CB Financial Services, Inc. 10-Q

Item 1. Financial Statements. CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (Unaudited) September 30, 2020 December 31, 2019 (Dollars in thousands, except per share and share data) ASSETS Cash and Due From Banks: Interest Bearing $ 102,400 $ 68,798 Non-Interest Bearing 9,769 11,419 Total Cash and Due From Banks 112,169 80,217 Investment Securities: Available-for-Sale 158,956 197,385 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 Premises and Equipment, Net 20,439 22,282 Bank-Owned Life Insurance 24,639 24,222 Goodwill 9,732 28,425 Intangible Assets, Net 8,931 10,527 Accrued Interest and Other Assets 20,905 15,850 TOTAL ASSETS $ 1,392,876 $ 1,321,537 LIABILITIES Deposits: Non-Interest Bearing Demand Deposits $ 335,287 $ 267,152 NOW Accounts 245,850 232,099 Money Market Accounts 188,958 182,428 Savings Accounts 232,691 216,924 Time Deposits 196,250 219,756 Total Deposits 1,199,036 1,118,359 Short-Term Borrowings 42,061 30,571 Other Borrowings 11,000 14,000 Accrued Interest and Other Liabilities 7,480 7,510 TOTAL LIABILITIES 1,259,577 1,170,440 STOCKHOLDERS' EQUITY Preferred Stock, No Par Value; 5,000,000 Shares Authorized — — Common Stock, $ 0.4167 Par Value; 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 2,367 2,367 Capital Surplus 83,338 82,971 Retained Earnings 49,348 66,955 Treasury Stock, at Cost ( 282,281 and 217,165 Shares at September 30, 2020 and December 31, 2019, Respectively) ( 5,825 ) ( 3,842 ) Accumulated Other Comprehensive Income 4,071 2,646 TOTAL STOCKHOLDERS' EQUITY 133,299 151,097 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,392,876 $ 1,321,537 The accompanying notes are an integral part of these consolidated financial statements 1 Table of Contents CONSOLIDATED STATEMENT OF (LOSS) INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands, except share and per share data) INTEREST AND DIVIDEND INCOME Loans, Including Fees $ 10,709 $ 10,984 $ 32,050 $ 32,090 Investment Securities: 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 TOTAL INTEREST AND DIVIDEND INCOME 11,656 13,098 35,712 38,063 INTEREST EXPENSE Deposits 1,150 1,864 4,136 5,407 Short-Term Borrowings 28 47 112 143 Other Borrowings 62 91 194 278 TOTAL INTEREST EXPENSE 1,240 2,002 4,442 5,828 NET INTEREST AND DIVIDEND INCOME 10,416 11,096 31,270 32,235 Provision For Loan Losses 1,200 175 4,000 550 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,216 10,921 27,270 31,685 NONINTEREST INCOME Service Fees 554 639 1,646 1,849 Insurance Commissions 1,079 985 3,475 3,219 Other Commissions 76 98 374 293 Net Gain on Sales of Loans 435 48 1,003 190 Net Gain (Loss) on Sales of Investment Securities — 3 489 ( 50 ) Change in Fair Value of Marketable Equity Securities ( 59 ) ( 25 ) ( 469 ) 104 Net Gain on Purchased Tax Credits 15 9 46 27 Net (Loss) Gain on Disposal of Fixed Assets ( 65 ) — ( 48 ) 2 Income from Bank-Owned Life Insurance 140 142 417 408 Other (Loss) Income ( 2 ) 67 ( 240 ) 203 TOTAL NONINTEREST INCOME 2,173 1,966 6,693 6,245 NONINTEREST EXPENSE Salaries and Employee Benefits 5,124 4,628 14,683 14,273 Occupancy 759 597 2,191 2,019 Equipment 220 266 701 847 Data Processing 482 370 1,367 1,158 FDIC Assessment 172 5 493 368 PA Shares Tax 355 226 963 743 Contracted Services 531 312 1,471 945 Legal and Professional Fees 161 117 567 458 Advertising 148 208 486 545 Other Real Estate Owned (Income) ( 12 ) 13 ( 30 ) ( 81 ) Amortization of Intangible Assets 532 531 1,596 1,595 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 (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 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 2 Table of Contents CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands) Net (Loss) Income $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650 Other Comprehensive (Loss) Income: Change in Unrealized (Loss) Gain on Investment Securities Available-for-Sale ( 653 ) 121 2,292 5,652 Income Tax Effect 137 ( 47 ) ( 481 ) ( 1,209 ) Reclassification Adjustment for (Gain) Loss on Sale of Investment Securities Included in Net (Loss) Income (1) — ( 3 ) ( 489 ) 50 Income Tax Effect (1) — 1 103 ( 11 ) Other Comprehensive (Loss) Income, Net of Income Tax Expense (Benefit) ( 516 ) 72 1,425 4,482 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 3 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity (Dollars in thousands, except share and per share data) 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 ) Restricted Stock Awards Granted — — ( 103 ) — 103 — — Stock-Based Compensation Expense — — 114 — — — 114 Dividends Paid ($ 0.24 Per Share) — — — ( 1,296 ) — — ( 1,296 ) 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 Comprehensive Income Total Stockholders' Equity (Dollars in thousands, except share and per share data) June 30, 2019 5,680,993 $ 2,367 $ 83,380 $ 61,140 $ ( 4,350 ) $ 2,970 $ 145,507 Comprehensive Income: Net Income — — — 3,746 — — 3,746 Other Comprehensive Income — — — — — 72 72 Stock-Based Compensation Expense — — 77 — — — 77 Dividends Paid ($ 0.24 Per Share) — — — ( 1,304 ) — — ( 1,304 ) 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 4 Table of Contents Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income Total Stockholders' Equity (Dollars in thousands, except share and per share data) December 31, 2019 5,680,993 $ 2,367 $ 82,971 $ 66,955 $ ( 3,842 ) $ 2,646 $ 151,097 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 ) — — Stock-Based Compensation Expense — — 370 — — — 370 Exercise of Stock Options — — 4 — ( 82 ) — ( 78 ) Treasury stock purchased, at cost ( 67,816 shares) — — — — ( 1,908 ) — ( 1,908 ) Dividends Paid ($ 0.72 Per Share) — — — ( 3,888 ) — — ( 3,888 ) 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 Comprehensive Income (Loss) Total Stockholders' Equity (Dollars in thousands, except share and per share data) December 31, 2018 5,680,993 $ 2,367 $ 83,225 $ 57,843 $ ( 4,370 ) $ ( 1,440 ) $ 137,625 Comprehensive Income: Net Income — — — 9,650 — — 9,650 Other Comprehensive Income — — — — — 4,482 4,482 Restricted Stock Awards Forfeited — — 8 — ( 8 ) — — Restricted Stock Awards Granted — — ( 11 ) — 11 — — Stock-Based Compensation Expense — — 230 — — — 230 Exercise of Stock Options — — 5 — 17 — 22 Dividends Paid ($ 0.72 Per Share) — — — ( 3,911 ) — — ( 3,911 ) 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 5 Table of Contents CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 2020 2019 (Dollars in thousands) OPERATING ACTIVITIES 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 ) Net Gain on Purchased Tax Credits ( 46 ) ( 27 ) Income from Bank-Owned Life Insurance ( 417 ) ( 408 ) Proceeds From Mortgage Loans Sold 24,317 7,378 Originations of Mortgage Loans for Sale ( 23,314 ) ( 7,188 ) Net Gain on Sales of Loans ( 1,003 ) ( 190 ) Net (Gain) Loss on Sales of Investment Securities ( 489 ) 50 Net Loss on Sales of Other Real Estate Owned and Repossessed Assets 26 6 Noncash Expense for Stock-Based Compensation 370 230 (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 Other, Net ( 1,329 ) ( 136 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 9,198 12,705 INVESTING ACTIVITIES Investment Securities Available for Sale: Proceeds From Principal Repayments and Maturities 91,219 34,490 Purchases of Debt and Marketable Equity Securities ( 68,851 ) ( 50,185 ) Proceeds from Sales of Securities 17,893 29,460 Net Increase in Loans ( 100,436 ) ( 21,531 ) Purchase of Premises and Equipment ( 184 ) ( 66 ) Proceeds from Disposal of of Premises and Equipment 26 — Asset Acquisition of a Customer List — ( 900 ) Proceeds From Sales of Other Real Estate Owned and Repossessed Assets 99 1,123 (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 ) FINANCING ACTIVITIES Net Increase in Deposits 80,677 39,250 Net Increase (Decrease) in Short-Term Borrowings 11,490 ( 1,861 ) Principal Payments on Other Borrowed Funds ( 3,000 ) ( 3,000 ) Cash Dividends Paid ( 3,888 ) ( 3,911 ) Treasury Stock, Purchases at Cost ( 1,908 ) — Exercise of Stock Options ( 78 ) 22 NET CASH PROVIDED BY FINANCING ACTIVITIES 83,293 30,500 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 6 Table of Contents CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, 2020 2020 2019 (Dollars in thousands) SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest on deposits and borrowings (including interest credited to deposit accounts of $ 4,382 and $ 5,070 , respectively) $ 4,694 $ 5,497 Income taxes 1,785 2,260 SUPPLEMENTAL NONCASH DISCLOSURE: 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 Lease liability recognized 329 1,712 The accompanying notes are an integral part of these consolidated financial statements 7 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters” or “EU”). CB Financial and the Bank are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill and intangible assets impairment, and the valuation of deferred tax assets. In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results are not necessarily indicative of results for a full year. The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification ("ASC") 855, Subsequent Events , to be recognizable events. Nature of Operations The Company derives substantially all its income from banking and bank-related services which include interest earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank. 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. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, a full-service, independent insurance agency. Reclassifications Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation. Such reclassifications did not affect net (loss) income or stockholders’ equity. Recent Accounting Standards 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. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The elective guidance in the ASU applies to modifications of contract terms that will directly replace, or have the potential to replace, an affected rate with another interest rate index, as well as certain contemporaneous modifications of other contract terms related to the replacement of an affected rate. 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 8 Table of Contents 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. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. While the LIBOR reform may require extensive changes to the contracts that govern LIBOR based products, as well as our systems and processes, we cannot yet determine whether the Company will be able to use the optional expedient for the changes to contract terms that may be required by LIBOR reform and therefore, the Company cannot yet determine the magnitude of the impact or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation. In August 2018, the FASB issued ASU 2018-15 , Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) . ASU 2018-15 was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). 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. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) . ASU 2018-13 modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU were effective for the Company beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. 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 January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the second step of the goodwill impairment test. Instead, an entity 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 new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted, and is to be applied on a prospective basis. The Company elected to early adopt the provisions of ASU 2017-04 effective October 31, 2019 and the adoption did not have a material impact on the Company's consolidated statement of financial condition or results of operations. In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU requires that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of January 1, 2023. Early adoption will continue to be permitted. 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. 9 Table of Contents Note 2. (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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands, except share and per share data) Net (Loss) Income $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650 Weighted-Average Basic Common Shares Outstanding 5,395,342 5,433,289 5,406,710 5,433,296 Dilutive Effect of Common Stock Equivalents (Stock Options and Restricted Stock) — 25,434 — 18,409 Weighted-Average Diluted Common Shares and Common Stock Equivalents Outstanding 5,395,342 5,458,723 5,406,710 5,451,705 (Loss) Earnings Per Share: Basic $ ( 3.22 ) $ 0.69 $ ( 2.54 ) $ 1.78 Diluted ( 3.22 ) 0.69 ( 2.54 ) 1.77 The dilutive effect on weighted average diluted common shares outstanding is the result of outstanding stock options and nonvested restricted stock. The following table presents for the periods indicated (a) options to purchase shares of common stock that were outstanding but not included in the computation of earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period, and (b) shares of restricted stock awards that were not included in the computation of diluted earnings per share because the hypothetical repurchase of shares under the treasury stock method exceeded the weighted average nonvested restricted awards, therefore the effects would be anti-dilutive. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Stock Options 220,271 88,253 220,271 88,253 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. 10 Table of Contents Note 3. Investment Securities The following table presents the amortized cost and fair value of investment securities available-for-sale at the dates indicated: September 30, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in thousands) Debt Securities: U.S. Government Agencies $ 41,994 $ 16 $ ( 178 ) $ 41,832 Obligations of States and Political Subdivisions 20,761 1,290 — 22,051 Mortgage-Backed Securities - Government-Sponsored Enterprises 88,735 4,049 — 92,784 Total Debt Securities 151,490 5,355 ( 178 ) 156,667 Marketable Equity Securities: Mutual Funds 1,022 Other 1,267 Total Marketable Equity Securities 2,289 Total Available-for-Sale Securities $ 158,956 December 31, 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in thousands) Debt Securities: U.S. Government Agencies $ 47,993 $ 227 $ ( 164 ) $ 48,056 Obligations of States and Political Subdivisions 25,026 819 ( 2 ) 25,843 Mortgage-Backed Securities - Government-Sponsored Enterprises 118,282 2,601 ( 107 ) 120,776 Total Debt Securities 191,301 3,647 ( 273 ) 194,675 Marketable Equity Securities: Mutual Funds 997 Other 1,713 Total Marketable Equity Securities 2,710 Total Available-for-Sale Securities $ 197,385 11 Table of Contents 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: September 30, 2020 Less than 12 months 12 Months or Greater Total Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses (Dollars in thousands) U.S. Government Agencies 8 $ 33,815 $ ( 178 ) — $ — $ — 8 $ 33,815 $ ( 178 ) Total 8 $ 33,815 $ ( 178 ) — $ — $ — 8 $ 33,815 $ ( 178 ) December 31, 2019 Less than 12 months 12 Months or Greater Total Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses (Dollars in thousands) U.S. Government Agencies 6 $ 16,116 $ ( 83 ) 6 $ 13,938 $ ( 81 ) 12 $ 30,054 $ ( 164 ) Obligations of States and Political Subdivisions — — — 1 509 ( 2 ) 1 509 ( 2 ) Mortgage Backed Securities- Government Sponsored Enterprises 7 20,003 ( 104 ) 1 1,711 ( 3 ) 8 21,714 ( 107 ) Total 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 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 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: September 30, 2020 Amortized Cost Fair Value (Dollars in thousands) Due in One Year or Less $ — $ — Due after One Year through Five Years 4,303 4,380 Due after Five Years through Ten Years 55,267 56,462 Due after Ten Years 91,920 95,825 Total $ 151,490 $ 156,667 12 Table of Contents The following table presents gross gain and loss of sales of available-for-sale investment securities for the periods indicated. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Debt Securities Gross Gain $ — $ 50 $ 489 $ 62 Gross Loss — ( 47 ) — ( 112 ) 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 (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. Note 4. Loans and Allowance for Loan Losses The Company’s loan portfolio consists of four classifications: real estate loans, commercial and industrial loans, consumer loans, and other loans. The following table presents the classifications of loans as of the dates indicated. September 30, 2020 December 31, 2019 Amount Percent Amount Percent (Dollars in thousands) Real Estate: Residential $ 343,955 32.7 % $ 347,766 36.6 % Commercial 353,904 33.7 351,360 36.9 Construction 69,178 6.6 35,605 3.7 Commercial and Industrial 144,315 13.7 85,586 9.0 Consumer 117,364 11.2 113,637 11.9 Other 22,169 2.1 18,542 1.9 Total Loans 1,050,885 100.0 % 952,496 100.0 % Allowance for Loan Losses ( 13,780 ) ( 9,867 ) Loans, Net $ 1,037,105 $ 942,629 The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic, which included authorizing the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). 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. The second round of the PPP began on April 27, 2020. Under the PPP, participating SBA and other qualifying lenders can originate loans to eligible businesses that are fully guaranteed by the SBA as to principal and interest, have more favorable terms than traditional SBA loans and may be forgiven if the proceeds are used by the borrower for certain purposes. PPP is designed to help small businesses keep their workforce employed and cover expenses during the COVID-19 crisis. These loans have a two- or five-year loan term to maturity, an interest rate of 1% per annum and loan payments are deferred for six months. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of a PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. 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 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 13 Table of Contents 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 $ 2.5 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 $ 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 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 Pass Special Mention Substandard Doubtful Total (Dollars in Thousands) Real Estate: Residential $ 340,421 $ 1,045 $ 2,489 $ — $ 343,955 Commercial 311,125 29,383 13,396 — 353,904 Construction 65,158 3,379 641 — 69,178 Commercial and Industrial 137,871 4,197 1,614 633 144,315 Consumer 117,315 — 49 — 117,364 Other 22,089 80 — — 22,169 Total Loans $ 993,979 $ 38,084 $ 18,189 $ 633 $ 1,050,885 December 31, 2019 Pass Special Mention Substandard Doubtful Total (Dollars in Thousands) Real Estate: Residential $ 343,851 $ 1,997 $ 1,918 $ — $ 347,766 Commercial 335,436 12,260 3,664 — 351,360 Construction 33,342 2,263 — — 35,605 Commercial and Industrial 75,201 7,975 1,691 719 85,586 Consumer 113,527 — 110 — 113,637 Other 18,452 90 — — 18,542 Total Loans $ 919,809 $ 24,585 $ 7,383 $ 719 $ 952,496 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. 14 Table of Contents 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. September 30, 2020 Loans Current 30-59 Days Past Due 60-89 Days Past Due 90 Days Or More Past Due Total Past Due Non- Accrual Total Loans (Dollars in Thousands) Real Estate: Residential $ 341,775 $ 281 $ 22 $ — $ 303 $ 1,877 $ 343,955 Commercial 345,772 — — — — 8,132 353,904 Construction 69,178 — — — — — 69,178 Commercial and Industrial 142,286 — — — — 2,029 144,315 Consumer 116,826 452 37 — 489 49 117,364 Other 22,169 — — — — — 22,169 Total Loans $ 1,038,006 $ 733 $ 59 $ — $ 792 $ 12,087 $ 1,050,885 December 31, 2019 Loans Current 30-59 Days Past Due 60-89 Days Past Due 90 Days Or More Past Due Total Past Due Non- Accrual Total Loans (Dollars in Thousands) Real Estate: Residential $ 342,010 $ 3,462 $ 281 $ 196 $ 3,939 $ 1,817 $ 347,766 Commercial 351,104 22 — — 22 234 351,360 Construction 35,605 — — — — — 35,605 Commercial and Industrial 84,280 388 178 — 566 740 85,586 Consumer 112,438 923 140 26 1,089 110 113,637 Other 18,542 — — — — — 18,542 Total Loans $ 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. 15 Table of Contents The following table sets forth the amounts and categories of nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“TDRs”), which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section. 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, 2019 (Dollars in Thousands) Nonaccrual Loans: Real Estate: Residential $ 1,877 $ 1,817 Commercial 8,132 234 Commercial and Industrial 2,029 740 Consumer 49 110 Total Nonaccrual Loans 12,087 2,901 Accruing Loans Past Due 90 Days or More: Real Estate: Residential — 196 Consumer — 26 Total Accruing Loans Past Due 90 Days or More — 222 Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More 12,087 3,123 Troubled Debt Restructurings, Accruing: Real Estate Residential 660 511 Commercial 2,162 1,648 Commercial and Industrial 96 100 Total Troubled Debt Restructurings, Accruing 2,918 2,259 Total Nonperforming Loans 15,005 5,382 Other Real Estate Owned: Residential 14 41 Commercial 208 192 Total Other Real Estate Owned 222 233 Total Nonperforming Assets $ 15,227 $ 5,615 Nonperforming Loans to Total Loans 1.43 % 0.57 % Nonperforming Assets to Total Assets 1.09 0.42 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. For a loan modification to be considered a TDR, the borrower must be experiencing financial difficulty and a concession must be granted, except for an insignificant delay in payment. 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. 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 16 Table of Contents 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. 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: (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, delinquent, or nonaccrual. 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 Number of Loans Amount % of Portfolio Number of Loans Amount % of Portfolio (Dollars in thousands) Real Estate: 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. 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 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. 17 Table of Contents 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 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Real Estate: Commercial 1 $ 504 $ 519 $ — Commercial and Industrial 1 38 38 — Total 2 $ 542 $ 557 $ — Nine Months Ended September 30, 2020 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Real Estate: Residential 1 $ 234 $ 234 $ — Commercial 1 504 519 — Commercial and Industrial 1 38 38 — Total 3 $ 776 $ 791 $ — Three Months Ended June 30, 2019 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Real Estate: Residential 1 $ 10 $ 10 $ — Total 1 $ 10 10 $ — 18 Table of Contents Nine Months Ended September 30, 2019 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Real Estate: Residential 2 $ 71 $ 71 $ — Commercial and Industrial 1 114 114 — Total 3 $ 185 $ 185 $ — The following table presents a summary of the loans considered to be impaired as of the dates indicated. September 30, 2020 Recorded Investment Related Allowance Unpaid Principal Balance Average Recorded Investment Interest Income Recognized (Dollars in thousands) With No Related Allowance Recorded: Real Estate: Residential $ 1,216 $ — $ 1,220 $ 1,220 $ 34 Commercial 20,896 — 20,916 25,193 811 Construction 641 — 641 766 21 Commercial and Industrial 881 — 1,069 936 6 Total With No Related Allowance Recorded $ 23,634 $ — $ 23,846 $ 28,115 $ 872 With A Related Allowance Recorded: Real Estate: Commercial $ 9,498 $ 2,248 $ 9,528 $ 9,610 $ 291 Commercial and Industrial 1,528 607 1,528 1,609 45 Total With A Related Allowance Recorded $ 11,026 $ 2,855 $ 11,056 $ 11,219 $ 336 Total Impaired Loans: Real Estate: Residential $ 1,216 $ — $ 1,220 $ 1,220 $ 34 Commercial 30,394 2,248 30,444 34,803 1,102 Construction 641 — 641 766 21 Commercial and Industrial 2,409 607 2,597 2,545 51 Total Impaired Loans $ 34,660 $ 2,855 $ 34,902 $ 39,334 $ 1,208 19 Table of Contents December 31, 2019 Recorded Investment Related Allowance Unpaid Principal Balance Average Recorded Investment Interest Income Recognized (Dollars in thousands) With No Related Allowance Recorded: Real Estate: Residential $ 549 $ — $ 553 $ 494 $ 20 Commercial 3,058 — 3,077 3,335 177 Commercial and Industrial 133 — 135 156 6 Total With No Related Allowance Recorded $ 3,740 $ — $ 3,765 $ 3,985 $ 203 With A Related Allowance Recorded: Real Estate: Commercial $ 1,646 $ 274 $ 1,646 $ 1,702 $ 81 Commercial and Industrial 2,378 610 2,529 2,448 113 Total With A Related Allowance Recorded $ 4,024 $ 884 $ 4,175 $ 4,150 $ 194 Total Impaired Loans Real Estate: Residential $ 549 $ — $ 553 $ 494 $ 20 Commercial 4,704 274 4,723 5,037 258 Commercial and Industrial 2,511 610 2,664 2,604 119 Total Impaired Loans $ 7,764 $ 884 $ 7,940 $ 8,135 $ 397 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. Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) June 30, 2020 $ 2,688 $ 5,160 $ 820 $ 1,566 $ 1,714 $ — $ 700 $ 12,648 Charge-offs ( 11 ) — — — ( 103 ) — — ( 114 ) Recoveries 1 1 — 6 38 — — 46 Provision ( 506 ) 1,711 71 170 ( 290 ) — 44 1,200 September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780 20 Table of Contents Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) December 31, 2019 $ 2,023 $ 3,210 $ 285 $ 2,412 $ 1,417 $ — $ 520 $ 9,867 Charge-offs ( 36 ) — — — ( 239 ) — — ( 275 ) Recoveries 5 28 — 21 134 — — 188 Provision 180 3,634 606 ( 691 ) 47 — 224 4,000 September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780 September 30, 2020 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) Individually Evaluated for Impairment $ — $ 2,248 $ — $ 607 $ — $ — $ — $ 2,855 Collectively Evaluated for Potential Impairment $ 2,172 $ 4,624 $ 891 $ 1,135 $ 1,359 $ — $ 744 $ 10,925 December 31, 2019 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) Individually Evaluated for Impairment $ — $ 274 $ — $ 610 $ — $ — $ — $ 884 Collectively Evaluated for Potential Impairment $ 2,023 $ 2,936 $ 285 $ 1,802 $ 1,417 $ — $ 520 $ 8,983 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) June 30, 2019 $ 1,096 $ 3,446 $ 488 $ 2,718 $ 1,500 $ — $ 443 $ 9,691 Charge-offs ( 28 ) — — ( 16 ) ( 165 ) — — ( 209 ) Recoveries 1 35 — 5 52 — — 93 Provision 582 ( 508 ) 49 ( 278 ) 76 — 254 175 September 30, 2019 $ 1,651 $ 2,973 $ 537 $ 2,429 $ 1,463 $ — $ 697 $ 9,750 21 Table of Contents Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) December 31, 2018 $ 1,050 $ 2,693 $ 395 $ 2,807 $ 2,027 $ — $ 586 $ 9,558 Charge-offs ( 71 ) — — ( 16 ) ( 451 ) — — ( 538 ) Recoveries 10 56 — 7 107 — — 180 Provision 662 224 142 ( 369 ) ( 220 ) — 111 550 September 30, 2019 $ 1,651 $ 2,973 $ 537 $ 2,429 $ 1,463 $ — $ 697 $ 9,750 September 30, 2019 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) Individually Evaluated for Impairment $ — $ 300 $ — $ 503 $ — $ — $ — $ 803 Collectively Evaluated for Potential Impairment $ 1,651 $ 2,673 $ 537 $ 1,926 $ 1,463 $ — $ 697 $ 8,947 The COVID-19 pandemic 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 in the current year for these circumstances. 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. For the quarter ended March 31, 2020, the Company began using a five-year rolling average of the net charge-off data within each segment. This change was driven by no net charge-off experience in the commercial real estate and commercial and industrial segments in the prior two-year rolling period as of March 31, 2020, which the Company believes does not represent the inherent risks in those segments. In the first quarter of 2018, the Company incurred $ 1.4 million of commercial and industrial charge-offs, however this period would have been removed from the lookback period as of March 31, 2020 if continuing to use a two-year history. 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. Accretable Discount (Dollars in Thousands) December 31, 2019 $ 1,628 Accretable Yield ( 293 ) September 30, 2020 $ 1,335 22 Table of Contents 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. September 30, 2020 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Total (Dollars in thousands) Individually Evaluated for Impairment $ 1,216 $ 30,394 $ 641 $ 2,409 $ — $ — $ 34,660 Collectively Evaluated for Potential Impairment 342,739 323,510 68,537 141,906 117,364 22,169 1,016,225 Total Loans $ 343,955 $ 353,904 $ 69,178 $ 144,315 $ 117,364 $ 22,169 $ 1,050,885 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. December 31, 2019 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Total (Dollars in thousands) Individually Evaluated for Impairment $ 549 $ 4,704 $ — $ 2,511 $ — $ — $ 7,764 Collectively Evaluated for Potential Impairment 347,217 346,656 35,605 83,075 113,637 18,542 944,732 Total Loans $ 347,766 $ 351,360 $ 35,605 $ 85,586 $ 113,637 $ 18,542 $ 952,496 Note 5. Deposits The following table shows the maturities of time deposits for the next five years and beyond at the date indicated. September 30, 2020 (Dollars in thousands) One Year or Less $ 86,604 Over One Through Two Years 36,463 Over Two Through Three Years 47,161 Over Three Through Four Years 9,527 Over Four Through Five Years 12,183 Over Five Years 4,312 Total $ 196,250 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. 23 Table of Contents Note 6. Short-Term Borrowings The following table sets forth the components of short-term borrowings as of the dates indicated. September 30, 2020 December 31, 2019 Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in thousands) Securities Sold Under Agreements to Repurchase: Balance at Period End $ 42,061 0.21 % $ 30,571 0.57 % Average Balance Outstanding During the Period 35,922 0.42 29,976 0.62 Maximum Amount Outstanding at any Month End 43,367 34,197 Securities Collaterizing the Agreements at Period-End: Carrying Value 44,601 37,584 Market Value 45,767 37,873 Note 7. Other Borrowed Funds Other borrowed funds consist of fixed rate advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”). The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated. September 30, 2020 December 31, 2019 Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in thousands) Due in One Year $ 5,000 2.09 % $ 6,000 1.97 % Due After One Year to Two Years 3,000 2.23 5,000 2.18 Due After Two Years to Three Years 3,000 2.41 3,000 2.41 Total $ 11,000 2.21 % $ 14,000 2.14 % 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 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. Note 8. Fair Value Disclosure FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value. The three levels of fair value hierarchy are as follows: Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs 24 Table of Contents include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statement of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values for Level 2 securities were primarily determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. 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 nine months ended September 30, 2020 or year ended December 31, 2019. Fair Value Hierarchy September 30, 2020 December 31, 2019 (Dollars in thousands) Available for Sales Securities: Debt Securities: U.S. Government Agencies Level 2 $ 41,832 $ 48,056 Obligations of States and Political Subdivisions Level 2 22,051 25,843 Mortgage-Backed Securities - Government-Sponsored Enterprises Level 2 92,784 120,776 Total Debt Securities 156,667 194,675 Marketable Equity Securities: Mutual Funds Level 1 1,022 997 Other Level 1 1,267 1,713 Total Marketable Equity Securities 2,289 2,710 Total Available-for-Sale Securities $ 158,956 $ 197,385 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. 25 Table of Contents Fair Value at Financial Asset Fair Value Hierarchy September 30, 2020 December 31, 2019 Valuation Techniques Significant Unobservable Inputs Range (Dollars in thousands) 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) Range includes discounts taken since appraisal and estimated values. 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 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. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. 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 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. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. 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, 26 Table of Contents 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. September 30, 2020 December 31, 2019 Fair Value Hierarchy Carrying Value Fair Value Carrying Value Fair Value (Dollars in thousands) Financial Assets: Cash and Due From Banks: Interest Bearing Level 1 $ 102,400 $ 102,400 $ 68,798 $ 68,798 Non-Interest Bearing Level 1 9,769 9,769 11,419 11,419 Investment Securities: Available for Sale See Above 158,956 158,956 197,385 197,385 Loans, Net Level 3 1,037,105 1,076,438 942,629 961,110 Restricted Stock Level 2 3,961 3,961 3,656 3,656 Bank-Owned Life Insurance Level 2 24,639 24,639 24,222 24,222 Mortgage Servicing Rights Level 3 694 694 930 930 Accrued Interest Receivable Level 2 4,241 4,241 3,297 3,297 Financial Liabilities: Deposits Level 2 1,199,036 1,207,246 1,118,359 1,128,078 Short-term Borrowings Level 2 42,061 42,061 30,571 30,571 Other Borrowed Funds Level 2 11,000 11,138 14,000 15,380 Accrued Interest Payable Level 2 735 735 987 987 Note 9. Commitments and Contingent Liabilities The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and performance letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and performance letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments and conditional obligations are evaluated the same as on-balance-sheet instruments but do not have a corresponding reserve recorded. The Company’s opinion on not implementing a corresponding reserve for off-balance-sheet instruments is supported by historical factors of no losses recorded due to these items. The Company is continually evaluating these items for credit quality and any future need for the corresponding reserve. 27 Table of Contents 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, 2019 (Dollars in thousands) Standby Letters of Credit $ 80,369 $ 42,041 Performance Letters of Credit 2,329 2,521 Construction Mortgages 62,167 59,689 Personal Lines of Credit 6,897 6,456 Overdraft Protection Lines 6,407 6,415 Home Equity Lines of Credit 20,609 20,560 Commercial Lines of Credit 68,685 102,422 Total Commitments $ 247,463 $ 240,104 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 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. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Performance letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the letter. For secured letters of credit, the collateral is typically Company deposit instruments or customer business assets. Note 10. Leases The Company evaluates contracts at commencement to determine if a lease is present. The Company’s lease contracts are all classified as operating leases and create operating right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The leases are primarily ROU assets of land and building for branch and loan production locations. ROU assets are reported in accrued interest and other assets and the related lease liabilities in accrued interest and other liabilities on the Consolidated Statement of Financial Condition. The following tables present the lease expense, ROU assets, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods and dates indicated. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands) Operating Lease Expense $ 118 $ 114 $ 353 $ 344 Variable Lease Expense 10 17 28 32 Total Lease Expense $ 128 $ 131 $ 381 $ 376 September 30, 2020 December 31, 2019 Operating Leases: ROU Assets $ 1,202 $ 1,289 Weighted Average Lease Term in Years 7.22 7.06 Weighted Average Discount Rate 2.55 % 2.89 % 28 Table of Contents September 30, 2020 Maturity Analysis: Due in One Year $ 348 Due After One Year to Two Years 255 Due After Two Years to Three Years 156 Due After Three Years to Four Years 113 Due After Four to Five Years 90 Due After Five Years 375 Total $ 1,337 Less: Present Value Discount 132 Lease Liabilities $ 1,205 Note 11. Other Noninterest Expense 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (Dollars in thousands) Non-Employee Compensation $ 155 $ 131 $ 449 $ 402 Printing and Supplies 125 96 365 289 Postage 61 62 176 195 Telephone 108 157 408 459 Charitable Contributions 32 53 98 146 Dues and Subscriptions 36 34 153 132 Loan Expenses 149 133 420 345 Meals and Entertainment — 23 74 124 Travel 13 50 87 147 Training 10 18 24 40 Bank Assessment 44 43 132 128 Insurance 59 55 173 168 Miscellaneous 127 129 418 489 Total Other Noninterest Expense $ 919 $ 984 $ 2,977 $ 3,064 Note 12. Segment and Related Information 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. Exchange Underwriters is an independent insurance agency that offers property, casualty, commercial liability, surety and other insurance products. 29 Table of Contents The following is a table of selected financial data for the Company’s subsidiaries and consolidated results at the dates and for the periods indicated. Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated (Dollars in thousands) September 30, 2020 Assets $ 1,392,537 $ 4,408 $ 133,314 $ ( 137,383 ) $ 1,392,876 Liabilities 1,264,864 1,701 15 ( 7,003 ) 1,259,577 Stockholders' equity 127,673 2,707 133,299 ( 130,380 ) 133,299 December 31, 2019 Assets $ 1,321,001 $ 4,076 $ 151,124 $ ( 154,664 ) $ 1,321,537 Liabilities 1,178,759 1,194 27 ( 9,540 ) 1,170,440 Stockholders' equity 142,242 2,882 151,097 ( 145,124 ) 151,097 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 and dividend income 10,399 1 1,310 ( 1,294 ) 10,416 Provision for loan losses 1,200 — — — 1,200 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 (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 Interest expense 4,442 — — — 4,442 Net interest income 31,222 3 2,634 ( 2,589 ) 31,270 Provision for loan losses 4,000 — — — 4,000 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 (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 (loss) income $ ( 13,402 ) $ 433 $ ( 13,719 ) $ 12,969 $ ( 13,719 ) 30 Table of Contents Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated (Dollars in thousands) 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 and dividend income 11,081 1 1,318 ( 1,304 ) 11,096 Provision for loan losses 175 — — — 175 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 (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 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 and dividend income 32,190 2 3,955 ( 3,912 ) 32,235 Provision for loan losses 550 — — — 550 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 Noninterest expense 23,209 2,716 9 — 25,934 Undistributed net income of subsidiary 340 — 5,654 ( 5,994 ) — Income before income tax expense 11,737 498 9,667 ( 9,906 ) 11,996 Income tax expense 2,171 158 17 — 2,346 Net income $ 9,566 $ 340 $ 9,650 $ ( 9,906 ) $ 9,650 Note 13. Goodwill and Intangible Assets Goodwill 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 31 Table of Contents (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. 32 Table of Contents The following table presents the changes in the Company's carrying amount of goodwill for the period indicated. Amount (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. Amount (Dollars in thousands) Remaining in 2020 $ 532 2021 2,128 2022 2,128 2023 2,128 2024 1,430 2025 and thereafter 585 Total Estimated Intangible Asset Amortization Expense $ 8,931 33 Table of Contents Note 14. 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. 34 Table of Contents