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Item 7. Management’s Discussion and Analysis

2023-03-03 compared with 2022-03-03 · 306 added, 269 removed, 551 unchanged (51% of the section changed)

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

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.”

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." This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.

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

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Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future conditional verbs such as "may," "will," "should," "would" and "could." CNB’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance.

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

The COVID-19 pandemic has impacted us and our customers significantly, and the extent that it continues to impact us and our customers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic and its impact on 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;

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

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

(iv) changes in interest rates;

(v) higher than expected costs or other difficulties related to integration of combined or merged businesses;

(vi) the effects of business combinations and other acquisition transactions, including the inability to realize our loan and investment portfolios;

(vii) changes in the quality or composition of our loan and investment portfolios;

(viii) adequacy of loan loss reserves;

(ix) increased competition;

(x) loss of certain key officers;

(xi) deposit attrition;

(xii) rapidly changing technology;

(xiii) unanticipated regulatory or judicial proceedings and liabilities and other costs;

(xiv) changes in the cost of funds, demand for loan products or demand for financial services;

and (xv) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices.

Such known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) adverse changes or conditions in capital and financial markets;

(ii) changes in interest rates;

(iii) the duration and scope of a pandemic, including the ongoing COVID-19 pandemic, and the local, national and global impact of a pandemic;

(iv) changes in general business, industry or economic conditions or competition;

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

(vi) higher than expected costs or other difficulties related to integration of combined or merged businesses;

(vii) the effects of business combinations and other acquisition transactions, including the inability to realize our loan and investment portfolios;

(viii) changes in the quality or composition of our loan and investment portfolios;

(ix) adequacy of loan loss reserves;

(x) increased competition;

(xi) loss of certain key officers;

(xii) deposit attrition;

(xiii) rapidly changing technology;

(xiv) unanticipated regulatory or judicial proceedings and liabilities and other costs;

(xv) changes in the cost or sources of funds, demand for loan and deposit products or demand for financial services;

and (xvi) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices.

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

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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 New York counties of Erie and Niagara.

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

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

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

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

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

Impressia Bank, a division of the Bank, will operate in the Bank’s primary market areas beginning in the first quarter of 2023.

Although the Corporation’s strategies, through its Bank subsidiary, are executed based on the divisions discussed above, the Bank is a single Pennsylvania-chartered bank whereby all divisions of the Bank conduct their business on a doing business as basis.

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

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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

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Non-GAAP measures reflected within the discussion below include:

• Tangible book value per share;

• Tangible equity/tangible assets;

• Tangible book value per common share;

• Tangible common equity/tangible assets;

• Pre-provision net revenue ("PPNR");

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

• Adjusted allowance/loans receivable, net of Paycheck Protection Program ("PPP") related loans;

• Net interest margin (fully tax equivalent basis);

• Efficiency ratio;

• Return on average tangible equity;

• Pre-provision net revenue ("PPNR");

• 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.

• Non-interest income excluding realized gains on available-for-sale ("AFS") securities.

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

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.

Primary Factors Used To Evaluate Performance

Management considers return on average assets, return on average equity, return on average tangible common equity, earnings per common share, tangible book value per common share, asset quality, net interest margin, 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.

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 and future growth goals.

Additionally, management frequently evaluates the potential impact of economic and geopolitical events that may have an impact on the credit risk profile of its customers and develops proactive strategies to mitigate such potential impacts on the Corporation’s loan portfolio.

Financial Condition

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Cash and Cash Equivalents

Cash and cash equivalents totaled $732.2 million at December 31, 2021, including additional excess liquidity of $684.3 million held at the Federal Reserve.

Cash and cash equivalents totaled $106.3 million at December 31, 2022, including $43.4 million held at the Federal Reserve.

Cash and cash equivalents totaled $732.2 million at December 31, 2021.

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 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.

The decrease in cash and cash equivalents from December 31, 2021 to December 31, 2022 was due primarily to robust loan growth coupled with an increase in investment purchases, to position a portion of the excess liquidity into higher earning assets, and a decrease in deposits.

The decrease in deposits was driven primarily by the impact of competitive pricing pressures due to the rapid increase in interest rates, as well as customers experiencing substantial increases in costs due to inflation.

Management believes the liquidity needs of the Corporation are satisfied primarily by the current balance of cash and cash equivalents, customer deposits, FHLB financing, other funding sources 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.

In addition to the above noted liquidity sources, the Corporation maintains access to the Federal Reserve discount window.

Securities AFS and equity securities totaled $381.0 million and $707.6 million at December 31, 2022 and 2021, respectively.

At December 31, 2022, the total balance of investments classified as held-to-maturity ("HTM") securities was $404.8 million.

There were no investments classified as HTM at December 31, 2021.

During 2022, as a result of the Corporation’s asset/liability and capital management strategies, securities with a combined amortized cost of $220.8 million and a fair value of $213.7 million were transferred from AFS to HTM.

These HTM portfolio bonds continue to support liquidity through pledging and can be utilized as collateral against borrowings.

In addition to these internal portfolio transfers, some of the investment purchases made by the Corporation during 2022 were also classified as HTM securities.

The Corporation’s objective is to maintain the investment securities portfolio at an appropriate level to balance the earnings and liquidity provided by the portfolio.

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

The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities AFS as of December 31, 2022.

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

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Total $ 4,661 2.91 % $ 50,236 2.92 % $ 113,109 2.84 % $ 203,403 1.65 % $ 371,409 2.20 %

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 following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities HTM as of December 31, 2022.

December 31, 2022

One Year After One But Within

Five Years After Five But

Years After Ten

Government Sponsored Entities $ 5,058 0.58 % $ 242,928 1.55 % $ 59,725 1.72 % $ — — % $ 307,711 1.57 %

Residential and multi-family mortgage — — 3,841 2.78 2,499 3.34 90,714 2.82 97,054 2.83

Total $ 5,058 0.58 % $ 246,769 1.57 % $ 62,224 1.79 % $ 90,714 2.82 % $ 404,765 1.87 %

The following table summarizes the weighted average modified duration of securities AFS as of December 31, 2022.

Weighted Average Modified Duration

Government Sponsored Entities 1.06

State and Political Subdivisions 6.18

Residential and multi-family mortgage 5.76

Corporate notes and bonds 5.02

Pooled SBA 2.97

The following table summarizes the weighted average modified duration of securities HTM as of December 31, 2022.

Weighted Average Modified Duration

Government Sponsored Entities 3.44

Residential and multi-family mortgage 5.13

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

government 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.

The Corporation's strategy given the current environment is to focus on lower risk securities and shorter durations that complement the current portfolio investment ladder, coupled with 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 Asset/Liability Committee ("ALCO").

The ALCO also reviews and manages interest rate risk for the Corporation.

Through active balance sheet management and analysis of the securities portfolio, a sufficient level of liquidity is maintained to satisfy depositor requirements and various credit needs of our customers.

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.

Loans Receivable

Note 4, "Loans Receivable and Allowance for Credit Losses," in the consolidated financial statements provides more detail concerning the loan portfolio of the Corporation.

At December 31, 2022, loans, excluding the impact of (i) syndicated loans, and (ii) PPP loans, net of PPP-related fees (such loans being referred to as the "PPP-related loans"), totaled $4.1 billion, representing an increase of $654.5 million, or 18.9%, from December 31, 2021.

This favorable loan growth, which was experienced across the Corporation's footprint, continued to reflect the Corporation's ongoing expansion in the Cleveland and Southwest Virginia regions, as well as new opportunities from its new loan production office in Rochester, New York, combined with growth in the portfolio related to its Private Banking division.

For the twelve months ended December 31, 2022, the Corporation's balance sheet reflected an increase in syndicated lending balances of $30.9 million compared to December 31, 2021.

The syndicated loan portfolio totaled $156.6 million, or 3.7% of total loans, excluding PPP-related loans, at December 31, 2022, compared to $125.8 million, or 3.5% of total loans, excluding PPP-related loans, at December 31, 2021.

Loan Origination/Risk Management

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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.

Maturities and Sensitivities of Loans Receivable to Changes in Interest Rate

The following table presents the maturity distribution of the Corporation's loans receivable at December 31, 2022.

The table also presents the portion of loans receivable 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, 2022

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Fifteen Years Total

Loans with Fixed Interest Rate

Loans Receivable with Fixed Interest Rate

$ — $ 2,258 $ 8,110 $ — $ 10,368

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Total $ 89,288 $ 510,111 $ 559,912 $ 200,692 $ 1,360,003

Loans with Variable or Floating Interest Rate

Loans Receivable with Variable or Floating Interest Rate

$ 555 $ 2,936 $ 9,711 $ 8,598 $ 21,800

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Total $ 484,367 $ 564,603 $ 1,250,448 $ 615,757 $ 2,915,175

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.

1 1-4 family construction loans and other construction loans and all land development and other land loans segments may include loans that have a permanent financing period as part of the original term of the loan.

Upon completion of the construction period the loans are reclassified to their permanent financing loan segment.

Loan Concentration

At December 31, 2022, 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:

The following table presents information concerning the loan portfolio delinquency and other nonperforming assets at December 31, 2022 and 2021:

December 31, 2022 December 31, 2021

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Allowance for credit losses on loans $ 43,436 $ 37,588

Allowance for credit losses / Total loans 1.02 % 1.03 %

Ratio of allowance for credit losses on loans to nonaccrual loans 206.98 % 193.55 %

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

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.

Total nonperforming assets were $23.5 million, or 0.43% of total assets, as of December 31, 2022, compared to $20.3 million, or 0.38% of total assets, as of December 31, 2021.

In addition, the allowance for credit losses as a percentage of nonaccrual loans was 207.0% as of December 31, 2022, compared to 193.6% as of December 31, 2021.

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.

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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.

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

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

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 contractual repayment terms because of the borrower’s potential operating or financial difficulties.

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

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

Allowance for Credit Losses

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.

The amount of each allowance for credit losses account represents management's best estimate of current expected credit losses 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.

While management utilizes its best judgment and information available, the ultimate adequacy of the Corporation's allowance for credit losses account is dependent upon a variety of factors beyond the Corporation's control, including the performance of the Corporation's loan 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.

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 and Allowance for Credit Losses" in these consolidated financial statements.

The table below provides an allocation of the allowance for credit losses on loans by loan portfolio segment at December 31, 2022 and 2021;

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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 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.

1 PPP loans, net of deferred PPP processing fees, disbursed in 2021 and 2020 are included in the Commercial and Industrial classification.

The allowance for credit losses measured as a percentage of total loans was 1.02% as of December 31, 2022, compared to 1.03% as of December 31, 2021.

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

For the year ended December 31, 2022, the allowance for credit losses increased due to the growth in the Corporation's loan portfolio, including growth in new market areas.

This was partially offset by improvements in the Corporation's historical loss rates, as well as the impact of net charge-offs.

There is still a significant amount of uncertainty related to the domestic and global economy, continued supply chain challenges, persistent inflation and the COVID-19 pandemic.

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

Note 4, "Loans Receivable and Allowance for Credit Losses," to the consolidated financial statements provides further disclosure of loan balances by portfolio segment as of December 31, 2022 and 2021, as well as the nature and scope of loans modified in a troubled debt restructuring during 2022 and 2021 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, 2022, 2021 and 2020 is presented in the tables below.

December 31, 2021

Provision (Benefit) for Credit Loss Expense Net

Year Ended December 31, 2022

Provision (Benefit) for Credit Losses on Loans Receivable (1)

(Charge-Offs)

Recoveries Average

Loans Ratio of Annualized Net (Charge-Offs)

Recoveries to Average Loans

Recoveries Average Loans Receivable Ratio of Annualized Net (Charge-Offs) Recoveries to Average Loans Receivable

$ 8 $ — $ 32,075 — %

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Overdrafts 460 (423) 282 (150.00)

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

December 31, 2020

Provision (Benefit) for Credit Loss Expense Net

Total $ 7,986 $ (2,138) $ 3,897,722 (0.05) %

(1) Excludes provision for credit losses totaling $603 thousand, related to unfunded commitments.

Note 20, "Off-Balance Sheet Commitments and Contingencies," in the consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments of the Corporation.

Year Ended December 31, 2021

Provision (Benefit) for Credit Losses on Loans Receivable (1)

(Charge-Offs)

Recoveries Average

Loans Ratio of Annualized Net (Charge-Offs)

Recoveries to Average Loans

Recoveries Average Loans Receivable Ratio of Annualized Net (Charge-Offs) Recoveries to Average Loans Receivable

$ (70) $ — $ 22,970 — %

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Overdrafts 275 (278) 224 (124.11)

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

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

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

Year Ended December 31, 2020

Provision (Benefit) for Credit Loss Expense Net

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Recoveries to Average Loans

Commercial, Industrial, and Agricultural

$ (30) $ — $ 27,359 — %

Commercial Mortgages

Owner-occupied, nonfarm nonresidential properties

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

Residential Real Estate

Agricultural production and other loans to farmers

(6) — 3,185 —

Commercial and Industrial

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

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

207 — 147,851 —

19 — 10,546 —

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 — 184,980 —

Non-owner occupied, nonfarm nonresidential properties

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

1-4 Family Construction 61 — 24,893 —

Home equity lines of credit 367 (5) 103,723 —

Residential Mortgages secured by first liens 2,366 (220) 691,294 (0.03)

Residential Mortgages secured by junior liens 148 (156) 55,018 (0.28)

Other revolving credit plans (51) (116) 27,102 (0.43)

Automobile 99 (27) 26,419 (0.10)

Other consumer 1,364 (1,383) 38,679 (3.58)

Credit cards 179 (139) 8,126 (1.71)

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During the year ended December 31, 2022, the Corporation recorded a provision for credit losses of $8.6 million, as compared to a provision for credit losses of $6.0 million for the year ended December 31, 2021.

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 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.

Included in the provision for credit losses for the year ended December 31, 2022 was $603 thousand expense related to the allowance for unfunded commitments compared to no accrual towards the allowance for unfunded commitments for the year ended December 31, 2021.

Net charge-offs during the year ended December 31, 2022 were $2.1 million, compared to net charge-offs of $2.8 million during the year ended December 31, 2021.

The increase of $2.6 million in provision for credit losses, from the year ended December 31, 2021 to the year ended December 31, 2022 was primarily due to loan growth, the impact of net charge-offs and the provision for credit losses recorded in 2022, related to the allowance for unfunded commitments.

Premises and Equipment

During the years ended December 31, 2022 and 2021, the Corporation invested $12.3 million and $6.5 million, respectively, in its physical infrastructure through the purchase of land, buildings, and equipment.

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

Bank Owned Life Insurance

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

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.

The Corporation made $11.6 million in purchases of BOLI during the twelve months ended December 31, 2022, while the Corporation made $22.0 million purchases of BOLI during the twelve months ended December 31, 2021.

Funding Sources

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Total $ 4,622,437 $ 4,715,619 (2.0)%

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.

At December 31, 2022, total deposits were $4.6 billion, reflecting a decrease of $93.2 million, or 2.0%, from December 31, 2021.

During the same timeframe, while non interest-bearing deposits increased approximately $106.4 million, or 13.4%, total interest-bearing deposits decreased approximately $199.5 million, or 5.1%, from December 31, 2021.

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

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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, 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.

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

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

There were $132.4 million in short-term FHLB borrowings as of December 31, 2022, compared to zero at December 31, 2021.

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.

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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.

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

Liquidity and Capital Resources

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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 Corporation’s expected material cash requirements for the twelve months ended December 31, 2023 and thereafter consist of 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 from loans and investment securities, maturing loans and investment securities, as well as wholesale funding sources maintained by the Corporation.

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.

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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.

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

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

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.

The Corporation regularly models liquidity stress scenarios to assess potential liquidity outflows or potential funding shortfalls 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.

At December 31, 2022, the Corporation’s cash and cash equivalents position was approximately $106.3 million, including liquidity of $43.4 million held 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.

At December 31, 2022, based upon available, pledgeable collateral, the Corporation's total borrowing capacity with the FHLB was approximately $757.8 million.

Furthermore, at December 31, 2022, the Corporation had approximately $177.0 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.

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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, 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.

Shareholders' Equity

On September 21, 2022, the Corporation successfully completed a common stock offering resulting in the issuance of 4,257,446 shares of common stock at $23.50 per share and net proceeds of $94.1 million after the deducting the underwriting discount and customary offering expenses.

The net proceeds from the capital raise will be used for general corporate purposes, including working capital and funding the Corporation's organic growth across its multiple geographic markets, or evaluating potential acquisition opportunities.

As of December 31, 2022, the Corporation’s total shareholders’ equity was $530.8 million, representing an increase of $87.9 million, or 19.9%, from December 31, 2021.

This increase was primarily due to the $94.1 million increase in additional paid in capital as a result of the Corporation's common stock offering described above coupled with $63.2 million from the Corporation's earnings for the year ended 2022, partially offset by approximately $16.9 million in both, common dividends and preferred dividends, as well as an increase of $51.7 million in accumulated other comprehensive loss, resulting primarily from the temporary unrealized reduction in the value on the AFS investment portfolio during the twelve months ended December 31, 2022.

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.

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

Subordinated Debentures and Notes

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 $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.

During the year ended December 31, 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.

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

Capital Ratios and Metrics

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

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

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

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

As of December 31, 2022 all of the Corporation's capital ratios exceeded regulatory "well-capitalized" levels.

The Corporation’s capital ratios and book value per common share at December 31, 2022 and 2021 were as follows:

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Leverage ratio 10.74 % 8.22 %

Tangible common common equity/tangible assets (1)

Tangible common equity/tangible assets (1)

7.90 % 6.45 %

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

Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets from the calculation of stockholders’ equity.

Tangible common equity is calculated by excluding the balance of goodwill and other intangible assets and preferred equity from the calculation of shareholders’ equity.

Tangible assets is calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets.

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Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies.

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

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

Average Balances, Interest Rates and Yields

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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.

See Note 1, "Summary of Significant Accounting Policies," and Note 4, "Loans Receivable and Allowance for Credit Losses," 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.

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Rate Interest

Taxable (1) (4)

$ 768,959 1.80 % $ 14,560 $ 624,330 1.70 % $ 10,500 $ 505,770 2.35 % $ 11,510

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Total securities (4)

813,172 1.85 15,816 675,124 1.83 12,194 574,044 2.53 14,037

Loans receivable:

Commercial (2) (3)

1,429,634 5.08 72,684 1,284,750 4.95 63,642 1,230,615 4.80 59,016

Mortgage (2) (3) (5)

2,355,662 4.78 112,583 2,080,000 4.51 93,738 1,783,980 4.76 84,857

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

Total Loans (3)

112,426 10.48 11,778 101,169 9.98 10,098 100,576 9.71 9,766

Total loans receivable (3)

3,897,722 5.06 197,045 3,465,919 4.83 167,478 3,115,171 4.93 153,639

Other earning assets 243,653 1.16 2,112 626,997 0.14 881 402,861 0.21 852

Total earning assets 4,954,547 4.30 $ 214,973 4,768,040 3.79 $ 180,553 4,092,076 4.14 $ 168,528

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

Noninterest-bearing assets:

Cash and due from banks 51,670 48,673 42,001

Premises and equipment 89,940 79,807 75,516

Other assets 227,991 199,107 166,511

Allowance for credit losses (39,935) (36,727) (28,962)

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

Total noninterest-bearing assets 329,666 290,860 255,066

TOTAL ASSETS $ 5,284,213 $ 5,058,900 $ 4,347,142

LIABILITIES AND SHAREHOLDERS’ EQUITY:

Interest Bearing Deposits

Demand—interest-bearing $ 1,061,452 0.20 $ 2,131 $ 978,279 0.18 $ 1,783 $ 755,200 0.24 $ 1,781

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Finance lease liabilities 426 4.69 20 507 4.54 23 587 4.60 27

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

Subordinated notes and debentures 104,432 3.69 3,857 108,963 4.35 4,735 70,620 5.35 3,780

Total interest-bearing liabilities 3,910,293 0.62 $ 24,079 3,842,797 0.52 $ 19,820 3,415,878 0.95 $ 32,456

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

Demand—noninterest-bearing 847,793 724,839 516,724

Other liabilities 70,379 60,202 56,377

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Interest expense/Earning assets 0.48 24,079 0.41 19,820 0.80 32,456

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

Net interest margin (fully tax-equivalent) 3.82 % $ 190,894 3.38 % $ 160,733 3.34 % $ 136,072

(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.

(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, 2021, 2020 and 2019.

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.

(2) Average yields are stated on a fully taxable equivalent basis (calculated using statutory rates of 21%) resulting from tax-free municipal securities in the investment portfolio and tax-free municipal loans in the commercial loan portfolio.

The taxable equivalent adjustment to net interest income for the years ended December 31, 2022, 2021 and 2020 were $1.2 million, $953 thousand and $1.4 million, respectively.

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

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

In addition, loans receivable interest income consists of loans receivable fees, including PPP deferred processing fees.

(4) Average balance is computed using the fair value of AFS securities and amortized cost of HTM securities.

Average yield has been computed using amortized cost average balance for AFS and HTM securities.

The adjustment to the average balance for securities in the calculation of average yield for the years ended December 31, 2022, 2021 and 2020 were $(40.3) million, $9.9 million and $18.9 million, respectively.

(5) Includes loans held for sale.

Volume Analysis of Changes in Net Interest Income

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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.

Net income available to common shareholders ("earnings") was $58.9 million, or $3.26 per diluted share, for the twelve months ended December 31, 2022, compared to $53.4 million, or $3.16 per diluted share, for the twelve months ended December 31, 2021, reflecting increases of $5.5 million, or 10.3%, and $0.10 per diluted share, or 3.2%.

The 2022 full-year earnings per share was partially impacted by the effect of the Corporation's common stock offering completed in September of 2022, resulting in the issuance of 4,257,446 shares of common stock at $23.50 per share and net proceeds of $94.1 million after deducting the underwriting discount and customary offering expenses.

PPNR, a non-GAAP measure, was $86.8 million for the year ended December 31, 2022, compared to $76.8 million for the year ended December 31, 2021, reflecting an increase of $10.0 million, or 13.1%.

The increase in PPNR for the year ended December 31, 2022 was primarily driven by growth in loans and expansion of the Corporation's net interest margin.

Return on average equity was 13.86% for the year ended December 31, 2022, compared to 13.39% for the year ended December 31, 2021.

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.

Return on average tangible common equity, a non-GAAP measure, was 16.64% and 16.23% for the same periods in 2022 and 2021, respectively.

The Corporation's efficiency ratio was 61.32% and 61.87% for the twelve and three months ended December 31, 2022, respectively, compared to 60.26% and 63.68% for the twelve and three months ended December 31, 2021, respectively.

The efficiency ratio on a fully tax-equivalent basis, a non-GAAP ratio, was 60.87% and 61.40% for the twelve and three months ended December 31, 2022, respectively, compared to 59.76% and 63.19% for the twelve and three months ended December 31, 2021, respectively.

The increase for the twelve months ended December 31, 2022 was primarily a result of expected increasing costs associated with the Corporation’s expanding franchise investments into the Cleveland and Southwest Virginia markets, coupled with its continued strategic investments in technologies focused on customer sales management and connectivity capabilities.

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.

Net interest income of $189.7 million for the year ended December 31, 2022 increased $29.9 million, or 18.7%, from the year ended December 31, 2021, primarily as a result of loan growth throughout 2022 and the benefits of the impact of rising interest rates in 2022 resulting in greater income on variable-rate loans, coupled with net growth in the Corporation's investment portfolio.

Included in net interest income were PPP-related fees, which totaled approximately $1.9 million for the year ended December 31, 2022, compared to $8.7 million for the year ended December 31, 2021.

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.

Net interest margin was 3.83% and 3.35% for the twelve months ended December 31, 2022 and 2021, respectively.

Net interest margin on a fully tax-equivalent basis, a non-GAAP measure, was 3.82% and 3.38% for the twelve months ended December 31, 2022 and 2021, respectively.

The yield on earning assets of 4.30% for the year ended December 31, 2022 increased 51 basis points from 3.79% for the year ended December 31, 2021, primarily as a result of loan growth, the repricing of variable rate loans, and the Corporation's redeployment of excess cash at the Federal Reserve to investment securities, partially offset by lower PPP-related fees in 2022 compared to 2021.

The cost of interesting-bearing liabilities increased 10 basis points from 0.52% for the year ended December 31, 2021 to 0.62% for the year ended December 31, 2022, primarily as a result of the Corporation's targeted interest-bearing deposit rate increases.

Provision for Credit Losses

The Corporation recorded a provision for credit losses of $8.6 million in 2022 compared to $6.0 million in 2021.

Net loan charge-offs were $2.1 million during the year ended December 31, 2022, compared to $2.8 million during the year ended December 31, 2021.

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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.

Total non-interest income was $34.8 million for the year ended December 31, 2022, representing an increase of $1.3 million, or 4.0%, from the same period in 2021.

Included in non-interest income for the years ended December 31, 2022 and 2021 was $651 thousand and $783 thousand, respectively, in net realized gains on AFS securities.

Non-interest income excluding net realized gains on AFS securities, a non-GAAP measure, for the year ended December 31, 2022 and the year ended December 31, 2021, increased $1.5 million, or 4.5%, from the same period in 2021.

During the year ended December 31, 2022, Wealth and Asset Management fees increased $432 thousand, or 6.4%, compared to the year ended December 31, 2021, as the Corporation benefited from an increased number of wealth management relationships.

Other notable increases during the year ended December 31, 2022 included increased income from service charges on deposits, other service charges and fees, pass-through income from small business investment companies ("SBICs") and bank owned life insurance mostly due to an $883 thousand gain resulting from death benefit proceeds.

These were partially offset by unrealized losses on equity securities and decreased mortgage banking activity.

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.

For the year ended December 31, 2022, total non-interest expense was $137.6 million, reflecting an increase of $21.2 million, or 18.2%, from the year ended December 31, 2021, primarily as a result of (i) expansion of the Corporation's workforce in its growth regions of Cleveland, Southwest Virginia, and Rochester, (ii) increased investments in technology aimed at enhancing both customer experience and expanding service delivery channels, and (iii) the Corporation's sales management and increased legal and professional expenses.

Year Ended December 31, 2021 vs.

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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.

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%.

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

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

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

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

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

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

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

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

Earnings were $53.4 million, or $3.16 per diluted share, for the year ended December 31, 2021, compared to $31.6 million, or $1.97 per diluted share, for the year ended December 31, 2020, reflecting increases of $21.8 million, or 69.0%, 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.

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.

PPNR, a non-GAAP measure, 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, a non-GAAP measure, was 16.23% and 10.67% for the same periods in 2021 and 2020, respectively.

As a measure of the Corporation’s efficiency in management of its expenses, the efficiency ratio on a fully tax-equivalent basis, a non-GAAP 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 December 31, 2020 increased 15.9% to $134.7 million from the twelve months ended December 31, 2019, driven by an organic growth of $560.9 million in earning assets, coupled with $336.3 million in PPP-related loans, estimated PPP-related deposits and Paycheck Protection Program Lending Facility ("PPPLF") related assets (collectively the "PPP-related assets").

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

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

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

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

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

Net interest income for the year ended December 31, 2021 increased $25.1 million, or 18.6%, to $159.8 million from the year 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, a non-GAAP measure, 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 year ended December 31, 2021 decreased 35 basis points from 4.14% for the year 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.

Provision for Credit Losses

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Non-Interest Income

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

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

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

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 AFS securities.

Non-interest income excluding net realized gains on AFS securities, a non-GAAP measure, for the year ended December 31, 2021, increased $6.8 million, or 26.2%, from the same period in 2020.

Other significant factors that contributed to the increase included income from investments in SBICs, 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 twelve months ended December 31, 2020, total non-interest expense was $107.3 million.

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

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

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

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

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.

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

Income Tax Expense

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Included in the 18.3% effective tax rate for the year ended December 31, 2020 were merger costs, FHLB prepayment penalties and branch closure costs, all of which reduced the effective tax rate.

Off-Balance Sheet Arrangements

Assets under management and assets under custody are held in fiduciary or custodial capacity for the Corporation's clients.

In accordance with U.S.

generally accepted accounting principles, these assets are not included on the Corporation's balance sheet.

The Corporation is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of the Corporation's clients.

These financial instruments include commitments to extend credit and standby letters of credit.

Further discussion of these commitments is included Note 20, "Off-Balance Sheet Commitments and Contingencies."

Critical Accounting Policies and Estimates

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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.

Fair Value Measurements

The Corporation uses fair value measurements to record certain financial instruments and to determine fair value disclosures.

AFS securities, mortgage loans held for sale, and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis.

Additionally, from time to time, the Corporation may be required to record at fair value other financial assets on a nonrecurring basis.

These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets.

GAAP establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value.

The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable.

Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data.

The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data.

For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value.

When observable market prices and data are not fully available, management judgment is necessary to estimate fair value.

In addition, changes in the market conditions may reduce the availability of quoted prices or observable data.

For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable.

Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement.

Fair value is discussed further in Note 1, "Summary of Significant Accounting Policies" and in Note 6, "Fair Value Measurements."

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.

Goodwill is tested at least annually for impairment, and if certain events occur which indicate goodwill might be impaired between annual tests, 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.

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December 31, December 31,

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

Calculation of tangible book value per common share and tangible common equity / tangible assets (non-GAAP):

Shareholders' equity $ 530,762 $ 442,847

preferred equity 57,785 57,785

Common shareholders' equity 472,977 385,062

goodwill 43,749 43,749

core deposit intangible 364 460

Tangible common equity $ 340,853 $ 314,036

Tangible common equity (non-GAAP) $ 428,864 $ 340,853

Total assets $ 5,475,179 $ 5,328,939

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core deposit intangible 364 460

Tangible assets $ 5,284,730 $ 4,685,083

Tangible assets (non-GAAP) $ 5,431,066 $ 5,284,730

Ending shares outstanding 21,121,346 16,855,062

Tangible book value per common share $ 20.22 $ 18.66

Tangible common equity/Tangible assets 6.45 % 6.70 %

Book value per common share (GAAP) $ 22.39 $ 22.85

Tangible book value per common share (non-GAAP) $ 20.30 $ 20.22

Common shareholders' equity / Total assets (GAAP) 8.64 % 7.23 %

Tangible common equity / Tangible assets (non-GAAP) 7.90 % 6.45 %

December 31, December 31,

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

Calculation of allowance for credit losses / total loans, net of PPP-related loans (non-GAAP):

Total allowance for credit losses $ 43,436 $ 37,588

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Adjusted total loans, net of PPP-related loans (non-GAAP) $ 4,275,019 $ 3,589,589

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

Allowance for credit losses / total loans (GAAP) 1.02 % 1.03 %

Adjusted allowance for credit losses / total loans, net of PPP-related loans (non-GAAP) 1.02 % 1.05 %

Twelve Months Ended

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

Interest income (fully tax equivalent basis) (non-GAAP) $ 180,553 $ 168,528

Interest expense (fully tax equivalent basis) (non-GAAP) 19,820 32,456

Calculation of net interest margin:

Interest income $ 213,738 $ 179,600

Interest expense 24,079 19,820

Net interest income $ 189,659 $ 159,780

Average total earning assets $ 4,954,547 $ 4,768,040

Net interest margin (GAAP) (annualized) 3.83 % 3.35 %

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

Interest income $ 213,738 $ 179,600

Tax equivalent adjustment (non-GAAP) 1,235 953

Adjusted interest income (fully tax equivalent basis) (non-GAAP) 214,973 180,553

Interest expense 24,079 19,820

Net interest income (fully tax equivalent basis) (non-GAAP) $ 190,894 $ 160,733

Average total earning assets $ 4,954,547 $ 4,768,040

average mark to market adjustment on investments 8,141 18,884

average mark to market adjustment on investments (non-GAAP) (40,271) 9,879

Adjusted average total earning assets, net of mark to market (non-GAAP) $ 4,994,818 $ 4,758,161

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Twelve Months Ended

Calculation of PPNR (non-GAAP):

Net interest income $ 189,659 $ 159,780

Non-interest income 34,766 33,434

Non-interest expense 137,622 116,433

PPNR (non-GAAP) $ 86,803 $ 76,781

(1) Management believes that this is an important metric as it illustrates the underlying performance of the Corporation, it enables investors and others to assess the Corporation's ability to generate capital to cover credit losses through the credit cycle and provides consistent reporting with a key metric used by bank regulatory agencies.

Twelve Months Ended

Calculation of efficiency ratio:

Non-interest expense $ 137,622 $ 116,433

Non-interest income $ 34,766 $ 33,434

Net interest income 189,659 159,780

Total revenue $ 224,425 $ 193,214

Efficiency ratio 61.32 % 60.26 %

Calculation of efficiency ratio (fully tax equivalent basis) (non-GAAP):

Non-interest expense $ 137,622 $ 116,433

core deposit intangible amortization 96 107

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tax exempt investment and loan income, net of TEFRA (non-GAAP) 5,011 4,973

tax exempt investment and loan income (non-GAAP) (tax-equivalent) 6,416 7,490

Adjusted net interest income (non-GAAP) 161,223 136,498

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

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

tax exempt investment and loan income (fully tax equivalent basis) (non-GAAP) 6,509 6,416

Adjusted net interest income (fully tax equivalent basis) (non-GAAP) 191,157 161,223

Adjusted net revenue (fully tax equivalent basis) (non-GAAP) $ 225,923 $ 194,657

Efficiency ratio (fully tax equivalent basis) (non-GAAP) 60.87 % 59.76 %

Twelve Months Ended

Calculation of adjusted return on average equity:

Calculation of return on average tangible common equity (non-GAAP):

Net income $ 63,188 $ 57,707

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

Adjusted net income $ 57,707 $ 42,911

preferred stock dividends 4,302 4,302

Net income available to common shareholders $ 58,886 $ 53,405

Average shareholders' equity $ 455,748 $ 431,062

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

average goodwill & intangibles 44,163 44,265

average preferred equity 57,785 57,785

Tangible common shareholders' equity (non-GAAP) $ 353,800 $ 329,012

Return on average equity (GAAP) (annualized) 13.86 % 13.39 %

Return on average common equity (GAAP) (annualized) 12.92 % 12.39 %

Return on average tangible common equity (non-GAAP) (annualized) 16.64 % 16.23 %

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 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:

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

Non-interest income $ 34,766 $ 33,434

net realized gains on available-for-sale securities 651 783

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

Adjusted non-interest income (non-GAAP) $ 34,115 $ 32,651

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