CB Financial Services, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This discussion should be read in conjunction with the unaudited consolidated financial statements, notes and tables included in this report. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Forward-Looking Statements This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the Company’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include, but are not limited to, the following: • General and local economic conditions; • The scope and duration of economic contraction as a result of the COVID-19 pandemic and its effects on the Company’s business and that of the Company’s customers; • Changes in market interest rates, deposit flows, demand for loans, real estate values and competition; • Competitive products and pricing; • The ability of our customers to make scheduled loan payments; • Loan delinquency rates and trends; • Our ability to manage the risks involved in our business; • Our ability to integrate the operations of businesses we acquire; • Our ability to control costs and expenses; • Inflation, market and monetary fluctuations; • Changes in federal and state legislation and regulation applicable to our business; • Actions by our competitors; and • Other factors disclosed in the Company’s periodic reports as filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Given the numerous unknowns and risks that are heavily weighted to the downside due to COVID-19, our forward-looking statements are subject to the risk that conditions will be substantially different than we currently expect. If efforts to contain COVID-19 are unsuccessful and government restriction last longer than expected, the recession would be much longer and much more severe and damaging. Ineffective fiscal stimulus, or an extended delay in implementing it, are also major risks. The deeper the recession and the longer it lasts, the more it will damage consumer fundamentals and sentiment. This could both prolong the recession and make any recovery weaker. Similarly, the recession could damage business fundamentals. As a result, the outbreak and its consequences, including responsive measures to manage it, have had and are likely to continue to have an adverse effect, possibly materially, on our business and financial performance by adversely affecting, possibly materially, the demand and profitability of our products and services, the valuation of assets and our ability to meet the needs of our customers. The ability to predict the impact of the COVID-19 pandemic on the Company’s future operating results with any precision is difficult and depends on many factors beyond our control. The Company's market area was impacted by state-wide shelter-in-place orders and closing all but essential businesses. Certain government restrictions remain in effect. The far-reaching consequences of these actions and the crisis is unknown and will largely depend on the extent and length of the recession combined with how quickly the economy can re-open. For example: • While specific actions have been taken to protect employees through work-at-home arrangements and social distancing measures for those working in our offices, outbreak among employees could result in closure of branches or back office operations for quarantine purposes and result in the unavailability of key employees and disruption of services provided to customers. • The lack of economic activity may curtail lending opportunities, especially from a commercial perspective, and impact our customers involved in vulnerable industries such as hospitality, retail, office space, senior housing, oil and gas, and restaurants. • Forbearance activity and any additional forbearance that may be needed could impact cash flows and liquidity. 30 Table of Contents • Delinquencies, nonperforming loans, charge-offs and the related provision for loan losses, and foreclosures may significantly increase after forbearance period ends, if economic stimulus does not have the intended outcome, and/or if the economy does not fully re-open allowing people to return to work. • A sustained economic downturn may result in a decrease in the Company’s value and result in potential material impairment to its intangible assets, and/or long-lived assets or additional impairment to goodwill. • The Federal Reserve Board’s decision in March 2020 to drop the benchmark interest rate from a range of 1.5% to 1.75% to a range of 0% to 0.25% as part of a wide-ranging emergency action to protect the economy from the COVID-19 outbreak may result in margin compression and an influx of loan refinances that could impact the Company’s net interest income. • The lack of economic activity may negatively impact our noninterest income through less fee activity, such as from customer debit card swipes for purchases. • Insurance commissions may decline because workers compensation policies are mainly determined based on payroll figures, which could decrease due to job loss. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation. General CB Financial Services, Inc. is a bank holding company established in 2006 and headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned bank subsidiary, Community Bank. The Bank is 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 also has a loan production office in Allegheny County, a corporate center in Washington County and an operations center in Greene County in Pennsylvania. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s wholly owned subsidiary that is a full-service, independent insurance agency located in Washington County. Overview The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of March 31, 2021, compared to the financial condition as of December 31, 2020 and the consolidated results of operations for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, insurance commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contracted services, legal and professional fees, advertising, deposit and general insurance and other expenses. Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in southwestern Pennsylvania and Ohio Valley market areas. Branch Optimization and Operational Efficiency Update 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 31 Table of Contents 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. The Company anticipates non-recurring pre-tax expenses during 2021 in line with the $6.1 million announced in February. This estimated cost excludes the impact of any premium from sale of branches, and assumes no salvage value, lease termination, severance, and other costs associated with the consolidations or sales; however, the Company anticipates some recovery of these costs over time. The Company expects an annual reduction in pre-tax operating expenses in 2021 of approximately $1.5 million, along with $3.0 million of ongoing pre-tax cost savings as a result of the implementation of the branch optimization initiatives. The Bank also completed a comprehensive review of its branch network and operating environment to identify solutions to improve operating performance. This review prioritized profitability, efficiency, infrastructure and client experience improvements, automation in operations, and digital marketing and technology investments. Explanation of Use of Non-GAAP Financial Measures In addition to financial measures presented in accordance with generally accepted accounting principles (“GAAP”), we present certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information in understanding our underlying results of operations or financial position and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, they should not be considered an alternative to GAAP financial measures or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein. The interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent (“FTE”) basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21.0%. We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Interest Income per Consolidated Statements of Income (GAAP) $ 10,988 $ 12,329 Adjustment to FTE Basis 40 53 Interest Income (FTE) (Non-GAAP) 11,028 12,382 Interest Expense per Consolidated Statements of Income 1,011 1,796 Net Interest Income (FTE) (Non-GAAP) $ 10,017 $ 10,586 Net Interest Rate Spread (GAAP) 2.91 % 3.34 % Adjustment to FTE Basis 0.01 0.01 Net Interest Rate Spread (FTE) (Non-GAAP) 2.92 3.35 Net Interest Margin (GAAP) 3.04 % 3.55 % Adjustment to FTE Basis 0.01 0.02 Net Interest Margin (FTE) (Non-GAAP) 3.05 3.57 32 Table of Contents Allowance for loan losses to total loans, excluding PPP loans, is a non-GAAP measure that serves as a useful measurement to evaluate the allowance for loan losses without the impact of SBA guaranteed loans. March 31, 2021 December 31, 2020 (Dollars in thousands) Allowance for Loan Losses (Numerator) $ 12,725 $ 12,771 Total Loans 1,041,697 $ 1,044,753 PPP Loans (60,380) (55,096) Total Loans, Excluding PPP Loans (Non-GAAP) (Denominator) $ 981,317 $ 989,657 Allowance for Loan Losses to Total Loans (GAAP) 1.22 % 1.22 % Allowance for Loan Losses to Total Loans, Excluding PPP Loans (Non-GAAP) 1.30 % 1.29 % Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by period-end common shares outstanding. We believe this non-GAAP measure serves as a useful tool to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value. March 31, 2021 December 31, 2020 (Dollars in thousands, except share and per share data) Stockholders' Equity (GAAP) $ 133,776 $ 134,530 Goodwill and Other Intangible Assets, Net (17,599) (18,131) Tangible Common Equity or Tangible Book Value (Non-GAAP) (Numerator) $ 116,177 $ 116,399 Common Shares Outstanding (Denominator) 5,434,374 5,434,374 Book Value per Common Share (GAAP) $ 24.62 $ 24.76 Tangible Book Value per Common Share (Non-GAAP) $ 21.38 $ 21.42 Consolidated Statements of Financial Condition Analysis Assets. Total assets increased $60.1 million, or 4.2%, to $1.48 billion at March 31, 2021, compared to $1.42 billion at December 31, 2020. Cash and Securities • Cash and due from banks increased $69.1 million, or 42.9%, to $230.0 million at March 31, 2021, compared to $160.9 million at December 31, 2020. The change is primarily due to an increase in Deposits as further described below in the Liabilities section. • Securities decreased $3.2 million, or 2.2%, to $142.2 million at March 31, 2021, compared to $145.4 million at December 31, 2020. Current period activity included $11.0 million of paydowns on mortgage-backed securities, $22.3 million of mortgage-backed securities and U.S. government agency securities purchases, and $11.9 million of mortgage-backed securities sales, which resulted in the recognition of a $225,000 gain on the sale of securities. The sales recognized gains on higher-interest securities with faster prepayment speeds. In addition, there was a $3.1 million decrease in the market value of the debt securities portfolio and a $222,000 gain in market value in the equity securities portfolio, which is primarily comprised of bank stocks. Payroll Protection Program (“PPP”) Update • The Small Business Administration reopened the PPP the week of January 11, 2021 and began accepting applications for both First Draw and Second Draw PPP Loans. As of March 31, 2021, as part of this round of PPP, the Bank funded 156 PPP loans totaling $25.0 million with net deferred origination fees of $984,000. Combined with $19.7 million of loan forgiveness processed in the first quarter of 2021, total PPP loans increased $5.3 million to $60.4 million at March 31, 2021 compared to $55.1 million at December 31, 2020. • $1.1 million of net PPP loan origination fees were unearned at December 31, 2020. Due to activity in the first quarter of 2021, $1.5 million of net PPP loan origination fees were unearned at March 31, 2021. $535,000 of net PPP loan 33 Table of Contents origination fees were earned in the first quarter of 2021 compared to $604,000 for the three months ended December 31, 2020. Loans, Allowance for Loan Losses and Credit Quality • Total loans decreased $3.1 million to $1.04 billion at March 31, 2021. Excluding the impact of PPP loans, organic loan growth declined $8.3 million. Residential real estate, commercial real estate and consumer loans declined $4.5 million, $3.4 million and $2.2 million, respectively. The Bank is experiencing headwinds in commercial real estate loan growth due to the pandemic's impact on overall commercial loan demand, particularly in the retail and office space sectors. These declines were offset by net loan funding of $5.1 million in construction loans. Average loans for the three months ended March 31, 2021 decreased $1.1 million compared to the three months ended December 31, 2020. • The allowance for loan losses was $12.7 million at March 31, 2021 compared to $12.8 million at December 31, 2020. There was no provision for loan losses in the first quarter. An $8.3 million decrease in net reservable loans in the current period, which excludes PPP loan activity, and improving economic and industry condition contributed to the lack of provision in the current period. As a result, the allowance for loan losses to total loans of 1.22% at March 31, 2021 was comparable to the percentage at December 31, 2020. No allowance was allocated to the PPP loan portfolio. The allowance for loan losses to total loans, excluding PPP loans, was 1.30% at March 31, 2021 compared to 1.29% at December 31, 2020. • Nonperforming loans decreased to $14.3 million at March 31, 2021 compared to $14.5 million at December 31, 2020 and, coupled with a decrease in loans noted previously, resulted in the nonperforming loans to total loans ratio decrease to 1.37% at March 31, 2021 compared to 1.39% at December 31, 2020. • The Bank provided borrower support and relief through short-term loan forbearance options 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. In certain circumstances, a second three-month deferral period was granted. The following table provides details of loans in forbearance at the dates indicated. March 31, 2021 December 31, 2020 Number of Loans Amount % of Portfolio Number of Loans Amount % of Portfolio (Dollars in thousands) Real Estate: Residential 7 1,343 0.4 % 4 749 0.2 % Commercial 7 13,814 3.7 % 8 19,818 5.3 % Construction 1 1,958 2.5 % 1 1,958 2.7 % Commercial and Industrial 5 1,219 0.9 % 5 1,219 1.0 % Consumer 5 106 0.1 % 13 356 0.3 % Total Loans in Forbearance 25 $ 18,440 1.8 % 31 $ 24,100 2.3 % Loans in deferral at March 31, 2021 include two commercial real estate loans totaling $4.6 million and one construction loan totaling $2.0 million that are all secured by hotels, one commercial real estate loan totaling $5.5 million secured by office space and a business relationship that rents equipment, supplies and other materials for events comprised of three commercial real estate loans totaling $3.3 million, and five commercial and industrial loans totaling $1.2 million. All loans will have exited their deferral periods by July 2021. Other • Accrued Interest Receivable and Other Assets decreased $2.3 million, or 15.1%, to $12.9 million at March 31, 2021, compared to $15.2 million at December 31, 2020. This was primarily due to the receipt of a $1.3 million federal income tax refund related to the 2018 alternative minimum tax carryforward from the First West Virginia Bancorp merger. The decrease was also related to the receipt of previously locked-in profit-sharing insurance commissions and annual agency bill receivables and decline in prepaid expenses. 34 Table of Contents Liabilities. Total liabilities increased $60.9 million, or 4.7%, to $1.34 billion at March 31, 2021 compared to $1.28 billion at December 31, 2020. Deposits • Deposits increased $59.9 million to $1.28 billion as of March 31, 2021 compared to $1.22 billion at December 31, 2020. Noninterest bearing demand deposits, NOW accounts and savings accounts increased $36.6 million, $21.1 million and $11.6 million, respectively, partially offset by a decrease of $9.3 million in time deposits. IRS and stimulus-related payments totaled $29.9 million in the current quarter and the impact of the PPP loans that were originated in the current quarter and the proceeds of which were initially deposited at the Bank was approximately $23.4 million. Annualized deposit growth rate was 19.6% including PPP loan deposits and 2.2% without IRS and PPP loan deposits, representing organic deposit growth. Average total deposits increased $17.0 million, primarily in noninterest-bearing deposits, for the three months ended March 31, 2021 compared to the three months ended December 31, 2020. Borrowed Funds • Short-term borrowings increased $4.3 million, or 10.5%, to $45.4 million at March 31, 2021, compared to $41.1 million at December 31, 2020. At March 31, 2021 and December 31, 2020, short-term borrowings were comprised entirely of securities sold under agreements to repurchase. The increase is related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase. • Other borrowed funds decreased $2.0 million to $6.0 million at March 31, 2021 due to a Federal Home Loan Bank borrowing that matured in the current period. Stockholders’ Equity. Stockholders’ equity decreased $754,000, or 0.6%, to $133.8 million at March 31, 2021, compared to $134.5 million at December 31, 2020. • Net income was $2.8 million for the three months ended March 31, 2021. • Accumulated other comprehensive income decreased $2.4 million primarily due to the effect of market interest rate conditions in the current period on the Bank’s available-for-sale debt securities. • The Company declared and paid $1.3 million in dividends to common stockholders in the current period. • Book value per share was $24.62 at March 31, 2021 compared to $24.76 at December 31, 2020, a decrease of $0.14. Tangible book value per share decreased $0.04, or 0.2%, to $21.38 compared to $21.42 at December 31, 2020. Refer to Explanation of Use of Non-GAAP Financial Measures in this Report. Consolidated Results of Operations for the Three Months Ended March 31, 2021 and 2020 Overview. Net income was $2.8 million for the three months ended March 31, 2021, an increase of $2.1 million compared to net income of $773,000 for the three months ended March 31, 2020. Net Interest and Dividend Income. Net interest and dividend income decreased $556,000, or 5.3%, to $10.0 million for the three months ended March 31, 2021 compared to $10.5 million for the three months ended March 31, 2020. Net interest margin (FTE) (Non-GAAP) decreased 52 basis points (“bps”) to 3.05% for the three months ended March 31, 2021 compared to 3.57% the three months ended March 31, 2020. Net interest margin (GAAP) decreased to 3.04% for the three months ended March 31, 2021 compared to 3.55% for the three months ended March 31, 2020. Interest and Dividend Income • Interest and dividend income decreased $1.3 million, or 10.9%, to $11.0 million for the three months ended March 31, 2021 compared to $12.3 million the three months ended March 31, 2020. ◦ Interest income on loans decreased $618,000, or 5.7%, to $10.1 million for the three months ended March 31, 2021 compared to $10.8 million for the three months ended March 31, 2020. While average loans increased $81.2 million compared to the three months ended March 31, 2020, the average yield decreased 57 bps to 4.00%. The current quarter loan yield compared to the quarter ended March 31, 2020 was impacted by the declines in interest rate indices in the first quarter of 2020 at the onset of the COVID-19 pandemic. PPP loans decreased loan yield approximately 5 bps but that was offset by the recognition of $535,000 of net PPP loan origination fees in the current period. ◦ The impact of the accretion of the credit mark on acquired loan portfolios was $138,000 for the three months ended March 31, 2021 compared to $76,000 for the three months ended March 31, 2020, or 6 bps in the current period compared to 3 bps in the prior period. 35 Table of Contents ◦ Interest income on taxable investment securities decreased $555,000, or 46.2%, to $646,000 for the three months ended March 31, 2021 compared to $1.2 million for the three months ended March 31, 2020 driven by a $35.8 million decrease in average investment securities balances and 93 bps decrease in average yield. The Federal Reserve’s pandemic-driven decision to drop the benchmark interest rate in 2020 resulted in significant calls of U.S. government agency securities and paydowns on mortgage-backed securities in the declining interest rate environment, which were replaced with lower-yielding securities or maintained in cash. ◦ Other interest and dividend income, which primarily consists of interest-bearing cash, decreased $140,000, or 58.8% to $98,000 for the three months ended March 31, 2021 compared to $238,000 for the three months ended March 31, 2020. Average other interest-earning assets increased $97.3 million compared to the three months ended March 31, 2020 primarily from buildup of cash as a result of securities activity, and PPP loan funds and government stimulus payments deposited with the Bank, although average yield declined 123 bps due to interest rate cuts on interest-earning cash deposits held at other financial institutions. Interest Expense • Interest expense decreased $785,000, or 43.7%, to $1.0 million for the three months ended March 31, 2021 compared to $1.8 million for the three months ended March 31, 2020. ◦ Interest expense on deposits decreased $734,000, or 43.7%, to $947,000 for the three months ended March 31, 2021 compared to $1.7 million for the three months ended March 31, 2020. While average interest-earning deposits increased $42.2 million compared to the three months ended March 31, 2020, interest rate declines for all products driven by pandemic-related interest rate cuts resulted in a 37 bp, or 46.0%, decrease in average cost compared to the three months ended March 31, 2020. In addition, average time deposits and the related average cost decreased $28.3 million and 41 bps, respectively. ◦ Interest expense on other borrowed funds decreased $29,000, or 41.4%, to $41,000 for the three months ended March 31, 2021 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $5.6 million decrease in average balance. 36 Table of Contents Average Balances and Yields . The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21.0% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans with a zero yield. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Three Months Ended March 31, 2021 2020 Average Balance Interest and Dividends Yield/ Cost (4) Average Balance Interest and Dividends Yield/ Cost (4) (Dollars in thousands) (Unaudited) Assets: Interest-Earning Assets: Loans, Net $ 1,031,853 $ 10,168 4.00 % $ 950,661 $ 10,796 4.57 % Debt Securities Taxable 122,883 646 2.10 158,655 1,201 3.03 Tax Exempt 12,943 96 2.97 16,837 127 3.02 Marketable Equity Securities 2,632 20 3.04 2,568 20 3.12 Other Interest-Earning Assets 161,871 98 0.25 64,608 238 1.48 Total Interest-Earning Assets 1,332,182 11,028 3.36 1,193,329 12,382 4.17 Noninterest-Earning Assets 92,550 114,056 Total Assets $ 1,424,732 $ 1,307,385 Liabilities and Stockholders' Equity: Interest-Bearing Liabilities: Interest-Bearing Demand Deposits $ 259,065 77 0.12 % $ 226,482 267 0.47 % Savings 239,850 32 0.05 218,328 90 0.17 Money Market 197,395 98 0.20 180,982 249 0.55 Time Deposits 187,114 740 1.60 215,449 1,075 2.01 Total Interest-Bearing Deposits 883,424 947 0.43 841,241 1,681 0.80 Short-Term Borrowings Securities Sold Under Agreements to Repurchase 41,094 23 0.23 29,541 45 0.61 Other Borrowings 7,200 41 2.31 12,780 70 2.20 Total Interest-Bearing Liabilities 931,718 1,011 0.44 883,562 1,796 0.82 Noninterest-Bearing Demand Deposits 349,108 261,504 Other Liabilities 8,869 9,797 Total Liabilities 1,289,695 1,154,863 Stockholders' Equity 135,037 152,522 Total Liabilities and Stockholders' Equity $ 1,424,732 $ 1,307,385 Net Interest Income (FTE) (Non-GAAP) (5) $ 10,017 $ 10,586 Net Interest Rate Spread (FTE) (Non-GAAP) (1)(5) 2.92 % 3.35 % Net Interest-Earning Assets (2) $ 400,464 $ 309,767 Net Interest Margin (FTE) (Non-GAAP) (3)(5)( 3.05 3.57 Return on Average Assets 0.81 0.24 Return on Average Equity (4) 8.54 2.04 Average Equity to Average Assets 9.48 11.67 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 142.98 135.06 (1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (3) Net interest margin represents annualized net interest income divided by average total interest-earning assets. (4) Annualized based on three months ended results. (5) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report. 37 Table of Contents Rate/Volume Analysis . The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21.0%. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns. Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) (Unaudited) Interest and Dividend Income: Loans, net $ 776 $ (1,404) $ (628) Debt Securities: Taxable (234) (321) (555) Exempt From Federal Tax (29) (2) (31) Marketable Equity Securities 1 (1) — Other Interest-Earning Assets 161 (301) (140) Total Interest-Earning Assets 675 (2,029) (1,354) Interest Expense: Deposits 67 (801) (734) Short-Term Borrowings: Securities Sold Under Agreements to Repurchase $ 13 $ (35) $ (22) Other Borrowings $ (32) $ 3 $ (29) Total Interest-Bearing Liabilities 48 (833) (785) Change in Net Interest Income $ 627 $ (1,196) $ (569) Provision for Loan Losses. There was no provision for loan losses for the three months ended March 31, 2021 compared to $2.5 million for the three months ended March 31, 2020. In the prior period, the COVID-19 pandemic, which led to state-wide shelter in place orders and mandatory closures of all but essential business resulted in a dramatic increase in unemployment and recessionary economic conditions. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis related to economic trends and industry conditions, specifically because of vulnerable industries such as hospitality, oil and gas, retail and restaurants, were adjusted for those circumstances and resulted in the $2.5 million provision for loan losses. Those qualitative factors have been decreased as the economic impact from the pandemic has eased. An $8.3 million decrease in net reservable loans in the current quarter, which excludes PPP loan activity, and improving economic and industry condition contributed to the lack of provision in the current period. Net charge-offs for the three months ended March 31, 2021 were $46,000, or 0.02% of average loans on an annualized basis. Net charge-offs for the three months ended March 31, 2020 were $45,000, or 0.02% of average loans on an annualized basis. Net charge-offs were primarily attributable to indirect automobile loans in both periods. Noninterest Income . Noninterest income increased $1.3 million, or 69.6%, to $3.2 million for the three months ended March 31, 2021, compared to $1.9 million for the three months ended March 31, 2020. • Service fees decreased $59,000 to $546,000 for the three months ended March 31, 2021, compared to $605,000 for the three months ended March 31, 2020 due to decrease in overdraft fees. • Insurance commissions increased $312,000 to $1.6 million for the three months ended March 31, 2021 compared to $1.3 million for the three months ended March 31, 2020 primarily due to an increase in contingency fees. Contingency fees are profit sharing commissions that are contingent upon several factors including, but not limited to, eligible written premiums, earned premiums, incurred losses, policy cancellations and stop loss charges. 38 Table of Contents • Net gain on sale of loans was $86,000 for the three months ended March 31, 2021 compared to $127,000 for the three months ended March 31, 2020. • Net gain on securities was $447,000 for the three months ended March 31, 2021 compared to a net loss of $438,000 for the three months ended March 31, 2020. In the current quarter, the Company recognized a $225,000 net gain on sale of debt securities from sales of higher-interest securities with faster prepayment speeds combined with a $222,000 increase in fair value in the equity securities portfolio, primarily comprised of bank stocks, which experienced a recovery in value from pandemic-related losses. The fair value of the Company’s equity securities declined $438,000 in the first quarter of 2020 from the impact of COVID-19 on the stock market. • Other income (loss) included a $172,000 recapture of temporary impairment on mortgage servicing rights in the current quarter due to an increase in fair value in the serviced mortgage portfolio primarily attributable to prepayment speeds. Noninterest Expense. Noninterest expense increased $392,000, or 4.4%, to $9.4 million for the three months ended March 31, 2021 compared to $9.0 million for the three months ended March 31, 2020. • Salaries and employee benefits increased $163,000 to $4.9 million for the three months ended March 31, 2021 compared to $4.7 million for the three months ended March 31, 2020. In the prior period, the Company recognized a $407,000 one-time benefit from health insurance claims exceeding our stop-loss limit for the 2019 plan year and change from a self-funded to a fully-insured plan. • Contracted services increased $309,000 to $687,000 for the three months ended March 31, 2021 compared to $378,000 for the three months ended March 31, 2020 The current period includes the engagement of a third-party workflow optimization expert to assist in implementing robotic process automations and more effective sales management designed to improve operational efficiencies in the near and long-term and engagement of a third party specialist to assist in core platform improvements and efficiencies. • Data processing increased $93,000 to $518,000 for the three months ended March 31, 2021 compared to $425,000 for the three months ended March 31, 2020 primarily due to core and other technology upgrades. • Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $92,000 to $250,000 for the three months ended March 31, 2021 compared to $158,000 for the three months ended March 31, 2020. The increase in assessment was due to the net loss recognized for the three months ended September 30, 2020 primarily due to goodwill impairment negatively impacting the assessment rate in the current period. • Legal fees and professional fees decreased $46,000 to $189,000 for the three months ended March 31, 2021 compared to $235,000 for the three months ended March 31, 2020 due to legal fees associated with the transition of the CEO in the prior period. • Advertising decreased $43,000 to $140,000 for the three months ended March 31, 2021 compared to $183,000 for the three months ended March 31, 2020 due to reduced marketing initiatives during the pandemic. • Other noninterest expense decreased $131,000 to $982,000 for the three months ended March 31, 2021 compared to $1.1 million for the three months ended March 31, 2020 primarily due to decreases in loan expenses and travel-related costs from employee work-at home arrangements during the pandemic. Income Tax Expense. Income tax expense increased $782,000 to $911,000 for the three months ended March 31, 2021 compared to $129,000 for the three months ended March 31, 2020. This change was primarily due to an increase in pretax income in the current period and an income tax expense adjustment that resulted from amended tax returns as a result of the CARES Act. Off-Balance Sheet Arrangements. Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 9 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of March 31, 2021 and December 31, 2020. Liquidity and Capital Management Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities, calls and sales of securities. While maturities and scheduled amortization of loans and securities are typically predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. 39 Table of Contents The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at March 31, 2021 to satisfy its short- and long-term liquidity needs. The Company’s most liquid assets are cash and due from banks, which totaled $230.0 million at March 31, 2021. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. Unpledged securities, which provide an additional source of liquidity, totaled $13.1 million at March 31, 2021. In addition, at March 31, 2021, the Company had the ability to borrow up to $433.0 million from the FHLB of Pittsburgh, of which $332.7 million is available. The Company also has the ability to borrow up to $84.4 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both March 31, 2021 and December 31, 2020. At March 31, 2021, $79.8 million, or 44.2% of total time deposits mature within one year. If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than it currently pays on these time deposits. The Company believes, however, based on past experience that a significant portion of its time deposits will remain with it, either as time deposits or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered. We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLB, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the FHLB in the future. CB Financial is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders and for other corporate purposes. Its primary source of liquidity is dividend payments it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations. At March 31, 2021, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $5.2 million. While the Company is not currently planning to reduce or suspend quarterly dividends, if the Company incurs or is expected to incur significant reduction in earnings as a result of the COVID-19 pandemic, it may need to suspend or reduce the level of quarterly dividends. The ability to pay future dividends or conduct stock repurchases may be limited under applicable banking regulations and regulatory policies due to expected losses for future periods and/or the inability to upstream funds from the Bank to the Company as a result of lower income or regulatory capital levels. Capital Management. 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. At March 31, 2021 and December 31, 2020, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. At March 31, 2021, 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. 40 Table of Contents The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated. March 31, 2021 December 31, 2020 Amount Ratio Amount Ratio (Dollars in thousands) Common Equity Tier 1 (to risk weighted assets) Actual $ 110,676 11.85 % $ 108,950 11.79 % For Capital Adequacy Purposes 42,046 4.50 41,598 4.50 To Be Well Capitalized 60,733 6.50 60,086 6.50 Tier 1 Capital (to risk weighted assets) Actual 110,676 11.85 108,950 11.79 For Capital Adequacy Purposes 56,061 6.00 55,464 6.00 To Be Well Capitalized 74,748 8.00 73,952 8.00 Total Capital (to risk weighted assets) Actual 122,368 13.10 120,520 13.04 For Capital Adequacy Purposes 74,748 8.00 73,952 8.00 To Be Well Capitalized 93,435 10.00 92,440 10.00 Tier 1 Leverage (to adjusted total assets) Actual 110,676 7.87 108,950 7.81 For Capital Adequacy Purposes 56,280 4.00 55,765 4.00 To Be Well Capitalized 70,350 5.00 69,706 5.00