What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-10 · 280 added, 215 removed, 328 unchanged (60% of the section changed)

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These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

Given the numerous unknowns and risks that are heavily weighted to the downside due to COVID-19, our forward-looking statements are subject to the risk that conditions will be substantially different than we currently expect.

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The far-reaching consequences of these actions and the crisis is unknown and will largely depend on the extent and length of the recession combined with how quickly the economy can re-open.

• While specific actions have been taken to protect employees through work-at-home arrangements and social distancing measures for those working in our offices, including limiting branch traffic to drive-thru and special appointments only, outbreak among employees could result in closure of branches or back office operations for quarantine purposes and result in the unavailability of key employees and disruption of services provided to customers.

• While specific actions have been taken to protect employees through work-at-home arrangements and social distancing measures for those working in our offices, outbreak among employees could result in closure of branches or back office operations for quarantine purposes and result in the unavailability of key employees and disruption of services provided to customers.

• The lack of economic activity may curtail lending opportunities, especially from a commercial perspective, and impact our customers involved in vulnerable industries such as hospitality, retail, office space, senior housing, oil and gas, and restaurants.

• Forbearance activity and any additional forbearance that may be needed could impact cash flows and liquidity and result in decreases in late charges.

• Forbearance activity and any additional forbearance that may be needed could impact cash flows and liquidity.

• Delinquencies, nonperforming loans, charge-offs and the related provision for loan losses, and foreclosures may significantly increase after forbearance period ends, if economic stimulus does not have the intended outcome, and/or if the economy does not fully re-open allowing people to return to work.

• A sustained economic downturn may result in a decrease in the Company’s value and result in potential material impairment to its goodwill, intangible assets, and/or long-lived assets.

• A sustained economic downturn may result in a decrease in the Company’s value and result in potential material impairment to its intangible assets, and/or long-lived assets or additional impairment to goodwill.

• The Federal Reserve Board’s decision to drop the benchmark interest rate from a range of 1.5% to 1.75% to start the year to a range of 0% to 0.25% as part of a wide-ranging emergency action to protect the economy from the COVID-19 outbreak may result in an influx of loan refinances that could impact the Company’s net interest income.

• The lack of movement may negatively impact our noninterest income through less fee activity, such as from customer debit card swipes for purchases.

• The lack of economic activity may negatively impact our noninterest income through less fee activity, such as from customer debit card swipes for purchases.

• Insurance commissions may decline because workers compensation policies are mainly determined based on payroll figures, which could decrease due to job loss.

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The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania.

The Bank operates from 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 also

has two loan production offices in Fayette and Allegheny County, a corporate center in Washington County and an operations center in Greene County in Pennsylvania.

The Bank operates from 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.

On September 30, 2020, the Bank completed the closure of the Monessen office in Westmoreland County, Pennsylvania and the Bethlehem office in Ohio County, West Virginia reducing the total number of branches to 22.

The Bank also has two loan production offices in Fayette and Allegheny County, a corporate center in Washington County and an operations center in Greene County in Pennsylvania.

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.

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It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith.

The detailed discussion focuses on our consolidated financial condition as of June 30, 2020, compared to the financial condition as of December 31, 2019 and the consolidated results of operations for the three and six months ended June 30, 2020 compared to the three and six month ended June 30, 2019.

The detailed discussion focuses on our consolidated financial condition as of September 30, 2020, compared to the financial condition as of December 31, 2019 and the consolidated results of operations for the three and nine months ended September 30, 2020 compared to the three and nine month ended September 30, 2019.

Our results of operations depend primarily on our net interest income.

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

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.

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 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.

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 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 exceeds its carrying value indicating that goodwill of the reporting unit is considered not impaired.

As such, no quantitative assessment was performed.

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 (i.e.

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.

Explanation of Use of Non-GAAP Financial Measures

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Three Months Ended

Six Months Ended

June 30, June 30,

Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

(Dollars in thousands)

Interest Income per Consolidated Statement of Income (GAAP)

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

Interest Income per Consolidated Statement of (Loss) Income (GAAP) $ 11,656 $ 13,098 $ 35,712 $ 38,063

Adjustment to FTE Basis

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11,709 13,154 35,877 38,266

Interest Expense per Consolidated Statement of Income

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

Interest Expense per Consolidated Statement of (Loss) Income 1,240 2,002 4,442 5,828

Net Interest Income (FTE) (Non-GAAP)

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3.21 3.74 3.35 3.67

Allowance for loan losses to total loans, excluding PPP loans, is a non-GAAP measure that serves as a useful measurement to evaluate the allowance for loan losses without the impact of SBA guaranteed loans.

September 30, 2020 December 31, 2019

(Dollars in thousands)

Allowance for Loan Losses $ 13,780 $ 9,867

Total Loans 1,050,885 $ 952,496

PPP Loans (71,028) —

Total Loans, Excluding PPP Loans (Non-GAAP) $ 979,857 $ 952,496

Allowance for Loan Losses to Total Loans (GAAP) 1.31 % 1.04 %

Allowance for Loan Losses to Total Loans, Excluding PPP Loans (Non-GAAP) 1.41 % 1.04 %

Tangible book value per common share is a non-GAAP measure and is calculated based on tangible common equity divided by period-end common shares outstanding.

We believe this non-GAAP measure serves as a useful tool to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value.

September 30, 2020 December 31, 2019

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

Stockholders' Equity (GAAP) $ 133,299 $ 151,097

Goodwill and Other Intangible Assets, Net (18,663) (38,952)

Tangible Common Equity or Tangible Book Value (Non-GAAP) $ 114,636 $ 112,145

Common Shares Outstanding 5,398,712 5,463,828

Book Value per Common Share (GAAP) $ 24.69 $ 27.65

Tangible Book Value per Common Share (Non-GAAP) $ 21.23 $ 20.52

Consolidated Statement of Financial Condition Analysis

Total assets increased $85.6 million, or 6.5%, to $1.41 billion at June 30, 2020, compared to $1.32 billion at December 31, 2019.

• Cash and due from banks increased $51.2 million, or 63.8%, to $131.4 million at June 30, 2020, compared to $80.2 million at December 31, 2019.

Total assets increased $71.3 million, or 5.4%, to $1.39 billion at September 30, 2020, compared to $1.32 billion at December 31, 2019.

• Cash and due from banks increased $32.0 million, or 39.9%, to $112.2 million at September 30, 2020, compared to $80.2 million at December 31, 2019.

This is primarily the result of investment security call and paydown activity.

• Investment securities classified as available-for-sale decreased $48.7 million, or 24.7%, to $148.6 million at June 30, 2020, compared to $197.4 million at December 31, 2019.

• Investment securities classified as available-for-sale decreased $38.4 million, or 19.5%, to $159.0 million at September 30, 2020, compared to $197.4 million at December 31, 2019.

This was primarily the result of $59.5 million of calls of U.S.

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In addition, there was a $1.8 million increase in the market value of the debt securities portfolio attributed to market interest rate decreases and $469,000 loss in market value in the marketable equity securities portfolio, which is primarily comprised of bank stocks.

• Net loans increased $86.9 million, or 9.2%, to $1.03 billion at June 30, 2020, compared to $942.6 million million at December 31, 2019.

Loan growth during the first half of the year was primarily due to funding of $70.0 million in PPP loans and net loan advances of $22.7 million in construction loans as of June 30, 2020.

Total loans, excluding allowance for loan losses, increased $89.7 million and represented an 18.8% annualized growth rate.

Excluding the impact of the PPP loans, organic loan growth was $19.6 million and represented an annualized growth rate of 4.1% for the six months ended June 30, 2020.

The allowance for loan losses was $12.6 million at June 30, 2020 compared to $9.9 million at December 31, 2019.

This reflects a $2.8 million provision for loan loss due to an increase in qualitative factors related to economic trends and industry conditions to account for the adverse economic impact of COVID-19.

As a result, the allowance for loan losses to total loans increased from 1.04% at December 31, 2019 to 1.21% at June 30, 2020.

• Total loans increased $98.4 million to $1.05 billion at September 30, 2020 and represented a 13.7% annualized growth.

Year-to-date loan growth was primarily due to originating 638 PPP loans totaling $71.0 million, mainly in the second quarter, which included $2.2 million in net origination fees.

Excluding the impact of PPP, organic loan growth was $27.4 million and represented an annualized growth rate of 3.8% as of September 30, 2020.

Additional loan growth was experienced through net funding of $33.6 million in construction loans.

Average loans for the three months ended September 30, 2020 increased $21.4 million compared to the three months ended June 30, 2020 and was primarily driven by the full quarter impact on average balances from PPP loans.

In October 2020, the SBA began processing loan

$1.7 million of origination fees are unearned as of September 30, 2020 and expected to be earned upon receipt of funds from the SBA for forgiveness.

• The allowance for loan losses was $13.8 million at September 30, 2020 compared to $9.9 million at December 31, 2019.

This reflects a $4.0 million provision for loan loss due to an increase in impaired loans with specific reserves and net increase in qualitative factors related to economic and industry conditions to account for the adverse economic impact of COVID-19.

As a result, the allowance for loan losses to total loans increased from 1.04% at December 31, 2019 to 1.31% at September 30, 2020.

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

The allowance for loan losses to total loans, excluding PPP loans, was 1.30% at June 30, 2020.

Nonperforming loans increased to $5.6 million at June 30, 2020 from $5.4 million at December 31, 2019 and, coupled with loan growth noted previously, resulted in the nonperforming loans to total loans ratio decreasing 3 bps to 0.54% at June 30, 2020 compared to 0.57% at December 31, 2019.

Excluding PPP loans, the nonperforming loans to total loans ratio was 0.57% at June 30, 2020.

The Company elected the practical expedients available in the CARES Act and interagency guidance and does not consider any of the loans that were modified through forbearance agreements as nonperforming loans.

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.

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.

The Bank regulatory agencies have subsequently confirmed that their guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.

Both Section 4013 of the CARES Act and the interagency statement can be applied to a second modification that occurs after the first modification provided that the second modification does not qualify as a TDR under Section 4013 of the CARES Act or the interagency statement.

In its evaluation of whether a payment deferral qualifies as short-term under the interagency statement, an entity should assess multiple payment deferrals collectively (i.e., the cumulative deferrals cannot exceed six months).

The Bank offered forbearance options for borrowers impacted by COVID-19 that provide a short-term delay in payment by primarily allowing:

The allowance for loan losses to total loans, excluding PPP loans, was 1.41% at September 30, 2020.

Nonperforming loans increased to $15.0 million from $5.4 million at December 31, 2019 and, coupled with loan growth noted previously, resulted in the nonperforming loans to total loans ratio increase to 1.43% at September 30, 2020 compared to 0.57% at December 31, 2019.

Nonaccrual loans increased primarily as a result of two hotels with a total principal balance of $7.9 million that were determined to be impaired due to insufficient cash flows and occupancy rates and one commercial and industrial relationship totaling $1.4 million downgraded to substandard.

• The Bank provided borrower support and relief through short-term loan forbearance options by primarily allowing:

(a) deferral of three months of payments;

or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months.

During the forbearance period, the borrower is not considered delinquent for credit bureau reporting purposes.

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.

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 following table sets forth details at June 30, 2020 of industries considered at higher risk to be negatively impacted by the COVID-19 pandemic:

In certain circumstances, a second three-month deferral period was granted.

The following table provides details of loans in forbearance at the dates indicated.

September 30, 2020 June 30, 2020

Loans Amount % of Portfolio Number

Loans Amount % of Portfolio

(Dollars in thousands)

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 %

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 %

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.

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

The following table sets forth details at September 30, 2020 of industries considered at higher risk to be negatively impacted by the COVID-19 pandemic:

Industry Forbearance

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Retail 3.6 $ 27,109 23.0 % 7.7 % — — $ — — %

Office Space 3.7 10,646 9.1 3.0 6 4.0 2,801 26.3

Oil and Gas 3.2 3,160 2.7 0.9 1 3.0 622 19.7

Restaurants 3.4 1,034 0.9 0.3 4 3.4 404 39.1

Commercial Real Estate - Nonowner Occupied:

Retail 3.7 56,185 47.6 15.9 — — — —

Multifamily 3.8 58,585 50.0 16.7 12 3.8 17,474 29.8

Office Space 4.0 43,102 36.8 12.3 7 4.8 12,998 30.2

Hotels 5.3 24,995 21.2 7.1 5 5.4 10,327 41.3

Senior Housing 3.7 8,212 7.0 2.3 1 4.0 4,008 48.8

Oil and Gas 3.7 7,871 6.7 2.2 — — — —

Restaurants 3.5 4,785 4.1 1.4 5 3.0 1,520 31.8

Construction - Commercial Real Estate:

Retail 4.0 7,992 6.8 11.6 1 4.0 7,162 89.6

Multifamily 4.0 3,080 2.6 5.3 — — — —

Office Space 4.0 9,011 7.7 15.5 — — — —

Hotels 4.3 5,327 4.5 7.7 — — — —

Senior Housing 4.0 7,321 6.3 12.6 — — — —

Oil and Gas 4.0 1,572 1.3 2.7 — — — —

Commercial and Industrial:

Senior Housing 3.0 4,552 3.9 3.1 — — — —

Oil and Gas 3.6 6,259 5.3 4.2 11 3.6 3,175 50.7

Retail 3.7 91,286 77.4 1 4.0 7,162

Multifamily 3.8 61,665 52.7 12 3.8 17,474

Office Space 3.9 62,759 53.6 13 4.7 15,799

Hotels 5.1 30,322 25.7 5 5.4 10,327

Senior Housing 3.7 20,085 17.2 1 4.0 4,008

Oil and Gas 3.6 18,862 16.1 12 3.5 3,797

Restaurants 3.5 5,819 5.0 9 3.1 1,924

Total High Risk Industries 3.9 $ 289,142 247.0 82 4.3 $ 95,200

(1) Loan risk rating of 1-4 is considered a pass-rated credit, 5 is special mention, 6 is substandard, 7 is doubtful and 8 is loss.

Refer to Note 4 in the Notes to Consolidated Financial Statements of this report for other details of activity related to loans in forbearance and PPP loans.

Total liabilities increased $84.3 million, or 7.2%, to $1.25 billion at June 30, 2020 compared to $1.17 billion at December 31, 2019.

• Total deposits increased $75.6 million, or 6.8%, to $1.19 billion at June 30, 2020, from $1.12 billion at December 31, 2019.

Noninterest bearing demand deposits and savings accounts increased $74.0 million and $12.5 million, respectively, partially offset by a decrease of $18.5 million in time deposits.

Total liabilities increased $89.1 million, or 7.6%, to $1.26 billion at September 30, 2020 compared to $1.17 billion at December 31, 2019.

• Deposits benefited from PPP loan origination and to a lesser extent government stimulus payments and increased $80.7 million, or 7.2%, to $1.20 billion as of September 30, 2020 compared to $1.12 billion at December 31, 2019.Noninterest bearing demand deposits and savings accounts increased $68.1 million and $15.8 million, respectively, partially offset by a decrease of $23.5 million in time deposits.

The impact of the PPP loans that were originated and the proceeds of which were subsequently deposited at the Bank was approximately $54.8 million.

The Bank has been selective on offering promotional interest rates in light of recent rate decreases by the Federal Reserve.

Annualized deposit growth rate was 9.6% including PPP loan deposits and 3.1% without PPP loan deposits, representing organic deposit growth.

• Short-term borrowings increased $11.8 million, or 38.5%, to $42.3 million at June 30, 2020, compared to $30.6 million at December 31, 2019.

At June 30, 2020 and December 31, 2019, short-term borrowings were comprised entirely of securities sold under agreements to repurchase.

• Short-term borrowings increased $11.5 million, or 37.6%, to $42.1 million at September 30, 2020, compared to $30.6 million at December 31, 2019.

At September 30, 2020 and December 31, 2019, short-term borrowings were comprised entirely of securities sold under agreements to repurchase.

The increase is related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase.

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Stockholders’ Equity.

Stockholders’ equity increased $1.3 million, or 0.9%, to $152.4 million at June 30, 2020, compared to $151.1 million at December 31, 2019.

• Net income was $3.7 million for the six months ended June 30, 2020.

Stockholders’ equity decreased $17.8 million, or 11.8%, to $133.3 million at September 30, 2020, compared to $151.1 million at December 31, 2019.

• Net loss was $13.7 million for the nine months ended September 30, 2020.

• Accumulated other comprehensive income increased $1.4 million primarily due to market interest rate conditions in the current period on the Bank’s available-for-sale debt securities.

2 unchanged sentences

COVID-19 prompted the Company to announce on March 19, 2020 that the stock repurchase program was suspended until further notice to preserve excess capital in support of the Bank’s business of providing financial services to its customers and communities.

• Book value per share was $28.25, an increase of $0.60 at June 30, 2020, compared to $27.65 for December 31, 2019.

Consolidated Results of Operations for the Three Months Ended June 30, 2020 and 2019

Net income decreased $76,000 to $2.9 million for the three months ended June 30, 2020, compared to $3.0 million for the three months ended June 30, 2019.

• Book value per share was $24.69 at September 30, 2020 compared to $27.65 at December 31, 2019, a decrease of $2.96 primarily due to goodwill impairment.

Tangible book value per share increased $0.71, or 3.5%, to $21.23 compared to $20.52 at December 31, 2019.

Consolidated Results of Operations

Quarterly and year-to-date results were impacted by the following:

• The Company conducted a goodwill impairment analysis during the most recent quarter.

The Company had goodwill of $28.4 million at December 31, 2019, which was primarily related to past bank mergers and is 100% attributable to the community banking segment.

Due to the macroeconomic impacts of the pandemic and the overall industry-wide decline in value of stocks and earnings expectations in the banking sector, including the Company's stock, the Company determined its goodwill was no longer supported by its estimate of the Company’s fair value.

Therefore, $18.7 million of goodwill was deemed impaired and written off for the three and nine months ended September 30, 2020, reducing goodwill to $9.7 million at September 30, 2020.

This non-cash expense was deemed non-core and has no impact on tangible equity, cash flows, liquidity or regulatory capital.

• The Company incurred a non-cash impairment of fixed assets of $884,000 as a result of the previously announced Monessen branch closure.

Given the change in business purpose of the bank owned location, an appraisal was obtained to determine the property value and, as a result, the property was written down to fair value.

The impairment charge primarily relates to write off of the unamortized purchase accounting adjustment associated with the branch, which was the former headquarters of FedFirst Financial Corporation acquired through merger in 2014.

In addition, there was a one-time $84,000 early lease termination payment from the Bethlehem branch closure.

The Company expects accretive annual earnings of approximately $678,000 from the branch consolidations.

Consolidated Results of Operations for the Three Months Ended September 30, 2020 and 2019

Net loss was $17.4 million for the three months ended September 30, 2020, a decrease of $21.1 million compared to net income of $3.7 million for the three months ended September 30, 2019.

Excluding the impact of goodwill impairment and impairment of fixed assets in the current period, net income decreased $1.9 million, or 50.8%, to $1.8 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Net Interest Income.

Net interest income decreased $384,000, or 3.6%, to $10.3 million for the three months ended June 30, 2020 compared to $10.7 million for the three months ended June 30, 2019.

• Interest and dividend income decreased $942,000, or 7.4%, to $11.7 million for the three months ended June 30, 2020 compared to $12.7 million the three months ended June 30, 2019.

◦ Interest income on loans decreased $96,000, or 0.9%, $10.6 million for the three months ended June 30, 2020 compared to $10.7 million for the three months ended June 30, 2019.

Although average loans increased $108.0 million compared to the three months ended June 30, 2019, the average yield decreased 53 basis points (“bps”) to 4.21%.

The current quarter loan yield was impacted by the declines in interest rate indices in March 2020 at the onset of the COVID-19 pandemic, which resulted in an immediate decrease in interest rates on adjustable rate loans.

In addition, PPP loans decreased the loan yield 6 bps in the current quarter.

The Bank continued to accrue and recognize interest income on loans in forbearance due to expectation that borrowers will resume payment at the end of forbearance and collectibility of the interest income is not in question.

With the majority of loans scheduled to exit forbearance in the third quarter, the Bank will evaluate whether continuing to accrue interest is prudent on a loan-by-loan or industry basis.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $90,000 in the current period compared to $78,000 in the prior period, or 4 bps in the current period compared to 3 bps in the prior period.

◦ Other interest and dividend income, which primarily consists of interest-bearing cash, decreased $290,000, or 77.5% to $84,000 for the three months ended June 30, 2020 compared to $374,000 for the three months ended June 30, 2019.

Average other interest-earning assets increased $43.6 million compared to the three months ended June 30, 2020 primarily from buildup of cash as a result of calls of U.S.

government agency and municipal securities and

government stimulus payments, but average yield declined 246 bps due to interest rate cuts on interest-earning cash deposits held at other financial institutions.

◦ Interest income on taxable investment securities decreased $502,000, or 34.8%, to $940,000 for the three months ended June 30, 2020 compared to $1.4 million for the three months ended June 30, 2019 driven by a $71.9 million decrease in average investment security balance.

Net interest income decreased $680,000, or 6.1%, to $10.4 million for the three months ended September 30, 2020 compared to $11.1 million for the three months ended September 30, 2019.

• Interest and dividend income decreased $1.4 million, or 11.0%, to $11.7 million for the three months ended September 30, 2020 compared to $13.1 million the three months ended September 30, 2019.

◦ Interest income on loans decreased $275,000, or 2.5%, $10.7 million for the three months ended September 30, 2020 compared to $11.0 million for the three months ended September 30, 2019.

Although average loans increased $115.4 million compared to the three months ended September 30, 2019, the average yield decreased 62 basis points (“bps”) to 4.13%.

The current quarter loan yield compared to the quarter ended September 30, 2019 was impacted by the declines in interest rate indices in the first quarter of 2020 at the onset of the COVID-19 pandemic and the full quarter impact of Paycheck Protection Program (“PPP”) loans, which decreased loan yield approximately 11 bps.

Approximately $274,000 of net loan origination fees were recognized in the current quarter.

In addition, the Bank continued to accrue and recognize interest income on loans in forbearance due to expectation that borrowers will resume payment at the end of forbearance and collectibility of the interest income is not in question.

However, two hotel loans were placed on nonaccrual in the current quarter which resulted in reversal of $231,000 of previously accrued interest income while the loans were in deferral.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $127,000 for the three months ended September 30, 2020 compared to $65,000 for the three months ended September 30, 2019, or 5 bps in the current period compared to 3 bps in the prior period.

◦ Interest income on taxable investment securities decreased $805,000, or 51.7%, to $753,000 for the three months ended September 30, 2020 compared to $1.6 million for the three months ended September 30, 2019 driven by a $76.1 million decrease in average investment security balance and 69 bps decrease in average yield.

The Federal Reserve’s decision to drop the benchmark interest rate resulted in the call of $59.5 million in U.S.

2 unchanged sentences

The funds were partially maintained in cash or reinvested in lower rate securities.

• Interest expense decreased $558,000, or 28.4%, to $1.4 million for the three months ended June 30, 2020 compared to $2.0 million for the three months ended June 30, 2019.

◦ Interest expense on deposits decreased $519,000, or 28.5%, to $1.3 million for the three months ended June 30, 2020 compared $1.8 million for the three months ended June 30, 2019.

While average interest-earning deposits increased $19.0 million, interest rate declines for all products driven by pandemic-related interest rate cuts and efforts to control pricing resulted in a 26 bp decrease in average cost compared to the quarter ended June 30, 2019.

◦ Interest expense on other borrowed funds decreased $28,000 to $62,000 for the three months ended June 30, 2020 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $6.0 million decrease in average balance.

◦ Other interest and dividend income, which primarily consists of interest-bearing cash, decreased $309,000, or 76.3% to $96,000 for the three months ended September 30, 2020 compared to $405,000 for the three months ended September 30, 2019.

Average other interest-earning assets increased $81.3 million compared to the three months ended September 30, 2020 primarily from buildup of cash as a result of calls of U.S.

government agency and

municipal securities and government stimulus payments, but average yield declined 353 bps due to interest rate cuts on interest-earning cash deposits held at other financial institutions.

• Interest expense decreased $762,000, or 38.1%, to $1.2 million for the three months ended September 30, 2020 compared to $2.0 million for the three months ended September 30, 2019.

◦ Interest expense on deposits decreased $714,000, or 38.3%, to $1.2 million for the three months ended September 30, 2020 compared $1.9 million for the three months ended September 30, 2019.

While average interest-earning deposits increased $13.6 million, interest rate declines for all products driven by pandemic-related interest rate cuts and efforts to control pricing resulted in a 34 bp decrease in average cost compared to the three months ended September 30, 2019.

◦ Interest expense on other borrowed funds decreased $29,000, or 31.9%, to $62,000 for the three months ended September 30, 2020 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $6.0 million decrease in average balance.

Average Balances and Yields .

7 unchanged sentences

The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

Three Months Ended June 30,

Three Months Ended September 30,

Balance Interest

28 unchanged sentences

Net Interest Income (FTE) (Non-GAAP) (5)

$ 10,469 $ 11,152

Net Interest Rate Spread (FTE) (Non-GAAP) (1)(5)

5 unchanged sentences

Return on Average Equity (4)

(45.13) 10.10

Average Equity to Average Assets 10.85 11.16

4 unchanged sentences

(4) Annualized based on three months ended results.

(5) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.

Rate/Volume Analysis .

5 unchanged sentences

The total column represents the sum of the prior columns.

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands) (Unaudited)

Interest and Dividend Income:

$ 1,168 $ (1,263) $ (95)

Loans, net $ 1,255 $ (1,526) $ (271)

Debt Securities:

(492) (10) (502)

Taxable (509) (296) (805)

Exempt From Federal Tax (51) (8) (59)

Marketable Equity Securities — (1) (1)

Other Interest-Earning Assets 293 (602) (309)

175 (465) (290)

Total Interest-Earning Assets 988 (2,433) (1,445)

767 (1,719) (952)

Interest Expense:

31 (550) (519)

(3) (36) (39)

Deposits 22 (736) (714)

Borrowings 21 (69) (48)

Total Interest-Bearing Liabilities 43 (805) (762)

28 (586) (558)

Change in Net Interest Income $ 945 $ (1,628) $ (683)

$ 739 $ (1,133) $ (394)

Provision for Loan Losses.

The provision for loan losses was $300,000 for the three months ended June 30, 2020 compared to $350,000 for the three months ended June 30, 2019.

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.

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, retail, oil and gas, and restaurants, were significantly adjusted for these circumstances for the quarter ended March 31, 2020 and resulted in a $2.5 million provision.

While recessionary economic conditions still exist, there has been an improvement to certain macroeconomic conditions, including unemployment, for the quarter ended June 30, 2020 compared to March 31, 2020, and resulted in a $300,000 provision.

Net recoveries for the three months ended June 30, 2020 were $26,000, or 0.01% net recoveries to average loans on an annualized basis.

Net charge-offs were $71,000, or 0.03% net charge-offs to average loans on an annualized basis, for the three months ended June 30, 2019 driven by higher automobile loan charge-offs.

The provision for loan losses was $1.2 million for the three months ended September 30, 2020 compared to $300,000 for the three months ended June 30, 2020 and $175,000 for the three months ended September 30, 2019.

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 hotels with a total principal balance of $7.9 million were determined to be impaired due to insufficient cash flows and occupancy rates and was a driving factor in a $2.3 million increase in specific reserves and current quarter provision.

This was partially offset by a reduction in the qualitative factors related to economic trends and industry conditions due to improving macroeconomic conditions as the economy continues to reopen from the second quarter pandemic-related shutdown.

In addition, $16.1 million of hotel loans excluded from homogenous loan pools were evaluated for impairment and determined to not require specific reserves.

Net charge-offs for the three months ended September 30, 2020 were $68,000, or 0.03% net charge-offs to average loans on an annualized basis.

Net charge-offs were $116,000, or 0.05% to average loans on an annualized basis, for the three months ended September 30, 2019 driven by higher automobile loan charge-offs.

Noninterest Income .

Noninterest income increased $483,000, or 22.3%, to $2.6 million for the three months ended June 30, 2020, compared to $2.2 million for the three months ended June 30, 2019.

• The Company recognized a $489,000 net gain on sales of investment securities in the current quarter to recognize gains on higher-interest mortgage-backed securities that were paying down quicker than expected.

• The Company recognized $441,000 gain on sales of loans in the current quarter compared to $50,000 for the three months ended June 30, 2019, primarily due to increased mortgage loan production from refinances, which were sold to reduce interest rate risk on lower yielding, long-term assets.

• Other (loss) income included a $51,000 increase in amortization on mortgage servicing rights combined with a $269,000 temporary impairment on mortgage servicing rights recognized in the current quarter due to a decline in the interest rate environment that has caused increased prepayment speeds and resulted in a decrease in fair value of the serviced mortgage portfolio.

• Service fees decreased $130,000 to $487,000 in the current quarter compared to $617,000 for the three months ended June 30, 2019 due to waiver of fees and decrease in customer usage from the pandemic.

Noninterest income increased $207,000, or 10.5%, to $2.2 million for the three months ended September 30, 2020, compared to $2.0 million for the three months ended September 30, 2019.

• Service fees decreased $85,000 to $554,000 for the three months ended September 30, 2020, compared to $639,000 for the three months ended September 30, 2019 due to decrease in overdraft fees and customer usage from the pandemic.

• Insurance commissions increased $94,000 to $1.1 million for the three months ended September 30, 2020 compared to $985,000 for the three months ended September 30, 2019.

Insurance commissions decreased $34,000 in the current quarter.

• Net gain on sale of loans was $435,000 in the current period with robust mortgage loan production from refinances in the current quarter compared to $48,000 for the three months ended September 30, 2019.

• The Company recorded a $65,000 net loss on disposal of fixed assets in the current quarter primarily related to the sale of the former Exchange Underwriters headquarters.

• Other (loss) income included a $71,000 increase in amortization on mortgage servicing rights in the current quarter due to increased prepayment speeds on the serviced mortgage portfolio.

Noninterest Expense.

Noninterest expense increased $274,000, or 3.1%, to $9.1 million for the three months ended June 30, 2020 compared to $8.8 million for the three months ended June 30, 2019.

• Salaries and employee benefits increased $120,000 to $4.8 million for the three months ended June 30, 2020 compared to $4.7 million for the three months ended June 30, 2019.

The increase was primarily due to the Community Bank Cares premium pay during the pandemic in addition to merit and promotional increases, which were more than offset by deferred employee-related loan origination costs associated with PPP loans.

• Contracted services increased $201,000 to $562,000 for the three months ended June 30, 2020 compared to $361,000 for the three months ended June 30, 2019 primarily due to temporary employees hired to assist with PPP loan processing and consultants used to assist in infrastructure improvements.

• Data processing increased $80,000 to $460,000 for the three months ended June 30, 2020 compared to $380,000 for the three months ended June 30, 2019 primarily due to technology investments.

• Other noninterest expense decreased $150,000 to $945,000 for the three months ended June 30, 2020 compared to $1.1 million for the three months ended June 30, 2019 primarily due to decreases in travel-related and telephone costs from employee work-at home arrangements during the pandemic as well as fraud losses incurred in the prior period.

• Advertising decreased $65,000 to $155,000 for the three months ended June 30, 2020 compared to $220,000 for the three months ended June 30, 2019 due to less emphasis on marketing initiatives during the pandemic.

• Equipment expense decreased $61,000 to $224,000 for three months ended June 30, 2020 compared to $285,000 for the three months ended June 30, 2019v primarily due to fully depreciated items.

Noninterest expense increased $20.7 million, or 250.8%, to $29.0 million for the three months ended September 30, 2020 compared to $8.3 million for the three months ended September 30, 2019.

This was primarily impacted by goodwill impairment of $18.7 million and writedown on fixed assets of $884,000 as previously noted.

Excluding the impact of these non-cash charges, noninterest expense increased $1.1 million, or 13.7%, to $9.4 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

• Salaries and employee benefits increased $496,000 to $5.1 million for the three months ended September 30, 2020 compared to $4.6 million for the three months ended September 30, 2019.

The increase was primarily due to merit and promotional increases and $113,000 of one-time payments related to the transition and retention of a permanent CEO.

• Occupancy expense increased $162,000 to $759,000 for the three months ended September 30, 2020 compared to $597,000 for the three months ended September 30, 2019.

The increase was primarily related to a one-time $84,000 early lease termination payment from the Bethlehem branch closure and increase in property management costs.

• Contracted services increased $219,000 to $531,000 for the three months ended September 30, 2020 compared to $312,000 for the three months ended September 30, 2019 primarily due to temporary employees hired to assist with loan processing and consultants used to assist in infrastructure improvements.

• Data processing increased $112,000 to $482,000 for the three months ended September 30, 2020 compared to $370,000 for the three months ended September 30, 2019 primarily due to technology investments.

• Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $167,000 to $172,000 for the three months ended September 30, 2020 compared to $5,000 for the three months ended September 30, 2019 due to deposit insurance fund credits approved for banks with less than $10 billion in assets in the prior period.

• Legal fees and professional fees increased $44,000 to $161,000 for the three months ended September 30, 2020 compared to $117,000 for the three months ended September 30, 2019 due to fees associated with the retention of a permanent CEO in the current period.

• Advertising decreased $60,000 to $148,000 for the three months ended September 30, 2020 compared to $208,000 for the three months ended September 30, 2019 due to reduced marketing initiatives during the pandemic.

• Other noninterest expense decreased $65,000 to $919,000 for the three months ended September 30, 2020 compared to $984,000 for the three months ended September 30, 2019 primarily due to decreases in travel-related, meals and telephone costs from employee work-at home arrangements during the pandemic.

Income Tax Expense.

Income tax expense decreased $49,000 to $695,000 for the three months ended June 30, 2020, compared to $744,000, for the three months ended June 30, 2019.

The effective tax rate for the three months ended June 30, 2020 was 19.3% compared to 20.0%, for the three months ended June 30, 2019.

Results of Operations for the Six Months Ended June 30, 2020 and 2019

Net income for the six months ended June 30, 2020 was $3.7 million compared to $5.9 million for the six months ended June 30, 2019.

This was a decrease of $2.2 million, or 37.7%.

Income tax benefit was $184,000 for the three months ended September 30, 2020 a decrease of $1.1 million compared to income tax expense of $884,000 for the three months ended September 30, 2019.

While the goodwill impairment charge was non-tax deductible, income tax benefit for the three months ended September 30, 2020 was impacted by a $338,000 benefit related to the reversal of a deferred tax liability associated with goodwill.

Due to goodwill being partially impaired, a proportional amount of the deferred tax liability was reversed.

Results of Operations for the Nine Months Ended September 30, 2020 and 2019

Net loss was $13.7 million for the nine months ended September 30, 2020, a decrease of $23.4 million compared to net income of $9.7 million for the nine months ended September 30, 2019.

Excluding the impact of goodwill impairment and impairment of fixed assets in the current period, net income decreased $4.1 million, or 42.8%, to $5.5 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

Net Interest Income.

Net interest income decreased $285,000, or 1.3% to $20.9 million for the six months ended June 30, 2020 compared to $21.1 million for the six months ended June 30, 2019.

• Interest and dividend income decreased $909,000, or 3.6%, to $24.1 million for the six months ended June 30, 2020 compared to $25.0 million for the six months ended June 30, 2019.

◦ Although average loans increased $80.1 million, the loan yield for the six months ended June 30, 2020 decreased 35 bps compared to the six months ended June 30, 2019.

Net interest income decreased $965,000, or 3.0% to $31.3 million for the nine months ended September 30, 2020 compared to $32.2 million for the nine months ended September 30, 2019.

• Interest and dividend income decreased $2.4 million, or 6.2%, to $35.7 million for the nine months ended September 30, 2020 compared to $38.1 million for the nine months ended September 30, 2019.

◦ Although average loans increased $92.0 million, primarily driven by PPP and mortgage loans, the loan yield for the nine months ended September 30, 2020 decreased 45 bps compared to the nine months ended September 30, 2019.

The current period loan yield was significantly impacted by the 150 bp decline in the Wall Street Journal Prime Rate in March 2020, which resulted in immediate decrease in interest rates on adjustable rate loans linked to that index.

In addition, PPP loans decreased the loan yield 4 bps in the current period.

With the majority of loans exiting forbearance in the third quarter, the Bank will evaluate whether continuing to accrue interest is prudent on a loan-by-loan or industry basis.

◦ Interest income on taxable investment securities decreased $618,000, or 22.4% to $2.1 million for the six months ended June 30, 2020 compared to $2.8 million for the six months ended June 30, 2019 driven by a $51.9 million decrease in average investment security balance primarily from significant calls of U.S.

government agency securities in a declining interest rate environment.

◦ Interest from other interest-earning assets, which primarily consist of interest-earning cash, decreased $370,000, or 53.5% for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 even though average balances increased $31.2 million primarily related to funds received from calls of U.S.

government agency securities.

The impact on interest income was primarily due to declines on interest rates earned on deposits at other financial institutions as noted by the 201 bp difference for respective periods.

◦ Interest expense on deposits decreased $557,000, or 15.7%, to $3.0 million for the six months ended June 30, 2020 compared to $3.5 million for the six months ended June 30, 2019.

While average interest-bearing deposits increased $16.0 million, interest rate declines for all products driven by pandemic-related interest rate cuts and efforts to control pricing resulted in a 15 bp decrease in average cost compared to the six months ended June 30, 2019.

In addition, PPP loans decreased the loan yield approximately 7 bps in the current year.

Approximately $465,000 of net loan origination fees were recognized in the current period.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $293,000 for the nine months ended September 30, 2020 compared to $203,000 for the nine months ended September 30, 2019, or 4 bps in the current period compared to 3 bps in the prior period.

◦ Interest income on taxable investment securities decreased $1.4 million, or 33.0%, to $2.9 million for the nine months ended September 30, 2020 compared to $4.3 million for the nine months ended September 30, 2019 driven by a $60.0 million decrease in average investment securities primarily from significant calls of U.S.

government agency securities and paydowns on mortgage-backed securities in a declining interest rate environment, which were replaced with lower-yielding securities.

Current period yield benefited from approximately $231,000 in discount accretion from U.S.

government agency calls.

◦ Interest from other interest-earning assets, which primarily consists of interest-earning cash, decreased $679,000, or 61.9% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 even though average balances increased $48.0 million primarily related to funds received from investment security activity.

The impact on interest income was primarily due to declines on interest rates earned on deposits at other financial institutions, which resulted in a 253 bp decrease in yield.

• Interest expense decreased $1.4 million, or 23.8%, to $4.4 million for the nine months ended September 30, 2020 compared to $5.8 million for the nine months ended September 30, 2019.

◦ Interest expense on deposits decreased $1.3 million, or 23.5%, to $4.1 million for the nine months ended September 30, 2020 compared to $5.4 million for the nine months ended September 30, 2019.

While average interest-bearing deposits increased $15.2 million, interest rate declines for all products driven by pandemic-related interest rate cuts and efforts to control pricing resulted in a 21 bp decrease in average cost compared to the nine months ended September 30, 2019.

◦ Interest expense on other borrowed funds decreased $84,000, 30.2%, to $194,000 for the nine months ended September 30, 2020 compared to $278,000 for the nine months ended September 30, 2019 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $6.0 million decrease in average balance.

Average Balances and Yields.

7 unchanged sentences

The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

Six Months Ended June 30,

Nine Months Ended September 30,

Balance Interest

28 unchanged sentences

Net Interest Income (FTE) (Non-GAAP) (5)

$ 31,435 $ 32,438

Net Interest Rate Spread (FTE) (Non-GAAP) (1)(5)(

10 unchanged sentences

(3) Net interest margin represents annualized net interest income divided by average total interest-earning assets.

(4) Annualized based on six months ended results.

(4) Annualized based on nine months ended results.

(5) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.

Rate Volume Analysis.

5 unchanged sentences

The total column represents the sum of the prior columns.

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020

Nine Months Ended September 30, 2019

Increase (Decrease) Due to

Volume Rate Total

(Dollars in thousands) (Unaudited)

Interest and Dividend Income:

$ 1,867 $ (1,633) $ 234

Loans, net $ 3,173 $ (3,210) $ (37)

Debt Securities:

(743) 125 (618)

Taxable (1,250) (173) (1,423)

Exempt From Federal Tax (259) 10 (249)

(210) 21 (189)

Marketable Equity Securities 1 (2) (1)

Other Interest-Earning Assets 614 (1,293) (679)

292 (662) (370)

Total Interest-Earning Assets 2,279 (4,668) (2,389)

1,207 (2,150) (943)

Interest Expense:

74 (631) (557)

(25) (42) (67)

Deposits 66 (1,337) (1,271)

Borrowings (1) (114) (115)

Total Interest-Bearing Liabilities 65 (1,451) (1,386)

49 (673) (624)

Change in Net Interest Income $ 2,214 $ (3,217) $ (1,003)

$ 1,158 $ (1,477) $ (319)

Provision for Loan Losses.

The 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 in the current year.

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, retail, oil and gas, and restaurants, were adjusted for these circumstances and resulted in a $2.8 million provision for loan losses for the six months ended June 30, 2020 compared to $375,000 for the six months ended June 30, 2019.

Net charge-offs were $19,000, or 0.00% net charge-offs to average loans on an annualized basis, for the six months ended June 30, 2020.

Net charge-offs were $242,000, or 0.05% net charge-offs to average loans on an annualized basis, for the six months ended June 30, 2019.

The provision for loan losses was $4.0 million for the nine months ended September 30, 2020, compared to $550,000 for the nine months ended September 30, 2019.

The pandemic resulted in a dramatic increase in unemployment and recessionary economic conditions in the current year.

Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis were increased at the onset of the pandemic, primarily related to economic trends and industry conditions, because of vulnerable industries such as hospitality, oil and gas, retail and restaurants and resulted in a $2.1 million provision in the first quarter.

Macroeconomic conditions have improved as the economy continues to reopen from the second quarter pandemic-related shutdown and the qualitative factors have been further adjusted.

However, as noted in the quarterly results, 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.

$16.1 million of hotel loans excluded from homogenous loan pools were evaluated for impairment and determined to not require specific reserves.

Net charge-offs were $87,000, or 0.01% net charge-offs to average loans on an annualized basis, for the nine months ended September 30, 2020.

Net charge-offs were $358,000, or 0.05% net charge-offs to average loans on an annualized basis, for the nine months ended September 30, 2019.

The increase in the prior year was driven by higher automobile loan charge-offs.

Noninterest Income.

Noninterest income increased $241,000, or 5.6%, to $4.5 million for the six months ended June 30, 2020, compared to $4.3 million million for the six months ended June 30, 2019.

• Net gain on sales of investment securities was $489,000 for the six months ended June 30, 2020 to harvest gains on higher-interest mortgage-backed securities that were paying down quicker than expected compared to a net loss of $53,000 for six months ended June 30, 2019.

• Net gain on sales of loans was $568,000 for the six months ended June 30, 2020 compared to $142,000 for the six months ended June 30, 2019 primarily due to increased mortgage loan production from refinances, which were sold to reduce interest rate risk on lower yielding, long-term assets.

• Insurance commissions increased $162,000, or 7.3%, to $2.4 million for the six months ended June 30, 2020 compared to $2.2 million for the six months ended June 30, 2019 due an increase in both commercial and personal line polices.

• Other (loss) income decreased $374,000 as a result of an increase in amortization on mortgage servicing rights combined with a $269,000 temporary impairment on mortgage servicing rights recognized in the current period due to a decline in the interest rate environment that caused increased prepayment speeds and resulted in a decrease in fair value of the serviced mortgage portfolio.

• Service fees decreased $118,000 to $1.1 million for the six months ended June 30, 2020 compared to $1.2 million for the six months ended June 30, 2019 due to waiver of fees and decrease in customer usage from the pandemic.

• The Company’s marketable equity securities, which are primarily comprised of bank stocks, reflected a decline of $410,000 for the six months ended June 30, 2020 primarily from the impact of COVID-19 on the stock market.

Noninterest income increased $448,000, or 7.2%, to $6.7 million for the nine months ended September 30, 2020, compared to $6.2 million million for the nine months ended September 30, 2019.

• Service fees decreased $203,000 to $1.6 million for the nine months ended September 30, 2020, compared to $1.8 million for the nine months ended September 30, 2019 due to decrease in overdraft fees and customer usage from the pandemic.

• Insurance commissions increased $256,000, or 8.0%, to $3.5 million for the nine months ended September 30, 2020, compared to $3.2 million for the nine months ended September 30, 2019 due to an increase in both commercial and personal line polices.

• Net gain on sales of loans was $1.0 million for the nine months ended September 30, 2020 compared to $190,000 for the nine months ended September 30, 2019 primarily due to increased mortgage loan production from refinances, which were sold to reduce interest rate risk on lower yielding, long-term assets.

• Net gain on sales of investment securities was $489,000 for the nine months ended September 30, 2020 to harvest gains on higher-interest mortgage-backed securities that were paying down quicker than expected compared to a net loss of $50,000 for nine months ended September 30, 2019.

• The Company’s marketable equity securities, which are primarily comprised of bank stocks, reflected a decline in value of $469,000 for the current period primarily from the impact of COVID-19 on the banking industry.

• The Company recorded a $48,000 net loss on disposal of fixed assets in the current year primarily related to the sale of the former Exchange Underwriters headquarters.

• There was a $443,000 decrease in other (loss) income as a result of an increase in amortization on mortgage servicing rights combined with a $269,000 temporary impairment on mortgage servicing rights recognized in the current period due to a decline in the interest rate environment that caused increased prepayment speeds and resulted in a decrease in fair value of the serviced mortgage portfolio.

Noninterest Expense.

Noninterest expense increased $397,000, or 2.2%, to $18.1 million for the six months ended June 30, 2020 compared to $17.7 million for the six months ended June 30, 2019.

• Salaries and employee benefits decreased $86,000 to $9.6 million for the six months ended June 30, 2020 compared to $9.6 million for the six months ended June 30, 2019.

The current period was impacted by a first quarter 2020, $407,000 one-time payment that offset employee benefits from health insurance claims exceeding our stop-loss limit for the 2019 plan year and change from a self-funded to a fully insured plan.

Noninterest expense increased $21.1 million, or 81.4%, to $47.0 million for the nine months ended September 30, 2020 compared to $25.9 million for the nine months ended September 30, 2019.

This was primarily impacted by goodwill impairment of $18.7 million and writedown on fixed assets of $884,000 as previously noted.

Excluding the impact of these non-cash charges, noninterest expense increased $1.5 million, or 5.9%, to $27.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

• Salaries and employee benefits increased $410,000 for the nine months ended September 30, 2020 compared to $14.3 million for the nine months ended September 30, 2019.

The increase is related to the Community Bank Cares 10% premium pay during the pandemic.

Additionally, the Company recognized approximately $388,000 of one-time payments related to the transition and retention of a permanent CEO for the nine months ended September 30, 2020 and restricted stock expense increased $91,000 in the current period related to grants in December 2019.

This was partially offset by a $407,000 one-time payment that reduced employee benefits from health insurance claims exceeding our stop-loss limit for the 2019 plan year and change from a self-funded to a fully insured plan.

Final calculation of the stop loss payment was completed 90 days after the end of the plan year.

Also the Company benefited from deferred employee-related loan origination costs associated with PPP loans, which were partially offset by the Community Bank Cares premium pay during the pandemic.

Additionally, the Company recognized approximately $236,000 of one-time payments related to the search for a permanent CEO in the six months ended June 30, 2020.

• Contracted services increased $307,000 to $940,000 for the six months ended June 30, 2020 compared to $633,000 for the six months ended June 30, 2019, primarily due to temporary employees hired to assist with PPP loan processing and consultants used to assist in infrastructure improvements.

In the first quarter of 2020, contracted services were impacted by $116,000 in consulting fees associated with the search for a new CEO.

• Equipment expense decreased $100,000 to $481,000 for the six months ended June 30, 2020 compared to $581,000 for the six months ended June 30, 2019 as the result of decrease in depreciation and repairs and maintenance.

• Data processing increased $97,000 to $885,000 for the six months ended June 30, 2020 compared to $788,000 for the six months ended June 30, 2019 primarily due to technology investments.

• Legal and professional fees increased $65,000 to $406,000 for the six months ended June 30, 2020 compared to $341,000 for the six months ended June 30, 2019 due to fees associated with the search for a permanent CEO in the first quarter.

Also the Company benefited from deferred employee-related loan origination costs associated with PPP loans.

• Occupancy expense increased $172,000 to $2.2 million for the nine months ended September 30, 2020 compared to $2.0 million for the nine months ended September 30, 2019.

The increase was primarily related to a one-time $84,000 early lease termination payment from the Bethlehem branch closure and increase in property management costs.

• Equipment expense decreased $146,000 to $701,000 for the nine months ended September 30, 2020 compared to $847,000 for the nine months ended September 30, 2019 as the result of decrease in depreciation and repairs and maintenance.

• Data processing increased $209,000 to $1.4 million for the nine months ended September 30, 2020 compared to $1.2 million for the nine months ended September 30, 2019 primarily due to technology investments.

• Contracted services increased $526,000 to $1.5 million for the nine months ended September 30, 2020 compared to $945,000 for the nine months ended September 30, 2019, primarily due to temporary employees hired to assist with PPP loan processing and consultants used to assist in infrastructure improvements.

Total consulting fees in the current period associated with the search for a permanent CEO were $177,000.

• FDIC assessment expense increased $125,000 to $493,000 for the nine months ended September 30, 2020 compared to $368,000 for the nine months ended September 30, 2019 due to deposit insurance fund credits approved for banks with less than $10 billion in assets in the prior period.

• Legal fees and professional fees increased $109,000 to $567,000 for the nine months ended September 30, 2020 compared to $458,000 for the nine months ended September 30, 2019 due to fees associated with the transition and retention of a permanent CEO.

Income Tax Expense.

Income tax expense decreased $638,000 to $824,000 for the six months ended June 30, 2020 compared to $1.5 million for the six months ended June 30, 2019.

The effective tax rate for the six months ended June 30, 2020 was 18.3% compared to 19.8%, for the six months ended June 30, 2019.

A $2.9 million decrease in pre-tax income combined with stable tax-preference items resulted in a lower effective tax rate for the six months ended June 30, 2020.

Income tax expense decreased $1.7 million to $640,000 for the nine months ended September 30, 2020 compared to $2.3 million for the nine months ended September 30, 2019.

While the goodwill impairment charge was non-tax deductible, income tax expense for the nine months ended September 30, 2020 was impacted by a $338,000 benefit related to the reversal of a deferred tax liability associated with goodwill.

Due to goodwill being partially impaired, a proportional amount of the deferred tax liability was reversed.

Off-Balance Sheet Arrangements.

Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

Refer to Note 9 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of June 30, 2020.

Refer to Note 9 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of September 30, 2020 and December 31, 2019.

Liquidity and Capital Management

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The far-reaching consequences of these actions and the crisis is unknown and will largely depend on the extent and length of the recession combined with how quickly the economy can fully re-open.

Forbearance activity and any additional forbearance that may be needed could significantly impact our sources of funds from loan cash flows.

As of September 30, 2020, 86% of loans that were in deferral at June 30, 2020 have returned to their regular payment schedule, but any additional forbearance that may be needed could significantly impact our sources of funds from loan cash flows.

The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities.

The Company believes that it had sufficient liquidity at June 30, 2020 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $131.4 million at June 30, 2020.

The Company believes that it had sufficient liquidity at September 30, 2020 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $112.2 million at September 30, 2020.

The levels of these assets depend on our operating, financing, lending and investing activities during any given period.

Unpledged securities, which provide an additional source of liquidity, totaled $10.0 million at June 30, 2020.

In addition, at June 30, 2020, the Company had the ability to borrow up to $428.5 million from the FHLB of Pittsburgh, of which $399.3 million is available.

The Company also has the ability to borrow up to $90.4 million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million as of both June 30, 2020 and December 31, 2019.

At June 30, 2020, $82.9 million, or 41.2% of total time deposits mature within one year.

Unpledged securities, which provide an additional source of liquidity, totaled $26.6 million at September 30, 2020.

In addition, at September 30, 2020, the Company had the ability to borrow up to $430.7 million from the FHLB of Pittsburgh, of which $416.9 million is available.

The Company also has the ability to borrow up to $95.7 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million as of both September 30, 2020 and December 31, 2019.

At September 30, 2020, $86.6 million, or 44.1% of total time deposits mature within one year.

If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds.

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The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations.

At June 30, 2020, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $4.8 million.

At September 30, 2020, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $4.7 million.

While the Company is not currently planning to reduce or suspend quarterly dividends, if the Company incurs or is expected to incur significant reduction in earnings as a result of the COVID-19 pandemic, it may need to suspend or reduce the level of quarterly dividends.

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The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.

Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary

actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

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Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.

At June 30, 2020 and December 31, 2019, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

At June 30, 2020, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act.

In addition, PPP loans received a zero-percent rish weight under the regulatory capital rules regardless of whether they were pledged as collateral to the Federal Reserve Bank's PPP lending facility, but were included in the Bank's leverage ratio requirement due to the Bank not pledging the loans as collateral to the PPP lending facility The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.

June 30, 2020 December 31, 2019

At September 30, 2020 and December 31, 2019, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

At September 30, 2020, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act.

In addition, PPP loans received a zero-percent risk weight under the regulatory capital rules regardless of whether they were pledged as collateral to the Federal Reserve Bank's PPP lending facility, but were included in the Bank's leverage ratio requirement due to the Bank not pledging the loans as collateral to the PPP lending facility.

The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.

September 30, 2020 December 31, 2019

Amount Ratio Amount Ratio

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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 2. Management’s Discussion and Analysis