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Item 8. Financial Statements and Supplementary Data

2022-03-03 compared with 2021-03-04 · 749 added, 559 removed, 1668 unchanged (44% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors

CNB Financial Corporation

Clearfield, Pennsylvania

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of CNB Financial Corporation (the "Corporation") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the threeyear period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements").

We also have audited the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit losses on Financial Instruments.

The Corporation adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

Basis for Opinions

The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.

Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Corporation in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit

preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans

The allowance for credit losses (the “ACL”) as described in Notes 1 and 4 is an accounting estimate of expected credit losses over the estimated life of loans.

The Corporation’s loan portfolio, measured at amortized cost, is presented at the net amount expected to be collected.

Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the life of the loans.

The Corporation measures expected credit losses based on pooled loans when similar risk characteristics exist primarily using a discounted cash flow (“DCF”) model.

The DCF model discounts instrument-level cash flows, adjusting for prepayments and curtailments, and incorporates loss expectations based on inputs of current and forecasted macroeconomic indicators.

The Corporation adjusts its quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated.

The qualitative framework reflects changes related to relevant data, such as differences in underwriting standards, changes in environmental conditions, delinquency levels, segment growth rates and changes in duration within new markets, or other relevant factors not considered in the base model.

The ACL was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management.

The principal considerations resulting in our determination included the following:

• Significant auditor judgment and audit effort to evaluate the significant assumptions input into the DCF model, including assistance by our valuation services specialists.

• Significant auditor judgment and audit effort to evaluate the qualitative factors used in the calculation.

The primary procedures performed to address the critical audit matter included:

• Testing the effectiveness of management’s controls addressing:

◦ Evaluation of the appropriateness of the loss driver analysis and probability of default and loss given default curves input into the model.

◦ Evaluation of the relevance and reliability of data used in the DCF model.

◦ Evaluation of the appropriateness of the key assumptions and judgments used in the determination of qualitative factors.

• Substantive testing including:

◦ Evaluating the appropriateness of the loss driver analysis and probability of default and loss given default curves in the DCF model, assisted by our valuation services specialists.

◦ Evaluating the relevance and reliability of data used in the DCF model.

◦ Evaluating management’s judgments and the relevance of data used in applying qualitative factors, including evaluating assumptions for reasonableness.

/s/ Crowe LLP

We have served as the Corporation’s auditor since 2000.

Columbus, Ohio

March 3, 2022

CONSOLIDATED BALANCE SHEETS

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Total cash and cash equivalents 732,198 532,694

Debt securities available for sale, at fair value (amortized cost of $ 565,493 and $ 533,203 as of December 31, 2020 and 2019, respectively)

Debt securities available for sale, at fair value (amortized cost of $ 698,085 as of December 31, 2021 and $ 565,493 as of December 31, 2020)

697,191 584,908

Trading securities 6,649 9,809

Equity securities 10,366 6,649

Loans held for sale 849 8,514

Loans 3,371,789 2,804,035

PPP 45,203 155,529

Syndicated 125,761 22,064

All other 3,463,828 3,194,196

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

allowance for credit losses ( 37,588 ) ( 34,340 )

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Non-interest bearing deposits $ 792,086 $ 627,114

Interest bearing deposits 3,554,630 2,720,068

Interest bearing demand deposits 1,079,336 951,903

Savings 2,457,745 2,126,183

Certificates of deposit 386,452 476,544

Total deposits 4,715,619 4,181,744

FHLB and other long-term borrowings 0 227,907

Subordinated debentures 20,620 20,620

Subordinated notes, net of unamortized issuance costs 83,661 50,000

Operating lease liabilities 21,159 19,449

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Commitments and contingent liabilities

Preferred stock, Series A non-cumulative perpetual, $ 0 par value;

Preferred stock, Series A non-cumulative perpetual,

$ 0 par value;

$ 1,000 liquidation preference;

authorized 60,375 shares;

issued 60,375 shares at December 31, 2020 and no shares issued at December 31, 2019

shares authorized 60,375 ;

Shares issued 60,375 at December 31, 2021 and 60,375 at December 31, 2020

57,785 57,785

Common stock, $ 0 par value;

authorized 50,000,000 shares;

issued 16,978,057 shares at December 31, 2020 and 15,360,946 shares at December 31, 2019

50,000,000 shares authorized;

Shares issued 16,978,057 shares at December 31, 2021 and 16,978,057 at December 31, 2020

Additional paid in capital 127,351 127,518

Retained earnings 260,582 218,727

Treasury stock, at cost ( 145,049 and 112,961 shares for 2020 and 2019, respectively)

Treasury stock, at cost ( 122,995 shares at December 31, 2021 and 145,049 shares at December 31, 2020)

( 2,477 ) ( 2,967 )

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Loans including fees

Interest and fees on loans $ 157,799 $ 147,547 $ 139,867

Processing fees on PPP loans 8,737 5,140 0

Securities and cash and cash equivalents:

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Deposits 15,062 24,142 30,202

Borrowed funds 4,534 5,349 5,856

Subordinated debentures (includes $ 224 , $ 63 , and $ 164 accumulated other comprehensive income reclassification for change in fair value of interest rate swap agreements in 2020, 2019, and 2018, respectively)

Borrowed funds and finance lease liabilities 23 4,534 5,349

Subordinated debentures (includes $ 276 , $ 224 , and $ 63 accumulated other comprehensive

income reclassification for change in fair value of interest rate swap agreements, respectively)

4,735 3,780 3,979

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Wealth and asset management fees 6,740 5,497 4,627

Net realized gains on available-for-sale securities (includes $ 2,190 , $ 148 , and $ 0 accumulated other comprehensive income reclassifications for net realized gains on available-for-sale securities in 2020, 2019, and 2018, respectively)

Net realized gains on trading securities 75 16 151

Net unrealized gains (losses) on trading securities 253 1,872 ( 602 )

Net realized gains on available-for-sale securities (includes $ 783 , $ 2,190 , and $ 148

accumulated other comprehensive income reclassifications for net realized gains

on available-for-sale securities, respectively)

783 2,190 148

Net realized gains on equity securities 0 75 16

Net unrealized gains on equity securities 790 253 1,872

Realized gains on Visa Class B shares 0 0 463

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NON-INTEREST EXPENSES:

Salaries 36,519 35,212 31,323

Employee benefits (includes $ 0 , $ 23 , and $ 84 accumulated other comprehensive income reclassifications for net amortization of actuarial losses in 2020, 2019, and 2018, respectively)

Compensation and benefits (includes $( 44 ), $ 0 , and $ 23 accumulated other comprehensive

income reclassifications for net amortization of actuarial (gains) losses, respectively)

61,175 48,723 46,405

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Amortization of core deposit intangible 107 206 567

Data processing 5,759 4,994 4,586

Technology expense 11,723 7,153 4,994

State and local taxes 4,057 3,340 3,140

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FDIC insurance 2,509 2,414 1,252

Directors fees and benefits 538 1,352 885

Merger costs, prepayment penalties and branch closure costs 0 12,642 170

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INCOME BEFORE INCOME TAXES 70,778 40,090 48,641

Income tax expense (includes $ 413 , $ 13 , and $( 52 ) income tax expense reclassification items in 2020, 2019, and 2018, respectively)

INCOME TAX EXPENSE (includes $ 116 , $ 413 , and $ 13 income tax expense

reclassification items, respectively)

13,071 7,347 8,560

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NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 53,405 31,596 40,081

Earnings Per Share:

EARNINGS PER COMMON SHARE:

Basic $ 3.16 $ 1.97 $ 2.63

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Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification and tax $ ( 16,044 ) $ 8,140 $ 10,732

Change in actuarial gain (loss), for post-employment health care plan, net of amortization and tax 219 428 386

Change in actuarial gain, for post-employment health care plan, net of amortization and tax 275 219 428

Change in fair value of interest rate swap agreements designated as a cash flow hedge, net of interest and tax 301 ( 224 ) ( 225 )

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( 1,086 ) 1,086 0

Performance based restricted stock award grants ( 798 shares)

Stock-based compensation expense 1,346 1,346

Issuance of common stock, net of issuance costs ( 52,568 shares)

Purchase of treasury stock ( 40,000 shares)

2 unchanged sentences

( 289 ) ( 289 )

Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting ( 294 )

Cash dividends declared ($ 0.68 per share)

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Balance, December 31, 2019 0 99,335 201,503 ( 2,811 ) 6,939 304,966

Cumulative-effect adjustment due to the adoption of ASU No.

2016-13 ( 3,391 ) ( 3,391 )

Net income 32,743 32,743

Other comprehensive loss 10,935 10,935

Forfeiture of restricted stock award grants ( 2,699 shares)

Other comprehensive income 8,135 8,135

Restricted stock award grants ( 36,968 shares)

1 unchanged sentence

Performance based restricted stock award grants ( 8,351 shares)

( 217 ) 217 0

Stock-based compensation expense 1,410 1,410

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Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting ( 3,458 )

Cash dividends declared ($ 0.68 per share)

( 113 ) ( 113 )

Balance, December 31, 2019 0 99,335 201,503 ( 2,811 ) 6,939 304,966

Cumulative-effect adjustment due to the adoption of ASU No.

Issuance of preferred equity, net of issuance costs 57,785 57,785

Acquisition of Bank of Akron 24,667 24,667

Preferred cash dividend declared ( 1,147 ) ( 1,147 )

Common cash dividends declared ($ 0.68 per share)

( 10,981 ) ( 10,981 )

Balance, December 31, 2020 $ 57,785 $ 127,518 $ 218,727 $ ( 2,967 ) 15,074 $ 416,137

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

FOR THE YEARS ENDED DECEMBER 31, 2021, 2020, AND 2019

Dollars in thousands, except share and per share data

Preferred Stock Additional

Capital Retained

Earnings Treasury

Stock Accumulated

Comprehensive

Income (Loss) Total

Net income 57,707 57,707

Other comprehensive income 8,135 8,135

Other comprehensive loss ( 15,468 ) ( 15,468 )

Forfeiture of restricted stock award grants ( 2,669 shares)

Restricted stock award grants ( 55,218 shares)

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Stock-based compensation expense 1,411 1,411

Issuance of common stock, net of issuance costs ( 115,790 shares)

Contribution of treasury stock ( 3,000 shares)

Stock-based contribution expense 75 75

Purchase of treasury stock ( 36,359 shares)

( 1,000 ) ( 1,000 )

Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting ( 7,349 )

Purchase of treasury stock for the purpose of tax withholding related to restricted stock award vesting ( 6,782 shares)

( 143 ) ( 143 )

Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting ( 3,458 )

Purchase of treasury stock for the purpose of tax withholding related to performance based restricted stock award vesting ( 941 shares)

( 20 ) ( 20 )

Issuance of preferred equity, net of issuance costs 57,785 57,785

Acquisition of Bank of Akron 24,667 24,667

Preferred cash dividend declared ( 4,302 ) ( 4,302 )

Common cash dividends declared ($ 0.68 per share)

Cash dividends declared ($ 0.685 per share)

( 11,550 ) ( 11,550 )

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Adjustments to reconcile net income to net cash provided by operations:

Provision for loan losses 15,354 6,024 6,072

Depreciation and amortization of premises and equipment, operating leases assets, core deposit intangible, and mortgage servicing rights 6,082 5,963 4,811

Amortization and accretion of securities premiums and discounts, deferred loan fees and costs, net yield and credit mark on acquired loans, and unearned income ( 1,955 ) ( 870 ) ( 537 )

Amortization and accretion of deferred PPP processing fees ( 5,140 ) 0 0

Provision for credit loss expense 6,003 15,354 6,024

Depreciation and amortization of premises and equipment, operating leases assets,

core deposit intangible, and mortgage servicing rights 6,241 6,082 5,963

Amortization (accretion) of securities, deferred loan fees and costs,

net yield and credit mark on acquired loans, and unearned income ( 2,127 ) ( 1,955 ) ( 870 )

Net amortization of deferred costs on borrowings 177 0 0

Accretion of deferred PPP processing fees ( 8,737 ) ( 5,140 ) 0

Deferred taxes ( 1,691 ) 1,390 ( 204 )

Net realized gains on sales of available-for-sale securities ( 783 ) ( 2,190 ) ( 148 )

Net realized and unrealized losses (gains) on trading securities ( 328 ) ( 1,888 ) 451

Net realized and unrealized losses (gains) on equity securities ( 790 ) ( 328 ) ( 1,888 )

Proceeds from sale of Visa Class B shares 0 0 463

4 unchanged sentences

Origination of loans held for sale ( 95,411 ) ( 87,528 ) ( 43,458 )

Income on bank owned life insurance, including death benefit of proceeds in excess of cash surrender value ( 1,747 ) ( 1,317 ) ( 1,408 )

Income on bank owned life insurance ( 2,184 ) ( 1,747 ) ( 1,317 )

Gain on bank owned life insurance (death benefit proceeds in excess of cash surrender value) ( 454 ) 0 0

Stock-based compensation expense 1,411 1,410 1,346

Stock-based contribution expense 75 0 0

Accrued interest receivable and other assets ( 1,056 ) ( 6,242 ) 1,072

4 unchanged sentences

Proceeds from sales of available-for-sale securities 33,553 57,185 11,403

Proceeds from sale of trading securities 5,935 301 455

Proceeds from sale of equity securities 0 5,935 301

Purchase of available-for-sale securities ( 341,140 ) ( 224,080 ) ( 122,358 )

Purchase of trading securities ( 2,447 ) ( 436 ) ( 1,542 )

Purchase of equity securities ( 407 ) ( 2,447 ) ( 436 )

Proceeds from loans held for sale previously classified as portfolio loans 1,921 0 0

Loan origination and payments, net ( 246,043 ) ( 244,903 ) ( 335,965 )

Purchase of bank owned life insurance ( 22,000 ) 0 ( 8,778 )

Proceeds from death benefit of bank owned life insurance policies 1,390 0 0

Net cash from business combinations 0 72,852 0

Repayment (purchase) of FHLB and other equity interests 7,268 ( 3,360 ) ( 2,991 )

Redemption (purchase) of FHLB, other equity, and restricted equity interests ( 2,258 ) 7,268 ( 3,360 )

Purchase of premises and equipment ( 6,484 ) ( 5,644 ) ( 9,045 )

Proceeds from the sale of premises and equipment and foreclosed assets 746 666 1,228

Net Cash Used In Investing Activities ( 168,680 ) ( 368,736 ) ( 452,675 )

NET CASH USED BY INVESTING ACTIVITIES ( 409,760 ) ( 168,680 ) ( 368,736 )

CASH FLOWS FROM FINANCING ACTIVITIES:

2 unchanged sentences

Certificates of deposit ( 90,092 ) ( 42,510 ) 32,379

Deposits held for sale 0 0 0

Purchase of treasury stock ( 1,163 ) ( 1,307 ) ( 1,291 )

3 unchanged sentences

Cash dividends paid on preferred stock ( 4,302 ) ( 1,147 ) 0

Proceeds from issuance of subordinated notes, net of issuance costs 83,484 0 0

Proceeds from long-term borrowings 0 231,985 30,353

Repayments on long-term borrowings ( 50,000 ) ( 459,892 ) ( 47,563 )

Net change in short-term borrowings 0 0 ( 34,416 )

NET CASH PROVIDED BY FINANCING ACTIVITIES 550,344 479,642 464,105

Net Increase in Cash and Cash Equivalents 339,720 147,411 10,218

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 199,504 339,720 147,411

CASH AND CASH EQUIVALENTS, Beginning 532,694 192,974 45,563

CASH AND CASH EQUIVALENTS, Ending $ 732,198 $ 532,694 $ 192,974

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Dollars in thousands

Year ended December 31,

2021 2020 2019

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

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Transfers to other real estate owned $ 1,470 $ 241 $ 2,066

Transfers from loans held for sale to loans held for investment 9,965 0 0

Transfers from loans held for investment to loans held for sale 1,921 0 0

Grant of restricted stock awards from treasury stock 1,374 934 1,086

1 unchanged sentence

Restricted stock forfeiture 64 0 71

Right of use assets obtained in exchange for lease liabilities 1,386 19,465 0

Contribution of stock from treasury stock 81 0 0

Lease liabilities arising from obtaining right-of-use assets 2,643 1,386 19,465

See Notes to Consolidated Financial Statements

1 unchanged sentence

Summary of Significant Accounting Policies

Unless otherwise indicated, dollar amounts are in thousands, except per share data.

Unless otherwise indicated, dollar amounts in tables are stated in thousands, except for per share amounts.

Business and Organization

CNB Financial Corporation (the "Corporation") is headquartered in Clearfield, Pennsylvania, and provides a full range of banking and related services through its wholly owned subsidiary, CNB Bank (the "Bank").

In addition, the Bank provides trust and asset management services, including the administration of trusts and estates, retirement plans, and other employee benefit plans as well as a full range of wealth management services.

In addition, the Bank provides wealth and asset management services, including the administration of trusts and estates, retirement plans, and other employee benefit plans as well as a full range of wealth management services.

The Bank serves individual and corporate customers and is subject to competition from other financial institutions and intermediaries with respect to these services.

1 unchanged sentence

The Corporation and its other subsidiaries are subject to examination by federal and state regulators.

The Corporation’s market area is primarily concentrated in the central and northwest regions of the Commonwealth of Pennsylvania, the central and northeast regions of the state of Ohio and western New York.

Basis of Financial Presentation

The financial statements are consolidated to include the accounts of the Corporation and the Bank, CNB Securities Corporation, Holiday, CNB Risk Management, Inc.

The financial statements are consolidated to include the accounts of the Corporation, the Bank, CNB Securities Corporation, Holiday, CNB Risk Management, Inc.

and CNB Insurance Agency.

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The worldwide spread of COVID-19 has created significant uncertainty in the global economy.

There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 and the related government actions impact the Corporation’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

There have been no comparable recent events that provide guidance as to the effects the global COVID-19 pandemic may have, and, as a result, the ultimate impact of the COVID-19 pandemic and the extent to which the COVID-19 pandemic and the related government responses impact the Corporation’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

Use of Estimates

1 unchanged sentence

generally accepted accounting principles ("GAAP"), management makes estimates and assumptions based on available information.

These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and future results could differ.

These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

The Corporation's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.

5 unchanged sentences

however, this could change in future periods due to any number of potential impacts from the COVID-19 pandemic.

The COVID-19 pandemic could cause a further and sustained decline in the Corporation's stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test, resulting in an impairment charge being recorded for that period.

The COVID-19 pandemic could cause a decline in the Corporation's stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform a goodwill impairment test, resulting in an impairment charge being recorded for that period.

In the event that the Corporation concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.

Such a charge would have no impact on tangible capital or regulatory capital.

The Corporation is working with customers directly affected by the COVID-19 pandemic.

6 unchanged sentences

Operating Segments

While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis, and operating segments are aggregated into one as operating results for all segments are similar.

While the Corporation monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis, and operating segments are aggregated into one as operating results for all segments are similar.

Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

5 unchanged sentences

Debt Securities

When purchased, debt securities are classified as held to maturity, trading or available for sale.

Debt securities are classified as held to maturity when the Corporation has the positive intent and ability to hold the securities to maturity.

Held to maturity securities are carried at amortized cost.

Debt securities are classified as trading when purchased principally for the purpose of selling them in the near term, or when the fair value option has been elected.

Trading securities are recorded at fair value with changes in fair value included in earnings in non-interest income.

Available for sale securities ("AFS") are those securities not classified as held to maturity or trading and are carried at their fair value.

Unrealized gains and losses, net of deferred tax, on securities classified as available for sale are recorded as other comprehensive income.

Management has not classified any debt securities as held to maturity.

Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.

Debt securities are classified as available for sale when they might be sold before maturity.

Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount.

Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.

Premiums on callable debt securities are amortized to their earliest call date.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method.

Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.

Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

The Corporation has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and report accrued interest separately in accrued interest receivable and other assets in the consolidated balance sheets.

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Losses are charged against the allowance when management confirms that an available-for-sale security is uncollectable or when either of the criteria regarding intent or requirement to sell is met.

As of December 31, 2020, the Corporation determined that the unrealized loss positions in available-for-sale debt securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded.

As of December 31, 2021 and December 31, 2020, the Corporation determined that the unrealized loss positions in available-for-sale debt securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded.

See Note 3, "Debt Securities," and Note 6, "Fair Value Measurements," for more information about available-for-sale debt securities.

Accrued interest receivable on available-for-sale debt securities totaled $ 2.2 million at December 31, 2020 and is excluded from the estimate of credit losses.

Accrued interest receivable on available-for-sale debt securities totaled $ 2.2 million and $ 2.2 million at December 31, 2021 and December 31, 2020, respectivley, and is excluded from the estimate of credit losses.

Equity Securities

Equity securities are carried at fair value, with changes in fair value reported in net income.

Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.

Loans Held for Sale

6 unchanged sentences

Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs.

Accrued interest receivable totaled $ 15.4 million at December 31, 2020 and was reported in Accrued interest receivable and other assets on the consolidated balance sheets and is excluded from the estimate of credit losses.

Accrued interest receivable totaled $ 13.3 million and $ 15.4 million at December 31, 2021 and December 31, 2020, respectively, and was reported in accrued interest receivable and other assets on the consolidated balance sheets and is excluded from the estimate of credit losses.

Interest income is accrued on the unpaid principal balance.

26 unchanged sentences

When there is a reasonable expectation, at the reporting date, that a TDR will be executed with a borrower the estimated life of the TDR reflects the extension or renewal.

Before granting approval to modify a loan in a TDR, the borrower’s ability to repay is evaluated, including:

current income levels and debt to income ratio, borrower’s credit score, payment history of the loan and updated evaluation of the secondary repayment source.

The Corporation also modifies some loans that are not classified as TDRs as the modification is due to a restructuring where the effective interest rate on the debt is reduced to reflect a decrease in market interest rates.

The Corporation's allowance for credit losses reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower.

The Corporation has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19.

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Concentration of Credit Risk

Most of the Corporation’s business activity is with customers located within the Commonwealth of Pennsylvania and the states of Ohio and New York.

Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economies of Pennsylvania, Ohio, and New York.

Most of the Corporation’s business activity is with customers located within the Commonwealth of Pennsylvania and the states of Ohio, New York and Virginia.

Therefore, the Corporation’s exposure to credit risk is significantly affected by changes in the economies of Pennsylvania, Ohio, New York and Virginia.

Allowance for Credit Losses - Loans

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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 ACL on loans, see Note 4, "Loans," for additional detail.

For further information on the allowance for credit losses on loans, see Note 4, "Loans," for additional detail.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.

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Residential Mortgages secured by first liens :

The Bank originates one-to-four family residential mortgage loans primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York.

The Bank originates one-to-four family residential mortgage loans primarily within central and northwest Pennsylvania, central and northeast Ohio, western New York and the Roanoke, Virginia market.

These loans are secured by first liens on a primary residence or investment property.

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Residential Mortgages secured by junior liens :

The Bank originates loans secured by junior liens against one to four family properties primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York.

The Bank originates loans secured by junior liens against one to four family properties primarily within central and northwest Pennsylvania, central and northeast Ohio, western New York and the Roanoke, Virginia market.

Loans secured by junior liens are primarily in the form of an amortizing home equity loan.

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Multifamily (5 or more) residential properties :

The Bank originates mortgage loans for multifamily properties primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York.

The Bank originates mortgage loans for multifamily properties primarily within central and northwest Pennsylvania, central and northeast Ohio, western New York and the Roanoke, Virginia market.

Multifamily loans are expected to be repaid from the cash flows of the underlying property so the collective amount of rents must be sufficient to cover all operating expenses, property management and maintenance, taxes and debt service.

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Owner-occupied, nonfarm nonresidential properties :

The Bank originates mortgage loans to operating companies primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York.

The Bank originates mortgage loans to operating companies primarily within central and northwest Pennsylvania, central and northeast Ohio, western New York and the Roanoke, Virginia market.

Owner-occupied real estate properties primarily include retail buildings, medical buildings and industrial/warehouse space.

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Non-owner occupied, nonfarm nonresidential properties :

The Bank originates mortgage loans for commercial real estate that is managed as an investment property primarily within central and northwest Pennsylvania, central and northeast Ohio and western New York.

Commercial real estate properties primarily include retail buildings/shopping centers, hotels, office/medical buildings and industrial/warehouse space.

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Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.

The primary risk characteristics associated with automobile loans typically involve major changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.

The primary risk characteristics associated with other consumer loans typically involve major changes to the borrower, including unemployment or other loss of income, unexpected significant expenses, such as for major medical expenses, catastrophic events, divorce or death.

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

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These loans are repaid through general cash flows or through specific revenue streams, such as water and sewer fees.

The primary risk characteristics associated with municipal loans are the municipalities ability to manage cash flow, balance the fiscal budget, fixed asset and infrastructure requirements.

The primary risk characteristics associated with municipal loans are the municipality's ability to manage cash flow, balance the fiscal budget, fixed asset and infrastructure requirements.

Additional risks include changes in demographics, as well as social and political conditions.

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National Home Price Index.

The portfolio segments utilizing the DCF methodology comprised 90.8 % of the amortized cost of loans as of December 31, 2020, and included:

The portfolio segments utilizing the DCF methodology comprised 88.4 % and 90.8 % of the amortized cost of loans as of December 31, 2021 and December 31, 2020, respectively, and included:

• Home equity lines of credit

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The selected period for which historic loss rates are used is dependent on management's evaluation of current conditions and expectations of future loss conditions.

The portfolio segments utilizing the WARM methodology comprised 9.2 % of the amortized cost of loans as of December 31, 2020, and included:

The portfolio segments utilizing the WARM methodology comprised 11.6 % and 9.2 % of the amortized cost of loans as of December 31, 2021 and December 31, 2020, respectively, and included:

• 1-4 Family Construction

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Loans that do not share risk characteristics are evaluated on an individual basis.

Loans evaluated individually are not also included in the collective evaluation and typically represent collateral dependent loans but may also include other non-performing loans or TDRs.

Loans evaluated individually are not also included in the collective evaluation and typically represent collateral dependent loans but may also include other nonperforming loans or TDRs.

The Corporation uses the practical expedient to measure individually evaluated loans as collateral dependent and/or when repayment is expected to be provided substantially through the operation or sale of the collateral.

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Management estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Bank and applying the loss factors used in the allowance for credit losses on loans methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan segment.

The estimate of credit losses on OBS credit exposures is not material at December 31, 2020.

Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank ("FHLB") of Pittsburgh, the Corporation is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements.

This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par.

As a result of these restrictions, FHLB stock is unlike other investment securities insofar as there is no trading market for FHLB stock and the transfer price is determined by FHLB membership rules and not by market participants.

FHLB stock is held as a long-term investment, is valued at its cost basis and is analyzed for impairment based on the ultimate recoverability of the par value.

The Company evaluates impairment quarterly.

The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:

• its operating performance;

• the severity and duration of declines in the fair value of its net assets related to its capital stock amount;

• its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;

• the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB;

• its liquidity and funding position.

Both cash and stock dividends are reported as income.

The estimate of credit losses on OBS credit exposures is not material at December 31, 2021 or December 31, 2020.

Mortgage Servicing Rights

When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in mortgage banking income.

Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.

The Corporation compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions.

All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount.

Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type.

Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount.

If the Corporation later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income.

Changes in valuation allowances are reported with mortgage banking income on the income statement.

The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Servicing fee income, which is reported on the income statement as mortgage banking income, is recorded for fees earned for servicing loans.

The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

The amortization of mortgage servicing rights is netted against loan servicing fee income.

Late fees and ancillary fees related to loan servicing are not material.

Foreclosed Assets

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Maintenance, repairs and minor renewals are charged to expense as incurred.

The Corporation leases real estate property for branches and certain equipment.

The Corporation determines if an arrangement is a lease at inception and if the lease is an operating lease or a finance lease.

Operating lease right-of-use assets represent the Corporation's right to use an underlying asset during the lease term and operating lease liabilities represent the Corporation's obligation to make lease payments arising from the lease.

The period over which the right-of-use asset is amortized is generally the lesser of the expected remaining term or the remaining useful life of the leased asset.

The lease liability is decreased as periodic lease payments are made.

The Corporation performs impairment assessments for right-of-use assets when events or changes in circumstances indicate that their carrying values may not be recoverable.

The calculated amounts of the right-of-use assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum remaining lease payments.

The Corporation's lease agreements often include one or more options to renew at the Corporation's discretion.

If, at lease inception, the Corporation considers the exercising of a renewal option to be reasonably certain, the Corporation includes the extended term in the calculation of the right-of-use asset and lease liability.

Generally, the Corporation cannot practically determine the interest rate implicit in the lease so the Corporation's incremental borrowing rate is used as the discount rate for the lease.

The Corporation uses Federal Home Loan Bank ("FHLB") of Pittsburgh advance interest rates, which have been deemed as the Company's incremental borrowing rate, at lease inception based upon the term of the lease.

The Corporation's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Lease expense, variable lease expense and short-term lease expense are included in occupancy expense in the Corporation's consolidated statements of income.

For facility-related leases, the Corporation elected, by lease class, to not separate lease and non-lease components.

Lease expense is recognized on a straight-line basis over the lease term.

Variable lease expense primarily represents payments such as common area maintenance, real estate taxes, and utilities and are recognized as expense in the period when those payments are incurred.

Short-term lease expense relates to leases with an initial term of 12 months or less.

The Corporation has elected to not record a right-of-use asset or lease liability for short-term leases.

Federal Home Loan Bank Stock

As a member of the FHLB of Pittsburgh, the Corporation is required to purchase and hold stock in the FHLB to satisfy membership and borrowing requirements.

This stock is restricted in that it can only be sold to the FHLB or to another member institution, and all sales of FHLB stock must be at par.

FHLB stock is held as a long-term investment, is valued at its cost basis and is analyzed for impairment based on the ultimate recoverability of the par value.

The Company evaluates impairment quarterly.

The decision of whether impairment exists is a matter of judgment that reflects our view of the FHLB’s long-term performance, which includes factors such as the following:

• its operating performance;

• the severity and duration of declines in the fair value of its net assets related to its capital stock amount;

• its commitment to make payments required by law or regulation and the level of such payments in relation to its operating performance;

• the impact of legislative and regulatory changes on the FHLB, and accordingly, on the members of FHLB;

• its liquidity and funding position.

Both cash and stock dividends are reported as income.

Bank Owned Life Insurance

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The Corporation has no intangible assets with an indefinite useful life.

The Corporation has selected December 31 as the date to perform the annual impairment test.

The Corporation has selected December 31st as the date to perform the annual impairment test.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

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The core deposit intangible assets from these acquisitions are amortized using an accelerated method over their estimated useful lives, which range from four years to ten years , respectively.

Long-term Assets

Premises and equipment, goodwill and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.

If impaired, the assets are recorded at fair value.

Loan Commitments and Related Financial Instruments

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In addition, the Corporation obtains collateral above certain thresholds of the fair value of its hedges for each counterparty based upon their credit standing and the Corporation has netting agreements with the dealers with which it does business.