What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-11 · 235 added, 101 removed, 233 unchanged (59% of the section changed)

32 unchanged sentences

The Bank also has a loan production office in Allegheny County, a corporate center in Washington County and an operations center in Greene County, all of which are 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.

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.

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

The detailed discussion focuses on our consolidated financial condition as of March 31, 2022, compared to the financial condition as of December 31, 2021 and the consolidated results of operations for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The detailed discussion focuses on our consolidated financial condition as of June 30, 2022, compared to the financial condition as of December 31, 2021 and the consolidated results of operations for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

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

18 unchanged sentences

Three Months Ended

Six Months Ended

June 30, June 30,

2022 2021 2022 2021

(Dollars in thousands)

9 unchanged sentences

Adjustment to FTE Basis

0.01 0.02 0.01 0.01

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

3.01 2.74 3.01 2.82

Net Interest Margin (GAAP)

1 unchanged sentence

Adjustment to FTE Basis

0.01 0.01 0.01 0.01

Net Interest Margin (FTE) (Non-GAAP)

3.13 2.85 3.11 2.95

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.

18 unchanged sentences

Consolidated Statements of Financial Condition Analysis

Total assets increased $13.2 million, or 0.9%, to $1.44 billion at March 31, 2022, compared to $1.43 billion at December 31, 2021.

The change is primarily due to increases in cash and due from banks and in securities.

Total assets decreased $39.0 million, or 2.7%, to $1.39 billion at June 30, 2022, compared to $1.43 billion at December 31, 2021.

Cash and Securities

• Cash and due from banks increased $3.9 million, or 3.3%, to $123.6 million at March 31, 2022, compared to $119.7 million at December 31, 2021.

The change is primarily due to an increase in deposits as further described below in the Liabilities section.

The increase was partially offset by purchases of securities detailed in the below Securities section.

• Securities increased $6.1 million, or 2.7%, to $231.1 million at March 31, 2022, compared to $225.0 million at December 31, 2021.

Current period activity included $26.8 million of purchases and $8.3 million of paydowns.

• Cash and due from banks decreased $38.6 million, or 32.2%, to $81.1 million at June 30, 2022, compared to $119.7 million at December 31, 2021.

The change is primarily due to a decrease in deposits as further described below in the Liabilities section.

• Securities decreased $11.5 million, or 5.1%, to $213.5 million at June 30, 2022, compared to $225.0 million at December 31, 2021.

Current period activity included $26.8 million of purchases, and $17.0 million of pay downs.

The purchases were made to earn a higher yield on excess cash.

In addition, there was a $12.4 million decrease in the market value of the debt securities portfolio due primarily to increases in market interest rates and a $7,000 loss in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

In addition, there was a $21.0 million decrease in the market value of the debt securities portfolio, primarily due to the increase in market interest rates, and a $206,000 loss in market value in the equity securities portfolio, which is primarily comprised of bank stocks.

Payroll Protection Program (“PPP”) Update

• PPP loans decreased $16.3 million to $8.2 million at March 31, 2022 compared to $24.5 million at December 31, 2021.

$274,000 of net PPP loan origination fees were unearned at March 31, 2022 compared to $678,000 at December 31, 2021.

$404,000 of net PPP loan origination fees were recognized for the three months ended March 31, 2022 compared to $321,000 for the three months ended December 31, 2021.

• PPP loans decreased $20.7 million to $3.9 million at June 30, 2022 compared to $24.5 million at December 31, 2021.

• $144,000 of net PPP loan origination fees were unearned at June 30, 2022 compared to $678,000 at December 31, 2021.

$130,000 of net PPP loan origination fees were earned in the three months ended June 30, 2022 compared to $404,000 for the three months ended March 31, 2022.

Loans, Allowance for Loan Losses and Credit Quality

• Total loans held for investment decreased $154,000 or 0.02%, to $1.02 billion at March 31, 2022 compared to $1.02 billion at December 31, 2021.

• Total loans held for investment increased $7.2 million, or 0.70%, to $1.03 billion at June 30, 2022 compared to $1.02 billion at December 31, 2021.

Excluding the net decline of $20.7 million in PPP loans in the current period, loans increased $27.8 million.

Average loans for the three months ended March 31, 2022 increased $4.4 million compared to the three months ended December 31, 2021.

An increase in consumer loans was the primary driver in the average balance change, offset by increased payoffs in residential and commercial and industrial loans.

• The allowance for loan losses was $11.6 million at both March 31, 2022 and December 31, 2021.

As a result, the allowance for loan losses to total loans was 1.14% at March 31, 2022 compared to 1.13% at December 31, 2021.

The allowance for loan losses to total loans, excluding PPP loans, was 1.15% at March 31, 2022 compared to 1.16% at December 31, 2021.

The lack of change in the allowance for loan losses was primarily due to consistent loan balances between the periods and no significant changes in qualitative factors.

• Net recoveries for the three months ended March 31, 2022 were $13,000, or 0.01% of average loans on an annualized basis.

Net charge-offs for the three months ended March 31, 2021 were $46,000, or 0.02% of average loans on an annualized basis.

• Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more, and accruing loans that are considered troubled debt restructurings, were $7.3 million at March 31, 2022 compared to $7.3 million at December 31, 2021.

Nonperforming loans to total loans ratio was 0.72% at March 31, 2022 compared to 0.71% at December 31, 2021.

• Intangible Assets decreased $445,000 to $4.9 million at March 31, 2022 compared to $5.3 million at December 31, 2021 due to amortization expense of $445,000 recognized during the period.

• Accrued Interest Receivable and Other Assets increased $3.7 million, or 28.8% to $16.5 million at March 31, 2022, compared to $12.9 million at December 31, 2021 This change is primarily driven by deferred taxes as a result of the increase in market interest rates and the resulting decrease in the market value of the portfolio.

• There was one loan in forbearance at March 31, 2022 totaling $128,000, compared to no loans in forbearance at December 31, 2021.

Total liabilities increased $24.2 million, or 1.9%, to $1.32 billion at March 31, 2022 compared to $1.29 billion at December 31, 2021.

• Total deposits increased $23.7 million to $1.25 billion as of March 31, 2022 compared to $1.23 billion at December 31, 2021.

Noninterest bearing demand deposits, NOW accounts and savings accounts increased $14.3 million, $7.9 million and $8.1 million, respectively, partially offset by a decrease of $7.5 million in time deposits.

Annualized deposit growth

rate was 7.7%.

Average total deposits decreased $54.6 million, primarily in time deposits, for the three months ended March 31, 2022 compared to the three months ended December 31, 2021.

Borrowed Funds

• Short-term borrowings decreased $47,000, or 0.12%, to $39.2 million at March 31, 2022, compared to $39.3 million at December 31, 2021.

At March 31, 2022 and December 31, 2021, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are 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.

• The allowance for loan losses was $12.8 million at June 30, 2022 and $11.6 million at December 31, 2021.

As a result, the allowance for loan losses to total loans was 1.25% at June 30, 2022 compared to 1.13% at December 31, 2021.

The allowance for loan losses to total loans, excluding PPP loans, was 1.25% at June 30, 2022 compared to 1.16% at December 31, 2021.

The change in the allowance for loan losses was primarily due to adjustments to historical loss factors and changes in qualitative factors in particular economic and industry conditions since December 31, 2021.

• Net charge-offs for the three months ended June 30, 2022 were $2.5 million, or 1.01% of average loans on an annualized basis.

Net recoveries for the three months ended June 30, 2021 were $19,000, or 0.01% of average loans on an annualized basis.

Net charge-offs for the six months ended June 30, 2022 were $2.5 million, or 0.50% of average loans on an annualized basis.

Net charge-offs for the six months ended June 30, 2021 were $27,000, or 0.01% of average loans on an annualized basis.

• Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more, and accruing loans that are considered troubled debt restructurings, were $5.8 million at June 30, 2022 compared to $7.3 million at December 31, 2021.

Nonperforming loans to total loans ratio was 0.57% at June 30, 2022 compared to 0.71% at December 31, 2021.

• Intangible Assets decreased $891,000, or 17.0%, to $4.4 million at June 30, 2022 compared to $5.3 million at December 31, 2021 primarily due to amortization expense recognized during the period.

• Accrued interest receivable and other assets increased $5.9 million, or 45.9%;

to $18.8 million at June 30, 2022, compared to $12.9 million at December 31, 2021.

This change was primarily driven by deferred taxes as a result of the increase in market interest rates conditions and the decrease in the market value of the securities portfolio.

Total liabilities decreased $19.7 million, or 1.5%, to $1.27 billion at June 30, 2022 compared to $1.29 billion at December 31, 2021.

• Total deposits decreased $11.4 million to $1.22 billion as of June 30, 2022 compared to $1.23 billion at December 31, 2021, an annualized decrease of 1.9%.

Interest-bearing demand deposits and time deposits decreased $7.2 million and

$11.5 million, respectively, partially offset by increases in noninterest bearing demand deposits and savings accounts by $3.4 million and $10.7 million, respectively.

• Short-term borrowings decreased $7.1 million, or 18.1%, to $32.2 million at June 30, 2022, compared to $39.3 million at December 31, 2021.

At June 30, 2022 and December 31, 2021, short-term borrowings were comprised entirely of securities sold under agreements to repurchase, which are 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.

Stockholders’ Equity

Stockholders’ equity decreased $11.0 million, or 8.3%, to $122.2 million at March 31, 2022, compared to $133.1 million at December 31, 2021.

• Net income was $3.0 million for the three months ended March 31, 2022.

• Accumulated other comprehensive income decreased $9.7 million primarily due to the effect of market interest rate increases on the Company’s debt securities.

Stockholders’ equity decreased $19.4 million, or 14.6%, to $113.8 million at June 30, 2022, compared to $133.1 million at December 31, 2021.

On February 15, 2022, the Company completed its stock repurchase program that was implemented on June 10, 2021.

On April 21, 2022, a new $10 million repurchase program was authorized, with the Company repurchasing 27,439 shares at an average price of $22.06 per share during the second quarter.

• Net income was $3.2 million for the six months ended June 30, 2022.

• Accumulated other comprehensive loss decreased $16.5 million primarily due to the effect of market interest rate increases on the Company’s debt securities.

• In total, the Company has repurchased $4.0 million since December 31, 2021

• The Company declared and paid $2.5 million in dividends to common stockholders in the current period.

• The Company repurchased $3.4 million of its common stock as part of its stock repurchase program that was completed on February 15, 2022

• Book value per share (GAAP) was $23.69 at March 31, 2022 compared to $25.31 at December 31, 2021, a decrease of $1.62.

• Book value per share (GAAP) was $22.18 at June 30, 2022 compared to $25.31 at December 31, 2021, a decrease of $3.13.

Tangible book value per share (Non-GAAP) decreased $3.02, or 13.5%, to $19.43 compared to $22.45 at December 31, 2021.

Refer to Explanation of Use of Non-GAAP Financial Measures in this Report.

Consolidated Results of Operations for the Three Months Ended March 31, 2022 and 2021

Net income was $3.0 million for the three months ended March 31, 2022, an increase of $202,000 compared to net income of $2.8 million for the three months ended March 31, 2021.

Consolidated Results of Operations for the Three Months Ended June 30, 2022 and 2021

Net income was $118,000 for the three months ended June 30, 2022, an increase of $341,000 compared to net loss of $223,000 for the three months ended June 30, 2021.

Net Interest and Dividend Income.

Net interest and dividend income decreased $84,000, or 0.8%, to $9.9 million for the three months ended March 31, 2022 compared to $10.0 million for the three months ended March 31, 2021.

Net interest margin (FTE) (Non-GAAP) increased 5 basis points (“bps”) to 3.10% for the three months ended March 31, 2022 compared to 3.05% the three months ended March 31, 2021.

Net interest margin (GAAP) increased to 3.08% for the three months ended March 31, 2022 compared to 3.04% for the three months ended March 31, 2021.

Net interest and dividend income increased $229,000, or 2.3%, to $10.2 million for the three months ended June 30, 2022 compared to $9.9 million for the three months ended June 30, 2021.

Net interest margin (GAAP) increased to 3.12% for the three months ended June 30, 2022 compared to 2.84% for the three months ended June 30, 2021.

Net interest margin (FTE) (Non-GAAP) increased 28 basis points (bps) to 3.13% for the three months ended June 30, 2022 compared to 2.85% for the three months ended June 30, 2021.

Interest and Dividend Income

• Interest and dividend income decreased $372,000, or 3.4%, to $10.6 million for the three months ended March 31, 2022 compared to $11.0 million the three months ended March 31, 2021.

◦ Interest income on loans decreased $595,000, or 5.9%, to $9.6 million for the three months ended March 31, 2022 compared to $10.1 million for the three months ended March 31, 2021.

The average balance of loans decreased $22.6 million and the average yield decreased 15 bps to 3.85% compared to the three months ended March 31, 2021.

◦ Interest and fee income on PPP loans was $445,000 for the three months ended March 31, 2022 and contributed 13 bps to loan yield, compared to $676,000 for the three months ended March 31, 2021, which contributed 5 bps to loan yield.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $56,000 for the three months ended March 31, 2022 compared to $138,000 for the three months ended March 31, 2021, or 2 bps in the current period compared to 6 bps in the prior period.

◦ Interest income on taxable investment securities increased $259,000, or 40.1%, to $905,000 for the three months ended March 31, 2022 compared to $646,000 for the three months ended March 31, 2021 driven by a $93.0 million increase in average investment securities balances and 42 bps decrease in average yield.

• Interest and dividend income increased $138,000, or 1.3%, to $11.0 million for the three months ended June 30, 2022 compared to $10.8 million the three months ended June 30, 2021.

◦ Interest income on loans decreased $203,000, or 2.0%, to $9.7 million for the three months ended June 30, 2022 compared to $9.9 million for the three months ended June 30, 2021.

The average balance of loans decreased $9.0 million to $1.01 billion from $1.02 billion and the average yield decreased 5 bps to 3.88% compared to 3.93%.

◦ Interest and fee income on PPP loans was $144,000 for the three months ended June 30, 2022 and contributed 4 bps to loan yield, compared to $636,000 for the three months ended June 30, 2021, which contributed 3 bps to loan yield.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $75,000 for the three months ended June 30, 2022 compared to $153,000 for the three months ended June 30, 2021, or 3 bps in the current period compared to 6 bps in the prior period.

◦ Interest income on taxable investment securities increased $353,000, or 55.6%, to $988,000 for the three months ended June 30, 2022 compared to $635,000 for the three months ended June 30, 2021 driven by a $103.6 million increase in average balance partially offset by a 31 bps decrease in average yield.

Interest Expense

• Interest expense decreased $288,000, or 28.5%, to $723,000 for the three months ended March 31, 2022 compared to $1.0 million for the three months ended March 31, 2021.

◦ Interest expense on deposits decreased $417,000, or 44.0%, to $530,000 for the three months ended March 31, 2022 compared to $947,000 for the three months ended March 31, 2021.

While average interest-earning deposits decreased $38.6 million compared to the three months ended March 31, 2021, controlling the deposit cost structure as deposit balances decreased combined with non-renewal or repricing of higher-cost time deposit resulted in an 18

bp, or 41.4%, decrease in average cost compared to the three months ended March 31, 2021.

In addition, average time deposits and the related average cost decreased $55.1 million and 30 bps, respectively.

• Interest expense decreased $91,000, or 10.3%, to $795,000 for the three months ended June 30, 2022 compared to $886,000 for the three months ended June 30, 2021.

◦ Interest expense on deposits decreased $223,000, or 27.0%, to $604,000 for the three months ended June 30, 2022 compared to $827,000 for the three months ended June 30, 2021.

While average interest-earning deposit balances decreased $74.5 million, or 8%, from $900.1 million as of June 30, 2021 compared to $825.6 million as of June 30, 2022, controlling the deposit cost structure combined with non-renewal or repricing of higher-cost time deposit resulted in a 8 bps, or 21.7%, decrease in average cost compared to the three months ended June 30, 2021.

In addition, the average balance of time deposits and the related average cost decreased $49.7 million and 24 bps, respectively.

These decreases are partially offset by a 9 bps increase in interest-bearing demand deposit average cost as well as an increase in average other borrowings of $11.6 million or 193.5% to $17.6 million as of June 30, 2022 compared to $6.0 million as of June 30, 2021, which was driven by an increase in subordinated debt balance.

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.

The following table presents 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.

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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,

Three Months Ended June 30,

Balance Interest

8 unchanged sentences

Taxable 228,315 988 1.73 124,685 635 2.04

Exempt From Federal Tax 9,109 73 3.21 12,276 94 3.06

Equity Securities 2,693 20 2.97 2,649 24 3.62

Interest Bearing Deposits at Banks 56,379 122 0.87 242,348 106 0.17

Other Interest-Earning Assets 3,235 38 4.71 4,044 45 4.46

Total Interest-Earning Assets 1,307,605 10,992 3.37 1,402,870 10,863 3.11

Noninterest-Earning Assets 84,323 82,794

Total Assets $ 1,391,928 $ 1,485,664

Liabilities and Stockholders' Equity:

Interest-Bearing Liabilities:

Interest-Bearing Demand Deposits (3)

$ 260,655 111 0.17 % $ 275,752 55 0.08 %

248,356 20 0.03 247,238 25 0.04

Money Market (3)

188,804 61 0.13 199,652 71 0.14

Time Deposits (3)

127,832 412 1.29 177,506 676 1.53

Total Interest-Bearing Deposits (3)

825,647 604 0.29 900,148 827 0.37

Short-Term Borrowings

Securities Sold Under Agreements to Repurchase 34,135 18 0.21 49,325 24 0.20

Other Borrowings 17,611 173 3.94 6,000 35 2.34

Total Interest-Bearing Liabilities 877,393 795 0.36 955,473 886 0.37

Noninterest-Bearing Demand Deposits 391,975 387,317

Other Liabilities 4,415 7,999

Total Liabilities 1,273,783 1,350,789

Stockholders' Equity 118,145 134,875

Total Liabilities and Stockholders' Equity $ 1,391,928 $ 1,485,664

Net Interest Income (FTE) (Non-GAAP) (4)

$ 10,197 $ 9,977

Net Interest Rate Spread (FTE) (Non-GAAP) (4)(6)

3.01 % 2.74 %

Net Interest-Earning Assets (5)

$ 430,212 $ 447,397

Net Interest Margin (GAAP) (7))

Net Interest Margin (FTE) (Non-GAAP) (4)(7)

Return on Average Assets (1)

Return on Average Equity (1)

Average Equity to Average Assets 8.49 9.08

Average Interest-Earning Assets to Average Interest-Bearing Liabilities 149.03 146.82

PPP Loans $ 5,546 $ 144 10.41 $ 57,661 $ 636 4.42

(1) Annualized based on three months ended results.

(2) Net of the allowance for loan losses and includes nonaccrual loans with a zero yield and Loans Held for Sale if applicable.

(3) Includes Deposits Held for Sale that were sold in December 2021.

(4) Refer to Explanation and Use of Non-GAAP Financial Measures in this filing for the calculation of the measure and reconciliation to the most comparable GAAP measure.

(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6) 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.

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

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 June 30, 2022

Three Months Ended June 30, 2021

(Decrease) Increase Due to

Volume Rate Total

(Dollars in thousands) (Unaudited)

Interest and Dividend Income:

Loans, net $ (82) $ (126) $ (208)

Debt Securities:

Taxable 462 (109) 353

Exempt From Federal Tax (26) 5 (21)

Marketable Equity Securities — (4) (4)

Other Interest-Earning Assets (10) 3 (7)

Total Interest-Earning Assets 211 (82) 129

Interest Expense:

Deposits (54) (169) (223)

Short-Term Borrowings:

Securities Sold Under Agreements to Repurchase (7) 1 (6)

Other Borrowings 102 36 138

Total Interest-Bearing Liabilities 41 (132) (91)

Change in Net Interest and Dividend Income $ 170 $ 50 $ 220

Provision for Loan Losses.

There was $3.8 million provision for loan losses for the three months ended June 30, 2022 compared with a recovery of $1.2 million for the three months ended June 30, 2021.

The increased provision for loan losses was primarily due to a provision for a single loan charge-of f of $2.7 million (pre-tax) with respect to a commercial and industrial loan.

As previously reported, the charge-off relates to a borrower which is ceasing operations and carried a $3.5 million revolving line of credit which had an outstanding balance of $2.7 million.

The remaining increase to the provision was a result of adjustments made to historical loss factors and changes in qualitative factors in particular economic and industry conditions between the three months ended June 30, 2022 and three months ended June 30, 2021.

Noninterest Income .

Noninterest income decreased $114,000, or 5.1%, to $2.1 million for the three months ended June 30, 2022, compared to $2.2 million for the three months ended June 30, 2021.

The decrease was largely due to a $210,000 reduction in securities gains due to a decline of $199,000 in the market value of equity securities, comprised mainly of bank stocks, partially offset by a $160,000 increase in insurance commissions.

The increase in insurance commissions was primarily driven by contingency income which resulted from the higher than lock-in amounts received and core business including commercial and personal insurance lines.

In addition, net gain on sale of loans decreased $31,000 as there were no loans sold during the three months ended June 30, 2022.

Noninterest Expense.

Noninterest expense decreased $5.3 million, or 38.7%, to $8.4 million for the three months ended June 30, 2022 compared to $13.7 million for the three months ended June 30, 2021, compared to $8.7 million for the three months ended March 31, 2022.

The primary drivers were decreases of $2.3 million and $1.2 million related to the writedown of fixed assets and intangible impairment associated with branch consolidation and sale initiatives in 2021, respectively.

In addition, salaries and benefits decreased $537,000 and occupancy decreased $248,000, primarily related to the reduction of footprint and related headcount resulting from the consolidation and sale of branches during 2021.

Contracted services decreased $402,000 to

$348,000 for the three months ended June 30, 2022 compared to $750,000 for the three months ended June 30, 2021.

This was a result of branch optimization initiatives completed in the prior year.

Income Taxes.

Income tax benefit was $44,000 for the three months ended June 30, 2022 compared to income tax benefit of $146,000 for the three months ended June 30, 2021.

This change was primarily driven by pre-tax income of $74,000 for the three months ended June 30, 2022 compared to pre-tax loss of $369,000 for the three months ended June 30, 2021, due to expenses incurred from the branch consolidation efforts in the three months ended June 30, 2021 which were not incurred in the three months ended June 30, 2022

Results of Operations for the Six Months Ended June 30, 2022 and 2021

Net income was $3.2 million for the six months ended June 30, 2022, an increase of $543,000 compared to net income of $2.6 million for the six months ended June 30, 2021.

Net Interest and Dividend Income.

Net interest and dividend income increased $145,000, or 0.7% to $20.1 million for the six months ended June 30, 2022 compared to $19.9 million for the six months ended June 30, 2021.

Net interest margin (Non-GAAP FTE) increased 16 bps to 3.11% for the six months ended June 30, 2022 compared to 2.95% the six months ended June 30, 2021.

Net interest margin (GAAP) increased to 3.10% for the six months ended June 30, 2022 compared to 2.94% for the six months ended June 30, 2021.

Interest and Dividend Income

• Interest and dividend income decreased $234,000, or 1.1%, to $21.6 million for the six months ended June 30, 2022 compared to $21.8 million for the six months ended June 30, 2021.

◦ Interest income on loans decreased $798,000 or 4.0% to $19.3 million during the six months ended June 30, 2022 compared to $20.1 million for the six months ended June 30, 2021.

Average loans decreased $15.8 million, and the loan yield for the six months ended June 30, 2022 decreased 10 bps to 3.86% compared to 3.96% for the six months ended June 30, 2021.

◦ Interest and fee income on PPP loans was $589,000 for the six months ended June 30, 2022 and contributed 8 bps to loan yield, compared to $1.3 million for the six months ended June 30, 2021, which contributed loan yield 4 bps in the prior period.

◦ The impact of the accretion of the credit mark on acquired loan portfolios was $130,000 for the six months ended June 30, 2022 compared to $291,000 for the six months ended June 30, 2021, or 3 bps in the current period compared to 5 bps in the prior period.

◦ Interest income on taxable investment securities increased $612,000, or 47.8%, to $1.9 million for the six months ended June 30, 2022 compared to $1.3 million for the six months ended June 30, 2021 driven by a $98.4 million increased in average taxable investment securities balance and partially offset by a 37 bps decrease in average yield.

Interest Expense

• Interest expense decreased $379,000, or 20.0%, to $1.5 million for the six months ended June 30, 2022 compared to $1.9 million for the six months ended June 30, 2021.

◦ Interest expense on deposits decreased $640,000, or 36.1%, to $1.1 million for the six months ended June 30, 2022 compared to $1.8 million for the six months ended June 30, 2021.

While average interest-bearing deposits decreased $56.6 million, controlling the deposit cost structure combined with non-renewal or repricing of higher-cost time deposit resulted in a resulted in a 13 bps decrease in average cost compared to the six months ended June 30, 2021.

In addition, the average balance of time deposits and the related average cost decreased $52.4 million and 28 bps, respectively.

These decreases are partially offset by a 2 bps increase in interest-bearing demand deposit average cost as well as an increase in average other borrowings of $11.0 million or 166.9% to $17.6 million as of June 30, 2022 compared to $6.6 million as of June 30, 2021, which was driven by an increase in subordinated debt balance.

Average Balances and Yields.

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% for the periods presented.

As such, amounts will not

agree to income as reported in the consolidated financial statements.

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

Six Months Ended June 30,

Balance Interest

Dividends Yield/

Balance Interest

Dividends Yield/

(Dollars in thousands) (Unaudited)

Interest-Earning Assets:

Loans, Net (2)

$ 1,008,539 $ 19,322 3.86 % $ 1,024,319 $ 20,131 3.96 %

Debt Securities

Taxable 222,144 1,893 1.70 123,790 1,281 2.07

Tax Exempt 9,649 156 3.23 12,608 192 3.05

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Interest-Bearing Demand Deposits (3)

Savings 243,786 19 0.03 239,850 32 0.05

$ 268,585 160 0.12 % $ 267,455 133 0.10 %

246,084 38 0.03 243,565 57 0.05

Money Market (3)

190,605 102 0.11 198,530 168 0.17

Time Deposits (3)

129,914 834 1.29 182,283 1,416 1.57

Total Interest-Bearing Deposits (3)

Short-Term Borrowings

835,188 1,134 0.27 891,833 1,774 0.40

ST Borrowings

Securities Sold Under Agreements to Repurchase 36,000 37 0.21 45,232 47 0.21

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(1) Annualized based on three months ended results.

(2) Net of the allowance for loan losses, and includes nonaccrual loans with a zero yield

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

(4) 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 of the allowance for loan losses and includes nonaccrual loans with a zero yield and Loans Held for Sale if applicable.

(3) Includes Deposits Held for Sale that were sold in December 2021.

(4) Refer to Explanation and Use of Non-GAAP Financial Measures in this filing for the calculation of the measure and reconciliation to the most comparable GAAP measure.

(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6) 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.

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

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The total column represents the sum of the prior columns.

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

Six Months Ended June 30, 2022

Six Months Ended June 30, 2021

Increase (Decrease) Due to

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Provision for Loan Losses.

There was no provision for loan losses for either the three months ended March 31, 2022 or the three months ended March 31, 2021.

The provision for loan losses remaining constant was primarily due to consistent loan balances between the periods and no significant changes in qualitative factors.

The provision for loan losses was $3.8 million for the six months ended June 30, 2022, compared to a $1.2 million recovery for the six months ended June 30, 2021.The increased provision for loan losses was primarily due to a provision for a single loan charge-of f of $2.7 million (pre-tax) with respect to a commercial and industrial loan.

As previously reported, the charge-off relates to a borrower which is ceasing operations and carried a $3.5 million revolving line of credit which had an outstanding balance of $2.7 million.

The remaining increase to the provision was a result of adjustments made to historical loss factors and changes in qualitative factors in particular economic and industry conditions.

Noninterest Income.

Noninterest income decreased $561,000, or 17.7%, to $2.6 million for the three months ended March 31, 2022, compared to $3.2 million for the three months ended March 31, 2021.

• Insurance commissions increased $203,000 to $1.8 million for the three months ended March 31, 2022 compared to $1.6 million for the three months ended March 31, 2021.

The increase in insurance commissions was primarily driven by contingency fees of $114,000.

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 which resulted from the higher than lock-in amounts received.

• Net (loss) gain on securities decreased $454,000 to a $7,000 loss for the three months ended March 31, 2022 compared to a $447,000 gain for the three months ended March 31, 2021.

The change was driven by a $229,000 decrease in fair market value of equity securities between the three months ended March 31, 2021 and three months ended March 31, 2022, in addition to a $225,000 net gain on sale of debt securities during the three months ended March 31, 2021, compared to no gain recognized in the three months ended March 31, 2022.

• Net gain on sale of loans decreased $86,000 as there were no loans sold for the three months ended March 31, 2022.

• Other income was $65,000 for the three months ended March 31, 2022 compared to $180,000 for the three months ended March 31, 2021, the Company recognized a recapture of a temporary impairment on mortgage servicing rights in the current quarter of $59,000, compared to the prior period recapture of temporary impairment of $172,000.

Noninterest income decreased $675,000, or 12.5%, to $4.7 million for the six months ended June 30, 2022, compared to $5.4 million for the six months ended June 30, 2021.

The decrease was primarily due to the net loss on securities of $206,000 for the six months ended June 30, 2022 compared to net gain on securities of $458,000 for the six months ended June 30, 2021, which was largely due to a decline of $439,000 in the market value of equity securities, comprised mainly of bank stocks.

In addition, net gain on sales of loans decreased $117,000 as there were no loans sold during for the six months ended June 30, 2022 compared to $117,000 for the six months ended June 30, 2021.

These changes are partially offset by an increase of $363,000, or 12.9%, in insurance commissions to $3.2 million for the six months ended June 30, 2022, compared to $2.8 million for the six months ended June 30, 2021 due to higher than lock-in amounts received and core business including commercial and personal insurance lines.

Noninterest Expense.

Noninterest expense decreased $739,000, or 7.9%, to $8.7 million for the three months ended March 31, 2022 compared to $9.4 million for the three months ended March 31, 2021, primarily due to the implementation of branch optimization initiatives completed during 2021 which established a lower expense base.

Partially offsetting the lower expense base in the first quarter were investment in executive leadership tasked with implementing growth initiatives.

• Salaries and employee benefits decreased $329,000 to $4.6 million for the three months ended March 31, 2022 compared to $4.9 million for the three months ended March 31, 2021.

The decrease was primarily related to prior year branch optimization, including the consolidation of six branches in June 2021 and the divestiture of two branches in December 2021, partially offset by costs for new strategic executive team members hired during the three months ended March 31, 2022.

• Occupancy expense decreased $24,000 to $686,000 for the three months ended March 31, 2022 compared to $710,000 for the three months ended March 31, 2021.

The decrease is primarily due to branch consolidations and divestitures in the prior year, reducing the Company's physical footprint, and partially offset by increased maintenance costs due to improvements at remaining locations.

• Contracted services decreased $100,000 to $587,000 for the three months ended March 31, 2022 compared to $687,000 for the three months ended March 31, 2021.

The decrease was primarily driven by a change in expense for occupancy management services, partially offset by increases in operational efficiency strategic expenses, Current Expected Credit Losses ("CECL") implementation expense and contracted recruiting spend.

• Amortization of intangible assets decreased $87,000 to $445,000 for the three months ended March 31, 2022 compared to $532,000 for the three months ended March 31, 2021 primarily due to impairment recognized in the later half of 2021 on the core deposit intangible asset from the announcement of the branch divestitures, and the corresponding sale of the related deposits, which reduced the remaining amount of intangible assets to amortize.

Noninterest expense decreased $6.1 million, or 26.2%, to $17.1 million for the six months ended June 30, 2022 compared to $23.1 million for the six months ended June 30, 2021.

The primary drivers were decreases of $1.2 million and $2.3 million as previously noted related to the writedown of fixed assets and intangible impairment associated with branch consolidation and sale initiatives in 2021, respectively.

In addition, salaries and benefits decreased $866,000 and occupancy decreased $272,000, primarily related to the reduction of footprint and related headcount resulting from the consolidation and sale of branches during 2021.

Contracted services decreased $502,000 to $935,000 for the six months ended June 30, 2022 compared

to $1.4 million for the six months ended June 30, 2021.

This was a result of branch optimization initiatives completed in the prior year.

Income Taxes.

Income tax expense was $803,000 for the three months ended March 31, 2022 compared to income tax expense of $911,000 for the three months ended March 31, 2021.

This change was primarily related to a prior period income tax adjustment that resulted from amended tax returns as a result of the CARES Act.

Income tax expense decreased $6,000 to $759,000 for the six months ended June 30, 2022 compared to $765,000 for the six months ended June 30, 2021.

The lack of significant change between the periods is consistent with the lack of significant change in pre-tax income, as pre-tax income was $3.9 million for the six months ended June 30, 2022 compared to pre-tax income of $3.4 million for the six months ended June 30, 2021.

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 7 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of March 31, 2022 and December 31, 2021.

Refer to Note 7 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of June 30, 2022 and December 31, 2021.

Liquidity and Capital Management

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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, 2022 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $123.6 million at March 31, 2022.

The Company believes that it had sufficient liquidity at June 30, 2022 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $81.1 million at June 30, 2022.

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 $83.7 million at March 31, 2022.

In addition, at March 31, 2022, the Company had the ability to borrow up to $430.9 million from the FHLB of Pittsburgh, of which $347.8 million is available.

The Company also has the ability to borrow up to $102.7 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $50.0 million as of both March 31, 2022 and December 31, 2021.

At March 31, 2022, $72.2 million, or 55.9% of total time deposits mature within one year.

Unpledged securities, which provide an additional source of liquidity, totaled $18.2 million at June 30, 2022.

In addition, at June 30, 2022, the Company had the ability to borrow up to $440.1 million from the FHLB of Pittsburgh, of which $434.4 million is available.

The Company also has the ability to borrow up to $106.2 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 June 30, 2022 and December 31, 2021.

At June 30, 2022, $72.9 million, or 58.2% 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 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.

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

At March 31, 2022, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $18.3 million.

At June 30, 2022, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $17.2 million.

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.

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

At March 31, 2022 and December 31, 2021, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

At March 31, 2022, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act.

At June 30, 2022 and December 31, 2021, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.

At June 30, 2022, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act.

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

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Amount Ratio Amount Ratio

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis