CB Financial Services, Inc. 10-K

ITEM 9A . Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. 57 Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. (b) Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, utilizing the framework established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment, the Company concluded that the Company’s internal control over financial reporting was effective as of December 31, 2020, based on that framework. (c) Changes to Internal Control Over Financial Reporting There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B . Other Information None. PART III ITEM 10. Directors, Executive Officers and Corporate Governance Information required by this item is incorporated by reference in the Proxy Statement for the 2021 Annual Meeting. ITEM 11. Executive Compensation Information required by this item is incorporated by reference in the Proxy Statement for the 2021 Annual Meeting. ITEM 12 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference in the Proxy Statement for the 2021 Annual Meeting. ITEM 13. Certain Relationships and Related Transactions and Director Independence Information required by this item is incorporated by reference in the Proxy Statement for the 2021 Annual Meeting. ITEM 14. Principal Accountant Fees and Services Information required by this item is incorporated by reference in the Proxy Statement for the 2021 Annual Meeting. 58 PART IV ITEM 15. Exhibits and Financial Statement Schedules (a)(1) Financial Statements The financial statements filed as a part of this Form 10-K are: (A) Report of Independent Registered Public Accounting Firm; (B) Consolidated Statement of Financial Condition at December 31, 2020 and 2019; (C) Consolidated Statement of Operations for the Years Ended December 31, 2020 and 2019; (D) Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2020 and 2019; (E) Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2020 and 2019; (F) Consolidated Statement of Cash Flows for the Years Ended December 31, 2020 and 2019; and (G) Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedules All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. (a)(3) Exhibits 3.1 Amended and Restated Articles of Incorporation of CB Financial Services, Inc. (1) 3.2 Bylaws of CB Financial Services, Inc. ( 2 ) 4.1 Form of Stock Certificate of CB Financial Services, Inc. (1) 4.2 Description of Registrant's Securities 10.1 Employment Agreement by and between Community Bank and John H. Montgomery (3 ) 10.2 Employment Agreement by and between Community Bank and Ralph Burchianti ( 4 ) 10.3 Employment Agreement by and between Community Bank and Jamie L. Prah ( 5 ) 10.4 Employment Agreement by and among Community Bank, Exchange Underwriters, Inc., and Richard B. Boyer dated April 14, 2014 (1) 10.5 Employment Agreement by and between Community Bank and Ralph J. Sommers, Jr. ( 6 ) 10.6 E xecutive Consultant Agreement by and among CB Financial Services, Inc., Community Bank and Barron P. McCune, Jr. (7) 10.7 Separation and Release Agreement by and among CB Financial Services, Inc., between Community Bank and Patrick G. O’Brien ( 8 ) 10.8 Split Dollar Life Insurance Agreement by and between Community Bank and John H. Montgomery , dated November 2, 2020 ( 9 ) 10.9 Split Dollar Life Insurance Agreement by and between Community Bank and Ralph Burchianti dated April 1, 2005 (1) 10.10 Split Dollar Life Insurance Agreement dated as of June 1, 2002, by and between First Federal Savings Bank and Richard B. Boyer ( 10 ) 10.11 Amendment dated as of July 19, 2002, to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between First Federal Savings Bank and Richard B. Boyer ( 11 ) 10.12 Amendment dated as of September 13, 2005, to the Life Insurance Endorsement Method Split Dollar Plan Agreement by and between First Federal Savings Bank and Richard B. Boyer ( 12 ) 10.13 Split Dollar Life Insurance Agreement by and between Community Bank and Ralph J. Sommers, Jr., dated April 1, 2005 (1) 10.14 Split Dollar Life Insurance Agreement by and between Community Bank and Barron P. McCune, Jr., dated April 1, 2005 (1) 10.15 CB Financial Services, Inc., 2015 Equity Incentive Plan (1 3 ) 21 Subsidiaries 23 Consent of Baker Tilly US , LLP 31.1 Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.0 The following materials for the year ended December 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Financial Condition, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to the Audited Consolidated Financial Statements. 104 Cover Page Interactive Data File (embedded in Inline XBRL contained in Exhibit 101) (1) Incorporated herein by reference to the Exhibits to the Company’s Registration Statement on Form S-4 filed with the Securities and Exchange Commission on June 13, 2014 (File No. 333-196749). (2) Incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 20, 2020. 59 (3) Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on August 14, 2020. (4) Incorporated herein by reference to Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2014, filed on March 26, 2015. (5) Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 24, 2020. (6) Incorporated herein by reference to Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31, 2014, filed on March 26, 2015. (7) Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on August 14, 2020. (8) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on January 9, 2020. (9) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on November 6, 2020. (10) Incorporated herein by reference to Exhibit 10.11 to FedFirst Financial Corporation’s Registration Statement on Form SB-2, as amended (File No. 333-121405), initially filed on December 17, 2004. (11) Incorporated herein by reference to Exhibit 10.2 to FedFirst Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed on May 9, 2008. (12) Incorporated herein by reference to Exhibit 10.4 to FedFirst Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed on May 9, 2008. (13) Incorporated herein by reference to Appendix A to the Company’s Definitive Proxy Statement, filed on April 16, 2015. ITEM 16 . Form 10-K Summary Not applicable. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CB FINANCIAL SERVICES, INC. Date: March 17, 2021 By: /s/ John H. Montgomery John H. Montgomery President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ John H. Montgomery By: /s/ Jamie L. Prah John H. Montgomery Jamie L. Prah President and Chief Executive Officer and Executive Vice President and Chief Financial Officer Director (Principal Financial Officer) Date: March 17, 2021 Date: March 17, 2021 By: /s/ Mark E. Fox By: /s/ Charles R. Guthrie Mark E. Fox Charles R. Guthrie, CPA Director (Chairman of the Board) Director (Vice Chairman of the Board) Date: March 17, 2021 Date: March 17, 2021 By: /s/ Karl G. Baily By: /s/ Jonathan A. Bedway Karl G. Baily Jonathan A. Bedway Director Director Date: March 17, 2021 Date: March 17, 2021 By: /s/ Richard B. Boyer By: /s/ Ralph Burchianti Richard B. Boyer Ralph Burchianti Director Senior Executive Vice President and Date: March 17, 2021 Chief Credit Officer and Director Date: March 17, 2021 By: /s/ William C. Groves By: /s/ Joseph N. Headlee William C. Groves Joseph N. Headlee Director Director Date: March 17, 2021 Date: March 17, 2021 By: /s/ John J. LaCarte By: /s/ Roberta Robinson Olejasz John J. LaCarte Roberta Robinson Olejasz Director Director Date: March 17, 2021 Date: March 17, 2021 By: /s/ William G. Petroplus By: /s/ David F. Pollock William G. Petroplus David F. Pollock Director Director Date: March 17, 2021 Date: March 17, 2021 By: /s/ Ralph J. Sommers, Jr. By: /s/ John M. Swiatek Ralph J. Sommers, Jr. John M. Swiatek Director Director Date: March 17, 2021 Date: March 17, 2021 61 CONSOLIDATED FINANCIAL STATEMENTS Contents Page Report of Independent Registered Public Accounting Firm 63 Consolidated Statement of F inancia l Condition a t December 31, 2020 and 2019 66 Consolidated Statement of Operations for the Years Ended December 31, 2020 and 2019 67 Consolidated Statement of Comprehensive Income for the Years Ended December 31, 2020 and 2019 68 Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 69 Consolidated Statement of Cash Flows for the Years Ended December 31, 2020 and 2019 70 Notes to Consolidated Financial Statements 72 62 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of CB Financial Services, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of CB Financial Services, Inc. and Subsidiary (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders' equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance For Loan Losses – Qualitative Factors – Refer to Notes 1 and 4 to the Consolidated Financial Statements Critical Audit Matter Description As disclosed in Note 4 to the Company's consolidated financial statements, the Company's loan portfolio totaled $1,044,753,000 as of December 31, 2020, and the related allowance for loan losses was $12,771,000. As described in Note 1 and 4, the allowance for loan losses consists of two components: (1) the specific component, consisting of the valuation allowance for loans individually evaluated for impairment (“specific component”), representing $649,000; and (2) the general component, consisting of the valuation allowance for pools of loans with similar risk characteristics collectively evaluated for impairment (“general component”), representing $12,122,000. The general component is further broken down between reserves assigned to each pool of loans based on both historical net charge-off experience ($2,098,000), and qualitative and environmental factors ($10,024,000) (“qualitative factors”) for changes not reflected in the historical loss experience. The determination of the qualitative factors adjustments involves significant estimates based on subjective assumptions that require a high degree of management judgment relating to how those assumptions impact probable incurred credit losses within the loan portfolio. Management has designed and evaluated the following qualitative factors: (1) levels and trends in delinquency and impaired loans; (2) levels and trends in net charge-offs, (3) trends in volume and terms of loans; (4) change in underwriting, policies, procedures, practices and key personnel; (5) national and local economic trends; (6) industry conditions, 63 and (7) effects of changes in high-risk credit circumstances. Changes in these assumptions could have a material effect on the allowance for loan losses. The allowance for loan losses is an accounting estimate with significant measurement uncertainty and involves the application of significant judgment by management. Therefore, a high degree of auditor judgment and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments used by management in the calculation. We identified the estimate of the general reserves qualitative factors of the allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment. How the Critical Audit Matter was Addressed in the Audit The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of internal controls relating to the evaluation of the assumptions and inputs used to evaluate the qualitative loss factors, including controls addressing: ◦ Management's review of the underlying data inputs used in the determination of qualitative loss factor adjustments for completeness and accuracy. ◦ Management's determination of impaired loans that have been excluded from the general reserve component of the allowance for loan losses. ◦ Management's review of the conclusions reached related to the qualitative and quantitative loss factors and the resulting allocation to the allowance for loan losses. • Substantively testing the appropriateness of the judgments and assumptions used in management's estimation process for developing the qualitative loss factor adjustments, including: ◦ Assessing whether all relevant factors have been considered that affect the collectability of the loan portfolio. ◦ Evaluating the completeness, accuracy, and relevance of underlying internal and external data inputs used as a basis for the qualitative loss factor adjustments and corroborating these inputs by comparing to the Company's lending practices, historical loan portfolio performance, and third-party macroeconomic data. ◦ Evaluating the propriety of impaired loans excluded from the general reserve component of the allowance for loan losses. ◦ Testing the mathematical accuracy of the allocation of qualitative loss factors to the appropriate loan categories. Goodwill Impairment Evaluation – Refer to Notes 1 and 6 to the Consolidated Financial Statements Critical Audit Matter Description For the year ended December 31, 2020, the Company recorded a pre-tax goodwill impairment charge of $18.7 million, which relates to the Company's community banking reporting unit. As discussed in Notes 1 and 6 to the consolidated financial statements, goodwill is tested for impairment on the basis of community banking reporting unit at least annually, or more frequently as events occur or circumstances change. In the third quarter of fiscal year 2020, the Company assessed relevant events and circumstances and determined it was appropriate to perform an impairment test. In performing the test, management used both a market capitalization approach and discounted cash flow approach to determine the estimated fair value of the community banking reporting unit. The results of these two approaches were equally weighted at 50% each. As a result of this analysis, management determined that the carrying value of the community banking reporting unit exceeded its fair value resulting in the recognition of a goodwill impairment charge. Auditing management's goodwill impairment test was complex and highly judgmental due to the significant estimation required to determine the estimated fair value of the community banking reporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the Company's financial forecast, the discount rate, cost synergies and terminal growth rate, which are affected by expectations about future market or economic conditions, including uncertainty resulting from the COVID-19 pandemic. 64 How the Critical Audit Matter was Addressed in the Audit The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of internal controls relating to the evaluation of the assumptions and inputs used to estimate the fair value of the Company's community banking reporting unit, including controls addressing: ◦ Management's review of the accuracy and reasonableness of the prospective financial information used in the discounted cash flow analysis. ◦ Management's evaluation of the key assumptions and inputs used by a third-party valuation specialist, including discount rate, terminal growth rate, control premium, and market comparable entities, as well as the weighting assigned to each of the valuation methodologies used to determine fair value. • Substantively testing, with the support of auditor employed valuation specialists, the appropriateness of the judgments and assumptions used in management's estimation process for determining the fair value of the Company's community banking reporting unit including: ◦ Testing the mathematical accuracy of the calculations performed. ◦ Assessing the historical accuracy of management's financial forecasts by comparing prior budgets to actual results. ◦ Evaluating the appropriateness of the valuation methodologies used, discount rate, cost synergies, terminal growth rate, control premium, market comparable entities and overall reasonableness of the fair value calculation. ◦ Comparing the significant assumptions used by management to current industry and economic trends, current and historical performance of the community banking reporting unit, and other relevant factors. ◦ Performing sensitivity analyses to evaluate the impact that changes in the significant assumptions used by management would have on the fair value of the reporting unit. ◦ Testing management's reconciliation of the fair value of the reporting unit to the market capitalization of the Company. /s/ Baker Tilly US, LLP We have served as the Company's auditor since 2006. Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP) Pittsburgh, Pennsylvania March 17, 2021 65 Consolidated Statement of Financial Condition December 31, 2020 2019 (Dollars in Thousands, except per share and share data) ASSETS Cash and Due From Banks: Interest Bearing $ 145,636 $ 68,798 Non-Interest Bearing 15,275 11,419 Total Cash and Due From Banks 160,911 80,217 Securities: Available-for-Sale Debt Securities, at Fair Value 142,897 194,675 Equity Securities, at Fair Value 2,503 2,710 Total Securities 145,400 197,385 Loans (Net of Allowance for Loan Losses of $ 12,771 and $ 9,867 at December 31, 2020 and 2019, Respectively) 1,031,982 942,629 Premises and Equipment, Net 20,302 22,282 Bank-Owned Life Insurance 24,779 24,222 Goodwill 9,732 28,425 Intangible Assets, Net 8,399 10,527 Accrued Interest Receivable and Other Assets 15,215 15,850 TOTAL ASSETS $ 1,416,720 $ 1,321,537 LIABILITIES Deposits: Demand Deposits $ 340,569 $ 267,152 NOW Accounts 259,870 232,099 Money Market Accounts 199,029 182,428 Savings Accounts 235,088 216,924 Time Deposits 190,013 219,756 Total Deposits 1,224,569 1,118,359 Short-Term Borrowings 41,055 30,571 Other Borrowed Funds 8,000 14,000 Accrued Interest Payable and Other Liabilities 8,566 7,510 TOTAL LIABILITIES 1,282,190 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 5,434,374 and 5,463,828 Shares Outstanding, Respectively 2,367 2,367 Capital Surplus 82,723 82,971 Retained Earnings 51,132 66,955 Treasury Stock, at Cost ( 246,619 and 217,165 Shares, Respectively) ( 5,094 ) ( 3,842 ) Accumulated Other Comprehensive Income 3,402 2,646 TOTAL STOCKHOLDERS' EQUITY 134,530 151,097 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,416,720 $ 1,321,537 The accompanying notes are an integral part of these consolidated financial statements 66 Consolidated Statement of Operations Year Ended December 31, 2020 2019 (Dollars in Thousands, except per share and share data) INTEREST AND DIVIDEND INCOME Loans, Including Fees $ 42,883 $ 43,176 Securities: Taxable 3,619 5,649 Tax-Exempt 369 608 Dividends 79 86 Other Interest and Dividend Income 517 1,512 TOTAL INTEREST AND DIVIDEND INCOME 47,467 51,031 INTEREST EXPENSE Deposits 5,172 7,303 Short-Term Borrowings 137 187 Other Borrowed Funds 254 367 TOTAL INTEREST EXPENSE 5,563 7,857 NET INTEREST INCOME 41,904 43,174 Provision For Loan Losses 4,000 725 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 37,904 42,449 NONINTEREST INCOME Service Fees on Deposits 2,206 2,492 Insurance Commissions 4,878 4,524 Other Commissions 479 372 Net Gain on Sales of Loans 1,391 266 Net Gain on Securities 233 140 Net Gain on Purchased Tax Credits 62 35 Net (Loss) Gain on Disposal of Fixed Assets ( 61 ) 2 Income from Bank-Owned Life Insurance 557 550 Other (Loss) Income ( 274 ) 186 TOTAL NONINTEREST INCOME 9,471 8,567 NONINTEREST EXPENSE Salaries and Employee Benefits 19,809 19,313 Occupancy 2,797 2,685 Equipment 935 1,102 Data Processing 1,843 1,583 FDIC Assessment 837 411 PA Shares Tax 1,313 999 Contracted Services 2,048 1,261 Legal Fees 752 688 Advertising 664 731 Other Real Estate Owned (Income) ( 69 ) ( 103 ) Amortization of Core Deposit Intangible 2,128 2,127 Goodwill Impairment 18,693 — Writedown of Fixed Assets 1,124 — Other 3,893 4,163 TOTAL NONINTEREST EXPENSE 56,767 34,960 (Loss) Income Before Income Tax Expense ( 9,392 ) 16,056 Income Tax Expense 1,248 1,729 NET (LOSS) INCOME $ ( 10,640 ) $ 14,327 (LOSS) EARNINGS PER SHARE Basic $ ( 1.97 ) $ 2.64 Diluted ( 1.97 ) 2.63 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 5,406,290 5,434,649 Diluted 5,406,290 5,448,761 The accompanying notes are an integral part of these consolidated financial statements 67 Consolidated Statement of Comprehensive (Loss) Income Year Ended December 31, 2020 2019 (Dollars in Thousands) Net (Loss) Income $ ( 10,640 ) $ 14,327 Other Comprehensive Income: Change in Unrealized Gain on Available-for-Sale Debt Securities 1,446 5,151 Income Tax Effect ( 304 ) ( 1,104 ) Reclassification Adjustment for (Gain) Loss on Sale of Debt Securities Included in Net (Loss) Income (1) ( 489 ) 50 Income Tax Effect (2) 103 ( 11 ) Other Comprehensive Income, Net of Income Tax Effect 756 4,086 Total Comprehensive (Loss) Income $ ( 9,884 ) $ 18,413 (1) Reported in Net Gain on Securities on the Consolidated Statement of Operations. (2) Reported in Income Taxes on the Consolidated Statement of Operations. The accompanying notes are an integral part of these consolidated financial statements 68 Consolidated Statement of Changes in Stockholders’ Equity Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total (Dollars in Thousands, Except Per Share and Share Data) December 31, 2018 5,680,993 2,367 $ 83,225 57,843 $ ( 4,370 ) $ ( 1,440 ) $ 137,625 Net Income — — — 14,327 — — 14,327 Other Comprehensive Income — — — — — 4,086 4,086 Restricted Stock Awards Forfeited — — 8 — ( 8 ) — — Restricted Stock Awards Granted — — ( 590 ) — 590 — — Stock-Based Compensation Expense — — 323 — — — 323 Exercise of Stock Options — — 5 — 17 — 22 Treasury Stock Purchased, at Cost ( 2,411 shares) — — — — ( 71 ) — ( 71 ) Dividends Declared ($ 0.96 per share) — — — ( 5,215 ) — — ( 5,215 ) December 31, 2019 5,680,993 2,367 82,971 66,955 ( 3,842 ) 2,646 151,097 Net Loss — — — ( 10,640 ) — — ( 10,640 ) Other Comprehensive Income — — — — — 756 756 Restricted Stock Awards Forfeited — — 119 — ( 119 ) — — Restricted Stock Awards Granted — — ( 869 ) — 869 — — Stock-Based Compensation Expense — — 498 — — — 498 Exercise of Stock Options — — 4 — ( 82 ) — ( 78 ) Treasury Stock Purchased, at Cost ( 68,434 shares) — — — — ( 1,920 ) — ( 1,920 ) Dividends Declared ($ 0.96 per share) — — — ( 5,183 ) — — ( 5,183 ) December 31, 2020 5,680,993 $ 2,367 $ 82,723 $ 51,132 $ ( 5,094 ) $ 3,402 $ 134,530 The accompanying notes are an integral part of these consolidated financial statements 69 Consolidated Statement of Cash Flows Year Ended December 31, 2020 2019 (Dollars in Thousands) OPERATING ACTIVITIES Net (Loss) Income $ ( 10,640 ) $ 14,327 Adjustments to Reconcile Net (Loss) Income to Net Cash Provided By Operating Activities: Net Amortization (Accretion) on Securities 24 ( 182 ) Depreciation and Amortization 3,340 3,728 Provision for Loan Losses 4,000 725 Goodwill Impairment 18,693 — Writedown on Fixed Assets 1,124 — Loss (Gain) on Equity Securities 267 ( 190 ) (Gain) Loss on Securities ( 500 ) 50 Gain on Purchased Tax Credits ( 62 ) ( 35 ) Income from Bank-Owned Life Insurance ( 557 ) ( 550 ) Proceeds From Mortgage Loans Sold 33,446 10,999 Originations of Mortgage Loans for Sale ( 32,055 ) ( 10,733 ) Gain on Sales of Loans ( 1,391 ) ( 266 ) Loss on Sales of Other Real Estate Owned 18 6 Noncash Expense for Stock-Based Compensation 498 323 (Increase) Decrease in Accrued Interest Receivable ( 575 ) 139 Loss (Gain) on Disposal of Fixed Assets 61 ( 2 ) Decrease in Deferred Income Tax ( 237 ) ( 614 ) (Decrease) Increase in Taxes Payable ( 858 ) 411 Payments on Operating Leases ( 515 ) ( 418 ) (Decrease) Increase in Accrued Interest Payable ( 220 ) 393 Other, Net 216 ( 241 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 14,077 17,870 INVESTING ACTIVITIES Securities Available for Sale: Proceeds From Principal Repayments and Maturities 104,111 54,289 Purchases of Securities ( 68,962 ) ( 50,202 ) Proceeds from Sales of Securities 18,002 29,460 Net Increase in Loans ( 89,594 ) ( 44,272 ) Purchase of Premises and Equipment ( 322 ) ( 48 ) Proceeds from Disposal of Premises and Equipment 26 — Asset Acquisition of a Customer List — ( 900 ) Proceeds From Sales of Other Real Estate Owned 171 1,135 Decrease in Restricted Equity Securities ( 328 ) 253 Acquisition of Bank-Owned Life Insurance — ( 750 ) NET CASH USED IN INVESTING ACTIVITIES ( 36,896 ) ( 11,035 ) FINANCING ACTIVITIES Net Increase in Deposits 106,210 31,701 Net Increase (Decrease) in Short-Term Borrowings 10,484 ( 408 ) Principal Payments on Other Borrowed Funds ( 6,000 ) ( 6,000 ) Cash Dividends Paid ( 5,183 ) ( 5,215 ) Treasury Stock, Purchases at Cost ( 1,920 ) ( 71 ) Exercise of Stock Options ( 78 ) 22 NET CASH PROVIDED BY FINANCING ACTIVITIES 103,513 20,029 INCREASE IN CASH AND CASH EQUIVALENTS 80,694 26,864 CASH AND DUE FROM BANKS AT BEGINNING OF THE YEAR 80,217 53,353 CASH AND DUE FROM BANKS AT END OF THE YEAR $ 160,911 $ 80,217 The accompanying notes are an integral part of these consolidated financial statements 70 SUPPLEMENTAL CASH FLOW INFORMATION: Cash Paid for: Interest on Deposits and Borrowings (Including Interest Credited to Deposit Accounts of $ 5,384 and $ 6,903 , Respectively) $ 5,783 $ 7,464 Income Taxes 3,010 2,785 SUPPLEMENTAL NONCASH DISCLOSURE: Real Estate Acquired in Settlement of Loans 165 457 Non-cash Transaction for Income Tax Receivable 1,311 — Non-cash Transaction Related to Loan Payoff Receivable — 3,490 Right of Use ("ROU") Asset Recognized 435 1,706 Lease Liability Recognized 435 1,712 The accompanying notes are an integral part of these consolidated financial statements 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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., 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 Services, Inc., Community Bank and Exchange Underwriters, Inc. are collectively referred to as the “Company.” All intercompany transactions and balances have been eliminated in consolidation. Nature of Operations The Company derives substantially all its income from banking and bank-related services which include interest income on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest and dividend income on securities, insurance commissions, and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank headquartered in Carmichaels, 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. 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. The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2020 through the date the consolidated financial statements are being issued for items that should potentially be recognized or disclosed in these consolidated financial statements. As previously disclosed by the Company on February 23, 2021, the Company announced the implementation of strategic initiatives to improve the Bank’s financial performance and to position the Bank for continued profitable growth. The Bank intends to optimize its current branch network through the consolidation of six branches and the possible divestiture of others, while expanding technology and infrastructure investments in its remaining locations. The decision was the result of a comprehensive internal study that measured branch performance by comparing financial and non-financial indicators to growth opportunities, while evolving changes in consumer preferences, largely driven by the global pandemic, led to an acceleration of branch optimization efforts. The branch optimization, which is expected to be completed in 2021, will result in the Company incurring restructuring related expenses predominantly from branch consolidations, lease termination and severance costs. Use of Estimates The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and with general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Statement of Financial Condition, and income and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to fair value of securities available for sale, determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, other-than-temporary impairment evaluations of securities, the valuation of deferred tax assets and the evaluation of goodwill and core deposit intangible impairment. Risks and Uncertainties In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The COVID-19 pandemic has adversely affected, and may continue to adversely affect, local, national and global economic activity. The spread of the outbreak has caused significant disruptions to the U.S. economy, significant reductions in the targeted federal funds rate and has disrupted banking and other financial activity in the areas in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. On December 27, 2020, the Consolidated Appropriations Act (2021) was enacted and provides an additional $900 billion in pandemic-related relief aimed to bolster the economy, provide relief to small businesses and the unemployed, deliver additional stimulus checks to individuals and provide funding for COVID-19 testing and the administration of vaccines while also extending certain provisions of the original CARES Act stimulus package. The reduction in interest rates and other effects of the COVID-19 pandemic may continue to materially and adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is possible that estimates made in the financial statements could be materially and adversely impacted as a result of these conditions, including estimates regarding the allowance for loan losses, impairment of loans, impairment of securities and additional impairment of goodwill. As the vaccine rollout continues, the Company continues to operate while taking steps to ensure the safety of employees and clients; however, COVID-19 could potentially create widespread business continuity issues for the Company. The extent to which the COVID-19 pandemic will continue to impact the Company’s business, financial condition and results of operations in future periods will depend on future developments, including the scope and duration of the pandemic and and additional actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions the Company may take as may be required by government authorities or that the Company determines is in the best interests of its employees and clients. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic. Revenue Recognition Income on loans and securities is recognized as earned on the accrual method. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related mortgage sold. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Accounting Standards Codification ("ASC") Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The Company’s revenue from contracts with customers within the scope of ASC Topic 606 is recognized within Noninterest Income with the exception of Other Real Estate Owned (“OREO”) Income, which is accounted for in Noninterest Expense. The following narrative describes the Company’s revenue streams accounted for under the guidance of ASC Topic 606: Service Fees : The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees include services fees for ATM usage, stop payment charges, statement production, ACH and wire fees, which are recognized into income at the occurrence of an executed transaction and the point in time the Company fulfills the customer’s request. Account maintenance fees, which are primarily based on monthly maintenance activities, are earned over the course of the month, and satisfy the Company’s performance obligation. Overdraft fees are recognized as the overdrafts on customer’s accounts are incurred. The services fees are automatically withdrawn from the customer’s account balance per their account agreement with the Company. In addition, the Company earns interchange fees from debit/credit cardholder transactions conducted through the applicable payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The Company currently does not offer a cardholder rewards program. Insurance Commissions : EU derives commission and fee income from direct and agency bill insurance policies. Direct bill policies are invoiced directly from the insurance company provider to the customer. Once the customer remits payment for the policy, the insurance company provider then remits the commission or fee income to EU on a monthly basis. Agency bill policies are invoiced from EU, the insurance underwriting agency, to the customer. EU records the insurance company policy payable and the commission or fee income earned on the policy. As all insurance policies are contracts with customers, each policy has different terms and conditions. EU utilizes a report from their core insurance data processing program, The Agency Manager (“TAM”), that captures all in-force policies that are active in the system and annualizes the commission over the life of each individual contract. The report then provides an overall commission and fee income total for the monthly reporting financial statement period. This income is then compared to the amount of direct and agency bill income recorded in TAM for the reporting month and an adjustment to income is made according to the report. This is the income recognized for the portion of the insurance contract that has been earned by EU and subsequently the Company. Other Commissions : The Company earns other commissions, such as wealth management referral fees, check sales and safe deposit box rentals to customers. The wealth management referral fees are earned as a referral when a bank customer initiates a customer relationship with an associated wealth management firm. These fees fulfill the contract/agreement between the Company and the wealth management firm. Check sales are recognized as customers contact the Company for check supplies or the customer initiates the check order through the Company website to our third-party check company. These commissions are recognized as the third-party check company satisfies the contract of providing check stock to our customers. Safe deposit box rental income is recognized on a monthly basis, per each contract agreement with our 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS customers. The safe deposit box income is automatically withdrawn from the customer’s deposit account on a monthly basis as this revenue is earned by the contract. Gains (Losses) on Sales of OREO : The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. It is not common policy that the Company will finance an OREO property with the buyer. It is the Company’s practice to sell loan collateral recognized as an OREO property to free the Company of any additional loss exposure. Operating Segments An operating segment is defined as a component of an enterprise that engages in business activities which generate revenue and incur expense, and the operating results of which are reviewed by management. At December 31, 2020, the Company’s business activities are comprised of two operating segments, which are community banking and insurance brokerage services. The Company has evaluated the provisions of ASC Topic 280, Segment Reporting, and determined that segment reporting information related to EU (Insurance Brokerage Services segment) is required to be presented because the segment has adopted a board of directors that conducts board meetings independent from the Company. In addition, the segment comprises a significant amount to total noninterest income, even though the segment is less than 10% of the combined assets of the Company. See Note 19 – Segment Reporting and Related Information for more information. Securities Securities are classified at the time of purchase, based on management’s intentions and ability, as securities held to maturity or securities available-for-sale. Debt securities acquired with the intent and the ability to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using a level yield method and recognized as adjustments to interest income. Unrealized holding gains and losses for available-for-sale debt securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Equity securities are measured at fair value with the change in fair value recognized in Net Gain on Securities of the noninterest income category in the Consolidated Statement of Operations. Realized securities gains and losses, if any, are computed using the specific identification method. Interest and dividends on securities are recognized as income when earned. Declines in the fair value of individual securities below amortized cost that are other-than-temporary result in write-downs of the individual securities to their fair value. In estimating other-than-temporary impairment of securities, securities are evaluated on at least a quarterly basis to determine whether a decline in their value is other-than-temporary. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether or not the Company intends to sell or expect that it is more likely than not that it will be required to sell the security before an anticipated recovery in fair value. Once a decline in value for a debt security is determined to be other than temporary, the other-than-temporary impairment is separated in (a) the amount of total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to credit loss is recognized in earnings. The amount of other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). Common stock of the Federal Home Loan Bank (“FHLB”) and of Atlantic Community Bankers’ Bank (“ACBB”) represent ownership in organizations that are wholly owned by other financial institutions. These restricted equity securities are accounted for based on industry guidance in ASC Sub-Topic 325-20, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. Included in accrued interest and other assets are FHLB stock of $ 3.9 million and $ 3.6 million at December 31, 2020 and 2019, respectively, and ACBB stock of $ 85,000 at December 31, 2020 and 2019. The Company periodically evaluates its FHLB restricted stock for possible impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. The Company believes its holdings in the stock are ultimately recoverable at par value at December 31, 2020, and, therefore, determined that FHLB stock was not impaired. In addition, the Company has ample liquidity and does not require redemption of its FHLB stock in the foreseeable future. Loans Receivable and Allowance for Loan Losses Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. The Company’s loan portfolio is segmented to enable management to monitor risk and performance. The real estate loans are further segregated into three classes. Residential mortgages include those secured by residential properties and include home equity loans, while commercial mortgages consist of loans to commercial borrowers secured by commercial real estate. Construction loans typically consist of loans to build commercial buildings and acquire and develop residential real estate. The commercial and 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS industrial segment consists of loans to finance the activities of commercial customers. The consumer segment consists primarily of indirect auto loans as well as personal installment loans and personal or overdraft lines of credit. Residential mortgage loans are typically longer-term loans and, therefore, generally present greater interest rate risk than the consumer and commercial loans. Under certain economic conditions, housing values may decline, which may increase the risk that the collateral values are not sufficient. Commercial real estate loans generally present a higher level of risk than loans secured by residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income-producing properties, and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of commercial real estate loans is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired. Construction loans are originated to individuals to finance the construction of residential dwellings and are also originated for the construction of commercial properties, including hotels, apartment buildings, housing developments, and owner-occupied properties used for businesses. Construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 to 18 months. At the end of the construction phase, the loan generally converts to a permanent residential or commercial mortgage loan. Construction loan risks include overfunding in comparison to the plans, untimely completion of work, and leasing and stabilization after project completion. Commercial and industrial loans are generally secured by business assets, inventories, accounts receivable, etc., which present collateral risk. Consumer loans generally have higher interest rates and shorter terms than residential mortgage loans; however, they have additional credit risk due to the type of collateral securing the loan. Accrual of interest on loans is generally discontinued when it is determined that a reasonable doubt exists as to the collectability of principal, interest, or both. Payments received on nonaccrual loans are applied against principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, and current and future payments are reasonably assured. The Company uses an eight-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are not considered criticized and are aggregated as “pass” rated. The criticized rating categories used by management generally follow bank regulatory definitions. The special mention category includes assets that are currently protected but are below average quality, resulting in an undue credit risk, but not to the point of justifying a substandard classification. Loans in the substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as loss are considered uncollectable and of such little value that continuance as an asset is not warranted. In the normal course of business, the Company modifies loan terms for various reasons. These reasons may include a retention strategy to compete in the current interest rate environment, and to extend a loan term and re-amortize to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered a troubled debt restructuring (“TDR”) when the Company has determined that the borrower is experiencing financial difficulties and the Company grants a concession to the borrower, except for an insignificant delay in payment. TDRs typically are the result of loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. The Company evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. To make this determination a credit review is performed to assess the ability of the borrower to meet their obligations. When the Company restructures a loan for a troubled borrower, the loan terms (i.e., interest rate, payment, amortization period and/or maturity date) are modified in such a way to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If the hardship is thought to be temporary, then modified terms are offered only for that time period. Where possible, the Company obtains additional collateral and/or secondary payment sources at the time of the restructure. To date, the Company has not forgiven any principal as a restructuring concession. The Company will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default. All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Company’s policy for recognizing interest income on TDRs does not differ from its overall policy for interest recognition. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to nonaccrual status. A loan may be removed from nonaccrual TDR status if it has performed according to its modified terms for at least six consecutive months. Section 4013 of the CARES Act and regulatory guidance promulgated by federal banking regulators provide temporary relief from accounting and financial reporting requirements for TDRs regarding certain short-term loan modifications related to COVID-19. Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Any modification involving a loan that was not more than 30 days past due as of December 31, 2019 and that occurs beginning on March 1, 2020 and ends on the earlier of January 1, 2022 (as extended by the Consolidated Appropriations Act, 2021) 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 to six 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 performance and credit quality of the loan portfolio are also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Loan origination and commitment fees as well as certain direct loan origination costs are deferred and the net amount either accreted or amortized as an adjustment to the related loan’s yield over the contractual lives of the related loans. The allowance for loan losses (“allowance”) is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance based on potential losses in the current loan portfolio, which includes an assessment of economic conditions, changes in the nature and volume of the loan portfolio, loan loss experience, volume and severity of past due, classified and nonaccrual loans as well as other loan modifications, quality of the Company’s loan review system, the degree of oversight by the Company’s board of directors, existence and effect of any concentrations of credit and changes in the level of such concentrations, effect of external factors, such as competition and legal and regulatory requirements, and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making evaluations. Additions are made to the allowance through periodic provisions charged to income and recovery of principal and interest on loans previously charged-off. Losses of principal are charged directly to the allowance when a loss occurs or when a determination is made that the specific loss is probable. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. A loan is considered impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due for principal and interest according to the original contractual terms of the loan agreement. Generally, management considers all substandard-, doubtful-, and loss-rated loans, nonaccrual loans, and TDRs for impairment. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The maximum period without payment that typically can occur before a loan is considered for impairment is 90 days. Impairment is measured based on the present value of expected future cash flows discounted at a loan’s effective interest rate, or as a practical expedient, the observable market price, or, if the loan is collateral dependent, the fair value of the underlying collateral. When the measurement of an impaired loan is less than the recorded investment in the loan, the impairment is 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS recorded in a specific valuation allowance. This specific valuation allowance is periodically adjusted for significant changes in the amount or timing of expected future cash flows, observable market price or fair value of the collateral. The specific valuation allowance, or allowance for impaired loans, is part of the total allowance for loan losses. Cash payments received on impaired loans that are considered nonaccrual are recorded as a direct reduction of the recorded investment in the loan. When the recorded investment has been fully collected, receipts are recorded as recoveries to the allowance for loan losses until the previously charged-off principal is fully recovered. Subsequent amounts collected are recognized as interest income. If no charge-off exists, then once the recorded investment has been fully collected, any future amounts collected would be recognized as interest income. Impaired loans are not returned to accrual status until all amounts due, both principal and interest, are current and a sustained payment history has been demonstrated. The general allowance component covers pools of homogeneous loans by loan class. Management determines historical loss experience for each segment of loans using the two-year rolling average of the net charge-off data within each segment. Qualitative and environmental factors are also considered that are likely to cause estimated credit losses associated with the Bank’s existing portfolio to differ from historical loss experience, and include levels and trends in delinquency and impaired loans; levels and trends in net charge-offs, trends in volume and terms of loans; change in underwriting, policies, procedures, practices and key personnel; national and local economic trends; industry conditions, and effects of changes in high-risk credit circumstances. The qualitative and environmental factors are reviewed on a quarterly basis to ensure they are reflective of current conditions in the portfolio and economy. An unallocated component, which is a part of the general allowance component, is maintained to cover uncertainties that could affect the Company’s estimate of probable losses. Loans that were acquired in previous mergers, were recorded at fair value with no carryover of the related allowance for credit losses. The fair value of the acquired loans was estimated by management with the assistance of a third-party valuation specialist. For performing loans acquired in a merger, the excess of expected cash flows over the estimated fair value, at acquisition, is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require an evaluation to determine the need for an allowance. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount, which is then reclassified as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. The evaluation of the amount of future cash flows that is expected to be collected is performed in a similar manner as that used to determine our allowance. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment. The Company grants commercial, residential, and other consumer loans to customers throughout southwestern Pennsylvania in Greene, Washington, Allegheny, Fayette and Westmoreland Counties; West Virginia in Brooke, Marshall, Ohio, Upshur and Wetzel Counties; and Belmont County in Ohio. Although the Company had a diversified loan portfolio at December 31, 2020 and 2019, a substantial portion of its debtors’ ability to honor their contracts is determined by the economic environment of these counties within the tri-state region footprint. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from three to seven years for furniture, fixtures and equipment, and 27.5 to 40 years for building premises. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from seven to fifteen years . Expenditures for maintenance and repairs are charged to expense when incurred while costs of major additions and improvements are capitalized. Bank-Owned Life Insurance The Company is the owner and beneficiary of bank-owned life insurance (“BOLI”) policies on certain employees. The earnings from the BOLI policies are recognized as a component of noninterest income. The BOLI policies are an asset that can be liquidated, if necessary, with associated tax costs. However, the Company intends to hold these policies and, accordingly, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value. Real Estate Owned Real estate owned acquired in settlement of foreclosed loans is carried as a component of Other Assets at the lower of cost or fair value, less estimated cost to sell. Prior to foreclosure, the estimated collectible value of the collateral is evaluated to determine if a partial charge-off of the loan balance is necessary. After transfer to real estate owned, any subsequent write-downs are charged against noninterest expense. Direct costs incurred in the foreclosure process and subsequent holding costs incurred on such properties are recorded as expenses of current operations. Real estate owned was $ 208,000 and $ 233,000 at 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2020 and 2019, respectively. Of these amounts, $ 0 and $ 41,000 represent residential loans at December 31, 2020 and 2019, respectively. Residential loans in process of foreclosure were $ 806,000 and $ 1.1 million at December 31, 2020 and 2019, respectively. Income Taxes The Company accounts for income taxes in accordance with income tax accounting guidance in ASC Topic 740, Income Taxes . The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination, the term more likely than not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date, and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties on income taxes as a component of income tax expense. Goodwill and Intangible Assets Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Deemed to have an indefinite life and not subject to amortization, goodwill is instead tested for impairment at the reporting unit level at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist. The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment. The Company has assigned 100 % of the goodwill to the Community Banking reporting unit. Determining the fair value of a reporting unit under the goodwill impairment test is judgmental and often involves the use of significant estimates and assumptions. 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 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 Company recorded goodwill impairment of $ 18.7 million for the year ended December 31, 2020 and did no t record any goodwill impairment for the year ended December 31, 2019. Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as core deposit intangibles acquired in mergers, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing at last annually. The amortization expense represents the estimated decline in value of the underlying asset. Core deposit intangibles are primarily amortized over 6.5 to 9 years on the straight-line method. Customer renewal lists are amortized over their estimated useful lives of 9.5 years. We monitor other intangibles for impairment and evaluate carrying amounts, as necessary. Estimates and assumptions are used in determining the fair value of other intangible assets. There were no events or changes in circumstances indicating impairment of other intangible assets at December 31, 2020. Future events could cause us to conclude that goodwill or other intangibles have become impaired, which would result in recording an impairment. Any resulting impairment could have a material adverse impact on the Company’s financial condition and results of operations. Refer to Note 6—Goodwill and Intangible Assets for additional details. Mortgage Servicing Rights (“MSRs”) The Company has agreements for the express purpose of selling loans in the secondary market. The Company maintains all servicing rights for these loans. MSRs are recognized when commitments are made to fund a loan to be sold and are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in proportion to sold mortgages that are serviced and are included in Accrued Interest Receivable and Other Assets on the accompanying Consolidated Statement of Financial Condition. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of MSRs is netted against servicing fee income in Other (Loss) Income of the noninterest income category in the Consolidated Statement of Operations. MSRs are evaluated for impairment based on the estimated fair value of the MSRs. MSRs are stratified by certain risk characteristics, primarily loan term and note rate. If temporary impairment exists within a risk stratification tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the estimated fair value. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced. Treasury Stock The purchase of the Company’s common stock is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the average cost basis, with any excess proceeds being credited to capital surplus. Comprehensive (Loss) Income Comprehensive (loss) income consists of net (loss) income and other comprehensive income. Other comprehensive income is comprised of unrealized holding gains on available-for-sale debt securities, net of tax. Earnings Per Share The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing the reported net income as the numerator and weighted average shares outstanding as the denominator. The computation of diluted earnings per share differs in that the denominator is adjusted for the dilutive effects of any options and convertible securities. Treasury shares are not deemed outstanding for earnings per share calculations. Stock-Based Compensation In 2015, the Company’s stockholders approved the 2015 Equity Incentive Plan (the “Plan”). The purpose of the Plan is to promote the long-term financial success of the Company by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interests with those of the Company’s stockholders through the ownership of additional common stock of the Company. The effective date of the Plan is May 20, 2015, which was the date the Plan satisfied the applicable stockholder approval requirement. The Plan shall remain in effect as long as any awards are outstanding, provided, however, that no awards may be granted under the Plan after the day immediately prior to the ten-year anniversary of the effective date of May 20, 2015. All of the Company’s directors and employees are eligible to participate in the Plan. The Plan authorizes the granting of options to purchase shares of the Company’s stock, which may be non-qualified stock options or incentive stock options, restricted stock awards or restricted stock units. The Plan reserved an aggregate number of 407,146 shares, of which two-thirds of the shares ( 271,431 ) may be issued as stock options and one-third of the shares ( 135,715 ) may be issued as restricted stock awards or units. Restricted stock awards or units can be issued above the one-third threshold provided that the number of shares reserved for stock options is reduced by three shares for each restricted stock award or unit granted above the one-third threshold. ASC Topic 718, Compensation – Stock Compensation, requires recognizing the compensation cost in the financial statements for stock-based payment transactions. Stock option expense is measured based on the grant date fair value of the stock options issued. The per share fair value of stock options granted is calculated using the Black-Scholes-Merton option pricing model, using assumptions for expected life, expected dividend yield, risk-free interest rate and an expected volatility. The Company uses the simplified method to determine the expected term because it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The stock option exercise price is equal to the market value on the date of grant. Restricted stock award expense is measured based on the market price of the Company’s common stock at the date of the grant. Unrecognized compensation expense is recognized ratably over the remaining service period, generally defined as the vesting period, for all nonvested restricted stock awards and stock options. Restricted stock awards and stock options are typically granted with a five years vesting period at a vesting rate of 20 % per year. The contractual life of stock options is typically 10 years from the date of grant. Cash Flow Information The Company has defined cash equivalents as those amounts due from depository institutions, interest-bearing deposits with other banks with maturities of less than 90 days, and federal funds sold. 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Advertising Costs Advertising costs are expensed as incurred. Reclassifications Certain comparative amounts for prior periods have been reclassified to conform to the current year presentation. Such reclassifications did not affect net income or stockholders’ equity. Recent Accounting Standards In March 2020, the Financial Accounting Standard Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): 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 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 December 2019, FASB issued ASU 2019-12, Income taxes (Topic 740); Simplifying the Accounting for Income Taxes . ASU 2019-12 provides amendments intended to reduce the cost and complexity in accounting for income taxes while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 removes the following exceptions from ASC 740, Income Taxes: (i) exceptions to the incremental approach for intraperiod tax allocation; (ii) exceptions to accounting for basis differences when a foreign subsidiary becomes an equity method investment or a foreign equity method investment become a subsidiary; and (iii) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 provides the following amendments that simplify and improve guidance with Topic 740: (i) franchise taxes that are based partially on income; (ii) transactions that result in a step up in the tax basis of goodwill; (iii) separate financial statements of legal entities that are not subject to tax; (iv) enacted changes in tax laws in interim periods; and (v) employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements. 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 are effective for the Company beginning in the first quarter 2020. The amendments on changes in unrealized gains and 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. NOTE 2— (LOSS) EARNINGS PER SHARE There are no convertible securities, which would affect the numerator in calculating basic and diluted earnings per share; therefore, net (loss) income as presented on the Consolidated Statement of Operations 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. Year Ended December 31, 2020 2019 (Dollars in Thousands, Except Share and Per Share Data) Net (Loss) Income $ ( 10,640 ) $ 14,327 Weighted-Average Basic Common Shares Outstanding 5,406,290 5,434,649 Dilutive Effect of Common Stock Equivalents (Stock Options and Restricted Stock) — 14,112 Weighted-Average Diluted Common Shares and Common Stock Equivalents Outstanding 5,406,290 5,448,761 (Loss) Earnings per share: Basic $ ( 1.97 ) $ 2.64 Diluted ( 1.97 ) 2.63 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. Year Ended December 31, 2020 2019 Stock Options 218,683 87,071 Restricted Stock 76,190 33,350 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. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3— SECURITIES The amortized cost and fair value of securities available-for-sale as of the dates indicated are as follows: 2020 December 31, Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in Thousands) Available-for-Sale Debt Securities: U.S. Government Agencies $ 41,994 $ 12 $ ( 595 ) $ 41,411 Obligations of States and Political Subdivisions 20,672 1,321 — 21,993 Mortgage-Backed Securities - Government-Sponsored Enterprises 75,900 3,593 — 79,493 Total Available-for-Sale Debt Securities $ 138,566 $ 4,926 $ ( 595 ) 142,897 Equity Securities: Mutual Funds 1,019 Other 1,484 Total Equity Securities 2,503 Total Securities $ 145,400 2019 December 31, Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in Thousands) Available-for-Sale 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 Available-for-Sale Debt Securities $ 191,301 $ 3,647 $ ( 273 ) 194,675 Equity Securities: Mutual Funds 997 Other 1,713 Total Equity Securities 2,710 Total Securities $ 197,385 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: 2020 Less than 12 months 12 Months or Greater Total December 31, 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 7 $ 32,399 $ ( 595 ) — $ — $ — 7 $ 32,399 $ ( 595 ) Total 7 $ 32,399 $ ( 595 ) — $ — $ — 7 $ 32,399 $ ( 595 ) 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2019 Less than 12 months 12 Months or Greater Total December 31, 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 any individual unrealized loss as of December 31, 2020 or 2019, represents an other-than-temporary impairment. The securities that are temporarily impaired at December 31, 2020 and 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. Securities available-for-sale with a fair value of $ 119.7 million and $ 151.2 million at December 31, 2020 and 2019, respectively, are pledged to secure public deposits, short-term borrowings and for other purposes as required or permitted by law. The scheduled maturities of securities available-for-sale are summarized as follows: 2020 December 31, Amortized Cost Fair Value (Dollars in Thousands) Due after One Year through Five Years $ 4,301 $ 4,366 Due after Five Years through Ten Years 56,001 56,925 Due after Ten Years 78,264 81,606 Total $ 138,566 $ 142,897 The following table presents gross gain and loss of sales of available-for-sale securities for the periods indicated. Year Ended December 31, 2020 2019 (Dollars in Thousands) Debt Securities Gross Realized Gain $ 489 $ 62 Gross Realized Loss — ( 112 ) Net Gain (Loss) on Debt Securities $ 489 $ ( 50 ) Equity Securities Net Unrealized (Loss) Gain Recognized on Securities Held $ ( 267 ) $ 190 Net Realized Gain Recognized on Securities Sold 11 — Net (Loss) Gain on Equity Securities ( 256 ) 190 Net Gain on Securities $ 233 $ 140 In 2020, the gross realized gain on the sale of debt securities of $ 489,000 was by design to recognize gains on higher-interest mortgage-backed securities that were paying down quicker than expected. In 2019, the realized loss on the sale of debt securities was recognized to mitigate investment-credit risk and to reinvest in higher yielding, longer-term investments as well as to mitigate call risk in a declining interest rate environment. 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4— LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES The following table summarizes the major classifications of loans as of the dates indicated: December 31, 2020 2019 (Dollars in Thousands) Real Estate: Residential $ 344,142 $ 347,766 Commercial 373,555 351,360 Construction 72,600 35,605 Commercial and Industrial 126,813 85,586 Consumer 113,854 113,637 Other 13,789 18,542 Total Loans 1,044,753 952,496 Allowance for Loan Losses ( 12,771 ) ( 9,867 ) Loans, Net $ 1,031,982 $ 942,629 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. PPP was designed to help small businesses keep their workforce employed and cover expenses during the COVID-19 crisis. Under the PPP, participating SBA and other qualifying lenders originated loans to eligible businesses that are fully guaranteed by the SBA as to principal and accrued interest, have more favorable terms than traditional SBA loans and may be forgiven if the proceeds are used by the borrower for certain eligible purposes. PPP loans have an interest rate of 1% per annum. Loans issued prior to June 5, 2020 have a term to maturity of two-years and loans issued after June 5, 2020 have a term to maturity of five-years. The PPP Flexibility Act of 2020 extended the deferral period for borrower payments of principal, interest, and fees on all PPP loans to the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). Previously the deferral period could end after six months. The Bank received a processing fee from the SBA ranging from 1 % to 5 % depending on the size of the loan, which was offset by a 0.75 % third-party servicing agent fee. In 2020, the Bank originated 639 PPP loans totaling $ 71.0 million. Among the largest sectors impacted were $ 15.6 million in loans for health care and social assistance, $ 12.6 million for construction and specialty-trade contractors, $ 6.1 million for professional and technical services, $ 6.1 million for retail trade, $ 5.1 million for wholesale trade, $ 4.6 million for manufacturing and $ 3.4 million for restaurant and food services. Net deferred origination fees were $ 2.2 million, of which $ 1.1 million was recognized during year ended December 31, 2020. Processing of PPP loan forgiveness began in the fourth quarter of 2020 and at December 31, 2020, PPP loans totaled $ 55.1 million. All PPP loans are classified as commercial and industrial loans. 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. The SBA reopened the PPP the week of January 11, 2021 and began accepting applications for both First Draw and Second Draw PPP Loans. Second Draw PPP Loans are available for certain eligible borrowers that previously received a PPP loan. A Second Draw PPP Loan has the same general terms as the First Draw PPP Loan. A borrower is generally eligible for a Second Draw PPP Loan if the borrower previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses, has no more than 300 employees, and can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. For most borrowers, the maximum amount of a Second Draw PPP Loan is 2.5x average monthly 2019 or 2020 payroll costs up to $2.0 million. Loan payments will be deferred for borrowers who apply for loan forgiveness until the SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (either 8 weeks or 24 weeks). For PPP loans made on or after December 27, 2020, the lender’s processing fee from the SBA is the lesser of 50% or $2,500 for loans up to $50,000, 5% for loans greater than $50,000 and up to $350,000, 3% for loans greater than $350,000 and less than $2.0 million and 1% for loans of at least $2.0 million. As of February 28, 2021, the Bank received 181 applications totaling $ 26.7 million with total estimated processing fees of $ 1.2 million. 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total unamortized net deferred loan fees were $ 2.0 million and $ 906,618 at December 31, 2020 and 2019, respectively. $ 1.1 million of net deferred PPP loan origination fees were unearned as of December 31, 2020. 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 dates indicated. At December 31, 2020 and 2019, there were no loans in the criticized category of loss. 2020 December 31, Pass Special Mention Substandard Doubtful Total (Dollars in Thousands) Real Estate: Residential $ 340,573 $ 1,115 $ 2,454 $ — $ 344,142 Commercial 320,358 37,482 15,715 — 373,555 Construction 68,343 53 4,204 — 72,600 Commercial and Industrial 113,797 7,787 4,620 609 126,813 Consumer 113,805 — 49 — 113,854 Other 13,711 78 — — 13,789 Total Loans $ 970,587 $ 46,515 $ 27,042 $ 609 $ 1,044,753 2019 December 31, 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 $ 21.9 million in the special mention loan category and $ 19.7 million in the substandard category as of December 31, 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. 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated: 2020 December 31, 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 $ 339,067 $ 2,919 $ 315 $ — $ 3,234 $ 1,841 $ 344,142 Commercial 365,712 1 740 — 741 7,102 373,555 Construction 72,600 — — — — — 72,600 Commercial and Industrial 124,916 — — — — 1,897 126,813 Consumer 112,952 784 61 8 853 49 113,854 Other 13,789 — — — — — 13,789 Total Loans $ 1,029,036 $ 3,704 $ 1,116 $ 8 $ 4,828 $ 10,889 $ 1,044,753 2019 December 31, 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 at December 31, 2020 compared to December 31, 2019 is primarily related to two hospitality loans with a total principal balance of $ 6.9 million that were impacted by the pandemic due to insufficient cash flows and occupancy rates. The increase in nonaccrual commercial and industrial loans is primarily related to a $ 1.3 million relationship. Total unrecorded interest income related to nonaccrual loans was $ 233,000 and $ 74,000 for the year ended December 31, 2020 and 2019, respectively. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the loans considered impaired and evaluated for impairment as of the dates indicated are as follows: 2020 December 31, Recorded Investment Related Allowance Unpaid Principal Balance Average Recorded Investment Interest Income Recognized (Dollars in Thousands) With No Related Allowance Recorded: Real Estate: Residential $ 1,183 $ — $ 1,187 $ 1,194 $ 46 Commercial 31,865 — 32,887 37,443 1,418 Construction 4,204 — 4,204 4,013 159 Commercial and Industrial 3,296 — 3,506 3,426 89 Total With No Related Allowance Recorded $ 40,548 $ — $ 41,784 $ 46,076 $ 1,712 With A Related Allowance Recorded: Real Estate: Residential $ — $ — $ — $ — $ — Commercial 1,524 293 1,524 1,585 72 Construction — — — — — Commercial and Industrial 2,069 356 2,069 2,114 57 Total With A Related Allowance Recorded $ 3,593 $ 649 $ 3,593 $ 3,699 $ 129 Total Impaired Loans: Real Estate: Residential $ 1,183 $ — $ 1,187 $ 1,194 $ 46 Commercial 33,389 293 34,411 39,028 1,490 Construction 4,204 — 4,204 4,013 159 Commercial and Industrial 5,365 356 5,575 5,540 146 Total Impaired Loans $ 44,141 $ 649 $ 45,377 $ 49,775 $ 1,841 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2019 December 31, 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 Construction — — — — — 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: Residential $ — $ — $ — $ — $ — Commercial 1,646 274 1,646 1,702 81 Construction — — — — — 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 Construction — — — — — Commercial and Industrial 2,511 610 2,664 2,604 119 Total Impaired Loans $ 7,764 $ 884 $ 7,940 $ 8,135 $ 397 The increase in commercial real estate loans and construction loans evaluated for impairment at December 31, 2020 compared to December 31, 2019 is primarily due to the Company evaluating the hospitality portfolio for impairment in light of the industry conditions caused by the COVID-19 pandemic. The following table provides details of loans in forbearance at the date indicated. 2020 December 31, Number of Loans Amount % of Portfolio (Dollars in Thousands) Real Estate: Residential 4 $ 749 0.2 % Commercial 8 19,818 5.3 % Construction 1 1,958 2.7 % Commercial and Industrial 5 1,219 1.0 % Consumer 13 356 0.3 % Other — — — % Total Loans in Forbearance 31 $ 24,100 2.3 % Loans on deferral at December 31, 2020 include the following: 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • Hospitality - three commercial real estate loans totaling $ 8.2 million and a $ 2.0 million construction loan. • Office and retail space - two commercial real estate loans totaling $ 8.3 million. • One commercial relationship that rents equipment, supplies and other materials for events comprised three commercial real estate loans totaling $ 3.3 million, and five commercial and industrial loans totaling $ 1.2 million. The majority of the commercial real estate loans, construction loans and commercial and industrial loans in the above table are on deferral for six months with regular payments scheduled to begin in July 2021. The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms and extension of maturity date. Loans classified as TDRs consisted of 17 and 18 loans totaling $ 4.2 million and $ 3.6 million as of December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, two residential real estate loan totaling $ 83,000 and one commercial and industrial loan totaling $ 1,000 modified in TDRs paid off. During the year ended December 31, 2019, one residential real estate loan modified in a TDR totaling $ 851,000 paid off. No TDRs subsequently defaulted during the years ended December 31, 2020 and 2019, respectively. The following table presents information at the time of modification related to loans modified as TDRs during the periods indicated. Year Ended December 31, 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 2 1,248 1,263 — Commercial and Industrial 1 38 38 — Total 4 $ 1,520 $ 1,535 $ — Year Ended December 31, 2019 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in Thousands) Real Estate Residential 3 $ 175 $ 175 — Commercial 2 426 426 — Total 5 $ 601 $ 601 — Loans acquired in connection with the previous mergers were recorded at their estimated fair value at the acquisition date and did not include a carryover of the allowance for loan losses because the determination of the fair value of acquired loans incorporated credit risk assumptions. The loans acquired with evidence of deterioration in credit quality since origination for which it was probable that all contractually required payments would not be collected were not significant to the consolidated financial statements of the Company. The activity in the allowance for loan loss summarized by primary segments and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment as of December 31, 2020 and 2019 is summarized below: 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2020 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 ( 65 ) ( 931 ) — — ( 329 ) — — ( 1,325 ) Recoveries 6 28 — 33 162 — — 229 Provision 285 3,703 604 ( 1,022 ) 33 — 397 4,000 December 31, 2020 $ 2,249 $ 6,010 $ 889 $ 1,423 $ 1,283 $ — $ 917 $ 12,771 Individually Evaluated for Impairment $ — $ 293 $ — $ 356 $ — $ — $ — $ 649 Collectively Evaluated for Potential Impairment $ 2,249 $ 5,717 $ 889 $ 1,067 $ 1,283 $ — $ 917 $ 12,122 2019 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 ( 96 ) — — ( 16 ) ( 609 ) — — ( 721 ) Recoveries 12 73 — 85 135 — — 305 Provision 1,057 444 ( 110 ) ( 464 ) ( 136 ) — ( 66 ) 725 December 31, 2019 $ 2,023 $ 3,210 $ 285 $ 2,412 $ 1,417 $ — $ 520 $ 9,867 Individually Evaluated for Impairment $ — $ 274 $ — $ 610 $ — $ — $ — $ 884 Collectively Evaluated for Potential Impairment $ 2,023 $ 2,936 $ 285 $ 1,645 $ 1,574 $ — $ 520 $ 8,983 The COVID-19 pandemic has resulted in an increase in unemployment and recessionary economic conditions in 2020. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis were increased in 2020 primarily related to economic trends and industry conditions as a result of the pandemic and vulnerable industries such as hospitality and retail. In addition, an increase in commercial real estate loans combined with an increase in the historical loss factor primarily related to a $ 931,000 commercial real estate loan charge-off resulted in an increase commercial real estate loan reserves. The combination of these factors primarily resulted in a $ 4.0 million provision for loan losses for the year ended December 31, 2020. Prior to 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. Starting in 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 determined did 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. 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables present the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of December 31, 2020 and 2019: 2020 December 31, Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Total (Dollars in Thousands) Individually Evaluated for Impairment $ 1,183 $ 33,389 $ 4,204 $ 5,365 $ — $ — $ 44,141 Collectively Evaluated for Potential Impairment 342,959 340,166 68,396 121,448 113,854 13,789 1,000,612 Total Loans $ 344,142 $ 373,555 $ 72,600 $ 126,813 $ 113,854 $ 13,789 $ 1,044,753 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 The following table presents changes in the accretable discount on the loans acquired at fair value for the dates indicated. Accretable Discount (Dollars in Thousands) Balance at December 31, 2018 $ 1,912 Accretable Yield ( 284 ) Balance at December 31, 2019 1,628 Accretable Yield ( 434 ) Balance at December 31, 2020 $ 1,194 Certain directors and executive officers of the Company, including family members or companies in which they are principal owners, are loan customers of the Company. Such loans are made in the normal course of business, and summarized as follows: December 31, 2020 2019 (Dollars in Thousands) Balance, January 1 $ 10,802 $ 6,234 Additions 505 5,875 Payments ( 414 ) ( 1,307 ) Balance, December 31 $ 10,893 $ 10,802 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5— PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows: 2020 2019 (Dollars in Thousands) Land $ 3,699 $ 3,833 Building 23,299 25,172 Leasehold Improvements 1,148 1,624 Furniture, Fixtures, and Equipment 11,104 11,601 Fixed Assets in Process 45 65 Total Premises and Equipment 39,295 42,294 Less: Accumulated Depreciation and Amortization ( 18,993 ) ( 20,012 ) Premises and Equipment, Net $ 20,302 $ 22,282 Depreciation and amortization expense on premises and equipment was $ 1.1 million and $ 1.2 million for the years ended December 31, 2020 and 2019, respectively. NOTE 6— GOODWILL AND INTANGIBLE ASSETS Goodwill 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 the Company. In light of the adverse circumstances resulting from COVID-19, management determined it was necessary to quantitatively evaluate goodwill for impairment at September 30, 2020. 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, the Company 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, the Company 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 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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%, the Company 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. The Company 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 were only seven transactions involving target institutions with assets greater than $1 billion announced since March 1, 2020 (post-COVID) through the September 30, 2020 assessment date. Of these, only two have closed. Therefore, the Company was unable to rely on this method in our analysis. The Company 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 quantitative goodwill impairment test and in connection with the preparation of the consolidated financial statements, the Company concluded that goodwill was impaired. Accordingly, the Company recorded a goodwill impairment charge of $ 18.7 million for the year ended December 31, 2020 as the Company's estimated fair value was less than its book value. This was a non-cash charge to earnings and had no impact on regulatory capital, cash flows or liquidity position. The Company performed a qualitative assessment for the annual impairment goodwill test completed as of October 31, 2020 and December 31, 2020 to determine if there was a material change in the most recent quantitative assessment that was performed at September 30, 2020. The Company determined there were not significant changes in macroeconomic conditions, stock price performance, overall financial performance and other relevant or entity-specific events since the most recent quantitative assessment that it is not more likely than not that goodwill was further impaired. The following table presents the changes in the Company's carrying amount of goodwill at the dates indicated. Carrying Amount (Dollars in Thousands) December 31, 2018 and 2019 $ 28,425 Goodwill Impairment ( 18,693 ) December 31, 2020 $ 9,732 Intangible Assets The following table presents a summary of intangible assets subject to amortization at the dates indicated. 2020 2019 December 31, Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value (Dollars in Thousands) Core Deposit Intangible $ 14,103 $ ( 7,047 ) $ 7,056 $ 14,103 $ ( 5,108 ) $ 8,995 Customer List 1,800 ( 457 ) 1,343 1,800 ( 268 ) 1,532 Total Intangible Assets $ 15,903 $ ( 7,504 ) $ 8,399 $ 15,903 $ ( 5,376 ) $ 10,527 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization of other intangible assets totaled $ 2.1 million for the years ended December 31, 2020 and 2019. 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) 2021 $ 2,128 2022 2,128 2023 2,128 2024 1,430 2025 189 2026 and Thereafter 396 Total Estimated Intangible Asset Amortization Expense $ 8,399 NOTE 7— DEPOSITS The following table shows the maturities of time deposits for the next five years and beyond. December 31, 2020 (Dollars in Thousands) One Year or Less $ 87,638 Over One Through Two Years 35,507 Over Two Through Three Years 43,257 Over Three Through Four Years 7,595 Over Four Through Five Years 11,900 Over Five Years 4,116 Total $ 190,013 The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $ 59.2 million and $ 69.3 million as of December 31, 2020 and 2019, respectively. The aggregate amount of demand deposits that are overdrawn and have been reclassified as loans was $ 231,000 and $ 1.7 million as of as of December 31, 2020 and 2019, respectively. Certain directors and executive officers of the Company, including family members or companies in which they are principal owners, are deposit customers of the Company. The total deposits of directors and executive officers was $ 6.0 million and $ 5.7 million as of December 31, 2020 and 2019, respectively. 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8— SHORT-TERM BORROWINGS The following table sets forth the components of short-term borrowings for the years indicated. 2020 2019 December 31, Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in Thousands) Securities Sold Under Agreements to Repurchase: Balance at Period End $ 41,055 0.21 % $ 30,571 0.57 % Average Balance Outstanding During the Period 37,819 0.36 29,976 0.62 Maximum Amount Outstanding at any Month End 46,123 34,197 Securities Collateralizing the Agreements at Period-End: Carrying Value $ 46,312 $ 37,584 Market Value 47,283 37,873 NOTE 9— OTHER BORROWED FUNDS Other borrowed funds consist of fixed rate, long-term advances from the FHLB with remaining maturities as follows: 2020 2019 December 31, Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in Thousands) Due in One Year $ 2,000 2.12 % $ 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 $ 8,000 2.27 $ 14,000 2.14 The Bank maintained a credit arrangement with the FHLB with a maximum borrowing limit of approximately $ 421.5 million and $ 374.8 million as of December 31, 2020 and 2019, respectively, and available borrowing capacity of $ 320.8 million at December 31, 2020. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $ 564.7 million of residential and commercial mortgage loans and the Bank’s investment in FHLB stock. Under this arrangement the Bank had available a variable rate line of credit in the amount of $ 150.0 million as of December 31, 2020 and 2019, respectively, of which, there was no outstanding balance as of December 31, 2020 and 2019. As an alternative to pledging securities, the FHLB periodically provides standby letters of credit on behalf of the Bank to secure certain public deposits in excess of the level insured by the FDIC. If the FHLB is required to make payment for a beneficiary’s draw, the payment amount is converted into a collateralized advance to the Bank. Standby letters of credit issued on our behalf by the FHLB to secure public deposits were $ 90.3 million and $ 41.7 million as of December 31, 2020 and 2019. The Bank maintains a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $ 91.5 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $ 133.8 million of commercial and consumer indirect auto loans. The Bank also maintains multiple line of credit arrangements with various unaffiliated banks totaling $ 60.0 million as of December 31, 2020 and 2019, respectively, of which no draws had been taken. The Company is not a party to any credit arrangements. 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10— INCOME TAXES Reconciliation of income tax provision for the periods indicated are as follows: Year Ended December 31, 2020 2019 (Dollars in Thousands) Current Payable $ 1,485 $ 2,343 Deferred Benefit ( 237 ) ( 614 ) Total Provision $ 1,248 $ 1,729 The tax effects of deductible and taxable temporary differences that gave rise to significant portions of the net deferred tax assets and liabilities are as follows: December 31, 2020 2019 (Dollars in Thousands) Deferred Tax Assets: Allowance for Loan Losses $ 2,715 $ 2,072 Non-Accrual Loan Interest 82 24 Amortization of Intangibles 85 76 Tax Credit Carryforwards — 1,207 Unrealized Loss of AFS - Merger Tax Adjustment 849 812 Postretirement Benefits 25 27 Net Unrealized Loss on Equity Securities 71 — Stock-Based Compensation Expense 74 42 Gas Lease - Deferred Revenue 102 130 OREO 48 48 Purchase Accounting Adjustments - Acquired Loans 255 348 Lease Liability 260 278 Other 4 — Gross Deferred Tax Assets 4,570 5,064 Deferred Tax Liabilities: Deferred Origination Fees and Costs 313 320 Discount Accretion 37 52 Depreciation 1,292 892 Net Unrealized Gain on Securities 933 725 Net Unrealized Gain on Equity Securities — 41 Mortgage Servicing Rights 141 199 ROU Asset 259 277 Purchase Accounting Adjustment - Core Deposit Intangible 1,513 1,930 Purchase Accounting Adjustments - Fixed Assets 69 292 Purchase Accounting Adjustments - Certificates of Deposit — 16 Goodwill 74 413 Other 5 2 Gross Deferred Tax Liabilities 4,636 5,159 Net Deferred Tax Liabilities $ ( 66 ) $ ( 95 ) Deferred taxes at December 31, 2020 and 2019, are included in Accrued Interest Receivable and Other Assets in the accompanying Consolidated Statement of Financial Condition. While the Tax Cuts and Jobs Act (“Tax Act”) enacted in 2017 was the first major overhaul of the Internal Revenue Code (“IRC”) in the last 30 years, it had many items that were left unaddressed once certain tax deadlines passed and for which no formal regulations had been issued as of December 31, 2018. One of these unaddressed tax deadlines was the expiration of the 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS alternative minimum tax (“AMT”) credit carryforward after the 2021 tax year. Pre–Tax Act regulations allowed for AMT credits to carryforward infinitely. As of December 31, 2018, it was determined that an AMT credit carryforward of approximately $ 1.3 million, acquired in the FWVB merger on April 30, 2018, would remain unutilized as of December 31, 2021 as a result of IRC Section 382 and 383 annual limitations. As a result of the uncertainty of the utilization of the AMT credit carryforwards post-2021, a valuation allowance (“VA”) was established for the AMT credit carryforward deferred tax asset (“DTA”) balance of $ 1.3 million, which was offset against goodwill at December 31, 2018. This is in accordance with ASC Topic 805 – Business Combinations , due to the AMT credit carryforward being realized under current tax law and minimal possibility of utilization as of the 2021 tax year, deemed to have no current value and offset into goodwill as a purchase accounting adjustment. During the fourth quarter of the year ended December 31, 2019, the IRS issued clarifying guidance under IRC Section 382(h) that provided an alternative approach to calculating unrealized built-in gains (“UBIGs”) related to the FWVB acquisition that impact annual Section 382 limitations. This approach is referred to as the “Section 338” approach and allows for the “realization” of UBIGs based on a “deemed asset acquisition” method, rather than “actual realization”, which accelerates UBIGs utilization and increases the annual Section 382 limitations. The Company performed an analysis of its built-in gains associated with the FWVB acquisition and elected to change its approach from the Section 1374 approach to the Section 338 approach in determining its annual limitations under section 382 and 383. As a result of this analysis as well as consideration of a number of factors, including the Company's current profitability, its forecast of future profitability, and evaluation of existing tax regulations related to NOL and AMT credit carryforwards, the Company concluded that it was more likely than not that it will generate sufficient taxable income within the applicable carryforward periods to realize its net operating loss (“NOL”) and AMT credit carryforwards by December 31, 2021. Therefore, for the year ended December 31, 2019, the Company recognized an income tax benefit of $ 1.3 million related to the reversal of 100% of the VA for the AMT credit carryforward. No other VA was established against the remaining DTA in view of the Company’s cumulative history of earnings and anticipated future taxable income as evidenced by the Company’s earnings potential at December 31, 2020 and 2019. A reconciliation of the federal income tax expense at statutory income tax rates and the actual income tax expense on income before taxes for the periods indicated is as follows: 2020 2019 Year Ended December 31, Amount Percent of Pre-tax Income Amount Percent of Pre-tax Income (Dollars in Thousands) Provision at Statutory Rate $ ( 1,972 ) 21.0 % $ 3,372 21.0 % State Taxes (Net of Federal Benefit) 116 ( 1.2 ) 155 1.0 Tax-Free Income ( 276 ) 2.9 ( 324 ) ( 2.0 ) BOLI Income ( 123 ) 1.3 ( 118 ) ( 0.7 ) Stock Options - ISO 29 ( 0.3 ) 35 0.2 Goodwill Impairment 3,594 ( 38.3 ) — — Reversal of the AMT Tax Credit Carryforward VA — — ( 1,311 ) ( 8.2 ) Other ( 120 ) 1.3 ( 80 ) ( 0.5 ) Actual Tax Expense and Effective Rate $ 1,248 ( 13.3 ) % $ 1,729 10.8 % The Company’s federal, Pennsylvania and West Virginia income tax returns are no longer subject to examination by applicable tax authorities for years before 2017. As of December 31, 2020 and 2019, there were no unrecognized tax benefits. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. There were no interest or penalties accrued at December 31, 2020 and 2019. NOTE 11— EMPLOYEE BENEFITS Savings and Profit Sharing Plan The Company maintains a Cash or Deferred Profit-sharing Section 401(k) Plan with contributions matching those by eligible employees for the first 4 % of an employee’s contribution at the rate of $ 0.25 on the dollar. All employees who are over the age of 18 and completed six months of employment are eligible to participate in the plan. The Company made contributions of $ 234,000 and $ 199,000 for the years ended December 31, 2020 and 2019, respectively, to this plan. The 401(k) Plan includes a “safe harbor” provision and a discretionary retirement contribution. The Company made contributions of $ 620,000 and 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $ 706,000 for the “safe harbor” provision and discretionary retirement contribution for the years ended December 31, 2020 and 2019, respectively. 2015 Equity Incentive Plan Details of the restricted stock award and stock option grants under the 2015 Equity Incentive Plan are summarized for the years ended December 31, 2020 and 2019 as follows. 2020 2019 Number of Restricted Shares Granted 42,100 33,350 Weighted Average Grant Date Common Stock Price $ 20.17 $ 30.32 Restricted Shares Market Value Before Tax 849,000 1,011,000 Number of Stock Options Granted 15,000 5,000 Stock Options Market Value Before Tax $ 31,000 $ 18,000 Summary of Significant Assumptions for Newly Issued Stock Options Expected Life in Years 6.5 6.5 Expected Dividend Yield 5.16 % 4.07 % Risk-free Interest Rate 0.28 % 2.30 % Expected Volatility 25.8 % 23.3 % Weighted Average Grant Date Fair Value $ 2.08 $ 3.52 The Company generally 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 $ 498,000 and $ 323,000 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, total unrecognized compensation expense was $ 148,000 and $ 363,000 , respectively, related to stock options, and $ 1.8 million and $ 1.4 million related to restricted stock awards. The Company accrued tax benefit for non-qualified stock options of $ 11,000 and $ 11,000 for the years ended December 31, 2020 and 2019, respectively. Intrinsic value represents the amount by which the fair value of the underlying stock at December 31, 2020 and 2019, exceeds the exercise price of the stock options. The intrinsic value of stock options was $ 21,000 and $ 1.4 million at December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, respectively, there were 19,723 and 13,359 shares available under the Plan to be issued in connection with the exercise of stock options, and 22,144 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. 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents stock option data for the years indicated: 2020 2019 Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Outstanding at beginning of year 245,153 $ 24.36 6.5 248,006 $ 24.39 7.5 Granted 15,000 18.60 5,000 23.60 Exercised ( 20,106 ) 22.69 ( 1,800 ) 22.25 Forfeited ( 21,364 ) 26.55 ( 6,053 ) 25.57 Outstanding at end of year 218,683 23.91 5.8 245,153 24.36 6.5 Exercisable at end of year 180,241 $ 23.80 5.4 166,974 $ 23.71 6.3 Number of Shares Weighted Average Exercise Price Weighted Average Remaining Service Period in Years Number of Shares Weighted Average Exercise Price Weighted Average Remaining Service Period in Years Nonvested at end of year 38,442 $ 24.40 8.0 78,179 $ 25.76 7.0 The following table presents restricted stock award data at the dates indicated. Number of Shares Weighted Average Grant Date Fair Value Price Weighted Average Remaining Service Period in Years Nonvested at December 31, 2018 18,750 $ 25.45 5.0 Granted 33,350 30.32 9.9 Vested ( 3,670 ) 25.45 4.0 Forfeited ( 400 ) 25.45 Nonvested at December 31, 2019 48,030 $ 28.83 8.1 Granted 42,100 20.17 5.5 Vested ( 9,820 ) 28.45 6.6 Forfeited ( 4,120 ) 29.08 Nonvested at December 31, 2020 76,190 $ 24.08 6.3 NOTE 12— 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 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. 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The unused and available credit balances of financial instruments whose contracts represent credit risk are as follows: December 31, 2020 2019 (Dollars in Thousands) Standby Letters of Credit $ 120 $ 375 Performance Letters of Credit 2,947 2,521 Construction Mortgages 60,312 59,689 Personal Lines of Credit 6,930 6,456 Overdraft Protection Lines 6,287 6,415 Home Equity Lines of Credit 22,110 20,560 Commercial Lines of Credit 69,738 102,422 Total $ 168,444 $ 198,438 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. 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. The Company recorded no liability associated with standby letters of credit as of December 31, 2020 and 2019. NOTE 13— REGULATORY CAPITAL 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. 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. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 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. As of December 31, 2020 and 2019, the Bank was considered "well capitalized" under the regulatory framework for prompt corrective action. At December 31, 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. 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 at December 31, 2020 and 2019. 2020 2019 December 31, Amount Ratio Amount Ratio (Dollars in Thousands) Common Equity Tier 1 Capital (to Risk-Weighted Assets) Actual $ 108,950 11.79 % $ 101,703 11.43 % For Capital Adequacy Purposes 41,598 4.50 40,050 4.50 To Be Well Capitalized 60,086 6.50 57,851 6.50 Tier I Capital (to Risk-Weighted Assets) Actual 108,950 11.79 101,703 11.43 For Capital Adequacy Purposes 55,464 6.00 53,401 6.00 To Be Well Capitalized 73,952 8.00 71,201 8.00 Total Capital (to Risk-Weighted Assets) Actual 120,520 13.04 111,570 12.54 For Capital Adequacy Purposes 73,952 8.00 71,201 8.00 To Be Well Capitalized 92,440 10.00 89,001 10.00 Tier I Leverage Capital (to Adjusted Total Assets) Actual 108,950 7.81 101,703 7.85 For Capital Adequacy Purposes 55,765 4.00 51,838 4.00 To Be Well Capitalized 69,706 5.00 64,798 5.00 NOTE 14— OPERATING LEASES The Company evaluates all contracts at commencement to determine if a lease is present. In accordance with ASC Topic 842, leases are defined as either operating or finance leases. The Company's lease contracts are classified as operating leases and create operating ROU assets and corresponding lease liabilities on the balance sheet. The leases are ROU assets of land and building for branch and loan production locations. The Company adopted ASC Topic 842 using the prospective method approach to all identified lease contracts or agreements, which permitted the Company to not restate comparative periods. In addition, since there were no readily determinable rates implicit in the operating leases, the incremental borrowing rate based on the lease term was used upon lease inception or as of the January 1, 2019 transition date. ROU assets are reported in Accrued Interest Receivable and Other Assets and the related lease liabilities in Accrued Interest Payable and Other Liabilities on the Consolidated Statement of Financial Condition. The following tables present the ROU assets, lease expense, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods indicated and dates indicated. Year Ended December 31, 2020 2019 (Dollars in Thousands) Operating Lease Expense $ 547 $ 459 Variable Lease Expense 36 38 Total Lease Expense $ 583 $ 497 December 31, 2020 2019 (Dollars in Thousands Operating Leases: ROU Assets $ 1,206 $ 1,289 Weighted Average Lease Term in Years 6.95 7.06 Weighted Average Discount Rate 2.39 % 2.89 % 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2020 (Dollars in Thousands) Maturity Analysis: Due in One Year $ 356 Due After One Year to Two Years 287 Due After Two Years to Three Years 142 Due After Three Years to Four Years 110 Due After Four to Five Years 75 Due After Five Years 364 Total $ 1,334 Less: Present Value Discount 125 Lease Liabilities $ 1,209 NOTE 15— MORTGAGE SERVICING RIGHTS The following table presents MSR activity and net carrying values for the periods indicated. Servicing Rights Valuation Allowance Net Carrying Value (Dollars in Thousands) December 31, 2018 $ 921 $ — $ 921 Additions 108 — 108 Amortization ( 28 ) — ( 28 ) Temporary impairment — ( 71 ) ( 71 ) December 31, 2019 1,001 ( 71 ) 930 Additions 280 — 280 Amortization ( 252 ) — ( 252 ) Temporary impairment — ( 302 ) ( 302 ) December 31, 2020 $ 1,029 $ ( 373 ) $ 656 Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $ 105.8 million and $ 100.0 million at December 31, 2020 and 2019, respectively. NOTE 16— FAIR VALUE DISCLOSURE ASC Topic 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 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. 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 from Level 1 to Level 2 and no transfers into or out of Level 3 during the years ended December 31, 2020 and 2019, respectively. December 31, Fair Value Hierarchy 2020 2019 (Dollars in Thousands) Securities: Available-for-Sale Debt Securities U.S. Government Agencies Level 2 $ 41,411 $ 48,056 Obligations of States and Political Subdivisions Level 2 21,993 25,843 Mortgage-Backed Securities - Government-Sponsored Enterprises Level 2 79,493 120,776 Total Available-for-Sale Debt Securities 142,897 194,675 Equity Securities Mutual Funds Level 1 1,019 997 Other Level 1 1,484 1,713 Total Equity Securities 2,503 2,710 Total Securities $ 145,400 $ 197,385 The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statement of Financial Condition as of the dates indicated by level within the fair value hierarchy. The table also presents the significant unobservable inputs used in the fair value measurements. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include quoted market prices for identical assets classified as Level 1 inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level 2 inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level 3 inputs. Fair Significant Value Fair Value at December 31, Valuation Unobservable Weighted Financial Asset Hierarchy 2020 2019 Technique Inputs Range Average (Dollars in Thousands) Impaired Loans Individually Assessed Level 3 $ 2,944 $ 3,140 Appraisal of Collateral (1) Appraisal Adjustments (2) 0 % to 50 % — MSRs Level 3 656 930 Discounted Cash Flow Discount Rate 9 % to 11 % 10.0 % Prepayment Speed 12 % to 27 % 18.7 % OREO Level 3 34 58 Appraisal of Collateral (1) Liquidation Expenses (2) 10 % to 30 % — (1) Fair value is generally determined through independent appraisals of the underlying collateral, which may include various Level 3 inputs, which are not identifiable. (2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of appraisal adjustments and liquidation expense are presented as a percent of the appraisal. 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing the loans and is classified as Level 3 in the fair value hierarchy. At December 31, 2020 and 2019, the fair value of impaired loans consists of the loan balance of $ 3.6 million and $ 4.0 million less their specific valuation allowances of $ 649,000 and $ 884,000 , respectively. The fair value of 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. 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. During the year ended December 31, 2020, one commercial real estate OREO property with a fair value of $ 18,000 was sold at a $ 4,000 gain and one residential real estate property with a fair value of $ 40,000 was sold at a $ 20,000 loss. In addition, three residential real estate loans with a fair value of $ 131,000 and one commercial real estate loan with a fair value of $ 34,000 transferred into OREO, of which the three residential properties were subsequently sold at a net loss of $ 2,000 . During the year ended December 31, 2019, one commercial real estate OREO property with a fair value of $ 697,000 was sold at a $ 33,000 gain and one residential real estate property with a fair value of $ 46,000 was sold at a loss of $ 3,000 . In addition, four residential real estate loans with a fair value of $ 439,000 and one commercial real estate loan with a fair value of $ 18,000 transferred into OREO, of which two properties with a fair value of $ 387,000 were subsequently sold at a net loss of $ 36,000 and one property with a fair value of $ 12,000 was donated. 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 libility 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 that are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values. 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated fair values of the Company’s financial instruments at the dates indicated are as follows: 2020 2019 December 31, Valuation Method Used Carrying Value Fair Value Carrying Value Fair Value (Dollars in Thousands) Financial Assets: Cash and Due From Banks: Interest Bearing Level 1 $ 145,636 $ 145,636 $ 68,798 $ 68,798 Non-Interest Bearing Level 1 15,275 15,275 11,419 11,419 Securities, Available for Sale See Above 145,400 145,400 197,385 197,385 Loans, Net Level 3 1,031,982 1,073,633 942,629 961,110 Restricted Stock Level 2 3,984 3,984 3,656 3,656 Bank-Owned Life Insurance Level 2 24,779 24,779 24,222 24,222 Mortgage Servicing Rights Level 3 656 656 930 930 Accrued Interest Receivable Level 2 3,872 3,872 3,297 3,297 Financial Liabilities: Deposits Level 2 1,224,569 1,231,606 1,118,359 1,128,078 Short-term Borrowings Level 2 41,055 41,055 30,571 30,571 Other Borrowed Funds Level 2 8,000 8,067 14,000 15,380 Accrued Interest Payable Level 2 767 767 987 987 NOTE 17— OTHER NONINTEREST EXPENSE The details for other noninterest expense for the Company’s Consolidated Statement of Operations are as follows: Year Ended December 31, 2020 2019 (Dollars in Thousands) Non-employee compensation $ 591 $ 538 Printing and supplies 493 402 Postage 244 264 Telephone 521 622 Charitable contributions 128 194 Dues and subscriptions 188 185 Loan expenses 562 458 Meals and entertainment 64 166 Travel 109 214 Training 37 58 Bank Assessment 175 172 Insurance 232 224 Miscellaneous 549 666 TOTAL OTHER NONINTEREST EXPENSE $ 3,893 $ 4,163 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18— CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY Financial information pertaining only to CB Financial Services, Inc., is as follows: Statement of Financial Condition December 31, 2020 2019 (Dollars in Thousands) ASSETS Cash and Due From Banks $ 3,466 $ 6,447 Equity Securities, at Fair Value 1,484 1,713 Investment in Community Bank 128,985 142,242 Other Assets 611 722 TOTAL ASSETS $ 134,546 $ 151,124 LIABILITIES AND STOCKHOLDERS' EQUITY Other Liabilities $ 16 $ 27 Stockholders' Equity 134,530 151,097 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 134,546 $ 151,124 Statement of Operations Year Ended December 31, 2020 2019 (Dollars in Thousands) Interest and Dividend Income $ 61 $ 63 Dividend from Bank Subsidiary 3,884 10,215 Noninterest Income (Loss) ( 279 ) 160 Noninterest Expense 11 8 Income Before Undistributed Net (Loss) Income of Subsidiary and Income Tax (Benefit) Expense 3,655 10,430 Undistributed Net (Loss) Income of Subsidiary ( 14,342 ) 3,936 (Loss) Income Before Income Tax (Benefit) Expense ( 10,687 ) 14,366 Income Tax (Benefit) Expense ( 47 ) 39 NET (LOSS) INCOME $ ( 10,640 ) $ 14,327 106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statement of Cash Flows Year Ended December 31, 2020 2019 (Dollars in Thousands) OPERATING ACTIVITIES Net (Loss) Income $ ( 10,640 ) $ 14,327 Adjustments to Reconcile Net (Loss) Income to Net Cash Provided By Operating Activities: Undistributed Net (Loss) Income of Subsidiary 14,342 ( 3,936 ) Noncash Expense for Stock-Based Compensation 498 323 Loss on Equity Securities 279 — Other, net ( 229 ) 34 NET CASH PROVIDED BY OPERATING ACTIVITIES 4,250 10,748 INVESTING ACTIVITIES Purchases of Equity Securities ( 159 ) ( 63 ) Proceeds from Sales of Equity Securities 109 — NET CASH USED IN INVESTING ACTIVITIES ( 50 ) ( 63 ) FINANCING ACTIVITIES Cash Dividends Paid ( 5,183 ) ( 5,215 ) Treasury Stock, Purchases at Cost ( 1,920 ) ( 90 ) Exercise of Stock Options ( 78 ) 41 NET CASH USED IN FINANCING ACTIVITIES ( 7,181 ) ( 5,264 ) (DECREASE) INCREASE IN CASH AND EQUIVALENTS ( 2,981 ) 5,421 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 6,447 1,026 CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 3,466 $ 6,447 The Parent Company's Statement of Comprehensive (Loss) Income and Statement of Changes in Stockholders' Equity are identical to the Consolidated Statement of (Loss) Comprehensive Income and the Consolidated Statement of Changes in Stockholders' Equity and are not presented. NOTE 19— SEGMENT REPORTING AND RELATED INFORMATION At December 31, 2020, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services. CB Financial Services, Inc. is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank. 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. 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents selected financial data for the Company’s subsidiaries and consolidated results for 2020 and 2019. Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated (Dollars in Thousands) December 31, 2020 Assets $ 1,416,132 $ 5,379 $ 134,546 $ ( 139,337 ) $ 1,416,720 Liabilities 1,287,148 2,325 16 ( 7,299 ) 1,282,190 Stockholders' Equity 128,984 3,054 134,530 ( 132,038 ) 134,530 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 Year Ended December 31, 2020 Interest and Dividend Income $ 47,402 $ 4 $ 3,945 $ ( 3,884 ) $ 47,467 Interest Expense 5,563 — — — 5,563 Net Interest Income 41,839 4 3,945 ( 3,884 ) 41,904 Provision for Loan Losses 4,000 — — — 4,000 Net Interest Income After Provision for Loan Losses 37,839 4 3,945 ( 3,884 ) 37,904 Noninterest Income 4,924 4,826 ( 279 ) — 9,471 Noninterest Expense 52,998 3,758 11 — 56,767 Undistributed Net Income (Loss) of Subsidiary 780 — ( 14,342 ) 13,562 — (Loss) Income Before Income Tax Expense (Benefit) ( 9,455 ) 1,072 ( 10,687 ) 9,678 ( 9,392 ) Income Tax Expense (Benefit) 1,003 292 ( 47 ) — 1,248 Net (Loss) Income $ ( 10,458 ) $ 780 $ ( 10,640 ) $ 9,678 $ ( 10,640 ) Year Ended December 31, 2019 Interest and Dividend Income $ 50,966 $ 3 $ 10,278 $ ( 10,216 ) $ 51,031 Interest Expense 7,857 — — — 7,857 Net Interest Income 43,109 3 10,278 ( 10,216 ) 43,174 Provision for Loan Losses 725 — — — 725 Net Interest Income After Provision for Loan Losses 42,384 3 10,278 ( 10,216 ) 42,449 Noninterest Income 3,890 4,517 160 — 8,567 Noninterest Expense 31,314 3,638 8 — 34,960 Undistributed Net Income of Subsidiary 608 — 3,936 ( 4,544 ) — Income Before Income Tax Expense 15,568 882 14,366 ( 14,760 ) 16,056 Income Tax Expense 1,416 274 39 — 1,729 Net Income $ 14,152 $ 608 $ 14,327 $ ( 14,760 ) $ 14,327 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20— QUARTERLY FINANCIAL INFORMATION (Unaudited) The following tables summarize selected information regarding the Company’s results of operations for the periods indicated. Quarterly earnings per share data may vary from annual earnings per share due to rounding. Three Months Ended March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 (Dollars in Thousands, Except Per Share Data) Interest Income $ 12,329 $ 11,727 $ 11,656 $ 11,755 Interest Expense 1,796 1,406 1,240 1,121 Net Interest Income 10,533 10,321 10,416 10,634 Provision for Loan Losses 2,500 300 1,200 — Net Interest Income after Provision for Loan Losses 8,033 10,021 9,216 10,634 Noninterest Income 1,872 2,648 2,173 2,778 Noninterest Expense 9,003 9,071 28,968 9,725 Income (Loss) Before Income Tax Expense (Benefit) 902 3,598 ( 17,579 ) 3,687 Income Tax Expense (Benefit) 129 695 ( 184 ) 608 Net Income (Loss) $ 773 $ 2,903 $ ( 17,395 ) $ 3,079 Earnings (Loss) Per Share - Basic $ 0.14 $ 0.54 $ ( 3.22 ) $ 0.57 Earnings (Loss) Per Share - Diluted 0.14 0.54 ( 3.22 ) 0.57 Dividends Per Share 0.24 0.24 0.24 0.24 Three Months Ended March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019 (Dollars in Thousands, Except Per Share Data) Interest Income $ 12,296 $ 12,669 $ 13,098 $ 12,968 Interest Expense 1,862 1,964 2,002 2,029 Net Interest Income 10,434 10,705 11,096 10,939 Provision for Loan Losses 25 350 175 175 Net Interest Income after Provision for Loan Losses 10,409 10,355 10,921 10,764 Noninterest Income 2,114 2,165 1,966 2,322 Noninterest Expense 8,880 8,797 8,257 9,026 Income Before Income Tax Expense (Benefit) 3,643 3,723 4,630 4,060 Income Tax Expense (Benefit) 718 744 884 ( 617 ) Net Income $ 2,925 $ 2,979 $ 3,746 $ 4,677 Earnings Per Share - Basic 0.54 0.55 0.69 0.86 Earnings Per Share - Diluted 0.54 0.55 0.69 0.85 Dividends Per Share 0.24 0.24 0.24 0.24 109