What changed in this filing

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Item 1. Business

2022-03-11 compared with 2021-03-17 · 95 added, 536 removed, 507 unchanged (55% of the section changed)

Forward-Looking Statements

This Annual Report on Form 10-K (“Report”) contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning.

These forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating strategies;

• statements regarding the asset quality of our loan and investment portfolios;

• estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations, and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.

In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• our ability to manage our operations under the current economic conditions nationally and in our market area, including the scope and duration of economic contraction as a result of the COVID-19 pandemic ("COVID-19") and its effects on the Company’s business and that of the Company’s customers;

• adverse changes in the financial industry, securities, credit, and national and local real estate markets (including real estate values);

• changes in consumer spending, borrowing and savings habits;

• changes in interest rates generally, including changes in the relative differences between short-term and long-term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

• declines in the yield on our interest-earning assets resulting from the current low interest rate environment;

• significant increases in our loan losses, including our inability to resolve classified and nonperforming assets or reduce risks associated with our loans, and management’s assumptions in determining the adequacy of the allowance for loan losses;

• credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

• loan delinquencies and changes in the underlying cash flows of our borrowers;

• our success in increasing our commercial real estate and commercial business lending;

• our ability to maintain/improve our asset quality even as we increase our commercial real estate and commercial business lending;

• risks related to a high concentration of loans secured by real estate located in our market area;

• fluctuations in the demand for loans;

• competitive products and pricing among depository and other financial institutions;

• our ability to enter new markets successfully and capitalize on growth opportunities;

• our ability to successfully integrate the operations of businesses we have acquired;

• our ability to attract and maintain deposits and our success in introducing new financial products;

• changes in our compensation and benefit plans, and our ability to attract and retain key members of our senior management team and to address staffing needs in response to product demand or to implement our strategic plans;

• our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;

• technological changes that may be more difficult or expensive than expected;

• the failure or security breaches of computer systems on which we depend;

• the ability of preventing or detecting cybersecurity attacks on customer credentials, developing multiple layers of security controls that defend against malicious use of customer internet-based products and services of Community Bank, and our business continuity plan to recover from a malware or other cybersecurity attack;

• the ability of key third-party service providers to perform their obligations to us;

• changes in laws or government regulations or policies affecting financial institutions, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements, regulatory fees and compliance costs, and the resources we have available to address such changes;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

• exploration and drilling of natural gas reserves in our market area may be affected by federal, state and local laws and regulations affecting production, permitting, environmental protection and other matters, which could materially and adversely affect our customers, loan and deposit volume, and asset quality;

• our customers who depend on the exploration and drilling of natural gas reserves may be materially and adversely affected by decreases in the market prices for natural gas;

• other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this Report.

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 in 2020 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.

• 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.

• 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 an influx of loan refinances that could impact the Company’s net interest income and cause margin compression.

• 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.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the expected results indicated by these forward-looking statements.

In this Report, the terms “we,” “our,” and “us” refer to CB Financial Services, Inc., and Community Bank, unless the context indicates another meaning.

In addition, we sometimes refer to CB Financial Services, Inc., as “CB,” or the “Company” and to Community Bank as the “Bank.”

CB Financial Services, Inc.

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Community 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.

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

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

After the consolidation and sale of eight branches in 2021 and consolidation of two branches in 2020, the Bank reduced the total number of branches to 14 and operates from 11 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania and three offices in Marshall and Ohio Counties in West Virginia.

The Bank also has one 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.

In addition, the Bank is the sole shareholder of Exchange Underwriters, Inc.

The Bank is the sole shareholder of Exchange Underwriters, Inc.

("Exchange Underwriters" or “EU”), a wholly-owned subsidiary located in Washington County that is a full-service, independent insurance agency that offers property and casualty, commercial liability, surety and other insurance products.

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Information on this website is not and should not be considered to be a part of this Report.

Recently Announced Branch Optimization Initiative

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 e volving changes in consumer preferences, largely driven by the global pandemic, led to an acceleration of branch optimization efforts.

The Bank plans to provide affected customers with details to ensure a seamless transition with minimal disruption to their daily banking needs.

Management believes this initiative is an important first step to improve the Bank’s operations, and to provide enhanced efficiency and production capabilities.

The Bank has also engaged with third-party workflow optimization experts to assist in implementing a number of robotic process automations and more effective sales management that it expects will improve operational efficiencies in the near and long-term.

These efforts will likely result in additional innovations designed to improve growth prospects for the Bank as customer preferences for mobile and other technology-based services evolve.

In connection with the branch consolidations and the other branch optimization initiatives, the Company anticipates non-recurring pre-tax costs during 2021 of up to $6.1 million.

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 does anticipate 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.

Branch Optimization and Operational Efficiency Initiative

In 2021, the Company announced the implementation of branch optimization and operational efficiency strategic initiatives to improve the Bank’s financial performance and operations in order to position the Bank for continued profitable growth through the optimization of its branch network 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 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 and the Bank is in process of implementing operational efficiencies related to individualized processes within its branch network and operating environment.

The Bank has substantially completed these initiatives through the consolidation of six branches that was completed on June 30, 2021.

In addition, CB Financial, Community Bank, and Citizens Bank of West Virginia, Inc.

(“Citizens Bank”) executed a Purchase and Assumption Agreement (the “Agreement”) pursuant to which Citizens Bank agreed to purchase certain loans and other assets, and assume certain deposits and other liabilities, of the branch offices of Community Bank located in Buckhannon, West Virginia, and New Martinsville, West Virginia.

The divestiture of two branches in December 2021 resulted in the sale of $102.8 million of deposits, $6.1 million of loans and $795,000 of premises and equipment and the recognition of a $5.2 million pre-tax gain on sale from a 5.0% premium paid by Citizens Bank on the assumed deposits.

The branch optimization initiative reduced the Bank's branch network to 14 branches.

Effective October 31, 2014, the Company completed a merger with FedFirst Financial Corporation (“FedFirst”), the holding company for First Federal Savings Bank (“FFSB”), a federally chartered stock savings bank.

As part of the merger, the Company also acquired FFSB's subsidary, Exchange Underwriters.

As part of the merger, the

Company also acquired FFSB's subsidiary, Exchange Underwriters.

The merger expanded the Company’s reach into Fayette and Westmoreland counties in southwestern Pennsylvania.

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Our employees will be treated fairly and given opportunities for personal growth.

We will be closely involved in improving our communities.Our business strategies emphasize building on core strengths and are discussed below.

We will be closely involved in improving our communities.

Our business strategies emphasize building on core strengths and are discussed below.

• Create a sales and service culture to build full relationships with our customers and utilize technology investments to enhance speed of process to improve our customer experience.

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• Enhance profitability and efficiency while continuing to invest for future growth.

Margin compression is a challenge as a result of pandemic-induced interest rate reductions.

To combat this potential impact on core earnings, we view cost reduction as a key part of a company-wide efficiency effort.

Margin compression continues to be a challenge.

To combat this impact on core earnings, we view cost reduction as a key part of a company-wide efficiency effort.

Short-term targeted cost reductions combined with long-term strategic initiatives will better position the Company for high performance.

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• Continue our track record of opportunistic growth in the robust Pittsburgh metropolitan area and across our footprint.

We believe we have competed effectively by leveraging a steadily growing branch network and a full assortment of banking products to facilitate deposit and loan growth in our core locations, including southwestern Pennsylvania, Ohio River Valley, and central West Virginia.

We believe we have competed effectively by leveraging our branch network and a full assortment of banking products to facilitate deposit and loan growth in our core locations, including southwestern Pennsylvania, Ohio River Valley, and central West Virginia.

• Leverage our credit culture and strong loan underwriting to uphold our asset quality metrics.

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Demographics.

As of December 31, 2020, we employed 254 full-time and 6 part-time employees across our three-state footprint.

As of December 31, 2021, we employed 192 full-time and 6 part-time employees in Pennsylvania and West Virginia.

None of these employees are represented by a collective bargaining agreement.

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We provide a competitive compensation and benefits program to help meet the needs of our employees.

In addition to salaries, these programs include opportunity for annual bonuses, a 401(k) Plan with an employer matching contribution in addition to an employer annual contribution, an equity incentive plan, healthcare and insurance benefits, health savings, flexible spending accounts, paid time off, family leave and an employee assistance program.

In addition to salaries, these programs include opportunity for annual bonuses, a 401(k) Plan with an employer matching contribution in addition to an employer annual contribution, an equity incentive plan, healthcare and insurance benefits, health savings accounts, paid time off, paid leave and an employee assistance program.

Learning and Development.

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The safety, health and wellness of our employees is a top priority.

The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations.

Through teamwork and the adaptability of our management and staff, we were able to transition, over a short period of time, 25% of our employees to effectively working from remote locations.

Additionally, we developed a safely distanced working environment for employees performing client facing activities, at branches and operations centers.

The COVID-19 pandemic continued to present a unique challenge with regard to maintaining employee safety while continuing successful operations.

While management transitioned the majority of our staff back to our locations in early July 2021, some flexible work arrangements continue.

Our staff continues to follow the safety protocol developed by management.

We further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum and sponsoring various wellness programs.

The Company’s southwestern Pennsylvania market area consists of Allegheny, Greene, Fayette, Washington and Westmoreland Counties.

The Company’s southwestern Pennsylvania market area consists of Allegheny, Fayette, Greene, Washington and Westmoreland Counties.

Greene County is a significantly more rural county compared to the counties in which we have our other branches.

Our offices located in Allegheny, Washington, Fayette, and Westmoreland Counties are in the southern suburban area of metropolitan Pittsburgh.

Our branches from the FWVB merger extend the Company’s market area into West Virginia with six offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties;

and one office in Belmont County in eastern Ohio.

Our branches from the FWVB merger extend the Company’s market area into West Virginia with three offices in Marshall and Ohio Counties.

The following table sets forth certain economic statistics for our market area.

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West Virginia 1,782,959 2.9 49,660

Brooke 21,939 7.1 48,308

Marshall 30,591 3.7 57,772

Ohio 42,425 2.8 48,984

Upshur 24,176 7.7 41,704

Wetzel 15,065 8.5 40,092

Ohio 11,689,100 5.2 53,612

Belmont 67,006 6.5 40,560

(1) Based on the latest data published by the U.S.

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Bureau of Labor Statistics (Second Quarter 2021)

The market area has been impacted by the energy industry through the extraction of untapped natural gas reserves in the Marcellus Shale Formation.

The Marcellus Shale Formation extends throughout much of the Appalachian Basin and most of Pennsylvania, West Virginia and Eastern Ohio and is located near high-demand markets along the East Coast.

The market area has been impacted by the energy industry through the extraction of untapped natural gas reserves in the Marcellus Shale and Utica Shale Formation.

The Utica Shale formation lies beneath most of Ohio, West Virginia, Pennsylvania and New York, as well as Kentucky, Maryland, Tennessee, Virginia and a part of Canada.

The Marcellus Shale Formation extends throughout much of the Appalachian Basin and most of Pennsylvania, West Virginia and Eastern Ohio.

formations are located near high-demand markets along the East Coast.

The proximity to these markets makes it an attractive target for energy development and has resulted in significant job creation through the development of gas wells and transportation of gas.

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We compete for deposits by offering depositors a high level of personal service and expertise together with a wide range of financial services.

Our deposit sources are primarily concentrated in the communities surrounding our banking offices.

As of June 30, 2020, our FDIC-insured deposit market share in the counties we serve, out of 59 bank and thrift institutions, was 0.65%.

Our deposit sources are primarily concentrated in the communities surrounding our branch offices.

As of June 30, 2021, our FDIC-insured deposit market share in the counties we serve was 0.61% out of 56 bank and thrift institutions.

Our FDIC-insured deposit market share in the counties we serve, excluding Allegheny County, which is the second most populous county in Pennsylvania, but where the Bank's has limited presence with one branch, was 5.18% out of 41 bank and thrift institutions.

Such data does not reflect deposits held by credit unions.

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Our principal lending activity has been the origination in our local market area of residential one- to four-family, commercial real estate, construction, commercial and industrial, and consumer loans.

At December 31, 2020, our total loans receivable, which excludes the allowance for loan losses, was $1.04 billion compared to $952.5 million at December 31, 2019.

Our overall loan growth was $92.3 million, or 9.7%.

Loan Portfolio Composition.

The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated.

When the Company sells loans, the loans are sold upon origination.

Therefore, the Company did not have loans held for sale at any of the dates indicated below.

2020 2019 2018 2017 2016

December 31, Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

(Dollars in Thousands)

Residential $ 344,142 32.9 % $ 347,766 36.6 % $ 326,769 35.9 % $ 273,438 36.7 % $ 271,588 39.8 %

Commercial 373,555 35.9 351,360 36.9 307,064 33.6 209,037 28.1 201,010 29.5

Construction 72,600 6.9 35,605 3.7 48,824 5.3 36,149 4.9 10,646 1.6

Commercial and Industrial 126,813 12.1 85,586 9.0 91,463 10.0 107,835 14.5 80,812 11.9

Consumer 113,854 10.9 113,637 11.9 122,241 13.4 114,557 15.4 114,204 16.7

Other 13,789 1.3 18,542 1.9 16,511 1.8 3,376 0.4 3,637 0.5

Total Loans 1,044,753 100.0 % 952,496 100.0 % 912,872 100.0 % 744,392 100.0 % 681,897 100.0 %

Allowance for Loan Losses (12,771) (9,867) (9,558) (8,796) (7,803)

Loans, Net $ 1,031,982 $ 942,629 $ 903,314 $ 735,596 $ 674,094

At December 31, 2021, our total loans receivable, which excludes the allowance for loan losses, decreased $24.0 million, or 2.3%, to $1.02 billion compared to $1.04 billion at December 31, 2020.

Residential Real Estate Loans .

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We generally originate mortgage loans in amounts up to the maximum conforming loan limits established by the Federal Housing Finance Agency, which, for 2021, is typically $548,250 for single-family homes, except in certain high-cost areas in the United States.

At December 31, 2020, one- to four-family residential mortgage loans with principal balances in excess of $510,400, commonly referred to as jumbo loans, totaled $38.5 million.

Our mortgage loans amortize monthly with principal and interest due each month.

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During the years ended December 31, 2021 and 2020, we originated $12.6 million and $32.1 million of fixed-rate residential mortgage loans, respectively, which were subsequently sold in the secondary mortgage market.

The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, our interest rate risk position and our competitors’ loan products.

competitors’ loan products.

Adjustable-rate mortgage loans secured by one- to four-family residential real estate totaled $39.3 million at December 31, 2021.

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This increased credit risk is a result of several factors, including the effects of general economic conditions on income producing properties and the successful operation or management of the properties securing the loans.

Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the

successful operation of the related business and real estate property.

Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related business and real estate property.

If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Commercial real estate loans generally have higher credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.

In addition, payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project, and this may be subject, to a greater extent, to adverse conditions in the real estate market and in the general economy.

Construction Loans.

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We originate commercial and industrial loans and lines of credit to borrowers located in our market area that are generally secured by collateral other than real estate, such as equipment, accounts receivable, inventory, and other business assets.

At December 31, 2020, $126.8 million, or 12.1% of our total loan portfolio, consisted of commercial and industrial loans, of which $55.1 million are Payroll Protection Program ("PPP") loans.

At December 31, 2021, $89.0 million, or 8.7% of our total loan portfolio, consisted of commercial and industrial loans, of which $24.5 million are SBA guaranteed Payroll Protection Program ("PPP") loans.

Exclusive of PPP loans, commercial and industrial loans generally have terms of maturity from five to seven years with adjustable interest rates tied to the prime rate, LIBOR or the weekly average of the FHLB of Pittsburgh three- to ten-year fixed rates.

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All commercial loans are assigned a risk rating, which is reviewed internally, as well as by independent loan review professionals, annually.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic, which included authorizing the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the PPP.

Commercial and industrial business loans involve a greater risk of default than one- to four-residential mortgage loans of like duration because their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of collateral, if any.

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.

to replenish the PPP.

PPP was designed to help small businesses keep their workforce employed and cover expenses during the COVID-19 crisis.

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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.

Loan payments were deferred for 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 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.

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 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.

In 2020, 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.

The SBA reopened the PPP in January 2021 and began accepting applications for both First Draw and Second Draw PPP Loans.

Second Draw PPP Loans were 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 was generally eligible for a Second Draw PPP Loan if the borrower previously received a First Draw PPP Loan and will or had used the full amount only for authorized uses, had no more than 300 employees, and demonstrated 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 was 2.5x average monthly 2019 or 2020 payroll costs up to $2.0 million.

Loan payments are 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 in 2021, the processing fee from the SBA was 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.

The Bank originated $71.1 million of PPP loans in 2020 and $34.6 million in 2021.

Net deferred loan origination fees were $2.2 million in 2020 and $1.3 million in 2021, of which $1.1 million was recognized during the year ended December 31, 2020 and $1.7 million during the year ended December 31, 2021.

After processing forgiveness, there is $24.5 million of PPP loans remaining at December 31, 2021, net of the unearned $678,000 in deferred loan origination fees.

Consumer Loans.

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Finally, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans in the event of a default.

Loan Portfolio Maturities and Yields.

The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2020.

Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

Consumer loans consist primarily of indirect automobile loans whereby a portion of the rate is prepaid to the dealer and accrued in a prepaid dealer reserve account.

Therefore, the true yield for the portfolio is significantly less than the note rate disclosed below.

Residential Commercial Construction Commercial and Industrial

Due During the Years Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate Amount Weighted Average Rate

Ending December 31,

(Dollars in Thousands)

2021 $ 16,731 3.62 % $ 14,085 3.73 % $ 7,734 4.03 % $ 27,839 3.28 %

2022 855 4.69 1,550 4.82 7,983 3.26 57,217 1.29

2023 1,120 5.17 22,890 4.34 9,421 3.70 6,219 4.26

2024 to 2025 4,042 4.45 20,241 3.75 19,064 3.01 11,802 3.75

2026 to 2030 49,774 3.90 178,733 3.75 17,486 3.38 12,306 3.05

2031 to 2035 73,244 3.98 121,281 4.02 3,727 3.88 2,995 3.89

2036 and Beyond 198,376 4.00 14,775 4.04 7,185 3.52 8,435 2.89

Total $ 344,142 3.97 % $ 373,555 3.89 % $ 72,600 3.42 % $ 126,813 2.43 %

Consumer Other Total

Due During the Years Weighted Average Rate Weighted Average Rate Weighted Average Rate

Ending December 31, Amount Amount Amount

(Dollars in Thousands)

2021 $ 6,622 4.84 % $ 1,666 2.99 % $ 74,677 3.65 %

2022 8,392 4.16 132 3.41 76,129 1.91

2023 17,290 4.52 35 4.22 56,975 4.28

2024 to 2025 45,259 4.76 461 4.62 100,869 4.09

2026 to 2030 34,323 4.70 1,833 3.03 294,455 3.83

2031 to 2035 — — 7,184 3.00 208,431 3.97

2036 and Beyond 1,968 5.32 2,478 4.00 233,217 3.95

Total $ 113,854 4.67 % $ 13,789 3.24 % $ 1,044,753 3.78 %

The following table sets forth at December 31, 2020, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2021.

Due After December 31, 2021

Fixed Adjustable Total

(Dollars in Thousands)

Residential $ 285,097 $ 42,314 $ 327,411

Commercial 165,146 194,324 359,470

Construction 44,020 20,846 64,866

Commercial and Industrial 89,057 9,917 98,974

Consumer 107,139 93 107,232

Other 8,577 3,546 12,123

Total Loans $ 699,036 $ 271,040 $ 970,076

Loan Approval Procedures and Authority

Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors (the “Board”).

In the approval process for residential loans, we assess the borrower’s ability to repay the loan and the value of the property securing the loan.

In the approval process for residential loans, we assess the borrower’s

ability to repay the loan and the value of the property securing the loan.

To assess the borrower’s ability to repay, we review the borrower’s income and expenses and employment and credit history.

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Loan approval authorities vary based on loan size in the aggregate.

Individual officer loan approval authority generally applies to loans of up $1.0 million.

Individual officer loan approval authority generally applies to loans of up to $1.0 million.

Loans above that amount and up to 65% of the Bank’s legal lending limit may be approved by the Loan Committee.

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In addition, telephone calls are made and additional letters may be sent.

Collection efforts continue until it is determined that the debt is uncollectable.

Collection efforts continue until it is determined that the debt is uncollectible.

For loans secured by real estate, a Homeownership Counseling Notice is mailed when the loan is 45 days delinquent.

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For commercial loans, the borrower is contacted in an attempt to reestablish the loan to current payment status and ensure timely payments continue.

Collection efforts continue until the loan is 60 days past due, at which time demand payment,

default, and/or foreclosure procedures are initiated.

Collection efforts continue until the loan is 60 days past due, at which time demand payment, default, and/or foreclosure procedures are initiated.

We may consider loan workout arrangements with certain borrowers under certain circumstances.

Nonperforming Assets and Delinquent Loans.

The Company reviews its loans on a regular basis and generally places loans on nonaccrual status when either principal or interest is 90 days or more past due.

In addition, the Company places loans on nonaccrual status when we do not expect to receive full payment of interest, principal or both.

Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income.

Loans that are 90 days or more past due may still accrue interest if they are well secured and in the process of collection.

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.

Management monitors all past due loans and nonperforming assets.

Such loans are placed under close supervision, with consideration given to the need for additions to the allowance for loan losses and (if appropriate) partial or full charge-off.

At December 31, 2020, we had $8,000 of loans 90 days or more past due that were still accruing interest.

Nonperforming assets increased $9.1 million to $14.7 million at December 31, 2020, compared to $5.6 million at December 31, 2019.

The increase in nonperforming loans at December 31, 2020 compared to December 31, 2019 is primarily related to two commercial real estate loans in the hospitality industry with a total principal balance of $6.9 million that were impacted by the CVOID-19 pandemic due to insufficient cash flows and occupancy rates as well as a $1.3 million commercial and industrial loan relationship.

Management believes the volume of nonperforming assets can be partially attributed to unique borrower circumstances as well as the economy in general.

We have an experienced chief credit officer, collections and credit departments that monitor the loan portfolio and seek to prevent any deterioration of asset quality.

Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold.

When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan, or its fair market value, less estimated selling expenses.

Any further write-down of real estate owned is charged against earnings.

At December 31, 2020, we owned $208,000 of property classified as real estate owned.

Nonperforming Assets.

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

Included in nonperforming loans and assets are troubled debt restructurings, which are loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties.

December 31, 2020 2019 2018 2017 2016

(Dollars in Thousands)

Nonaccrual loans:

Residential $ 1,841 $ 1,817 $ 2,154 $ 1,423 $ 1,873

Commercial 7,102 234 — 288 420

Construction — — — 43 107

Commercial and Industrial 1,897 740 1,044 2,095 1,829

Consumer 49 110 83 71 160

Total Nonaccrual Loans 10,889 2,901 3,281 3,920 4,389

Accruing loans past due 90 days or more:

Residential — 196 324 142 343

Consumer 8 26 3 26 8

Total Accruing Loans 90 Days or More Past Due 8 222 327 168 351

Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due 10,897 3,123 3,608 4,088 4,740

Troubled Debt Restructurings, Accruing

Residential 650 511 1,238 1,287 1,299

Commercial 2,861 1,648 1,313 1,697 1,985

Commercial and Industrial 80 100 154 178 399

Total Troubled Debt Restructurings, Accruing 3,591 2,259 2,705 3,163 3,687

Total Nonperforming Loans 14,488 5,382 6,313 7,251 8,427

Real Estate Owned:

Residential — 41 46 152 —

Commercial 208 192 871 174 174

Total Real Estate Owned 208 233 917 326 174

Total Nonperforming Assets $ 14,696 $ 5,615 $ 7,230 $ 7,577 $ 8,601

Nonaccrual Loans to Total Loans 1.04 % 0.30 % 0.36 % 0.53 % 0.64 %

Nonperforming Loans to Total Loans 1.39 0.57 0.69 0.97 1.24

Nonperforming Assets to Total Assets 1.04 0.42 0.56 0.81 1.02

For the year ended December 31, 2020, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $233,000.

For the year ended December 31, 2020, interest income recorded on nonaccrual loans and accruing troubled debt restructurings was $338,000.

At December 31, 2020, we had no loans that were not classified as nonaccrual, 90 days past due or troubled debt restructurings where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure as nonaccrual, 90 days past due or troubled debt restructurings.

Classified Assets.

Federal regulations provide that loans and other assets of lesser quality should be classified as “substandard,” “doubtful” or “loss” assets.

An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

Substandard assets include those characterized by the “distinct possibility” that the Company will sustain “some loss” if the deficiencies are not corrected.

Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the

weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets is not warranted.

The Company designates an asset as “special mention” if the asset has a potential weakness that warrants management’s close attention.

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.

As part of the periodic exams of the Bank by the FDIC and the Pennsylvania Department of Banking and Securities, the staff of such agencies reviews our classifications and determines whether such classifications are adequate.

Such agencies have, in the past, and may in the future require us to classify certain assets which management has not otherwise classified or require a classification more severe than established by management.

The following table shows the principal amount of special mention and classified loans at December 31, 2020 and 2019.

December 31, 2020 2019

(Dollars in Thousands)

Special Mention $ 46,515 $ 24,585

Substandard 27,042 7,383

Doubtful 609 719

Total $ 74,166 $ 32,687

The total amount of special mention and classified loans increased $41.5 million, or 126.90%, to $74.2 million at December 31, 2020, compared to $32.7 million at December 31, 2019.

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.

Allowance for Loan Losses.

The allowance for loan losses 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 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, 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.

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.

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 recorded in a specific valuation allowance through a charge to the provision for loan losses.

Any reserve for unfunded lending

commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in the allowance for loan losses on the consolidated Statement of Condition.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The general component covers non-classified loans and is based on historical charge-off experience and expected loss given our internal risk rating process.

The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.

The other qualitative factors considered by management include, but are not limited to, the following:

• changes in lending policies and procedures, including underwriting standards and collection practices;

• changes in national and local economic and business conditions and developments, including the condition of various market segments;

• changes in the nature and volume of the loan portfolio;

• changes in the experience, ability and depth of management and the lending staff;

• changes in the trend of the volume and severity of the past due, nonaccrual, and classified loans;

• the existence of any concentrations of credit, and changes in the level of such concentrations;

• the effect of external factors, such as competition and legal and regulatory requirements on the level of estimated credit losses in our current portfolio.

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 non-accrual 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.

Troubled Debt Restructuring (TDR) loans are generally considered impaired loans until such loans are performing in accordance with their modified terms.

Once a TDR loan establishes a consistent payment history under the modified terms, then it is considered to return to accrual status.

A consistent payment history is generally demonstrated by payment under the modified terms for a period of least six consecutive months.

The general component covers pools of loans by loan class, including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate and consumer loans.

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.

Generally, management considers all nonaccrual and TDR loans and certain renegotiated debt, when it exists, for impairment.

The maximum period without payment that typically can occur before a loan is considered for impairment is 90 days.

The past due status of loans receivable is determined based on contractual due dates for loan payments.

The allowance for loan losses increased $2.9 million, or 29.4%, to $12.8 million at December 31, 2020, compared to $9.9 million at December 31, 2019.

Allowance for loan losses to total loans increased 19 basis points to 1.22% at December 31, 2020 compared to 1.04% at December 31, 2019.

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.

The ratio of allowance for loan losses to nonaccrual loans ratio decreased to 117.28% at December 31, 2020, compared to 340.12% at December 31, 2019.

Nonaccrual loans increased $8.0 million to $10.9 million at December 31, 2020 compared to $2.0 million at December 31, 2019.

Nonaccrual commercial real estate loans increased $6.9 million to $7.1 million at December 31, 2020 compared to $234,000 at December 31, 2019 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.

Nonaccrual commercial and industrial loans increased to $1.2 million to $1.9 million at December 31, 2020 compared to $740,000 at December 31, 2019 primarily related to a $1.3 million relationship impacted by the pandemic due to an inability to hold social events.

The following table presents the components of the ratio of nonaccrual loans to total loans at the dates indicated.

December 31, Nonaccrual Loans Total Loans Nonaccrual Loans to Total Loans Nonaccrual Loans Total Loans Nonaccrual Loans to Total Loans

(Dollars in Thousands)

Residential $ 1,841 $ 344,142 0.53 % $ 1,817 $ 347,766 0.52 %

Commercial 7,102 373,555 1.90 234 351,360 0.07

Construction — 72,600 — — 35,605 —

Commercial and Industrial 1,897 126,813 1.50 740 85,586 0.86

Consumer 49 113,854 0.04 110 113,637 0.10

Other — 13,789 — — 18,542 —

Total $ 10,889 $ 1,044,753 1.04 % $ 2,901 $ 952,496 0.30 %

Net charge-offs were $1.1 million during 2020 compared to $416,000 during 2019.

The increase was primarily related to the $931,000 commercial real estate loan charge-off of a hotel loan partially offset by a decrease in net charge-offs on consumer loans, mainly in indirect auto loans.

The following table presents the ratio of net charge-offs (recoveries) as a percent of average loans for the periods indicated.

Year Ended December 31, 2020 2019

Residential 0.02 % 0.03 %

Commercial 0.25 (0.02)

Construction — —

Commercial and Industrial (0.03) (0.07)

Consumer 0.14 0.41

Total Loans 0.11 % 0.05 %

Although we maintain our allowance for loan losses at a level that we consider to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts or that we will not be required to make additions to the allowance for loan losses in the future.

Future additions to our allowance for loan losses and changes in the related ratio of the allowance for loan losses to nonperforming loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory authorities toward adequate loan loss reserve levels, and inflation.

Management will continue to periodically review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary.

Analysis of the Allowance for Loan Losses.

The following table summarizes changes in the allowance for loan losses by loan categories for each year indicated and additions to the allowance for loan losses, which have been charged to operations.

Loans acquired in connection with mergers were recorded at their estimated fair value at the acquisition date and did not include a carryover of the pre-merger allowance for loan losses.

Year Ended December 31, 2020 2019 2018 2017 2016

(Dollars in Thousands)

Balance at Beginning of Year $ 9,867 $ 9,558 $ 8,796 $ 7,803 $ 6,490

Provision for Loan Losses 4,000 725 2,525 1,870 2,040

Residential (65) (96) (64) (131) (48)

Commercial (931) — — (132) (191)

Construction — — — — —

Commercial and Industrial — (16) (1,456) — —

Consumer (329) (609) (597) (919) (724)

Other — — — — (49)

Total Charge-offs (1,325) (721) (2,117) (1,182) (1,012)

Residential 6 12 28 62 17

Commercial 28 73 168 3 98

Construction — — — — —

Commercial and Industrial 33 85 5 37 —

Consumer 162 135 153 203 147

Other — — — — 23

Total Recoveries 229 305 354 305 285

Net Charge-offs (1,096) (416) (1,763) (877) (727)

Balance at End of Year $ 12,771 $ 9,867 $ 9,558 $ 8,796 $ 7,803

Allowance for Loan Losses to Nonperforming Loans 88.15 % 183.33 % 151.41 % 121.31 % 92.60 %

Allowance for Loan Losses to Nonaccrual Loans 117.28 340.12 291.32 224.39 177.79

Allowance for Loan Losses to Total Loans 1.22 1.04 1.05 1.18 1.14

Net Charge-offs to Average Loans 0.11 0.05 0.21 0.13 0.11

Allocation of Allowance for Loan Losses.

The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated.

The table reflects the allowance for loan losses as a percentage of total loans receivable.

Management believes that the allowance can be allocated by category only on an approximate basis.

The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

2020 2019 2018 2017 2016

December 31, Amount Percent of

Amount Percent of

(Dollars in Thousands)

Residential $ 2,249 32.9 % $ 2,023 36.6 % $ 1,050 35.9 % $ 891 36.7 % $ 1,106 39.8 %

Commercial 6,010 35.9 3,210 36.9 2,693 33.6 2,289 28.1 2,307 29.5

Construction 889 6.9 285 3.7 395 5.3 276 4.9 65 1.6

Commercial and Industrial 1,423 12.1 2,412 9.0 2,807 10.0 2,544 14.5 1,699 11.9

Consumer 1,283 10.9 1,417 11.9 2,027 13.4 2,358 15.4 2,463 16.7

Other — 1.3 — 1.9 — 1.8 — 0.4 — 0.5

Total Allocated Allowance 11,854 100.0 9,347 100.0 8,972 100.0 8,358 100.0 7,640 100.0

Unallocated 917 — 520 — 586 — 438 — 163 —

Total Allowance for Loan Losses $ 12,771 100.0 % $ 9,867 100.0 % $ 9,558 100.0 % $ 8,796 100.0 % $ 7,803 100.0 %

(1) Represents percentage of loans in each category to total loans

Investment Activities

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Our current investment policy permits us to invest in U.S.

treasuries, federal agency securities, mortgage-backed securities, investment grade corporate bonds, municipal bonds, short-term instruments, and other securities.

treasuries, U.S government agency securities, mortgage-backed securities, investment grade corporate bonds, obligations of states and political subdivisions, short-term instruments, and other securities.

The investment policy also permits investments in certificates of deposit, securities purchased under an agreement to resell, banker’s acceptances, commercial paper and federal funds.

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Federal and Pennsylvania state laws generally limit our investment activities to those permissible for a national bank.

The accounting rules require that, at the time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent.

The accounting rules require that, at the time of purchase, we designate a debt security as held to maturity, available-for-sale, or trading, depending on our ability and intent.

Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost.

Our entire portfolio is designated as available-for-sale.

The portfolio consists primarily of U.S.

government and agency securities, municipal bonds, and mortgage-backed securities.

We expect the composition of our investment portfolio to continue to change based on liquidity needs associated with loan origination activities.

During the year ended December 31, 2020, we had no securities that were deemed to be other than temporarily impaired.

Our entire debt securities portfolio is designated as available-for-sale.

The debt securities portfolio consists primarily of U.S.

government agency securities, obligations of states and political subdivisions, and mortgage-backed securities and collateralized mortgage obligations of government sponsored enterprises.

We expect the composition of our debt securities portfolio to continue to change based on liquidity needs associated with loan origination activities.

During the year ended December 31, 2021, we had no debt securities that were deemed to be other than temporarily impaired.

We also invest in equity securities, which consist primarily of mutual funds and a portfolio of bank stocks.

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Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management’s judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management’s projections as to the short-term demand for funds to be used in our loan originations and other activities.

Government and Agency Securities.

Government Agency Securities.

At December 31, 2021, we held U.S.

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While these securities generally provide lower yields than other investments, such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity and pledging purposes, as collateral for borrowings, and for prepayment protection.

Municipal Bonds.

Obligations of States and Political Subdivisions.

At December 31, 2021, we held available-for-sale municipal bonds with a fair value of $19.0 million compared to $22.0 million at December 31, 2020.

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Investments in MBS’s involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may result in adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities.

Securities Portfolio.

The following table sets forth the composition of our securities portfolio at the dates indicated.

securities do not include FHLB of Pittsburgh and Atlantic Community Bankers’ Bank stock totaling $4.0 million, $3.7 million, and $3.9 million at December 31, 2020, 2019 and 2018, respectively.

2020 2019 2018

December 31, Amortized

Value Amortized

(Dollars in Thousands)

Available-for-Sale Debt Securities:

Government Agencies $ 41,994 $ 41,411 $ 47,993 $ 48,056 $ 82,506 $ 80,579

Obligations of States and Political Subdivisions 20,672 21,993 25,026 25,843 44,737 44,601

Mortgage-Backed Securities - Government-Sponsored Enterprises 75,900 79,493 118,282 120,776 97,535 97,771

Total Available-for-Sale Debt Securities 138,566 142,897 191,301 194,675 224,778 222,951

Equity Securities:

Mutual Funds 1,019 997 968

Other 1,484 1,713 1,490

Total Equity Securities 2,503 2,710 2,458

Total Securities $ 145,400 $ 197,385 $ 225,409

Portfolio Maturities and Yields.

The composition and maturities of the available-for-sale debt securities portfolio at December 31, 2020, are summarized in the following table.

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

One Year or Less More than One Year Through

Five Years More than Five Years Through

Ten Years More than

Ten Years Total

Value Weighted

Yield Carrying

Value Weighted

Yield Carrying

Value Weighted

Yield Carrying

Value Weighted

Yield Carrying

Value Weighted

(Dollars in Thousands)

Government Agencies $ — — % $ — — % $ 37,000 1.07 % $ 4,994 1.26 % $ 41,994 1.09 %

Obligations of States and Political Subdivisions — — 4,301 2.12 8,104 3.18 8,266 3.10 20,672 2.93

Mortgage-Backed Securities - Government-Sponsored Enterprises — — — — 10,896 3.00 65,004 2.62 75,900 2.68

Total Debt Securities $ — — % $ 4,301 2.12 % $ 56,001 1.75 % $ 78,264 2.59 % $ 138,566 2.23 %

Corporate Debt.

At December 31, 2021, we held corporate debt securities with a fair value of $7.5 million.

We invest in corporate debt issued by financial institutions which have fixed to floating-rate terms.

Corporate debt are unsecured, medium or long term, interest-bearing bonds issued by financial institutions that are backed only by the general credit of the issuer.

As such, investments in corporate debt involve default risk that the company may fail to make timely payments of interest or principal.

We perform a credit analysis to verify the creditworthiness of the financial institution prior to purchase.

Sources of Funds

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However, the ability to attract and maintain deposits and the rates paid on these deposits has been and will continue to be significantly affected by market conditions.

The following table sets forth the distribution of our average deposit accounts, by account type, for the years indicated.

2020 2019 2018

Year Ended December 31, Average

Balance Percent Weighted

(Dollars in Thousands)

Non-Interest Bearing

Demand Deposits

$ 313,858 26.8 % — % $ 267,311 24.1 % — % $ 232,872 24.3 % — %

NOW Accounts 240,372 20.5 0.25 222,148 20.0 0.53 174,653 18.3 0.36

Savings Accounts 227,277 19.4 0.08 215,798 19.5 0.23 184,093 19.3 0.26

Money Market Accounts 187,095 16.0 0.38 181,985 16.4 0.57 167,247 17.5 0.49

Time Deposits 203,128 17.3 1.81 221,904 20.0 2.06 197,104 20.6 1.54

Total Deposits $ 1,171,730 100.0 % 0.44 % $ 1,109,146 100.0 % 0.66 % $ 955,969 100.0 % 0.52 %

The following table sets forth time deposits classified by interest rate as of the dates indicated.

December 31, 2020 2019 2018

(Dollars in Thousands)

Less than 0.25% $ 14,818 $ 3,833 $ 11,638

0.25% to 0.49% 28,729 18,910 20,536

0.50% to 0.99% 17,787 14,739 17,490

1.00% to 1.49% 24,616 41,147 72,776

1.50% to 1.99% 19,564 43,753 34,934

2.00% to 2.49% 40,169 48,365 38,059

2.49% to 2.99% 19,037 24,344 7,419

3.00% or Greater 25,293 24,665 13,524

Total Time Deposits $ 190,013 $ 219,756 $ 216,376

The following table sets forth, by interest rate ranges and scheduled maturity, information concerning our time deposits at the date indicated.

Period to Maturity

December 31, 2020 Less Than Or Equal to One Year More Than One to Two Years More Than Two to Three Years More Than Three to Four Years More Than Four to Five Years More Than Five Years Total Percent of Total

(Dollars in Thousands)

Less than 0.25% $ 11,332 $ 3,376 $ 23 $ 7 $ 80 $ — $ 14,818 7.8 %

0.25% to 0.49% 15,839 8,898 1,654 319 2,019 — 28,729 15.1

0.50% to 0.99% 6,281 3,667 996 879 5,681 283 17,787 9.4

1.00% to 1.49% 11,095 5,886 3,313 1,893 2,324 105 24,616 13.0

1.50% to 1.99% 9,747 2,825 1,546 1,861 1,163 2,422 19,564 10.3

2.00% to 2.49% 26,462 4,094 5,945 2,195 167 1,306 40,169 21.1

2.49% to 2.99% 2,904 1,104 14,536 96 397 — 19,037 10.0

3.00% or Greater 3,978 5,657 15,244 345 69 — 25,293 13.3

Total $ 87,638 $ 35,507 $ 43,257 $ 7,595 $ 11,900 $ 4,116 $ 190,013 100.0 %

As of December 31, 2020, the aggregate amount of outstanding time deposits in amounts greater than or equal to $100,000 was approximately $107.9 million, of which $42.3 million were deposits from public entities.

The following table sets forth the maturity of those time deposits as of December 31, 2020.

December 31, 2020

(Dollars in Thousands)

Three Months or Less $ 13,004

Over Three Months to Six Months 13,768

Over Six Months to One Year 24,215

Over One Year to Three Years 46,756

Over Three Years 10,172

Total $ 107,915

Deposits are our primary source of funds for lending and investment activities.

If the need arises, we may rely upon borrowings to supplement our supply of available funds and to fund deposit withdrawals.

Our borrowings may consist of advances from the FHLB, funds borrowed under repurchase agreements and federal funds purchased.

Our borrowings may consist of advances from the FHLB, subordinated debt, funds borrowed under repurchase agreements and federal funds purchased.

The FHLB functions as a central reserve bank providing credit for us and other member savings associations and financial institutions.

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Advances are made pursuant to several different programs.

Each credit program has its own interest rate and range of

Each credit program has its own interest rate and range of maturities.

Depending on the program, limitations on the amount of advances are based either on a fixed percentage of a member institution’s stockholders’ equity or on the FHLB’s assessment of the institution’s creditworthiness.

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At December 31, 2021, we did not have any outstanding balances under any of these borrowing relationships.

The following table sets forth information concerning balances and interest rates on our repurchase agreements at the dates and for the periods indicated.

At or For the Years Ended December 31, 2020 2019 2018

(Dollars in Thousands)

Balance at End of Period $ 41,055 $ 30,571 $ 30,979

Average Balance Outstanding During the Period 37,819 29,976 29,300

Maximum Amount Outstanding at any Month End 46,123 34,197 35,661

Weighted Average Interest Rate at End of Period 0.21 % 0.57 % 0.54 %

Average Interest Rate During the Period 0.36 0.62 0.53

The following table sets forth information concerning balances and interest rates on our federal funds purchased at the dates and for the periods indicated.

At or For the Years Ended December 31, 2020 2019 2018

(Dollars in Thousands)

Balance at End of Period $ — $ — $ —

Average Balance Outstanding During the Period — — 37

Maximum Amount Outstanding at any Month End — — 1,500

Weighted Average Interest Rate at End of Period — % — % — %

Average Interest Rate During the Period — — 2.70

The following table sets forth information concerning balances and interest rates on our short-term FHLB advances at the dates and for the periods indicated.

At or For the Years Ended December 31, 2020 2019 2018

(Dollars in Thousands)

Balance at End of Period $ — $ — $ —

Average Balance Outstanding During the Period — — 19,726

Maximum Amount Outstanding at any Month End — — 98,960

Weighted Average Interest Rate at End of Period — % — % — %

Average Interest Rate During the Period — — 1.86

The following table sets forth information concerning balances and interest rates on our long-term FHLB advances at the dates and for the periods indicated.

At or For the Years Ended December 31, 2020 2019 2018

(Dollars in Thousands)

Balance at End of Period $ 8,000 $ 14,000 $ 20,000

Average Balance Outstanding During the Period 11,328 17,460 22,415

Maximum Amount Outstanding at any Month End 14,000 20,000 24,500

Weighted Average Interest Rate at End of Period 2.27 % 2.14 % 2.03 %

Average Interest Rate During the Period 2.24 2.10 2.05

In December 2021, the Company entered into a term loan in the principal amount of $15.0 million, evidenced by a term note which matures on December 15, 2031 ("2031 Note").

The 2031 Note is an unsecured subordinated obligation of the Company and may be repaid in whole or in part, without penalty, on any interest payment date on or after December 15, 2026 and at any time upon the occurrence of certain events.

The 2031 Note initially bears a fixed interest rate of 3.875% per year to, but excluding, December 15, 2026 and thereafter at a floating rate equal to the then-current three-month term SOFR plus 280 basis points.

The 2031 Note qualifies as Tier 2 capital under regulatory guidelines.

At December 31, 2021, the principal balance and unamortized debt issuance costs for the 2031 Note were $15.0 million and $399,000, respectively.

Subsidiary Activities

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Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution.

The legislation also increased the maximum amount of deposit insurance for banks to $250,000 per depositor, retroactive to January 1, 2008.

The legislation also increased the maximum amount of deposit insurance for banks to $250,000 per depositor.

The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so called “golden parachute” payments.

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Additionally, an institution that retains credit risk in connection with an asset sale is required to maintain additional regulatory capital because of the purchaser’s recourse against the institution.

In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors, but qualitative factors as well and has the authority to establish higher capital requirements for individual associations where necessary.

an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors, but qualitative factors as well and has the authority to establish higher capital requirements for individual associations where necessary.

At December 31, 2021, the Bank’s capital exceeded all applicable requirements.

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Generally, the Pennsylvania Department of Banking and Securities (the “Pennsylvania Department of Banking” or “PDBS”) is required to appoint a receiver or conservator for a state-chartered bank that is “critically undercapitalized” within specific time frames.

must guarantee performance under the plan in an amount of up to the lesser of 5% of the institution’s assets at the time it was deemed to be undercapitalized by the FDIC or the amount necessary to restore the institution to adequately capitalized status.

The regulations also provide that a capital restoration plan must be filed with the FDIC within 45 days of the date that an institution is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any bank holding company of an institution that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the institution’s assets at the time it was deemed to be undercapitalized by the FDIC or the amount necessary to restore the institution to adequately capitalized status.

This guarantee remains in place until the FDIC notifies the institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters.

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It also has the power to appoint a conservator or receiver for a bank upon insolvency, imminent insolvency, unsafe or unsound condition or certain other situations.

The FDIC has primary federal enforcement responsibility over non-Federal Reservice Bank (“FRB”)-member state banks and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on the bank.

The FDIC has primary federal enforcement responsibility over non-Federal Reserve Bank (“FRB”)-member state banks and has authority to bring actions against the institution and all institution-affiliated parties, including shareholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful actions likely to have an adverse effect on the bank.

Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors.

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The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% to 1.35% of estimated insured deposits.

The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020, and insured institutions with assets of $10 billion or more were supposed to fund the increase.

On September 30, 2018, the 1.35% ratio was exceeded, reaching 1.36%.

Insured institutions of less than $10 billion of assets will receive credits for the portion of their assessments that contributed to raising the reserve ratio between 1.15% and 1.35% effective when the fund rate achieves 1.38%.

The fund rate achieved 1.40% as of June 30, 2019, and the FDIC first applied small bank credits on the September 30, 2019 assessment invoice (for the second quarter of 2019).

The FDIC will continue to apply small bank credits so long as the ratio is at least 1.35%.

After applying small bank credits for four quarters, the FDIC will remit to banks the value of any remaining small bank credits in the next assessment period in which the ratio is at least 1.35%.

A total of $308,000 of DIF credits were recognized in the third and fourth quarters of 2019.

All DIF credits available to the Bank have been utilized.

The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC to establish a maximum fund ratio.

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The FDIC adopted a plan to restore the fund to the 1.35% ratio within eight years but did not change its assessment schedule.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980's to recapitalize the former Federal Savings and Loan Insurance Corporation.

The bonds issued by the FICO matured in 2019.

The FDIC has authority to increase insurance assessments.

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• The USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering.

Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations;

Such required compliance programs are intended to supplement existing compliance requirements, also

applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations;

• The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties.

3 unchanged sentences

As such, the Company is registered with the Federal Reserve and is subject to regulations, examinations, supervision and reporting requirements applicable to bank holding companies.

In addition, the Federal Reserve has enforcement authority

over the Company and its non-bank subsidiaries.

In addition, the Federal Reserve has enforcement authority over the Company and its non-bank subsidiaries.

Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to the subsidiary banking institution.

31 unchanged sentences

The Company and Exchange Underwriters are subject to the Pennsylvania Corporate Net Income Tax, otherwise known as “CNI tax.” The CNI tax rate in 2021 and 2020 was 9.99%.

The tax is imposed on income or loss from the federal income tax return on a separate-company basis for the Company and

Exchange Underwriters.

The tax is imposed on income or loss from the federal income tax return on a separate-company basis for the Company and Exchange Underwriters.

The federal return income or loss is adjusted for various items treated differently by the Pennsylvania Department of Revenue.

2 unchanged sentences

The State of Ohio imposes an equity-based tax similar to the PA Shares Tax called Financial Institutions Tax (“FIT”) at a minimum tax of $1,000 or a rate of 0.8% for the first $200 million of Ohio based-equity, and then a declining rate thereafter.

All state taxation is apportioned to states where nexus exists based on different metrics of the Company's consolidated statement of financial condition and consolidated statement of operations.

All state taxation is apportioned to states where nexus exists based on different metrics of the Company's Consolidated Statements of Financial Condition and Consolidated Statements of Income (Loss).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business