What changed in this filing

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Item 1. Financial Statements

2020-11-09 compared with 2020-08-10 · 336 added, 261 removed, 816 unchanged (42% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

(Unaudited) June 30,

(Unaudited) September 30,

2020 December 31,

6 unchanged sentences

Available-for-Sale 158,956 197,385

Loans, Net of Allowance for Loan Losses of $ 12,648 and $ 9,867 at June 30, 2020 and December 31, 2019, Respectively

Loans, Net of Allowance for Loan Losses of $ 13,780 and $ 9,867 at September 30, 2020 and December 31, 2019, Respectively

1,037,105 942,629

3 unchanged sentences

24,639 24,222

28,425 28,425

Intangible Assets, Net

19 unchanged sentences

Common Stock, $ 0.4167 Par Value;

35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,393,712 and 5,463,828 Shares Outstanding at June 30, 2020 and December 31, 2019, Respectively

35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,398,712 and 5,463,828 Shares Outstanding at September 30, 2020 and December 31, 2019, Respectively

Capital Surplus

2 unchanged sentences

49,348 66,955

Treasury Stock, at Cost ( 287,281 and 217,165 Shares at June 30, 2020 and December 31, 2019, Respectively)

Treasury Stock, at Cost ( 282,281 and 217,165 Shares at September 30, 2020 and December 31, 2019, Respectively)

( 5,825 ) ( 3,842 )

5 unchanged sentences

The accompanying notes are an integral part of these consolidated financial statements

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

CONSOLIDATED STATEMENT OF (LOSS) INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

June 30, 2020

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

2 unchanged sentences

Loans, Including Fees $ 10,709 $ 10,984 $ 32,050 $ 32,090

$ 10,577 $ 10,673 $ 21,341 $ 21,106

Investment Securities:

940 1,442 2,141 2,759

106 160 212 368

Taxable 753 1,558 2,894 4,317

Tax-Exempt 79 131 291 499

Dividends 19 20 59 60

Other Interest and Dividend Income 96 405 418 1,097

84 374 322 692

TOTAL INTEREST AND DIVIDEND INCOME 11,656 13,098 35,712 38,063

11,727 12,669 24,056 24,965

INTEREST EXPENSE

1,305 1,824 2,986 3,543

Deposits 1,150 1,864 4,136 5,407

Short-Term Borrowings 28 47 112 143

Other Borrowings 62 91 194 278

62 90 132 187

TOTAL INTEREST EXPENSE 1,240 2,002 4,442 5,828

1,406 1,964 3,202 3,826

NET INTEREST INCOME

10,321 10,705 20,854 21,139

NET INTEREST AND DIVIDEND INCOME 10,416 11,096 31,270 32,235

Provision For Loan Losses 1,200 175 4,000 550

300 350 2,800 375

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,216 10,921 27,270 31,685

10,021 10,355 18,054 20,764

NONINTEREST INCOME

487 617 1,092 1,210

Service Fees 554 639 1,646 1,849

Insurance Commissions 1,079 985 3,475 3,219

1,113 1,083 2,396 2,234

Other Commissions 76 98 374 293

188 78 298 195

Net Gain on Sales of Loans 435 48 1,003 190

441 50 568 142

Net Gain (Loss) on Sales of Investment Securities — 3 489 ( 50 )

Change in Fair Value of Marketable Equity Securities ( 59 ) ( 25 ) ( 469 ) 104

28 109 ( 410 ) 129

Net Gain on Purchased Tax Credits 15 9 46 27

Net Gain on Disposal of Fixed Assets — 8 17 2

Net (Loss) Gain on Disposal of Fixed Assets ( 65 ) — ( 48 ) 2

Income from Bank-Owned Life Insurance 140 142 417 408

138 134 277 266

Other (Loss) Income ( 2 ) 67 ( 240 ) 203

TOTAL NONINTEREST INCOME 2,173 1,966 6,693 6,245

2,648 2,165 4,520 4,279

NONINTEREST EXPENSE

Salaries and Employee Benefits 5,124 4,628 14,683 14,273

4,828 4,708 9,559 9,645

699 663 1,432 1,422

224 285 481 581

Occupancy 759 597 2,191 2,019

Equipment 220 266 701 847

Data Processing 482 370 1,367 1,158

460 380 885 788

FDIC Assessment 172 5 493 368

163 175 321 363

PA Shares Tax 355 226 963 743

333 249 608 517

Contracted Services 531 312 1,471 945

562 361 940 633

Legal and Professional Fees 161 117 567 458

171 160 406 341

155 220 338 337

Advertising 148 208 486 545

Other Real Estate Owned (Income) ( 12 ) 13 ( 30 ) ( 81 )

( 1 ) ( 31 ) ( 18 ) ( 94 )

Amortization of Intangible Assets 532 531 1,596 1,595

532 532 1,064 1,064

945 1,095 2,058 2,080

Goodwill Impairment 18,693 — 18,693 —

Writedown of Fixed Assets 884 — 884 —

Other 919 984 2,977 3,064

TOTAL NONINTEREST EXPENSE 28,968 8,257 47,042 25,934

9,071 8,797 18,074 17,677

Income Before Income Tax Expense

3,598 3,723 4,500 7,366

Income Tax Expense

695 744 824 1,462

$ 2,903 $ 2,979 $ 3,676 $ 5,904

EARNINGS PER SHARE

$ 0.54 $ 0.55 $ 0.68 $ 1.09

0.54 0.55 0.68 1.08

(Loss) Income Before Income Tax (Benefit) Expense ( 17,579 ) 4,630 ( 13,079 ) 11,996

Income Tax (Benefit) Expense ( 184 ) 884 640 2,346

NET (LOSS) INCOME $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650

(LOSS) EARNINGS PER SHARE

Basic $ ( 3.22 ) $ 0.69 $ ( 2.54 ) $ 1.78

Diluted ( 3.22 ) 0.69 ( 2.54 ) 1.77

WEIGHTED AVERAGE SHARES OUTSTANDING

5,393,712 5,433,537 5,412,456 5,433,198

5,393,770 5,444,824 5,423,770 5,448,040

Basic 5,395,342 5,433,289 5,406,710 5,433,296

Diluted 5,395,342 5,458,723 5,406,710 5,451,705

The accompanying notes are an integral part of these consolidated financial statements

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

(Dollars in thousands)

$ 2,903 $ 2,979 $ 3,676 $ 5,904

Net (Loss) Income $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650

Other Comprehensive (Loss) Income:

2 unchanged sentences

Income Tax Effect 137 ( 47 ) ( 481 ) ( 1,209 )

Reclassification Adjustment for (Gain) Loss on Sales of Investment Securities Included in Net Income (1)

Reclassification Adjustment for (Gain) Loss on Sale of Investment Securities Included in Net (Loss) Income (1)

— ( 3 ) ( 489 ) 50

3 unchanged sentences

( 516 ) 72 1,425 4,482

Total Comprehensive Income

$ 2,065 $ 5,005 $ 5,617 $ 10,314

(1) The gross amount of gain (loss) on sales of investment securities is reported as Net Gain (Loss) on Sales of Investments Securities on the Consolidated Statement of Income.

The income tax effect (benefit) is included in Income Tax Expense on the Consolidated Statement of Income.

Total Comprehensive (Loss) Income $ ( 17,911 ) $ 3,818 $ ( 12,294 ) $ 14,132

(1) The gross amount of gain (loss) on sales of investment securities is reported as Net Gain (Loss) on Sales of Investments Securities on the Consolidated Statement of (Loss) Income.

The income tax effect (benefit) is included in Income Tax Expense on the Consolidated Statement of (Loss) Income.

The accompanying notes are an integral part of these consolidated financial statements

7 unchanged sentences

(Dollars in thousands, except share and per share data)

March 31, 2020 5,680,993 $ 2,367 $ 83,216 $ 66,431 $ ( 5,914 ) $ 5,425 $ 151,525

Comprehensive Income:

— — — 2,903 — — 2,903

June 30, 2020 5,680,993 $ 2,367 $ 83,327 $ 68,039 $ ( 5,928 ) $ 4,587 $ 152,392

Comprehensive Loss:

Net Loss — — — ( 17,395 ) — — ( 17,395 )

Other Comprehensive Loss — — — — — ( 516 ) ( 516 )

Stock-Based Compensation Expense

Restricted Stock Awards Granted

— — ( 103 ) — 103 — —

Exercise of Stock Options

Stock-Based Compensation Expense

— — 114 — — — 114

1 unchanged sentence

— — — ( 1,296 ) — — ( 1,296 )

June 30, 2020 5,680,993 $ 2,367 $ 83,327 $ 68,039 $ ( 5,928 ) $ 4,587 $ 152,392

September 30, 2020 5,680,993 $ 2,367 $ 83,338 $ 49,348 $ ( 5,825 ) $ 4,071 $ 133,299

Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other

1 unchanged sentence

(Dollars in thousands, except share and per share data)

March 31, 2019 5,680,993 $ 2,367 $ 83,307 $ 59,464 $ ( 4,353 ) $ 944 $ 141,729

June 30, 2019 5,680,993 $ 2,367 $ 83,380 $ 61,140 $ ( 4,350 ) $ 2,970 $ 145,507

Comprehensive Income:

1 unchanged sentence

Other Comprehensive Income — — — — — 72 72

Restricted Stock Awards Forfeited — — 8 — ( 8 ) — —

Restricted Stock Awards Granted — — ( 11 ) — 11 — —

Stock-Based Compensation Expense — — 77 — — — 77

1 unchanged sentence

— — — ( 1,304 ) — — ( 1,304 )

June 30, 2019 5,680,993 $ 2,367 $ 83,380 $ 61,140 $ ( 4,350 ) $ 2,970 $ 145,507

September 30, 2019 5,680,993 $ 2,367 $ 83,457 $ 63,582 $ ( 4,350 ) $ 3,042 $ 148,098

The accompanying notes are an integral part of these consolidated financial statements

8 unchanged sentences

December 31, 2019 5,680,993 $ 2,367 $ 82,971 $ 66,955 $ ( 3,842 ) $ 2,646 $ 151,097

Comprehensive Income:

— — — 3,676 — — 3,676

Comprehensive (Loss) Income:

Net Loss — — — ( 13,719 ) — — ( 13,719 )

Other Comprehensive Income

— — — — — 1,425 1,425

Restricted Stock Awards Granted

— — ( 103 ) — 103 — —

Restricted Stock Awards Forfeited — — 96 — ( 96 ) — —

7 unchanged sentences

— — — ( 3,888 ) — — ( 3,888 )

June 30, 2020 5,680,993 $ 2,367 $ 83,327 $ 68,039 $ ( 5,928 ) $ 4,587 $ 152,392

Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other

September 30, 2020 5,680,993 $ 2,367 $ 83,338 $ 49,348 $ ( 5,825 ) $ 4,071 $ 133,299

Shares Issued

Capital Surplus

Retained Earnings

Treasury Stock

Accumulated Other

Comprehensive Income (Loss) Total Stockholders' Equity

10 unchanged sentences

— — — ( 3,911 ) — — ( 3,911 )

June 30, 2019 5,680,993 $ 2,367 $ 83,380 $ 61,140 $ ( 4,350 ) $ 2,970 $ 145,507

September 30, 2019 5,680,993 $ 2,367 $ 83,457 $ 63,582 $ ( 4,350 ) $ 3,042 $ 148,098

The accompanying notes are an integral part of these consolidated financial statements

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30, 2020 2019

Nine Months Ended September 30, 2020 2019

(Dollars in thousands)

OPERATING ACTIVITIES

Net Income $ 3,676 $ 5,904

Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities:

Net (Accretion) Amortization on Investments ( 50 ) 20

Net (Loss) Income $ ( 13,719 ) $ 9,650

Αdjustmеnts to Rеconcilе Net (Loss) Income to Net Cash Provided By Operating Activities:

Net Accretion on Investments ( 9 ) ( 145 )

Depreciation and Amortization 2,578 2,730

Provision for Loan Losses 4,000 550

Goodwill impairment 18,693 —

Writedown on Fixed Assets 884 —

Change in Fair Value of Marketable Equity Securities 469 ( 104 )

5 unchanged sentences

Net (Gain) Loss on Sales of Investment Securities ( 489 ) 50

Net Loss (Gain) on Sales of Other Real Estate Owned and Repossessed Assets 16 ( 30 )

Net Loss on Sales of Other Real Estate Owned and Repossessed Assets 26 6

Noncash Expense for Stock-Based Compensation 370 230

Increase in Accrued Interest Receivable ( 1,366 ) ( 343 )

Net Gain on Disposal of Fixed Assets ( 17 ) ( 2 )

Increase in Taxes Payable 1,018 536

(Increase) Decrease in Accrued Interest Receivable ( 944 ) 33

Net Loss (Gain) on Disposal of Fixed Assets 48 ( 2 )

(Decrease) Increase in Taxes Payable ( 253 ) 259

Payments on Operating Leases ( 412 ) ( 312 )

(Decrease) Increase in Accrued Interest Payable ( 252 ) 331

Net Payment of Federal and State Income Taxes — ( 1,365 )

Other, Net ( 1,329 ) ( 136 )

11 unchanged sentences

(Increase) Decrease in Restricted Equity Securities ( 305 ) 214

Acquisition of Bank Owned Life Insurance — ( 750 )

NET CASH USED IN INVESTING ACTIVITIES ( 60,539 ) ( 8,145 )

7 unchanged sentences

NET CASH PROVIDED BY FINANCING ACTIVITIES 83,293 30,500

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 51,186 ( 8,979 )

INCREASE IN CASH AND CASH EQUIVALENTS 31,952 35,060

CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 80,217 53,353

CASH AND DUE FROM BANKS AT END OF PERIOD $ 112,169 $ 88,413

The accompanying notes are an integral part of these consolidated financial statements

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 2020 2020 2019

(Dollars in thousands)

SUPPLEMENTAL CASH FLOW INFORMATION:

5 unchanged sentences

Real estate acquired in settlement of loans 115 427

Income tax refund receivable 1,002 —

Loan payoff receivable 5,628 1,644

Right of use asset recognized 329 1,706

22 unchanged sentences

The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank.

The Bank operates 16 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, seven offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio.

The Bank operates 15 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, six offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio.

The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area.

2 unchanged sentences

Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation.

Such reclassifications did not affect net income or stockholders’ equity.

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.

At June 30, 2020 and December 31, 2019, the carrying value of goodwill was $ 28.4 million.

Goodwill is subject to impairment testing at the reporting unit level, which is conducted at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist.

The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment.

The Company has assigned 100 % of the goodwill to the Community Banking reporting unit.

In 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-04 whereby the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

The Company has the option of performing a qualitative assessment to determine whether any further quantitative testing for impairment is necessary.

The option of whether or

not to perform a qualitative assessment is made annually.

The quantitative test primarily utilizes market comparisons and recent merger and acquisition transactions to determine whether there is goodwill impairment.

The COVID-19 pandemic that has impacted the U.S.

and most of the world and government response to curtail the spread of the virus through shelter-in-place orders and mandatory closures of all but essential businesses beginning in March 2020 has significantly impacted our market area and the activities of individuals and businesses.

These restrictions have resulted in significant adverse effects on macroeconomic conditions, and stock market valuations have decreased substantially for most companies, including banks.

The ultimate effect of COVID-19 on the local or broader economy is not yet known nor is the ultimate length of the restrictions described and any accompanying effects.

In light of the adverse circumstances resulting from COVID-19, management determined it was necessary to evaluate goodwill for impairment at March 31, 2020.

Determining the fair value of a reporting unit under a quantitative goodwill impairment test is judgmental and often involves the use of significant estimates and assumptions.

The Company utilized a market approach to determine the fair value of the Community Banking reporting unit.

Significant assumptions inherent in the valuation methodologies for goodwill are employed and include, but are not limited to, current and prospective financial information of the Bank, most recent performance of the Bank’s peers, including common banking industry performance measures and ratios, and comparable multiples from publicly traded companies in our industry.

The valuation was primarily based on observable price to tangible book value bank merger and acquisition multiples for similar size community banks, which is the most widely used valuation metric in the community banking industry.

As part of its analysis, the Company considered bank transactions of target banks that were comparable in asset size, risk and profitability and efficiency metrics during the “Great Recession” period from 2008 to 2010 when bank stock values were depressed and the stock market decline was similar with the current sudden and unexpected events caused by the COVID-19 pandemic.

Based on the analysis, management determined that goodwill was not impaired as of March 31, 2020.

Future events, particularly worsening business, profitability and economic conditions as of a result of the COVID-19 pandemic, could cause additional triggering events and require management to further evaluate goodwill for impairment.

In performing our quarterly goodwill impairment assessment, we first assessed qualitative factors to determine whether any triggering events occurred that would require us to perform an interim goodwill impairment analysis and evaluate if it is more likely than not that the fair value of a reporting unit is less than its carrying value.

Qualitative factors include, among other things, macroeconomic conditions, industry and market considerations, financial performance of the reporting unit and other relevant entity and reporting-unit specific considerations.

Based on qualitative assessment as of June 30, 2020, we concluded that no triggering events occurred and it is more likely than not that the fair value of a reporting unit exceed its carrying value indicating that goodwill of the reporting unit is considered not impaired.

As such, no quantitative assessment was performed.

Such reclassifications did not affect net (loss) income or stockholders’ equity.

Recent Accounting Standards

In March 2020, the Financial Accounting Standard Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848):

In March 2020, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

3 unchanged sentences

The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition.

The optional expedient allows companies to account for the modification as if it was not substantial (i.e., do not treat as an extinguishment of debt).

expedient allows companies to account for the modification as if it was not substantial (i.e., do not treat as an extinguishment of debt).

The ASU is intended to help stakeholders during the global market-wide reference rate transition period.

5 unchanged sentences

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments.

This guidance became effective for the Company beginning in the first quarter 2020

and the adoption of this ASU did not have a material impact on the Company's consolidated statement of financial condition or results of operations.

This guidance became effective for the Company beginning in the first quarter 2020 and the adoption of this ASU did not have a material impact on the Company's consolidated statement of financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) .

26 unchanged sentences

The Company is evaluating the impact of this ASU and expects to recognize a one-time adjustment to the allowance for loan losses upon adoption, but we cannot yet determine the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.

Earnings Per Share

There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share;

therefore, net income as presented on the Consolidated Statement of Income is used as the numerator.

(Loss) Earnings Per Share

There are no convertible securities which would affect the numerator in calculating basic and diluted (loss) earnings per share;

therefore, net (loss) income as presented on the Consolidated Statement of (Loss) Income is used as the numerator.

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

(Dollars in thousands, except share and per share data)

$ 2,903 $ 2,979 $ 3,676 $ 5,904

Net (Loss) Income $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650

Weighted-Average Basic Common Shares Outstanding

4 unchanged sentences

5,395,342 5,458,723 5,406,710 5,451,705

Earnings per share:

(Loss) Earnings Per Share:

$ ( 3.22 ) $ 0.69 $ ( 2.54 ) $ 1.78

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

1 unchanged sentence

Restricted Stock 49,130 — 49,130 600

When there is a net loss for the period, the exercise or conversion of any potential shares increases the number of shares in the denominator and results in a lower loss per share.

In that situation, the potential shares are antidilutive and not included in the Company's loss per share calculation.

Therefore, if there is a net loss, diluted loss per share is the same as basic loss per share.

Investment Securities

The following table presents the amortized cost and fair value of investment securities available-for-sale at the dates indicated:

June 30, 2020

September 30, 2020

(Dollars in thousands)

26 unchanged sentences

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at the dates indicated:

June 30, 2020

September 30, 2020

Less than 12 months

3 unchanged sentences

8 $ 33,815 $ ( 178 ) — $ — $ — 8 $ 33,815 $ ( 178 )

Obligations of States and Political Subdivisions

— — — — — — — — —

Mortgage Backed Securities- Government Sponsored Enterprises

1 695 ( 1 ) — — — 1 695 ( 1 )

Total 8 $ 33,815 $ ( 178 ) — $ — $ — 8 $ 33,815 $ ( 178 )

10 unchanged sentences

13 $ 36,119 $ ( 187 ) 8 $ 16,158 $ ( 86 ) 21 $ 52,277 $ ( 273 )

For debt securities, the Company does not believe that any individual unrealized loss as of June 30, 2020 or December 31, 2019, represents an other-than-temporary impairment.

For debt securities, the Company does not believe that any individual unrealized loss as of September 30, 2020 or December 31, 2019, represents an other-than-temporary impairment.

The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary impairment.

The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer.

The securities that are temporarily impaired at June 30, 2020 and December 31, 2019 relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The securities that are temporarily impaired at September 30, 2020 and December 31, 2019 relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

The Company does not intend to sell, or it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security.

The following table presents the scheduled maturities of debt securities as of the date indicated:

June 30, 2020

September 30, 2020

(Dollars in thousands)

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

3 unchanged sentences

Net Gain (Loss) on Sales of Investment Securities $ — $ 3 $ 489 $ ( 50 )

Marketable equity securities are measured at fair value with changes in fair value included in Change in Fair Value of Marketable Equity Securities on the Consolidated Statement of Income.

Realized gains and losses on sales of marketable equity securities are included in Net Gain (Loss) on Sales of Investment Securities on the Consolidated Statement of Income.

There were no sales of marketable equity securities for the three and six months ended June 30, 2020 and 2019, respectively.

Marketable equity securities are measured at fair value with changes in fair value included in Change in Fair Value of Marketable Equity Securities on the Consolidated Statement of (Loss) Income.

Realized gains and losses on sales of marketable equity securities are included in Net Gain (Loss) on Sales of Investment Securities on the Consolidated Statement of (Loss) Income.

There were no sales of marketable equity securities for the three and nine months ended September 30, 2020 and 2019, respectively.

Loans and Allowance for Loan Losses

2 unchanged sentences

The following table presents the classifications of loans as of the dates indicated.

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(Dollars in thousands)

12 unchanged sentences

On April 16, 2020, the original $349 billion funding cap was reached.

On April 23, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) was

signed into law and included an additional $484 billion in COVID-19 relief, including allocating an additional $310 billion to replenish the PPP.

On April 23, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) was signed into law and included an additional $484 billion in COVID-19 relief, including allocating an additional $310 billion to replenish the PPP.

The second round of the PPP began on April 27, 2020.

5 unchanged sentences

The Bank receives a processing fee from the SBA ranging from 1 % to 5 % depending on the size of the loan, which is offset by a 0.75 % third-party servicing agent fee.

As of June 30, 2020, the Bank originated 628 loans totaling $ 70.0 million, with a median loan balance of $ 35,000 .

The loans impact over 8,300 small business employees.

Among the largest sectors impacted were $ 15.3 million in loans for health care and social assistance, $ 12.4 million for construction and specialty-trade contractors, $ 6.1 million for professional and technical services, $ 5.9 million for retail trade, $ 5.1 million for wholesale trade, $ 4.6 million for manufacturing and $ 3.4 million for restaurant and food services.

Net SBA origination fees as of June 30, 2020 were $ 2.1 million, of which $ 191,000 was recognized during the three and six months ended June 30, 2020.

We expect to recognize the majority of unearned net origination fees in the third and fourth quarter upon processing requests for loan forgiveness.

As of September 30, 2020, the Bank originated 638 PPP loans totaling $ 71.0 million, with a median loan balance of $ 35,000 .

Among the largest sectors impacted were $ 15.6 million in loans for health care and social assistance, $ 12.6 million for

construction and specialty-trade contractors, $ 6.1 million for professional and technical services, $ 6.1 million for retail trade, $ 5.1 million for wholesale trade, $ 4.6 million for manufacturing and $ 3.4 million for restaurant and food services.

Net SBA origination fees as of September 30, 2020 were $ 2.2 million, of which $ 274,000 was recognized for the three months ended September 30, 2020 and $ 465,000 for the nine months ended September 30, 2020.

All PPP loans are classified as commercial and industrial loans held for investment.

No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.

Total unamortized net deferred loan fees were $ 2.9 million and $ 907,000 at June 30, 2020 and December 31, 2019, respectively.

Total unamortized net deferred loan fees were $ 2.5 million and $ 907,000 at September 30, 2020 and December 31, 2019, respectively.

The increase in unamortized net deferred loan fees is primarily due to PPP loans.

Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $ 105.6 million and $ 100.0 million at June 30, 2020 and December 31, 2019, respectively.

Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $ 106.0 million and $ 100.0 million at September 30, 2020 and December 31, 2019, respectively.

The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated.

At June 30, 2020 and December 31, 2019, there were no loans in the criticized category of Loss within the internal risk rating system.

June 30, 2020

At September 30, 2020 and December 31, 2019, there were no loans in the criticized category of Loss within the internal risk rating system.

September 30, 2020

(Dollars in Thousands)

17 unchanged sentences

$ 919,809 $ 24,585 $ 7,383 $ 719 $ 952,496

The increase of $ 28.5 million in the special mention loan category as of June 30, 2020 compared to December 31, 2019 was mainly from the downgrade of the hospitality portfolio due to the economic conditions in that industry caused by the COVID-19 pandemic.

The increase of $ 4.1 million in the substandard category is primarily due to a lease dispute on a $ 2.3 million industrial building (commercial real estate) and $ 961,000 and $ 853,000 associated with two residential real estate loans and one residential construction loan, respectively, which have insufficient debt service coverage from the borrower demonstrating an inability to build and sell the speculative homes at a fast enough rate that can service the interest-only debt.

The increase of $ 13.5 million in the special mention loan category and $ 10.8 million in the substandard category as of September 30, 2020 compared to December 31, 2019 was mainly from the downgrade of the hospitality portfolio due to the economic conditions in that industry caused by the COVID-19 pandemic.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated.

June 30, 2020

September 30, 2020

(Dollars in Thousands)

17 unchanged sentences

$ 943,979 $ 4,795 $ 599 $ 222 $ 5,616 $ 2,901 $ 952,496

The increase in nonaccrual commercial real estate loans is primarily related to two hotel loans with a total principal balance of $ 7.9 million that were impacted by the pandemic and determined to be impaired due to insufficient cash flows and occupancy rates.

The increase in nonaccrual commercial and industrial loans is primarily related to a $ 1.4 million relationship with collateral and income shortfalls.

The following table sets forth the amounts and categories of nonperforming assets at the dates indicated.

2 unchanged sentences

Nonperforming loans do not include loans modified under Section 4013 of the CARES Act and interagency guidance as further explained below.

September 30,

2020 December 31,

18 unchanged sentences

Nonperforming Assets to Total Assets

The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $ 1.2 million and $ 1.1 million at June 30, 2020 and December 31, 2019, respectively.

The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $ 805,000 and $ 1.1 million at September 30, 2020 and December 31, 2019, respectively.

TDRs typically are the result of loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral.

1 unchanged sentence

Section 4013 of the CARES Act provides temporary relief from accounting and financial reporting requirements for TDRs regarding certain loan modifications related to COVID-19.

modifications would be considered a TDR, including the related impairment for accounting purposes.

Any modification involving a loan that was not more than 30 days past due as of December 31, 2019 and that occurs beginning on March 1, 2020 and ends on the earlier of December 31, 2020 or the date that is 60 days after the termination date of the national emergency related to the COVID-19 outbreak qualify for this exception, including a forbearance arrangement, interest rate modification, repayment plan or any other similar arrangement that defers or delays the payment of principal or interest.

Bank regulatory agencies released an interagency statement that offers practical expedients for modifications that occur in response to the COVID-19 pandemic, but they differ with the CARES Act in certain areas.

Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

Any modification involving

a loan that was not more than 30 days past due as of December 31, 2019 and that occurs beginning on March 1, 2020 and ends on the earlier of December 31, 2020 or the date that is 60 days after the termination date of the national emergency related to the COVID-19 outbreak qualify for this exception, including a forbearance arrangement, interest rate modification, repayment plan or any other similar arrangement that defers or delays the payment of principal or interest.

Bank regulatory agencies released an interagency statement that offers practical expedients for modifications that occur in response to the COVID-19 pandemic, but it differs with the CARES Act in certain areas.

The expedients require a lender to conclude that a borrower is not experiencing financial difficulty if either short-term (e.g., six months or less) modifications are made, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented or the modification or deferral program is mandated by the federal government or a state government.

7 unchanged sentences

The Company has elected the practical expedients related to TDRs that are available in the CARES Act and interagency guidance as an entity-wide accounting policy and does not consider any of the forbearance agreements TDRs, delinquent, or nonaccrual.

The following table provides details of loans in forbearance and the forbearance end dates as of June 30, 2020.

The following table provides details of loans in forbearance and the forbearance end dates as of the dates indicated.

September 30, 2020 June 30, 2020

Loans Amount % of Portfolio Number

Loans Amount % of Portfolio

(Dollars in thousands)

July 2020 108 $ 15,333

August 2020 41 5,912

September 2020 12 2,272

October 2020 2 136

Total Residential 163 23,653 6.9 %

July 2020 70 64,039

August 2020 31 25,497

September 2020 7 8,714

October 2020 2 2,378

November 2020 1 4,489

Total Commercial 111 105,117 30.0 %

July 2020 3 10,494

August 2020 2 4,726

September 2020 1 298

Total Construction 6 15,518 26.6 %

Residential 11 1,242 0.4 % 163 23,653 6.9 %

Commercial 9 13,885 3.9 % 111 105,117 30.0 %

Construction 1 7,162 10.4 % 6 15,518 26.6 %

Commercial and Industrial 1 122 0.1 % 76 15,697 10.5 %

July 2020 42 10,300

August 2020 32 5,180

September 2020 2 217

Total Commercial and Industrial 76 15,697 10.5 %

July 2020 124 2,493

August 2020 39 857

September 2020 7 97

Total Consumer 170 3,447 2.9 %

July 2020 1 2,504 11.2 %

Consumer 12 295 0.3 % 170 3,447 2.9 %

Other — — — % 1 2,504 11.2 %

Total Loans in Forbearance 34 $ 22,706 2.2 % 527 $ 165,936 15.9 %

As of June 30, 2020, $ 165.9 million, or 15.9 % of total loans, were in forbearance.

Approximately $ 105.2 million, or 63.4 % of loans in forbearance, are scheduled to end forbearance as of July 2020 and return to their normal payment schedule.

As of July 30, 2020, out of the 348 loans totaling $ 105.2 million with a forbearance period ending in July 2020, 9 loans totaling $ 3.3 million requested additional forbearance - two residential, two commercial real estate, which were both hotel loans, one commercial and industrial and four consumer loans totaling $ 393,000 , $ 2.7 million, $ 123,000 and $ 133,000 , respectively.

At June 30, 2020, out of approximately 128 loans totaling $ 22.7 million with a forbearance period ending on or prior to June 30, 2020, six loans totaling $ 5.8 million requested an additional one- to three-month forbearance.

These loans were comprised of three residential mortgage loans, two commercial real estate loans, which were both hotel loans, and one consumer loan totaling $ 493,000 , $ 5.3 million and $ 12,000 , respectively.

The commercial real estate loans remaining in deferral at September 30, 2020 include five hotel loans totaling $ 10.3 million and the construction loan is a retail project.

The loans are scheduled to exit their deferral period in the fourth quarter.

The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date.

Loans classified as TDRs consisted of 16 loans totaling $ 3.0 million at June 30, 2020 and December 31, 2019, respectively.

During the three and six months ended June 30, 2020, there was one residential real estate loan modified in a TDR totaling $ 60,000 that paid off.

During the six months ended June 30, 2019, one residential real estate loan modified in a TDR totaling $ 851,000 paid off.

No TDRs subsequently defaulted during the three and six months ended June 30, 2020 and 2019, respectively.

The following tables present information at the time of modification related to loans modified in a TDR during the three and six months ended June 30, 2020 and 2019.

Three and Six Months Ended June 30, 2020

Loans classified as TDRs consisted of 18 loans totaling $ 3.6 million at September 30, 2020 and 16 loans totaling $ 3.0 million at December 31, 2019, respectively.

During the nine months ended September 30, 2020, there was one residential real estate loan modified in a TDR totaling $ 60,000 that paid off.

During the nine months ended September 30, 2019, one residential real estate loan modified in a TDR totaling $ 851,000 paid off.

No TDRs subsequently defaulted during the three and nine months ended September 30, 2020 and 2019, respectively.

The following tables present information at the time of modification related to loans modified in a TDR during the three and nine months ended September 30, 2020 and 2019.

Three Months Ended September 30, 2020

(Dollars in thousands)

Residential 1 $ 234 $ 234 $ —

Commercial 1 $ 504 $ 519 $ —

Commercial and Industrial 1 38 38 —

Total 2 $ 542 $ 557 $ —

Nine Months Ended September 30, 2020

(Dollars in thousands)

1 $ 234 $ 234 $ —

Commercial 1 504 519 —

Commercial and Industrial 1 38 38 —

Total 3 $ 776 $ 791 $ —

Three Months Ended June 30, 2019

3 unchanged sentences

Total 1 $ 10 10 $ —

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

(Dollars in thousands)

3 unchanged sentences

The following table presents a summary of the loans considered to be impaired as of the dates indicated.

June 30, 2020

September 30, 2020

(Dollars in thousands)

43 unchanged sentences

$ 7,764 $ 884 $ 7,940 $ 8,135 $ 397

The $ 3.8 million increase in recorded investment of loans evaluated for impairment is primarily due to a lease dispute on a $ 2.3 million industrial building (commercial real estate) and $ 961,000 and $ 853,000 associated with two residential real estate loans and one residential construction loan, respectively, which have insufficient debt service coverage from the borrower demonstrating an inability to build and sell the speculative homes at a fast enough rate that can service the interest-only debt.

These loans were downgraded to substandard as of June 30, 2020.

The following table presents the activity in the allowance for loan losses (“ALLL”) summarized by major classifications and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.

The $ 26.9 million increase in recorded investment of loans evaluated for impairment, primarily in the commercial real estate category, is mainly due to evaluating the hotel portfolio for potential impairment.

$ 16.1 million of hotel loans were evaluated for impairment and determined to not require specific reserves.

Two hotel loans with a total principal balance of $ 7.9 million were determined to be impaired due to insufficient cash flows and occupancy rates.

The following tables present the activity in the allowance for loan losses (“ALLL”) summarized by major classifications and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.

(Dollars in thousands)

March 31, 2020 $ 2,685 $ 4,875 $ 664 $ 1,592 $ 1,879 $ — $ 627 $ 12,322

June 30, 2020 $ 2,688 $ 5,160 $ 820 $ 1,566 $ 1,714 $ — $ 700 $ 12,648

( 11 ) — — — ( 103 ) — — ( 114 )

1 unchanged sentence

( 506 ) 1,711 71 170 ( 290 ) — 44 1,200

June 30, 2020 $ 2,688 $ 5,160 $ 820 $ 1,566 $ 1,714 $ — $ 700 $ 12,648

September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780

(Dollars in thousands)

3 unchanged sentences

180 3,634 606 ( 691 ) 47 — 224 4,000

June 30, 2020 $ 2,688 $ 5,160 $ 820 $ 1,566 $ 1,714 $ — $ 700 $ 12,648

June 30, 2020

September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780

September 30, 2020

(Dollars in thousands)

10 unchanged sentences

(Dollars in thousands)

March 31, 2019 $ 1,154 $ 2,550 $ 500 $ 2,553 $ 1,733 $ — $ 922 $ 9,412

June 30, 2019 $ 1,096 $ 3,446 $ 488 $ 2,718 $ 1,500 $ — $ 443 $ 9,691

( 28 ) — — ( 16 ) ( 165 ) — — ( 209 )

1 unchanged sentence

582 ( 508 ) 49 ( 278 ) 76 — 254 175

June 30, 2019 $ 1,096 $ 3,446 $ 488 $ 2,718 $ 1,500 $ — $ 443 $ 9,691

September 30, 2019 $ 1,651 $ 2,973 $ 537 $ 2,429 $ 1,463 $ — $ 697 $ 9,750

(Dollars in thousands)

3 unchanged sentences

662 224 142 ( 369 ) ( 220 ) — 111 550

June 30, 2019 $ 1,096 $ 3,446 $ 488 $ 2,718 $ 1,500 $ — $ 443 $ 9,691

June 30, 2019

September 30, 2019 $ 1,651 $ 2,973 $ 537 $ 2,429 $ 1,463 $ — $ 697 $ 9,750

September 30, 2019

(Dollars in thousands)

3 unchanged sentences

$ 1,651 $ 2,673 $ 537 $ 1,926 $ 1,463 $ — $ 697 $ 8,947

The COVID-19 pandemic, which led to state-wide shelter in place orders and mandatory closures of all but essential business, has resulted in a dramatic increase in unemployment and recessionary economic conditions.

Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis related to economic trends and industry conditions, specifically because of vulnerable industries such as hospitality, oil and gas, retail and restaurants, were adjusted for these circumstances and resulted in a $ 300,000 and $ 2.8 million provision for loan losses for the three and six months ended June 30, 2020, respectively.

While recessionary economic conditions still exist, there has been an improvement in certain macroeconomic conditions, including unemployment, for the quarter ended June 30, 2020 compared to March 31, 2020, and resulted in the decrease in the provision for loan losses.

This change increased the ALLL in all categories except commercial and industrial due to a decrease in the average loss history factor as further explained below.

The COVID-19 pandemic has resulted in a dramatic increase in unemployment and recessionary economic conditions.

In addition, the Company has an exposure of hotel loans that have been greatly impacted by the COVID-19 pandemic and were evaluated for impairment in the current quarter.

Two hotel loans with a total principal balance of $ 7.9 million were determined to be impaired due to insufficient cash flows and occupancy rates.

The combination of these factors primarily resulted in a $ 1.2 million provision for loan losses for the three months ended September 30, 2020 and $ 4.0 million provision for loan losses for the nine months ended September 30, 2020.

Prior to the quarter ended March 31, 2020, management determined historical loss experience for each segment of loans using a two-year rolling average of the net charge-off data within each loan segment, which was then used in combination with qualitative factors to calculate the general allowance component that covers pools of homogeneous loans that are not specifically evaluated for impairment.

3 unchanged sentences

In addition, moving to a five-year history is expected to improve the calculation moving forward by capturing economic ebbs and flows over a longer period while also not heavily weighting one period of charge-off activity.

The following table presents changes in the accretable discount on the loans acquired at fair value at the dates indicated (dollars in thousands).

The following table presents changes in the accretable discount on the loans acquired at fair value at the dates indicated.

Accretable Discount

2 unchanged sentences

Accretable Yield

June 30, 2020 $ 1,462

September 30, 2020 $ 1,335

The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated.

June 30, 2020

September 30, 2020

(Dollars in thousands)

4 unchanged sentences

$ 343,955 $ 353,904 $ 69,178 $ 144,315 $ 117,364 $ 22,169 $ 1,050,885

Commercial and industrial contains $ 70.0 million of PPP loans collectively evaluated for potential impairment.

At September 30, 2020, commercial and industrial contains $ 71.0 million of PPP loans collectively evaluated for potential impairment.

No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.

7 unchanged sentences

The following table shows the maturities of time deposits for the next five years and beyond at the date indicated.

September 30,

(Dollars in thousands)

5 unchanged sentences

Over Five Years

The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $ 63.0 million and $ 69.3 million as of June 30, 2020 and December 31, 2019, respectively.

The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $ 61.6 million and $ 69.3 million as of September 30, 2020 and December 31, 2019, respectively.

Short-Term Borrowings

The following table sets forth the components of short-term borrowings as of the dates indicated.

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Amount Weighted

11 unchanged sentences

The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated.

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(Dollars in thousands)

6 unchanged sentences

$ 11,000 2.21 % $ 14,000 2.14 %

As of June 30, 2020, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $ 428.5 million with the FHLB and available borrowing capacity of $ 399.3 million.

As of September 30, 2020, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $ 430.7 million with the FHLB and available borrowing capacity of $ 416.9 million.

This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $ 577.1 million of residential and commercial mortgage loans and the Company’s investment in FHLB stock.

Under this arrangement the Company had available a variable rate Line of Credit in the amount of $ 150.0 million as of June 30, 2020, of which there was no outstanding balance as of June 30, 2020.

At June 30, 2020, the Company maintained a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $ 90.4 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $ 143.5 million of commercial and industrial and consumer indirect auto loans.

Under this arrangement the Company had available a variable rate Line of Credit in the amount of $ 150.0 million as of September 30, 2020, of which there was no outstanding balance as of September 30, 2020.

At September 30, 2020, the Company maintained a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $ 95.7 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $ 145.3 million of commercial and industrial and consumer indirect auto loans.

In addition, the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $ 60.0 million of which no draws had been taken.

17 unchanged sentences

The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

There were no transfers into or out of Level 3 during the six months ended June 30, 2020 or year ended December 31, 2019.

There were no transfers into or out of Level 3 during the nine months ended September 30, 2020 or year ended December 31, 2019.

September 30,

2020 December 31,

14 unchanged sentences

$ 158,956 $ 197,385

The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statement of Financial Condition as of the dates indicated by level within the fair value hierarchy.

The following table presents the financial assets on the Consolidated Statement of Financial Condition measured at fair value on a nonrecurring basis as of the dates indicated by level within the fair value hierarchy for only those nonrecurring assets that had a fair value below the carrying amount.

The table also presents the significant unobservable inputs used in the fair value measurements.

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves.

Techniques used to value the collateral that secure the impaired loans include quoted market prices for identical assets classified as Level 1 inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level 2 inputs.

In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level 3 inputs.

Fair Value at

Financial Asset Fair Value

Hierarchy June 30,

Hierarchy September 30,

2020 December 31,

4 unchanged sentences

Impaired Loans Level 3 $ 8,171 $ 3,140 Market Comparable Properties Marketability Discount 10 % to 30 % (1)

Premises and Equipment, Net Level 3 240 — Market Comparable Properties Price Per Square Footage $ 26.88 to $ 34.79

Mortgage Servicing Rights Level 3 694 930 Discounted Cash Flow Discount Rate 9 % to 11 %

Prepayment Rate 15.7 % to 21.4 %

OREO Level 3 34 58 Market Comparable Properties Marketability Discount 10 % to 30 % (1)

1 unchanged sentence

Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time.

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves.

Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy.

At June 30, 2020 and December 31, 2019, the fair value of impaired loans consists of the loan balances of $ 4.1 million and $ 4.0 million, respectively, less their specific valuation allowances of $ 599,000 and $ 884,000 , respectively.

At September 30, 2020 and December 31, 2019, the fair value of impaired loans consists of the loan balances of $ 11.0 million and $ 4.0 million, respectively, less their specific valuation allowances of $ 2.9 million and $ 884,000 , respectively.

Given the change in business purpose of the Monessen branch due to closure, an appraisal was obtained to determine the property value and, as a result, the property was written down to fair value based on market comparable properties.

The fair value was determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy.

The fair value of mortgage servicing rights ("MSRs") is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions.

The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs.

MSRs are considered impaired if the carrying value exceeds fair value.

Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3.

MSRs are reported in other assets in the Consolidated Statement of Financial Condition and are amortized into mortgage servicing income in Other (Loss) Income in the Consolidated Statement of (Loss) Income.

OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs.

1 unchanged sentence

The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy.

For the six months ended June 30, 2020, one commercial real estate OREO property with a fair value of $ 18,000 sold at a gain of $ 4,000 and one residential real estate OREO property with a fair value of $ 40,000 sold at a loss of $ 20,000 .

In addition, two residential real estate loans for $ 76,000 transferred to OREO.

For the six months ended June 30, 2019, one commercial real estate OREO property with a fair value of $ 697,000 was sold at a $ 33,000 gain and one residential OREO property with a fair value of $ 46,000 was sold at a loss of $ 3,000 .

For the nine months ended September 30, 2020, one commercial real estate OREO property with a fair value of $ 18,000 sold at a gain of $ 4,000 and two residential real estate OREO properties with a fair value of $ 108,000 sold at a loss of $ 30,000 .

In addition, two residential real estate loans with a fair value of $ 81,000 and one commercial real estate loan with a fair value of $ 34,000 transferred to OREO.

For the nine months ended September 30, 2019, one commercial real estate OREO property with a fair value of $ 697,000 was sold at a $ 33,000 gain and one residential OREO property with a fair value of $ 46,000 was sold at a loss of $ 3,000 .

In addition, three residential real estate loans with a fair value of $ 427,000 transferred into OREO, of which two properties with a fair value of $ 386,000 were subsequently sold at a net loss of $ 36,000 .

Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

2 unchanged sentences

As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument.

In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.

changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

(Dollars in thousands)

35 unchanged sentences

The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.

September 30,

2020 December 31,

14 unchanged sentences

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer.

Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

13 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

3 unchanged sentences

Total Lease Expense $ 128 $ 131 $ 381 $ 376

September 30,

2020 December 31,

3 unchanged sentences

Weighted Average Discount Rate 2.55 % 2.89 %

September 30,

Maturity Analysis:

9 unchanged sentences

Other Noninterest Expense

The details of other noninterest expense for the Company’s consolidated statement of income for the three and six months ended June 30, 2020 and 2019, are as follows:

The details of other noninterest expense for the Company’s Consolidated Statement of (Loss) Income for the three and nine months ended September 30, 2020 and 2019, are as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

15 unchanged sentences

Segment and Related Information

At June 30, 2020, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services.

CB Financial Services, Inc.

is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank.

At September 30, 2020, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services.

CB Financial is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank.

Exchange Underwriters has an independent board of directors from the Company and is managed separately from the banking and related financial services that the Company offers.

5 unchanged sentences

(Dollars in thousands)

June 30, 2020

September 30, 2020

Assets $ 1,392,537 $ 4,408 $ 133,314 $ ( 137,383 ) $ 1,392,876

5 unchanged sentences

Stockholders' equity 142,242 2,882 151,097 ( 145,124 ) 151,097

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Interest and dividend income $ 11,639 $ 1 $ 1,310 $ ( 1,294 ) $ 11,656

Interest expense 1,240 — — — 1,240

Net interest income 10,305 1 1,309 ( 1,294 ) 10,321

Net interest and dividend income 10,399 1 1,310 ( 1,294 ) 10,416

Provision for loan losses 1,200 — — — 1,200

Net interest income after provision for loan losses 10,005 1 1,309 ( 1,294 ) 10,021

Net interest and dividend income after provision for loan losses 9,199 1 1,310 ( 1,294 ) 9,216

Noninterest income 1,208 1,024 ( 59 ) — 2,173

Noninterest expense 28,046 919 3 — 28,968

Undistributed net income of subsidiary 148 — 1,580 ( 1,728 ) —

Income before income tax expense (benefit) 3,501 211 2,908 ( 3,022 ) 3,598

Income tax expense (benefit) 627 63 5 — 695

Net income $ 2,874 $ 148 $ 2,903 $ ( 3,022 ) $ 2,903

Six Months Ended June 30, 2020

Undistributed net income (loss) of subsidiary 73 — ( 18,694 ) 18,621 —

(Loss) income before income tax (benefit) expense ( 17,566 ) 106 ( 17,446 ) 17,327 ( 17,579 )

Income tax (benefit) expense ( 166 ) 33 ( 51 ) — ( 184 )

Net (loss) income $ ( 17,400 ) $ 73 $ ( 17,395 ) $ 17,327 $ ( 17,395 )

Nine Months Ended September 30, 2020

Interest and dividend income $ 35,664 $ 3 $ 2,634 $ ( 2,589 ) $ 35,712

2 unchanged sentences

Provision for loan losses 4,000 — — — 4,000

Net interest income after provision for loan losses 18,023 1 1,324 ( 1,294 ) 18,054

Net interest and dividend income after provision for loan losses 27,222 3 2,634 ( 2,589 ) 27,270

Noninterest income (loss) 3,760 3,426 ( 493 ) — 6,693

Noninterest expense 44,227 2,806 9 — 47,042

Undistributed net income of subsidiary 360 — 2,703 ( 3,063 ) —

Income before income tax expense (benefit) 4,755 516 3,586 ( 4,357 ) 4,500

Undistributed net (loss) income of subsidiary 433 — ( 15,991 ) 15,558 —

(Loss) income before income tax expense (benefit) ( 12,812 ) 623 ( 13,859 ) 12,969 ( 13,079 )

Income tax expense (benefit) 590 190 ( 140 ) — 640

Net income $ 3,997 $ 360 $ 3,676 $ ( 4,357 ) $ 3,676

Net (loss) income $ ( 13,402 ) $ 433 $ ( 13,719 ) $ 12,969 $ ( 13,719 )

Community Bank Exchange Underwriters, Inc.

2 unchanged sentences

(Dollars in thousands)

Three Months Ended June 30, 2019

Three Months Ended September 30, 2019

Interest and dividend income $ 13,083 $ 1 $ 1,318 $ ( 1,304 ) $ 13,098

Interest expense 2,002 — — — 2,002

Net interest income 10,691 1 1,317 ( 1,304 ) 10,705

Net interest and dividend income 11,081 1 1,318 ( 1,304 ) 11,096

Provision for loan losses 175 — — — 175

Net interest income after provision for loan losses 10,341 1 1,317 ( 1,304 ) 10,355

Noninterest income 990 1,079 96 — 2,165

Net interest and dividend income after provision for loan losses 10,906 1 1,318 ( 1,304 ) 10,921

Noninterest income (loss) 1,018 984 ( 36 ) — 1,966

Noninterest expense 7,401 853 3 — 8,257

Undistributed net income of subsidiary 90 — 2,463 ( 2,553 ) —

Income before income tax expense 3,556 193 2,997 ( 3,023 ) 3,723

Income tax expense 665 61 18 — 744

Income before income tax expense (benefit) 4,613 132 3,742 ( 3,857 ) 4,630

Income tax expense (benefit) 846 42 ( 4 ) — 884

Net income $ 3,767 $ 90 $ 3,746 $ ( 3,857 ) $ 3,746

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Interest and dividend income $ 38,018 $ 2 $ 3,955 $ ( 3,912 ) $ 38,063

Interest expense 5,828 — — — 5,828

Net interest income 21,110 1 2,636 ( 2,608 ) 21,139

Net interest and dividend income 32,190 2 3,955 ( 3,912 ) 32,235

Provision for loan losses 550 — — — 550

Net interest income after provision for loan losses 20,735 1 2,636 ( 2,608 ) 20,764

Net interest and dividend income after provision for loan losses 31,640 2 3,955 ( 3,912 ) 31,685

Noninterest income 2,966 3,212 67 — 6,245

4 unchanged sentences

Net income $ 9,566 $ 340 $ 9,650 $ ( 9,906 ) $ 9,650

Goodwill and Intangible Assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired.

Deemed to have an indefinite life and not subject to amortization, goodwill is instead tested for impairment at the reporting unit level at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist.

The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment.

The Company has assigned 100 % of the goodwill to the Community Banking reporting unit.

In 2019, the Company adopted ASU 2017-04 whereby the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a step one impairment test is unnecessary.

An entity also has the option to bypass the qualitative assessment for any reporting unit and proceed directly to the first step of impairment testing.

The COVID-19 pandemic that has impacted the U.S.

and most of the world along with government response to curtail the spread of the virus beginning in March 2020 has significantly impacted our market area.

These restrictions have resulted in significant adverse effects on macroeconomic conditions, and stock market valuations have decreased substantially for most companies in the banking sector, including our Company.

In light of the adverse circumstances resulting from COVID-19, management determined it was necessary to evaluate goodwill for impairment.

Determining the fair value of a reporting unit under a quantitative goodwill impairment test is judgmental and involves the use of significant estimates and assumptions.

The methodology used to assess impairment was a combination of the income approach

discounted cash flow (“DCF”) method) and the market approach (i.e.

Guideline Public Company ("GPC") method) to determine the fair value.

In the application of the income approach, the Company determined the fair value of the reporting unit using a DCF analysis.

The income approach uses valuation techniques to convert future earnings or cash flows to present value to arrive at a value that is indicated by market expectations about future amounts.

The income approach relies on Level 3 inputs along with a market-derived cost of capital when measuring fair value.

Fair value is determined by converting anticipated benefits into a present single value.

Once the benefit or benefits are selected, an appropriate discount or capitalization rate is applied to each benefit.

These rates are calculated using the appropriate measure for the size and type of company, using financial models and market data as required.

The discount rate was derived based on the modified capital asset pricing model.

The discount rate applied is comprised of a risk-free rate of return, an equity risk premium, a size premium and a factor covering the systemic market risk and a company specific risk premium.

The values for the factors applied are determined primarily using external sources of information.

The discount rate was estimated at 13.3 %.

Using the discount rate derived from the above components, we subtracted an expected sustainable long-term growth estimate of 3.0 % given expected growth in the geographic market and the overall long-term economy to arrive at a capitalization rate of 10.3 %.

The DCF model also used prospective financial information.

For purposes of the impairment test, the Company’s financial plans for the remainder of 2020 through 2024 were updated for the projected impact of COVID-19 on the net revenue growth and asset utilization.

Estimating future earnings and capital requirements involves judgment and the consideration of past and current performance and overall macroeconomic and regulatory environments.

The market approach uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities.

The fair value measure is based on the value that those transactions indicate.

Under the market approach, we utilized Level 1 and 2 inputs when measuring fair value.

In the application of the market approach, the GPC method of appraisal is based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing a closely held entity.

A value multiple or ratio relates a stock’s market price to the reported accounting data such as revenue, earnings, and book value.

These ratios provide an objective basis for measuring the market’s perception of a stock’s fair value.

Value ratios generally reflect the trends in growth, performance and stability of the financial results of operations.

In this way, the business and financial risks exhibited by an industry or group of companies can be viewed in relation to market values.

Value ratios also reflect the market’s outlook for the economy as a whole.

Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the company being valued.

Utilizing publicly traded companies located in Pennsylvania and surrounding states with assets between $1.0 billion and $2.5 billion and return on assets greater than 0.5%, we analyzed the relationships between the guideline companies' asset size, profitability, asset quality and capital ratios and applied a control premium of 34 % to the selected guideline company multiples.

The control premium is management's estimate of how much a market participant would be willing to pay over the fair market value in consideration of synergies and other benefits that flow from control of the entity.

We also considered the GPC method using trading activity of publicly traded companies that are most similar to the Company.

While the banking industry typically has a sufficient level of mergers and acquisitions activity to rely on this method under the market approach, there have only been seven transactions involving target institutions with assets greater than $1 billion announced since March 1, 2020 (post-COVID).

Of these, only two have closed.

Therefore, we were unable to rely on this method in our analysis.

We then placed equal consideration on the results of the income and market approaches to determine the concluded fair value of the reporting unit.

The weighting is judgmental and is based on the perceived level of appropriateness of the valuation methodology.

Estimating the fair value involves the use of estimates and significant judgments that are based on a number of factors including actual operating results.

If current conditions change from those expected, it is reasonably possible that the judgments and estimates described above could change in future periods and require management to further evaluate goodwill for impairment.

As a result of the goodwill impairment test and in connection with the preparation of the consolidated financial statements included in this Quarterly Report on Form 10-Q, the Company concluded that goodwill was impaired.

Accordingly, the Company recorded a goodwill impairment charge of $ 18.7 million for the three and nine months ended September 30, 2020 as our estimated fair value was less than our book value.

This was a non-cash charge to earnings and had no impact on regulatory capital, cash flows or liquidity position.

No goodwill impairment charge was recognized for the three and nine months ended September 30, 2019.

The following table presents the changes in the Company's carrying amount of goodwill for the period indicated.

(Dollars in thousands)

December 31, 2019 $ 28,425

Goodwill Impairment ( 18,693 )

September 30, 2020 $ 9,732

Intangible Assets

Intangible assets with definite lives are amortized over their respective estimated useful lives.

The amortization expense represents the estimated decline in value of the underlying asset.

The following table presents a summary of intangible assets subject to amortization at the dates indicated.

September 30, 2020 December 31, 2019

Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value

(Dollars in thousands)

Core Deposit Intangible $ 14,103 $ ( 6,562 ) $ 7,541 $ 14,103 $ ( 5,108 ) $ 8,995

Customer List 1,800 ( 410 ) 1,390 1,800 ( 268 ) 1,532

Total Intangible Assets $ 15,903 $ ( 6,972 ) $ 8,931 $ 15,903 $ ( 5,376 ) $ 10,527

The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets.

Estimated amortization expense of intangible assets in subsequent fiscal years is as follows.

(Dollars in thousands)

Remaining in 2020 $ 532

2025 and thereafter 585

Total Estimated Intangible Asset Amortization Expense $ 8,931

Stock Based Compensation

The following table presents stock option information for the periods indicated.

Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual

Life in Years

Outstanding at December 31, 2019 245,153 $ 24.36 6.5

Granted 15,000 18.60

Exercised ( 20,106 ) 22.69

Forfeited ( 19,776 ) 26.64

Outstanding at September 30, 2020 220,271 $ 23.92 6.1

Exercisable at September 30, 2020 139,548 $ 23.67 5.6

Number of Shares Weighted Average Exercise Price Weighted Average Remaining Service Period in Years

Nonvested at September 30, 2020 80,723 $ 24.36 6.9

Summary of Significant Assumptions for Newly Issued Stock Options

Expected Term in Years 6.5

Expected Volatility 25.8 %

Expected Dividends $ 0.96

Risk Free Rate of Return 0.28 %

The following table presents restricted stock award information for the periods indicated

Number of Shares Weighted Average Grant Date Fair Value Price Weighted Average Remaining Service Period in Years

Nonvested at December 31, 2019 48,030 $ 28.83 8.1

Granted 5,000 18.60

Vested ( 600 ) 25.08

Forfeited ( 3,300 ) 29.23

Nonvested at September 30, 2020 49,130 $ 27.81 7.6

The Company recognizes expense over a five -year vesting period for the restricted stock awards and stock options.

Stock-based compensation expense related to restricted stock awards and stock options was $ 114,000 and $ 78,000 for the three months ended September 30, 2020 and 2019, respectively and $ 370,000 and $ 232,000 for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020 and December 31, 2019, total unrecognized compensation expense was $ 195,000 and $ 363,000 , respectively, related to stock options, and $ 1.1 million and $ 1.4 million, respectively, related to restricted stock awards.

Intrinsic value represents the amount by which the fair value of the underlying stock at September 30, 2020 and December 31, 2019 exceeds the exercise price of the stock options.

The intrinsic value of stock options was $ 7,200 and $ 1.4 million at September 30, 2020 and December 31, 2019, respectively.

At September 30, 2020 and December 31, 2019, respectively, there were 18,135 and 13,359 shares available under the Plan to be issued in connection with the exercise of stock options, and 58,424 and 60,124 shares that may be issued as restricted stock awards or units.

Restricted stock awards or units may be issued above this amount provided that the number of shares reserved for stock options is reduced by three shares for each restricted stock award or unit share granted.

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-Q

Item 1. Financial Statements