, was 1.05% as of December 31, 2021 compared to 1.07% as of December 31, 2020.

The Corporation's allowance for credit losses is influenced by loan volumes, risk rating migration, delinquency status and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.

For the year ended December 31, 2021, the allowance for credit losses increased due to the growth in the Corporation's loan portfolio, coupled with qualitative adjustments in the Corporation's residential and consumer loan portfolios, growth in new market areas, and qualitative adjustments related to the continued uncertainty with the pandemic and economic environment.

These factors were partially offset by improvements in the Corporation's historical loss rates and quantitative inputs including the unemployment forecast and prepayment and curtailment speeds, as well as the impact of net charge-offs and improvements or resolutions in the Corporation's individually evaluated loans.

There is still a significant amount of uncertainty related to the economic impact of COVID-19, including duration, new variants, future government responses, and the resiliency of the U.S.

During 2021, management reviewed internal and external factors to consider the need for any qualitative adjustments to the quantitative model.

Specifically, management reevaluated the loss given default assumptions that utilize Frye Jacobs, the time period used for prepayment and curtailment speeds and the unemployment forecast.

Management will continue to evaluate its estimate of expected credit losses as new information becomes available.

Note 4, "Loans," to the consolidated financial statements provides further disclosure of loan balances by portfolio segment as of December 31, 2021 and 2020, as well as the nature and scope of loans modified in a troubled debt restructuring during 2021 and 2020 and the related effect on provision for credit expense and allowance for credit losses.

Additional information related to credit loss expense and net (charge-offs) recoveries at December 31, 2021 and 2020 is presented in the tables below.

December 31, 2021

Provision (Benefit) for Credit Loss Expense Net

(Charge-Offs)

Recoveries Average

Loans Ratio of Annualized Net (Charge-Offs)

Recoveries to Average Loans

$ (70) $ 0 $ 22,970 0.00 %

Commercial, industrial, and agricultural 17 171 235 89

Commercial mortgages 124 30 197 8

Residential real estate 73 67 78 93

Consumer 154 141 161 122

Owner-occupied, nonfarm nonresidential properties

213 (574) 428,377 (0.13) %

Agricultural production and other loans to farmers

(15) 0 2,245 0.00 %

Commercial and Industrial

2,564 40 680,368 0.01 %

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

1,028 (377) 138,604 (0.27) %

81 0 12,187 0.00 %

Other construction loans and all land development and other land loans 524 (282) 246,583 (0.11) %

Multifamily (5 or more) residential properties

(435) 0 218,285 0.00 %

Non-owner occupied, nonfarm nonresidential properties

(2,128) (49) 627,595 (0.01) %

1-4 Family Construction 76 0 30,513 0.00 %

Home equity lines of credit 186 (2) 106,214 0.00 %

Residential Mortgages secured by first liens 2,436 (32) 795,747 0.00 %

Residential Mortgages secured by junior liens 308 (3) 55,063 (0.01) %

Other revolving credit plans 49 (28) 25,751 (0.11) %

Automobile 154 (23) 23,027 (0.10) %

Other consumer 637 (1,053) 42,634 (2.47) %

Credit cards 120 (94) 9,532 (0.99) %

Overdrafts 275 (278) 224 (124.11) %

Total loans $ 6,003 $ (2,755) $ 3,465,919 (0.08) %

December 31, 2020

Provision (Benefit) for Credit Loss Expense Net

(Charge-Offs)

Recoveries Average

Loans Ratio of Annualized Net (Charge-Offs)

Recoveries to Average Loans

$ (30) $ 0 $ 27,359 0.00 %

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

Provision for loan losses 6,024 6,072 6,655 4,149

Balance at end of period $ 19,473 $ 19,704 $ 19,693 $ 16,330

Loans, net of unearned income $ 2,804,035 $ 2,474,557 $ 2,145,959 $ 1,873,536

Allowance to net loans 0.69 % 0.80 % 0.92 % 0.87 %

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

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

2,031 (49) 396,881 (0.01) %

Agricultural production and other loans to farmers

(6) 0 3,185 0.00 %

Commercial and Industrial

5,283 (2,740) 644,793 (0.42) %

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

207 0 147,851 0.00 %

19 0 10,546 0.00 %

Other construction loans and all land development and other land loans (1,504) 125 191,984 0.07 %

Multifamily (5 or more) residential properties

1,301 0 184,980 0.00 %

Non-owner occupied, nonfarm nonresidential properties

3,266 (1,470) 532,088 (0.28) %

1-4 Family Construction 61 0 24,893 0.00 %

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Total loans $ 15,354 $ (6,430) $ 3,115,171 (0.21) %

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:

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

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 year ended December 31, 2019:

December 31, 2019

Provision (Benefit) for Credit Loss Expense Net

(Charge-Offs)

Recoveries Average

Loans Ratio of Annualized Net (Charge-Offs)

Recoveries to Average Loans

Commercial, Industrial, and Agricultural

$ 1,134 $ (188) $ 987,974 (0.02) %

Commercial Mortgages

2,729 (3,267) 748,915 (0.44) %

Residential Real Estate

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

(344) (313) 790,293 (0.04) %

2,080 (2,046) 95,018 (2.15) %

Credit cards 82 (101) 7,448 (1.36) %

Overdrafts 343 (340) 462 (73.59) %

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.

Total loans $ 6,024 $ (6,255) $ 2,630,110 (0.24) %

During the year ended December 31, 2021, the Corporation recorded a provision for credit losses of $6.0 million, as compared to a provision for credit losses of $15.4 million for the year ended December 31, 2020.

Net chargeoffs during the year ended December 31, 2021 were $2.8 million, compared to net chargeoffs of $6.4 million during the year ended December 31, 2020.

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.

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.

The year ended December 31, 2020 included (i) a charge-off of approximately $2.6 million related to a secured commercial and industrial loan relationship with a borrower who is deceased, and (ii) a separate $1 million charge-off related to the $8.7 million commercial real estate loan relationship discussed above.

Premises and Equipment

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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.

Bank Owned Life Insurance

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

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 Corporation made $22 million in purchases of BOLI during the twelve months ended December 31, 2021, while the Corporation made no purchases of BOLI during the twelve months ended December 31, 2020.

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

Funding Sources

The Corporation’s sources of funds are deposits, borrowings, amortization and repayment of loan principal, interest earned on or maturation of investment securities and funds provided from operations.

The Corporation considers deposits to be its primary source of funding in support of growth in assets.

December 31, 2021 December 31, 2020 Percentage change

Demand, Non interest bearing $ 792,086 $ 627,114 26.3%

Demand, Interest bearing 1,079,336 951,903 13.4%

Savings deposits 2,457,745 2,126,183 15.6%

Time deposits 386,452 476,544 (18.9)%

Total $ 4,715,619 $ 4,181,744 12.8%

Deposits totaled $4.7 billion at December 31, 2021, reflecting a $533.9 million, or 12.8%, increase from December 31, 2020, primarily resulting from the Corporation's customer acquisition strategies across all of the Corporation's regions and its Private Banking division, as well as the impact of government stimulus initiatives.

The number of households across all regions increased 3.3% from December 31, 2020.

The following table sets forth the average balances of and the average rates paid on deposits for the period indicated.

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Total $ 4,458,166 $ 3,640,546 $ 2,762,569

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:

The following table presents additional information about our December 31, 2021 and 2020 deposits:

December 31, 2021 December 31, 2020

Time deposits not covered by deposit insurance $ 68,562 $ 64,202

Total deposits not covered by deposit insurance 1,711,676 1,401,417

Scheduled maturities of time deposits not covered by deposit insurance at December 31, 2021 were as follows:

December 31, 2021

3 months or less $ 7,482

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Total $ 68,562

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.

2020 Percentage change

2019 2019 Percentage change

Demand, Non interest bearing $ 627,114 64.1% $ 382,259 7.1% $ 356,797

Demand, Interest bearing 951,903 51.4% 628,579 4.8% 600,046

Savings deposits 2,126,183 27.8% 1,663,673 32.2% 1,258,506

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

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, "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.

There were no FHLB or other long-term borrowings as of December 31, 2021 and 2020.

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.

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

On October 18, 2021, the Corporation announced that it had completed the redemption of $50 million aggregate principal amount of its 5.75% Fixed-to-Floating Rate Subordinated Notes due October 15, 2026 (the “2026 Notes”), representing all outstanding 2026 Notes.

The 2026 Notes were redeemed pursuant to their terms at a price equal to 100% of the principal amount, plus accrued and unpaid interest up to, but excluding, October 15, 2021.

The Corporation financed the redemption of the 2026 Notes with cash on hand, including net proceeds from the issuance and sale of $85.0 million aggregate principal amount of the Corporation’s 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 completed in June 2021.

Liquidity and Capital Resources

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

The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities.

The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds.

The Corporation’s expected material cash requirements for the twelve months ended December 31, 2022 and thereafter consist withdrawals by depositors, credit commitments to borrowers, shareholder dividends, share repurchases, operating expenses and capital expenditures.

The Corporation expects to satisfy these short-term and long-term cash requirements through deposit growth, principal and interest payments on loans and investment securities, maturing loans and investment securities, as well as the Corporation maintains access to wholesale funding sources.

The objective of the Corporation's liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund the Corporation's operations and to meet cash obligations and other commitments on a timely basis and at a reasonable cost.

The Corporation seeks to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on its balance sheet.

The Corporation's liquidity position is enhanced by its ability to raise additional funds as needed in the wholesale markets.

Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future.

Liquid assets include cash, interest-bearing deposits in banks, including the Federal Reserve, and securities available for sale.

Liability liquidity is provided by access to funding sources which include core deposits, correspondent banks and other wholesale funding.

The Corporation's liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate.

Liquidity risk management is an important element in the Corporation's asset/liability management process.

The Corporation regularly models liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management.

These scenarios are incorporated into the Corporation's contingency funding plan, which provides the basis for the identification of its liquidity needs.

As of December 31, 2021, the Corporation had approximately $684.3 million held in an interest-bearing account at the Federal Reserve.

The Corporation also has the ability to borrow funds as a member of the FHLB.

As of December 31, 2021, based upon available, pledgeable collateral, the Corporation's total borrowing capacity with the FHLB was approximately $932.7 million.

Furthermore, at December 31, 2021, the Corporation had approximately $235.7 million in securities that were unencumbered by a pledge and could be used to support additional borrowings through the Federal Reserve discount window, as needed.

As of December 31, 2021, management is not aware of any events that are reasonably likely to have a material adverse effect on the Corporation's liquidity, capital resources or operations.

In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on the Corporation.

In the ordinary course of business the Corporation has entered into contractual obligations and have made other commitments to make future payments.

Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as of December 31, 2021.

The Corporation’s material contractual obligations as of December 31, 2021 consist of (i) long-term borrowings - Note 12, "Borrowings," (ii) operating leases - Note 9, "Leases," (iii) time deposits with stated maturity dates - Note 11, "Deposits," and (iv) commitments to extend credit and standby letters of credit - Note 20, "Off-Balance Sheet Activities."

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.

As of December 31, 2021, CNB’s total shareholders’ equity was $442.8 million, an increase of $26.7 million, or 6.4%, from December 31, 2020 primarily as a result of growth in organic earnings, partially offset by a decrease in accumulated other comprehensive income and payment of common and preferred stock dividends to the Corporation's common and preferred shareholders during the year ended December 31, 2021.

Under the Basel III Capital Rules, the Corporation elected to opt-out of the requirement to include most components of accumulated other comprehensive income in regulatory capital.

Accordingly, amounts reported as accumulated other comprehensive income/loss related to securities available for sale, effective cash flow hedges and defined benefit post-retirement benefit plans do not impact regulatory capital and are not included in the calculation of risk-based capital and leverage ratios.

In connection with the adoption of ASC 326 on January 1, 2020, the Corporation also elected to exclude, for a transitional period, the effects of credit loss accounting under CECL in the calculation of our regulatory capital and regulatory capital ratios.

Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items.

See Note 19, "Regulatory Capital Matters," in the accompanying notes to consolidated financial statements.

Preferred 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.

Bank regulators have established "risk-based" capital requirements designed to measure capital adequacy.

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

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

The $57.8 million qualify as Tier 1 capital for regulatory capital purposes.

Subordinated Debentures and Notes

The 2026 Notes were redeemed pursuant to their terms at a price equal to 100% of the principal amount, plus accrued and unpaid interest up to, but excluding, October 15, 2021.

The $85.0 million qualify as Tier 2 capital for regulatory capital purposes.

Additional details about our subordinated debentures and notes are included in Note 12, "Borrowings" in the accompanying notes to consolidated financial statements.

As of December 31, 2021 all of the Corporation's capital ratios exceeded regulatory “well-capitalized” levels and continue to support the Corporation's growth strategy.

The Corporation’s capital ratios and book value per common share at December 31, 2021 and 2020 were as follows:

December 31, 2021 December 31, 2020

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

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

The consolidated statements of cash flows included in the accompanying financial statements provide analysis of the Corporation’s cash and cash equivalents and the sources and uses of cash.

Additionally, the portion of the loan portfolio that matures within one year and securities with maturities within one year in the investment portfolio are considered part of the Corporation’s liquid assets.

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

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

Average Balances, Interest Rates and Yields

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.

December 31, 2021 December 31, 2020 December 31, 2019

Balance Annual

Rate Interest

Balance Annual

Rate Interest

Balance Annual

Rate Interest

$ 624,330 1.70 % $ 10,500 $ 505,770 2.35 % $ 11,510 $ 436,122 2.77 % $ 11,973

Tax-Exempt (1) (2)

42,658 3.43 % 1,403 55,460 3.32 % 1,772 85,802 3.40 % 2,867

Equity Securities (1) (2)

8,136 3.58 % 291 12,814 5.89 % 755 18,203 6.17 % 1,123

Total Securities 675,124 1.83 % 12,194 574,044 2.53 % 14,037 540,127 2.99 % 15,963

Commercial (2)

1,284,750 4.95 % 63,642 1,230,615 4.80 % 59,016 987,974 5.35 % 52,868

2,080,000 4.51 % 93,738 1,783,980 4.76 % 84,857 1,539,208 5.04 % 77,501

Consumer 101,169 9.98 % 10,098 100,576 9.71 % 9,766 102,928 10.08 % 10,373

Total Loans (3)

3,465,919 4.83 % 167,478 3,115,171 4.93 % 153,639 2,630,110 5.35 % 140,742

Other Earning Assets 626,997 0.14 % 881 402,861 0.21 % 852 24,674 2.02 % 499

Total earning assets 4,768,040 3.79 % $ 180,553 4,092,076 4.14 % $ 168,528 3,194,911 4.93 % $ 157,204

Non-Interest Earning Assets

Cash & Due From Banks 48,673 42,001 33,218

Premises, Equipment and Right of Use Assets 79,807 75,516 68,744

Other Assets 199,107 166,511 137,519

Allowance for Credit Losses (36,727) (28,962) (20,655)

Total Non-Interest Earning Assets 290,860 255,066 218,826

Total Assets $ 5,058,900 $ 4,347,142 $ 3,413,737

Liabilities and Shareholders’ Equity

Interest Bearing Deposits

Demand – interest bearing $ 978,279 0.18 % $ 1,783 $ 755,200 0.24 % $ 1,781 $ 580,244 0.42 % $ 2,455

Savings 2,309,560 0.22 % 5,164 1,923,214 0.66 % 12,775 1,450,653 1.39 % 20,138

Time 445,488 1.82 % 8,115 445,408 2.15 % 9,586 371,464 2.05 % 7,609

Total interest bearing deposits 3,733,327 0.40 % 15,062 3,123,822 0.77 % 24,142 2,402,361 1.26 % 30,202

Short-term borrowings 0 0.00 % 0 0 0.00 % 0 16,022 2.65 % 425

Long-term borrowings 0 0.00 % 0 220,849 2.04 % 4,507 228,714 2.15 % 4,894

Finance lease liabilities 507 4.54 % 23 587 4.60 % 27 663 4.52 % 30

Subordinated debentures & notes 108,963 4.35 % 4,735 70,620 5.35 % 3,780 70,620 5.63 % 3,979

Total interest bearing liabilities 3,842,797 0.52 % $ 19,820 3,415,878 0.95 % $ 32,456 2,718,380 1.45 % $ 39,530

Demand – non-interest bearing 724,839 516,724 360,208

Other liabilities 60,202 56,377 49,825

Total Liabilities 4,627,838 3,988,979 3,128,413

Shareholders’ Equity 431,062 358,163 285,324

Total Liabilities and Shareholders’ Equity $ 5,058,900 $ 4,347,142 $ 3,413,737

Interest Income/Earning Assets 3.79 % $ 180,553 4.14 % $ 168,528 4.93 % $ 157,204

Interest Expense/Interest Bearing Liabilities 0.52 % 19,820 0.95 % 32,456 1.45 % 39,530

Net Interest Spread 3.27 % $ 160,733 3.19 % $ 136,072 3.48 % $ 117,674

Interest Income/Earning Assets 3.79 % $ 180,553 4.14 % $ 168,528 4.93 % $ 157,204

Interest Expense/Earning Assets 0.41 % 19,820 0.80 % 32,456 1.24 % 39,530

Net Interest Margin 3.38 % $ 160,733 3.34 % $ 136,072 3.69 % $ 117,674

(1) Includes unamortized discounts and premiums.

Average balance is computed using the fair value of securities.

The average yield has been computed using the amortized cost average balance for available for sale securities.

Interest income has been increased by $953 thousand, $1.4 million, and $1.5 million for the years ended December 31, 2021, 2020, and 2019, 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.

Loans consist of the average of total loans less average unearned income.

Included in loan interest income are loan fees of $15.5 million, $10.4 million, and $4.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Loan fees for the year ended December 31, 2021 and 2020 included $8.7 million and $5.1 million in PPP deferred processing fees.

Volume Analysis of Changes in Net Interest Income

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, 2021 over (under) 2020 Due to Change In (1)

For Twelve Months Ended December 31, 2020 over (under) 2019 Due to Change In (1)

Volume Rate Net Volume Rate Net

Taxable $ 2,278 $ (3,288) $ (1,010) $ 1,369 $ (1,832) $ (463)

Tax-Exempt (2)

(430) 61 (369) (1,026) (69) (1,095)

Equity Securities (2)

(168) (296) (464) (317) (51) (368)

Total Securities 1,680 (3,523) (1,843) 26 (1,952) (1,926)

Commercial (2)

2,780 1,846 4,626 11,582 (5,434) 6,148

13,341 (4,460) 8,881 11,666 (4,310) 7,356

Consumer 60 272 332 (226) (381) (607)

Total Loans 16,181 (2,342) 13,839 23,022 (10,125) 12,897

Other Earning Assets 311 (282) 29 800 (447) 353

Total Earning Assets $ 18,172 $ (6,147) $ 12,025 $ 23,848 $ (12,524) $ 11,324

Liabilities and Shareholders’ Equity

Interest Bearing Deposits

Demand – Interest Bearing $ 407 $ (405) $ 2 $ 413 $ (1,087) $ (674)

Savings 864 (8,475) (7,611) 3,139 (10,502) (7,363)

Time 1 (1,472) (1,471) 1,591 386 1,977

Total Interest Bearing Deposits 1,272 (10,352) (9,080) 5,143 (11,203) (6,060)

Short-Term Borrowings 0 0 0 0 (425) (425)

Long-Term Borrowings 0 (4,507) (4,507) (145) (242) (387)

Finance Lease Liabilities (4) 0 (4) (3) 0 (3)

Subordinated Debentures 1,666 (711) 955 0 (199) (199)

Total Interest Bearing Liabilities $ 2,934 $ (15,570) $ (12,636) $ 4,995 $ (12,069) $ (7,074)

Change in Net Interest Income $ 15,238 $ 9,423 $ 24,661 $ 18,853 $ (455) $ 18,398

(1) The change in interest due to both volume and rate have been allocated entirely to volume changes.

Results of Operations

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Overview of the Statements of Income and Comprehensive Income

Net income was $57.7 million, or $3.16 per diluted common share, for the year ended December 31, 2021, compared to $32.7 million, or $1.97 per diluted share, for the year ended December 31, 2020, reflecting increases of $25.0 million, or 76.2%, and $1.19 per diluted share, or 60.4%.

The primary drivers of the increase in net income were the growth in earning assets and PPP related fees.

In addition, included in net income for the year ended December 31, 2020 was the after-tax impact of $10.2 million, or $0.63 per diluted share, in merger costs, FHLB prepayment penalties and branch closure costs.

Partially offsetting were the growth in operating expenses to support the Corporation's growth, as well as a lower net interest margin as a result of the low interest rate environment.

Pre-provision net revenue ("PPNR") was $76.8 million for the year ended December 31, 2021, compared to $55.4 million for the year ended December 31, 2020, reflecting an increase of $21.3 million, or 38.5%.

Included in PPNR for the year ended December 31, 2020 was $12.6 million in merger costs, prepayment penalties and branch closure costs.

Return on average equity was 13.39% for the year ended December 31, 2021, compared to 9.14% for the year ended December 31, 2020.

Return on average tangible common equity was 16.23% and 10.67% for the same periods in 2021 and 2020, respectively.

Excluding after-tax merger costs, FHLB prepayment penalties and branch closure costs, adjusted return on average equity and average tangible common equity were 11.98% and 14.10% for the year ended December 31, 2020, respectively.

As a measure of the Corporation’s efficiency in management of its expenses, the efficiency ratio was 59.76% for the year ended December 31, 2021, compared to 65.10% for the year ended December 31, 2020.

The efficiency ratio for the year ended December 31, 2020 included $12.6 million in merger costs, FHLB prepayment penalties and branch closure costs.

Interest Income and Expense

Net interest income for the twelve months ended increased $25.1 million, or 18.6%, to $159.8 million from the twelve months ended December 31, 2020, primarily as a result of loan growth, various deposit pricing and liquidity strategies.

Included in net interest income were PPP-related fees, which totaled approximately $8.7 million for the year ended December 31, 2021, compared to $5.1 million for the year ended December 31, 2020.

Net interest margin on a fully tax-equivalent basis was 3.38% and 3.34% for the year ended December 31, 2021 and 2020, respectively.

The yield on earning assets of 3.79% for the twelve months ended December 31, 2021 decreased 35 basis points from 4.14% for the twelve months ended December 31, 2020, primarily as a result of the lower interest rate environment and higher level of excess cash at the Federal Reserve, partially offset by higher PPP-related fees.

The cost of interest-bearing liabilities decreased 43 basis points from 0.95% for the year ended December 31, 2020 to 0.52% for the year ended December 31, 2021, primarily as a result of the Corporation’s targeted deposit rate reductions and the prepayment of the Corporation's remaining FHLB borrowings, which were approximately $160 million at a weighted average interest rate of 2.24%, in the fourth quarter of 2020.

Provision for Credit Losses

The Corporation recorded a provision for credit losses of $6.0 million in 2021 compared to $15.4 million in 2020.

Net loan charge-offs were $2.8 million during the year ended December 31, 2021, compared to $6.4 million during the year ended December 31, 2020.

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, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.

Management believes the charges to the provision for credit losses in 2021 were appropriate and the allowance for credit losses was adequate to absorb losses in the loan portfolio at December 31, 2021.

Non-Interest Income

Total non-interest income was $33.4 million for the year ended December 31, 2021 compared to $28.1 million from the same period in 2020, reflecting an increase of $5.4 million, or 19.2%.

Included in non-interest income for the year ended December 31, 2021 and 2020 were $783 thousand and $2.2 million, respectively, in net realized gains on available for sale securities.

Excluding the impact of the realized gains on available for sale securities for the year ended December 31, 2021 and 2020, total non-interest income for the year ended December 31, 2021 increased $6.8 million, or 26.2%, from the same period in 2020.

The increase was partially driven by growth in Wealth and Asset Management fees, as assets under management increased by $135.2 million, or 11.9%, from December 31, 2020, to $1.3 billion as of December 31, 2021.

Other significant factors that contributed to the increase included income from investments in small business investment company ("SBIC") funds, card processing and interchange income and service charges on deposits from increased business activity as well as an increase in bank owned life insurance income.

Non-Interest Expense

For the year ended December 31, 2021, total non-interest expense was $116.4 million, reflecting an increase of $9.1 million, or 8.5%, from the year ended December 31, 2020.

Included in non-interest expense for the year ended December 31, 2020 was $12.6 million in merger costs, prepayment penalties and branch closure costs.

In addition, non-interest expense for the year ended December 31, 2021 included expenses related to hiring additional personnel in the Corporation's growth regions of Cleveland, Buffalo and Ridge View (Roanoke) as well as investments in technology aimed at enhancing customer experience.

Also, included in the fourth quarter of 2021 is approximately $2.3 million in additional personnel costs primarily from increased incentive compensation accruals and certain retirement benefit expenses.

Year Ended December 31, 2020 vs.

Year Ended December 31, 2019

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.

PPNR 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%.

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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.

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

Non-Interest Income

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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%.

Net interest income increased $11.3 million, or 10.7%, and non-interest income increased $5.3 million, or 25.3%.

The provision for loan losses remained stable at approximately $6.0 million, while non-interest expenses increased by $8.2 million, or 10.3%.

Earnings per diluted share were $2.63 in 2019 and $2.21 in 2018, reflecting an increase of $0.42 per diluted share, or 19.0%, over the same period.

For the twelve months ended December 31, 2019, return on average assets and the return on average equity were 1.17% and 14.05%, respectively, compared to 1.12% and 13.46%, respectively for 2018.

As a measure of the Corporation’s efficiency in management of its expenses, the efficiency ratio of 60.19% for the twelve months ended December 31, 2019 improved from 61.37% during the same period in 2018.

Interest Income and Expense

Net interest margin on a fully tax equivalent basis was 3.69% and 3.77% for the years ended December 31, 2019 and 2018, respectively.

The yield on earning assets increased 20 basis points to 4.93% for the year ended December 31, 2019 from 4.73% for the year ended December 31, 2018.

The cost of interest-bearing liabilities increased 33 basis points to 1.45% for the year ended December 31, 2019 from 1.12% for the year ended December 31, 2018.

Provision for Loan Losses

The Corporation recorded a provision for loan losses of $6.0 million in 2019 compared to $6.1 million in 2018.

Net loan charge-offs were $6.3 million during the year ended December 31, 2019 compared to $6.1 million during the year ended December 31, 2018.

As disclosed in "Allowance for Loan Losses" discussion 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 2019 are appropriate and the allowance for loan losses is adequate to absorb probable incurred losses in the loan portfolio at December 31, 2019.

Non-Interest Income

Total non-interest income of $26.0 million, for the twelve months ended December 31, 2019, includes gains associated with the sale of available-for-sale securities, net realized and unrealized gains on trading securities and realized gains on the sale of Visa Class B shares, which combined totaled $2.5 million for the year ended December 31, 2019 compared to a loss of $451 thousand for the year ended December 31, 2018.

Excluding the items discussed above, non-interest income for the twelve months ended December 31, 2019 totaled $23.5 million, reflecting an increase of $2.3 million or 10.9%, from the same period in 2018.

As a result of the Corporation’s continued organic growth, it experienced an increase in service charges on deposit accounts of $643 thousand, or 11.2%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

In addition, Wealth and Asset Management fees increased $455 thousand, or 10.9%, over the same period, primarily as a result of growth in assets under management.

Non-Interest Expense

Total non-interest expenses were $87.5 million, for the twelve months ended December 31, 2019, reflecting an increase of $8.2 million, or 10.3%.

Salaries and benefits expense increased $4.5 million, or 10.9%, during the year ended December 31, 2019 compared to the year ended December 31, 2018.

In addition to compensation increases incurred in the normal course of business, 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 in the twelve months ended December 31, 2019, when compared to the same period in 2018.

The remainder of the increase in non-interest expenses is primarily a result of expansion of staffing levels in several areas including business development, customer service and risk management, as well as other costs required to service a larger customer base.

Total households serviced at December 31, 2019 were 68,892, compared to 63,920 households at December 31, 2018, reflecting an organic increase of 7.8%.

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.

Income Tax Expense

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

Income tax expense was $13.1 million in 2021, compared to $7.3 million in 2020 and $8.6 million in 2019.

The effective tax rates were 18.5%, 18.3%, and 17.6% for 2021, 2020, and 2019, respectively.

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

The Corporation has various financial obligations, including contractual obligations and commitments that may require future cash payments.

The following table presents, as of December 31, 2020, significant fixed and determinable contractual obligations to third parties by payment date.

Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

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

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, "Employee Benefit Plans," to the consolidated financial statements.

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

The supplemental executive retirement plan allocates expenses over the participant’s service period.

The Corporation reserves the right to terminate these plans at any time.

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

Included in the 18.3% effective tax rate for the year ended December 30, 2020 were merger costs, FHLB prepayment penalties and branch closure costs, all of which reduced the effective tax rate.

Critical Accounting Policies and Estimates

The Corporation's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S.

and follow general practices within the industries in which the Corporation operates.

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

Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and accompanying notes.

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accordingly, as this information changes, the financial statements could reflect different estimates or judgments.

Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported.

Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

Carrying assets and liabilities at fair value inherently results in more financial statement volatility.

The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third party sources, when available.

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, "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 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 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.

Another material estimate is the calculation of fair values of the Corporation’s debt securities.

For most of the Corporation’s debt securities, the Corporation receives estimated fair values from an independent valuation service or from brokers.

In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments.

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., 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.

In management’s opinion, some of these estimates and assumptions have a more significant impact than others on the Corporation's financial reporting.

For the Corporation, these estimates and assumptions include accounting for the allowance for credit losses and goodwill.

Allowance for Credit Losses

The Corporation's allowance for credit losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its consolidated financial statements.

In determining the appropriate estimate for the allowance for credit losses, management considers a number of factors relative to both individually evaluated credits in the loan portfolio and macro-economic factors relative to the economy of the U.S.

as a whole and the economies of the areas in which the Corporation does business.

Management performs a quarterly evaluation of the adequacy of the allowance for credit losses.

Management considers a variety of factors in establishing this estimate.

This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

The evaluation is comprised of specific and pooled components.

The specific component is the Corporation's evaluation of credit loss on individually evaluated loans based on the fair value of the collateral less estimated selling costs if collateral dependent or based on the present value of expected future cash flows discounted at the loan's initial effective interest rate if not collateral dependent.

The majority of the Corporation's loans subject to individual evaluation are considered collateral dependent.

All other loans are evaluated collectively for credit loss by pooling loans based on similar risk characteristics.

As a significant percentage of the Corporation's loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans are critical in determining the charge-offs for specific loans.

Assumptions are instrumental in determining the value of properties.

Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined.

Management carefully reviews the assumptions supporting such appraisals to determine that the resulting values reasonably reflect amounts realizable on the related loans.

The pooled component of the evaluation is determined by applying reasonable and supportable economic forecasts and historical averages to the remaining loans segmented by similar risk characteristics.

The key assumptions used in projecting future loss rates include the economic forecast, the forecast and reversion to mean time periods, and prepayment and curtailment assumptions.

The assumptions are used to calculate and aggregate estimated cash flows for the time period that remains in each loan's contractual life.

The cash flows are discounted back to the balance sheet date using each loan's effective yield, to arrive at a present value of future cash flows, which is compared to the amortized cost basis of the loan pool to determine the amount of allowance for credit loss required by the calculation.

One of the most significant judgments used in projecting loss rates when estimating the allowance for credit loss is the macro-economic forecast provided by a third party.

The economic indices sourced from the macro-economic forecast and used in projecting loss rates are national unemployment rate and changes in home values.

The economic index used in the calculation to which the calculation is most sensitive is the national unemployment rate.

Changes in the macro-economic forecast, especially for the national unemployment rate, could significantly impact the calculated estimated credit losses between reporting periods.

Other key assumptions in the calculation of the allowance for credit loss include the forecast and reversion to mean time periods and prepayment and curtailment assumptions.

The macro-economic forecast is applied for a reasonable and supportable time period before reverting to long-term historical averages for each economic index.

The forecast and reversion to mean time period used for each economic index at December 31, 2021 were four quarters and eight quarters, respectively.

Prepayment and curtailment assumptions are based on the Corporation's historical experience over the trailing 12 months and are adjusted by management as deemed necessary.

The prepayment and curtailment assumptions vary based on segment.

The quantitative estimated losses are supplemented by more qualitative factors that impact potential losses.

Qualitative factors include changes in underwriting standards, changes in environmental conditions, delinquency level, segment growth rates and changes in duration within new markets, or other relevant factors.

The allowance for credit loss may be materially affected by these qualitative factors, especially during periods of economic uncertainty, for items not reflected in the lifetime credit loss calculation, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors.

The qualitative factors applied at December 31, 2021, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of allowance for credit loss calculated by the model.

The evaluation of qualitative factors is inherently imprecise and requires significant management judgment.

While management utilizes its best judgment and information available, the adequacy of the allowance for credit loss is determined by certain factors outside of the Corporation's control, such as the performance of the Corporation's portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of allowance for credit loss.

Additionally, the level of allowance for credit loss may fluctuate based on the balance and mix of the loan portfolio.

If actual results differ significantly from management's assumptions, the Corporation's allowance for credit loss may not be sufficient to cover inherent losses in the Corporation's loan portfolio, resulting in additions to the Corporation's allowance for credit loss and an increase in the provision for credit losses.

Certain intangible assets generated in connection with acquisitions are periodically assessed for impairment.

Goodwill is tested at least annually for impairment, and if certain events occur which indicate goodwill might be impaired between annual tests, such as the potential impact of the COVID-19 pandemic, goodwill must be tested when such events occur.

In making this assessment, the Corporation considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, stock price, etc.

There are inherent uncertainties related to these factors and the Corporation's judgment in applying them to the analysis of goodwill impairment.

Future changes in economic and operating conditions could result in goodwill impairment in subsequent periods.

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, December 31,

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Tangible common equity/Tangible assets 6.45 % 6.70 %

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, December 31,

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 $ 37,588 $ 34,340

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

Total loans $ 3,634,792 $ 3,371,789

PPP-related loans 45,203 155,529

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

Adjusted total loans, net of PPP-related loans (non-GAAP) $ 3,589,589 $ 3,216,260

Adjusted allowance / loans, net of PPP-related loans (non-GAAP) 1.05 % 1.07 %

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):

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Net interest margin, fully tax equivalent basis (non-GAAP) (annualized) 3.38 % 3.34 %

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:

Calculation of efficiency ratio:

Non-interest expense $ 116,433 $ 107,326

core deposit intangible amortization 107 206

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

Adjusted non-interest expense (non-GAAP) $ 116,326 $ 107,120

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Adjusted net revenue (non-GAAP) (tax-equivalent) $ 194,657 $ 164,557

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:

Efficiency ratio 59.76 % 65.10 %

Twelve Months Ended

Calculation of PPNR:

Net interest income $ 159,780 $ 134,711

Non-interest income 33,434 28,059

Non-interest expense 116,433 107,326

PPNR (non-GAAP) $ 76,781 $ 55,444

Twelve Months Ended

Calculation of adjusted return on average equity:

Net income $ 57,707 $ 32,743

merger costs, prepayment penalties and branch closure costs (net of tax) 0 10,168

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:

Adjusted net income $ 57,707 $ 42,911

Average shareholders' equity $ 431,062 $ 358,163

Adjusted return on average equity 13.39 % 11.98 %

Twelve Months Ended

Calculation of return on average tangible common equity:

Net income available to common stockholders $ 53,405 $ 31,596

Average tangible common shareholders' equity 329,012 296,142

Return on average tangible common equity (non-GAAP) (annualized) 16.23 % 10.67 %

Calculation of adjusted return on average tangible common equity:

Net income available to common stockholders $ 53,405 $ 31,596

merger costs, prepayment penalties and branch closure costs (net of tax) 0 10,168

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 %

Adjusted net income available to common stockholders $ 53,405 $ 41,764

Average tangible common shareholders' equity 329,012 296,142

Adjusted return on average tangible common equity (non-GAAP) (annualized) 16.23 % 14.10 %

Twelve Months Ended

Calculation of non-interest income excluding net realized gains on available-for-sale securities:

Non-interest income $ 33,434 $ 28,059

net realized gains on available-for-sale securities 783 2,190

Adjusted non-interest income $ 32,651 $ 25,869

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