CB Financial Services, Inc. 10-Q

Item 1. Financial Statements. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) March 31, 2023 December 31, 2022 (Dollars in thousands, except per share and share data) ASSETS Cash and Due From Banks: Interest Bearing $ 85,533 $ 82,957 Non-Interest Bearing 18,012 20,743 Total Cash and Due From Banks 103,545 103,700 Securities: Available-for-Sale Debt Securities, at Fair Value 186,559 187,360 Equity Securities, at Fair Value 2,466 2,698 Total Securities 189,025 190,058 Loans, Net of Allowance for Credit Losses of $ 10,270 and $ 12,819 at March 31, 2023 and December 31, 2022, Respectively 1,061,595 1,037,054 Premises and Equipment, Net 17,732 17,844 Bank-Owned Life Insurance 24,943 25,893 Goodwill 9,732 9,732 Intangible Assets, Net 3,068 3,513 Accrued Interest Receivable and Other Assets 21,068 21,144 TOTAL ASSETS $ 1,430,708 $ 1,408,938 LIABILITIES Deposits: Non-Interest Bearing Demand Deposit Accounts $ 350,911 $ 390,405 NOW Accounts 359,051 311,825 Money Market Accounts 206,174 209,125 Savings Accounts 234,935 248,022 Time Deposits 130,449 109,126 Total Deposits 1,281,520 1,268,503 Short-Term Borrowings 121 8,060 Other Borrowings 14,648 14,638 Accrued Interest Payable and Other Liabilities 17,224 7,582 TOTAL LIABILITIES 1,313,513 1,298,783 STOCKHOLDERS' EQUITY Preferred Stock, No Par Value; 5,000,000 Shares Authorized — — Common Stock, $ 0.4167 Par Value; 35,000,000 Shares Authorized, 5,730,908 Shares Issued and 5,116,830 Shares Outstanding at March 31, 2023, with 5,708,433 and 5,100,189 Shares Issued and Outstanding at December 31, 2022. 2,388 2,379 Capital Surplus 84,118 83,953 Retained Earnings 68,834 63,861 Treasury Stock, at Cost ( 614,078 and 608,244 Shares at March 31, 2023 and December 31, 2022, Respectively) ( 13,927 ) ( 13,797 ) Accumulated Other Comprehensive Loss ( 24,218 ) ( 26,241 ) TOTAL STOCKHOLDERS' EQUITY 117,195 110,155 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,430,708 $ 1,408,938 The accompanying notes are an integral part of these consolidated financial statements 1 Table of Contents CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March 31, 2023 2022 (Dollars in thousands, except share and per share data) INTEREST AND DIVIDEND INCOME Loans, Including Fees $ 12,371 $ 9,551 Investment Securities: Taxable 964 905 Tax-Exempt 41 66 Dividends 24 22 Other Interest and Dividend Income 844 72 TOTAL INTEREST AND DIVIDEND INCOME 14,244 10,616 INTEREST EXPENSE Deposits 2,504 530 Short-Term Borrowings 2 19 Other Borrowings 155 174 TOTAL INTEREST EXPENSE 2,661 723 NET INTEREST AND DIVIDEND INCOME 11,583 9,893 Provision For Credit Losses - Loans 80 — Provision For Credit Losses - Unfunded Commitments — — NET INTEREST AND DIVIDEND INCOME AFTER PROVISION FOR CREDIT LOSSES 11,503 9,893 NONINTEREST INCOME Service Fees 445 526 Insurance Commissions 1,922 1,798 Other Commissions 144 89 Net Gain on Sales of Loans 2 — Net Loss on Securities ( 232 ) ( 7 ) Net Gain on Purchased Tax Credits 7 14 Net Gain (Loss) on Disposal of Fixed Assets 11 ( 8 ) Income from Bank-Owned Life Insurance 140 136 Net Gain on Bank-Owned Life Insurance Claims 302 — Other Income 69 65 TOTAL NONINTEREST INCOME 2,810 2,613 NONINTEREST EXPENSE Salaries and Employee Benefits 5,079 4,565 Occupancy 701 686 Equipment 218 210 Data Processing 857 485 FDIC Assessment 152 209 PA Shares Tax 260 240 Contracted Services 147 587 Legal and Professional Fees 182 152 Advertising 79 116 Other Real Estate Owned (Income) ( 37 ) ( 38 ) Amortization of Intangible Assets 445 445 Other Expense 945 999 TOTAL NONINTEREST EXPENSE 9,028 8,656 Income Before Income Tax Expense 5,285 3,850 Income Tax Expense 1,129 803 NET INCOME $ 4,156 $ 3,047 EARNINGS PER SHARE Basic $ 0.81 $ 0.59 Diluted 0.81 0.58 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 5,109,597 5,198,194 Diluted 5,115,705 5,220,887 The accompanying notes are an integral part of these consolidated financial statements 2 Table of Contents CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) Three Months Ended March 31, 2023 2022 (Dollars in thousands) Net Income $ 4,156 $ 3,047 Other Comprehensive Income (Loss): Change in Unrealized Gain (Loss) on Investment Securities Available-for-Sale 2,580 ( 12,351 ) Income Tax Effect ( 557 ) 2,660 Other Comprehensive Income (Loss), Net of Income Tax Effect 2,023 ( 9,691 ) Total Comprehensive Income (Loss) $ 6,179 $ ( 6,644 ) The accompanying notes are an integral part of these consolidated financial statements 3 Table of Contents CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) Three Months Ended March 31, 2023 Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' Equity (Dollars in thousands, except share and per share data) December 31, 2022 5,708,433 $ 2,379 $ 83,953 $ 63,861 $ ( 13,797 ) $ ( 26,241 ) $ 110,155 Adoption of Accounting Standard ASU 2016-13 — — — 2,092 — — 2,092 Balance as of January 1, 2023, adjusted 5,708,433 $ 2,379 $ 83,953 $ 65,953 $ ( 13,797 ) $ ( 26,241 ) $ 112,247 Comprehensive Income: Net Income — — — 4,156 — — 4,156 Other Comprehensive Income — — — — — 2,023 2,023 Restricted Stock Awards Granted 22,475 9 ( 9 ) — — — — Stock-Based Compensation Expense — — 174 — — — 174 Treasury stock purchased, at cost ( 5,834 shares) — — — — ( 130 ) — ( 130 ) Dividends Paid ($ 0.25 Per Share) — — — ( 1,275 ) — — ( 1,275 ) March 31, 2023 5,730,908 $ 2,388 $ 84,118 $ 68,834 $ ( 13,927 ) $ ( 24,218 ) $ 117,195 Three Months Ended March 31, 2022 Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Stockholders' Equity (Dollars in thousands, except share and per share data) December 31, 2021 5,680,993 $ 2,367 $ 83,294 $ 57,534 $ ( 9,144 ) $ ( 927 ) $ 133,124 Comprehensive Loss: Net Income — — — 3,047 — — 3,047 Other Comprehensive Loss — — — — — ( 9,691 ) ( 9,691 ) Restricted Stock Awards Forfeited — — 4 — ( 4 ) — — Restricted Stock Awards Granted 20,765 9 ( 9 ) — — — — Stock-Based Compensation Expense — — 130 — — — 130 Exercise of Stock Options — — 3 — 164 — 167 Treasury Stock Purchased, at cost ( 131,840 shares) — — — — ( 3,383 ) — ( 3,383 ) Dividends Paid ($ 0.24 Per Share) — — — ( 1,238 ) — — ( 1,238 ) March 31, 2022 5,701,758 $ 2,376 $ 83,422 $ 59,343 $ ( 12,367 ) $ ( 10,618 ) $ 122,156 The accompanying notes are an integral part of these consolidated financial statements 4 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, 2023 2022 (Dollars in thousands) OPERATING ACTIVITIES Net Income $ 4,156 $ 3,047 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities Net Amortization on Securities 22 17 Depreciation and Amortization 710 637 Provision for Credit Losses 80 — Loss on Securities 232 7 Gain on Purchased Tax Credits ( 7 ) ( 14 ) Income from Bank-Owned Life Insurance ( 140 ) ( 136 ) Proceeds From Mortgage Loans Sold 140 — Originations of Mortgage Loans for Sale ( 138 ) — Gain on Sale of Loans ( 2 ) — Gain on Sale of Other Real Estate Owned and Repossessed Assets — ( 1 ) Noncash Expense for Stock-Based Compensation 174 130 (Increase) Decrease in Accrued Interest Receivable ( 33 ) 94 Net (Gain) Loss on Disposal of Fixed Assets ( 11 ) 8 Increase in Taxes Payable 1,129 956 Increase in Accrued Interest Payable 109 60 Other, Net 810 ( 1,640 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 7,231 3,165 INVESTING ACTIVITIES Investment Securities Available for Sale: Proceeds From Principal Repayments and Maturities 3,359 8,328 Purchases of Securities — ( 26,826 ) Net (Increase) Decrease in Loans ( 15,865 ) 223 Purchase of Premises and Equipment ( 204 ) ( 186 ) Proceeds from Disposal of Premises and Equipment 36 — Proceeds From a Claim on Bank-Owned Life Insurance 1,392 — Proceeds From Sale of Other Real Estate Owned — 37 (Increase) Decrease in Restricted Equity Securities 223 ( 26 ) NET CASH USED IN INVESTING ACTIVITIES ( 11,059 ) ( 18,450 ) FINANCING ACTIVITIES Net Increase in Deposits 13,017 23,700 Net Decrease in Short-Term Borrowings ( 7,939 ) ( 47 ) Cash Dividends Paid ( 1,275 ) ( 1,238 ) Treasury Stock, Purchases at Cost ( 130 ) ( 3,383 ) Exercise of Stock Options — 167 NET CASH PROVIDED BY FINANCING ACTIVITIES 3,673 19,199 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 155 ) 3,914 CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 103,700 119,674 CASH AND DUE FROM BANKS AT END OF PERIOD $ 103,545 $ 123,588 The accompanying notes are an integral part of these consolidated financial statements 5 Table of Contents CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, 2023 2022 (Dollars in thousands) SUPPLEMENTAL CASH FLOW INFORMATION: Cash Paid For: Interest on Deposits and Borrowings (Including Interest Credited to Deposits of $ 2,540 and $ 616 , Respectively) $ 2,552 $ 486 SUPPLEMENTAL NONCASH DISCLOSURE: Proceeds receivable from claims on bank-owned life insurance 1,392 — Other Real Estate Acquired in Settlement of Loans 248 — Syndicated Loans Purchased not Settled 8,943 — Right of Use Asset Recognized 77 1,175 Lease Liability Recognized 75 1,175 The accompanying notes are an integral part of these consolidated financial statements 6 Table of Contents NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters”). CB Financial, the Bank and Exchange Underwriters are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation. The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with general practice within the banking industry. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Statements of Financial Condition and income and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, other-than-temporary impairment evaluations of securities, goodwill and intangible assets impairment, and the valuation of deferred tax assets. In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Interim results are not necessarily indicative of results for a full year. The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification ("ASC") 855, Subsequent Events , to be recognizable events. Nature of Operations The Company derives substantially all its income from banking and bank-related services which include interest income on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest and dividend income on securities, insurance commissions, and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank 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 operates 10 branches in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, and three branches in Marshall and Ohio Counties in West Virginia. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, a full-service, independent insurance agency. Critical Accounting Policies; Use of Critical Accounting Estimates The disclosures below supplements the accounting policies previously disclosed in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC. The updates reflect the adoption of Financial Accounting Standard Board ("FASB") ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , referred to as ASC 326 or, more commonly, referred to as Current Expected Credit Losses (CECL). Allowance for Credit Losses (ACL) On January 1, 2023, the Company adopted ASU 2016-13, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss methodology. The Company adopted ASU 2016-13 using a modified retrospective approach. Results for reporting periods beginning after January 1, 2023 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The adoption resulted in a decrease of $ 3.4 million to the Company’s ACL related to loans receivable (ACL - Loans) and an increase of $ 718,000 in ACL 7 Table of Contents for unfunded commitments (ACL - Unfunded Commitments). The net impact resulted in a $ 2.1 million increase to retained earnings, net of deferred taxes. The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for credit losses is reported separately as a contra-asset on the consolidated statement of financial condition. The expected credit loss for unfunded loan commitments is reported on the Consolidated Statement of Financial Condition in other liabilities while the provision for credit losses related to unfunded commitments is reported in provision for credit losses - unfunded commitments in the Consolidated Statements of Income. Allowance for Credit Losses on Loans Receivable The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected. Expected losses are evaluated and calculated on a collective, or pooled, basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether loans within a pool continue to exhibit similar risk characteristics. If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics. If the loan does not share risk characteristics with other loans, the Company will evaluate the loan on an individual basis. The Company evaluates the pooling methodology at least annually. Loans are charged off against the allowance for credit losses when the Company believes the balances to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off. The Company has chosen to segment its portfolio consistent with the manner in which it manages credit risk. Such segments include residential mortgage, commercial real estate mortgages, construction, commercial business, consumer and other. For most segments the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount. The Company estimates the allowance for credit losses on loans via a quantitative analysis which considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a restructurings will be executed with an individual borrower or the renewal option is included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Also included in the allowance for credit losses on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and non-accrual loans, and the effect of external factors such as competition, legal and regulatory requirements, among others. Furthermore, the Company considers the inherent uncertainty in quantitative models that are built upon historical data. Individually Evaluated Loans On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan. 8 Table of Contents Allowance for Credit Losses on Off-Balance Sheet Commitments The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancellable. To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate. To determine the expected funding rate, the Company uses a historical utilization rate for each segment. As noted above, the allowance for credit losses on unfunded loan commitments is included in other liabilities on the Consolidated Statement of Financial Condition and the related credit expense is recorded in provision for credit losses - unfunded commitments in the Consolidated Statements of Income. Allowance for Credit Losses on Available for Sale Securities For available for sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating by a rating agency, and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major agencies and have a long history of no credit losses. Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued Interest Receivable The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans and available for sale securities. Accrued interest receivable on loans is reported as a component of accrued interest receivable and other assets on the Consolidated Statement of Financial Condition, totaled $ 3.5 million at March 31, 2023 and is excluded from the estimate of credit losses. Accrued interest receivable on available of sale securities, also a component of accrued interest receivable and other assets on the Consolidated Statement of Financial Condition, totaled $ 534,000 , at March 31, 2023 and is excluded from the estimate of credit losses. Recent Accounting Standards In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 that extends the period of time preparers can utilize the reference rate reform relief guidance. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The elective guidance in the ASU applies to modifications of contract terms that will directly replace, or have the potential to replace, an affected rate with another interest rate index, as well as certain contemporaneous modifications of other contract terms related to the replacement of an affected rate. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The optional expedient allows companies to account for the modification as if it was not substantial (i.e., do not treat as an extinguishment of debt). To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. For all entities, the amendments in ASU 2022-06 are effective upon issuance. As of March 31, 2023, the Company has identified approximately $ 126.0 million in outstanding loan balances and a $ 5.0 million corporate debt security tied to the LIBOR reference rate. The Company has not yet made any contract modifications. The Company is currently evaluating the potential impact of this guidance on its consolidated statements of financial statements and results of operations. 9 Table of Contents Note 2. Earnings Pe r Share There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statements of Income is used as the numerator. The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation. Three Months Ended March 31, 2023 2022 (Dollars in thousands, except share and per share data) Net Income $ 4,156 $ 3,047 Weighted-Average Basic Common Shares Outstanding 5,109,597 5,198,194 Dilutive Effect of Common Stock Equivalents (Stock Options and Restricted Stock) 6,108 22,693 Weighted-Average Diluted Common Shares and Common Stock Equivalents Outstanding 5,115,705 5,220,887 Earnings Per Share: Basic $ 0.81 $ 0.59 Diluted 0.81 0.58 The dilutive effect on weighted average diluted common shares outstanding is the result of outstanding stock options and nonvested restricted stock. The following table presents for the periods indicated (a) options to purchase shares of common stock that were outstanding but not included in the computation of earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period, and (b) shares of restricted stock awards that were not included in the computation of diluted earnings per share because the hypothetical repurchase of shares under the treasury stock method exceeded the weighted average nonvested restricted awards, therefore the effects would be anti-dilutive. Three Months Ended March 31, 2023 2022 Stock Options 224,076 155,138 Restricted Stock 49,527 37,865 10 Table of Contents Note 3. Securities The following table presents the amortized cost and fair value of securities available-for-sale at the dates indicated: March 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in thousands) Available-for-Sale Debt Securities: U.S. Government Agencies $ 53,994 $ — $ ( 8,243 ) $ 45,751 Obligations of States and Political Subdivisions 14,052 1 ( 363 ) 13,690 Mortgage-Backed Securities - Government-Sponsored Enterprises 44,873 — ( 4,415 ) 40,458 Collateralized Mortgage Obligations - Government Sponsored Enterprises 95,022 — ( 15,847 ) 79,175 Corporate Debt 9,486 — ( 2,001 ) 7,485 Total Available-for-Sale Debt Securities 217,427 1 ( 30,869 ) 186,559 Equity Securities: Mutual Funds 889 Other 1,577 Total Equity Securities 2,466 Total Securities $ 189,025 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Dollars in thousands) Available-for-Sale Debt Securities: U.S. Government Agencies $ 53,993 $ — $ ( 9,359 ) $ 44,634 Obligations of States and Political Subdivisions 14,053 — ( 711 ) 13,342 Mortgage-Backed Securities - Government-Sponsored Enterprises 46,345 — ( 4,918 ) 41,427 Collateralized Mortgage Obligations - Government Sponsored Enterprises 96,930 — ( 17,288 ) 79,642 Corporate Debt 9,487 — ( 1,172 ) 8,315 Total Available-for-Sale Debt Securities 220,808 — ( 33,448 ) 187,360 Equity Securities: Mutual Funds 875 Other 1,823 Total Equity Securities 2,698 Total Securities $ 190,058 11 Table of Contents The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at the dates indicated: March 31, 2023 Less than 12 months 12 Months or Greater Total Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses (Dollars in thousands) U.S. Government Agencies — $ — $ — 13 $ 45,751 $ ( 8,243 ) 13 $ 45,751 $ ( 8,243 ) Obligations of States and Political Subdivisions 31 12,104 ( 349 ) 2 1,043 ( 14 ) 33 13,147 ( 363 ) Mortgage Backed Securities- Government Sponsored Enterprises 24 14,133 ( 611 ) 18 26,325 ( 3,804 ) 42 40,458 ( 4,415 ) Collateralized Mortgage Obligations - Government Sponsored Enterprises 2 82 — 20 79,093 ( 15,847 ) 22 79,175 ( 15,847 ) Corporate Debt — — — 3 7,485 ( 2,001 ) 3 7,485 ( 2,001 ) Total 57 $ 26,319 $ ( 960 ) 56 $ 159,697 $ ( 29,909 ) 113 $ 186,016 $ ( 30,869 ) December 31, 2022 Less than 12 months 12 Months or Greater Total Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses (Dollars in thousands) U.S. Government Agencies 1 $ 2,600 $ ( 400 ) 12 $ 42,034 $ ( 8,959 ) 13 $ 44,634 $ ( 9,359 ) Obligations of States and Political Subdivisions 34 13,342 ( 711 ) — — — 34 13,342 ( 711 ) Mortgage Backed Securities- Government Sponsored Enterprises 34 19,433 ( 1,018 ) 8 21,994 ( 3,900 ) 42 41,427 ( 4,918 ) Collateralized Mortgage Obligations - Government Sponsored Enterprises 12 25,395 ( 3,393 ) 10 54,247 ( 13,895 ) 22 79,642 ( 17,288 ) Corporate Debt 1 1,665 ( 335 ) 2 6,650 ( 837 ) 3 8,315 ( 1,172 ) Total 82 $ 62,435 $ ( 5,857 ) 32 $ 124,925 $ ( 27,591 ) 114 $ 187,360 $ ( 33,448 ) For debt securities, the Company does not believe that any individual unrealized loss as of March 31, 2023 or December 31, 2022, represents a credit related impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate a credit related impairment. The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer. The unrealized losses on securities 12 Table of Contents at March 31, 2023 and December 31, 2022 relate principally to changes in market interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell, and it is more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security. Total securities available to be pledged have a fair value of $ 179.1 million at March 31, 2023 and $ 179.0 million at December 31, 2022 of which securities with a fair value of $ 172.9 million and $ 175.6 million at March 31, 2023 and December 31, 2022, respectively, were pledged to secure uninsured public deposits, short-term borrowings and for other purposes as required or permitted by law. The following table presents the scheduled maturities of debt securities as of the date indicated: March 31, 2023 Amortized Cost Fair Value (Dollars in thousands) Due in One Year or Less $ 245 $ 245 Due after One Year through Five Years 23,554 21,204 Due after Five Years through Ten Years 60,797 52,746 Due after Ten Years 132,831 112,364 Total $ 217,427 $ 186,559 The following table presents the gain and loss on equity securities from both realized sales and unrealized market adjustments for the periods indicated. There were no realized gain or loss on sales of debt securities for the periods indicated, All gains and losses presented in the table below are reported in Net Loss on Securities on the Consolidated Statements of Income. Three Months Ended March 31, 2023 2022 (Dollars in thousands) Equity Securities Net Unrealized Loss Recognized on Securities Held $ ( 232 ) $ ( 7 ) Net Realized Gain Recognized on Securities Sold — — Net Loss on Equity Securities $ ( 232 ) $ ( 7 ) Net Loss on Securities $ ( 232 ) $ ( 7 ) Note 4. Loans and Allowance for Credit Losses The Company’s loan portfolio is segmented to enable management to monitor risk and performance. Real estate loans are further segregated into three classes. Residential mortgages include those secured by residential properties and include home equity loans, while commercial mortgages consist of loans to commercial borrowers secured by commercial real estate. Construction loans typically consist of loans to build commercial buildings and acquire and develop residential real estate. The commercial and industrial segment consists of loans to finance the activities of commercial customers. The consumer segment consists primarily of indirect auto loans as well as personal installment loans and personal or overdraft lines of credit. Residential mortgage loans are typically longer-term loans and, therefore, generally present greater interest rate risk than the consumer and commercial loans. Under certain economic conditions, housing values may decline, which may increase the risk that the collateral values are not sufficient. Commercial real estate loans generally present a higher level of credit risk than loans secured by residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income-producing properties, and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of commercial real estate loans is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired. Construction loans are originated to individuals to finance the construction of residential dwellings and are also originated for the construction of commercial properties, including hotels, apartment buildings, housing developments, and owner-occupied 13 Table of Contents properties used for businesses. Construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 to 18 months. At the end of the construction phase, the loan generally converts to a permanent residential or commercial mortgage loan. Construction loan risks include overfunding in comparison to the plans, untimely completion of work, and leasing and stabilization after project completion. Commercial and industrial loans are generally secured by inventories, accounts receivable, and other business assets, which present collateral risk. Consumer loans generally have higher interest rates and shorter terms than residential mortgage loans; however, they have additional credit risk due to the type of collateral securing the loan. The following table presents the classifications of loans as of the dates indicated. March 31, 2023 December 31, 2022 (Dollars in thousands) Real Estate: Residential $ 332,840 $ 330,725 Commercial 452,770 436,805 Construction 39,522 44,923 Commercial and Industrial 79,501 70,044 Consumer 146,081 146,927 Other 21,151 20,449 Total Loans 1,071,865 1,049,873 Allowance for Credit Losses ( 10,270 ) ( 12,819 ) Loans, Net $ 1,061,595 $ 1,037,054 Included in total loans above are unamortized net deferred loan fees of $ 1.3 million and $ 1.2 million at March 31, 2023 and December 31, 2022, respectively. 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 uncollectible and of such little value that continuance as an asset is not warranted. The following table presents the Company’s loans by year of origination, loan segmentation and risk indicator summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2023. There were no loans in the criticized category of loss. 14 Table of Contents Classified Loans by Origination Year (as of March 31, 2023) (dollars in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Real Estate: Residential Pass $ 7,837 $ 42,965 $ 44,803 $ 60,872 $ 41,078 $ 118,135 $ 14,247 $ 329,937 Special Mention — — 519 12 — 421 — 952 Substandard — — 168 — — 1,783 — 1,951 Doubtful — — — — — — — — Loss — — — — — — — — Total 7,837 42,965 45,490 60,884 41,078 120,339 14,247 332,840 Commercial Pass 17,003 76,891 88,230 50,562 54,631 123,778 1,846 412,941 Special Mention — — 1,519 3,005 5,171 18,451 — 28,146 Substandard — — — — 1,649 10,034 — 11,683 Doubtful — — — — — — — — Loss — — — — — — — — Total 17,003 76,891 89,749 53,567 61,451 152,263 1,846 452,770 Construction Pass 2,492 11,332 14,902 7,714 — — 1,055 37,495 Special Mention — 673 1,047 — — — — 1,720 Substandard — — — — — 307 — 307 Doubtful — — — — — — — — Loss — — — — — — — — Total 2,492 12,005 15,949 7,714 — 307 1,055 39,522 Commercial and Industrial Pass 15,853 18,397 10,020 6,483 4,079 3,877 10,265 68,974 Special Mention — — — 22 7 7,396 2,700 10,125 Substandard — — — 11 — — — 11 Doubtful — — — — — 391 — 391 Loss — — — — — — — — Total 15,853 18,397 10,020 6,516 4,086 11,664 12,965 79,501 Consumer Pass 13,116 62,753 34,584 15,872 7,089 8,395 4,081 145,890 Special Mention — — — — — — — — Substandard — 77 — — — 114 — 191 Doubtful — — — — — — — — Loss — — — — — — — — Total 13,116 62,830 34,584 15,872 7,089 8,509 4,081 146,081 Other Pass — 13,810 51 710 1,365 4,313 851 21,100 Special Mention — — — — — 51 — 51 Substandard — — — — — — — — Doubtful — — — — — — — — Loss — — — — — — — — Total — 13,810 51 710 1,365 4,364 851 21,151 Total Loans $ 56,301 $ 226,898 $ 195,843 $ 145,263 $ 115,069 $ 297,446 $ 35,045 $ 1,071,865 Gross Charge Offs (1) $ — $ 22 $ 7 $ — $ — $ 8 $ 16 $ 53 (1) Gross charge-offs for the three months ended March 31, 2023, were related to consumer loans. There were no other charge-offs for the other loan categories in the current period. 15 Table of Contents The following table presents the Company’s loan segmentation and risk indicator summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2022, prior to the adoption of ASU 2016-13: December 31, 2022 Pass Special Mention Substandard Doubtful Total (Dollars in Thousands) Real Estate: Residential $ 327,531 $ 1,180 $ 2,014 $ — $ 330,725 Commercial 395,168 29,680 11,957 — 436,805 Construction 42,693 1,912 318 — 44,923 Commercial and Industrial 58,562 10,977 90 415 70,044 Consumer 146,807 — 120 — 146,927 Other 20,394 55 — — 20,449 Total Loans $ 991,155 $ 43,804 $ 14,499 $ 415 $ 1,049,873 The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated. March 31, 2023 Loans Current 30-59 Days Past Due 60-89 Days Past Due 90 Days Or More Past Due Total Past Due Non- Accrual Total Loans (Dollars in Thousands) Real Estate: Residential $ 328,957 $ 2,475 $ 30 $ — $ 2,505 $ 1,378 $ 332,840 Commercial 449,075 93 160 — 253 3,442 452,770 Construction 39,522 — — — — — 39,522 Commercial and Industrial 77,101 1,968 30 — 1,998 402 79,501 Consumer 145,094 749 47 — 796 191 146,081 Other 21,151 — — — — — 21,151 Total Loans $ 1,060,900 $ 5,285 $ 267 $ — $ 5,552 $ 5,413 $ 1,071,865 December 31, 2022 Loans Current 30-59 Days Past Due 60-89 Days Past Due 90 Days Or More Past Due Total Past Due Non- Accrual Total Loans (Dollars in Thousands) Real Estate: Residential $ 325,591 $ 3,451 $ 34 $ — $ 3,485 $ 1,649 $ 330,725 Commercial 434,933 58 — — 58 1,814 436,805 Construction 44,923 — — — — — 44,923 Commercial and Industrial 69,621 8 — — 8 415 70,044 Consumer 145,887 854 66 — 920 120 146,927 Other 20,449 — — — — — 20,449 Total Loans $ 1,041,404 $ 4,371 $ 100 $ — $ 4,471 $ 3,998 $ 1,049,873 Additional interest income that would have been recorded if the loans that were nonaccrual at March 31, 2023 were current was $ 33,000 for the three months ended March 31, 2023, and $ 79,000 for the three months ended March 31, 2022. 16 Table of Contents The following table sets forth the amounts for amortized cost basis of loans on nonaccrual status, loans past due 90 days still accruing, and categories of nonperforming assets at the date indicated. March 31, 2023 Nonaccrual With No ACL Nonaccrual With ACL Loans Past Due 90 Days Still Accruing Total Nonperforming Loans (Dollars in Thousands) Nonaccrual Loans: Real Estate: Residential $ 1,378 $ — $ — $ 1,378 Commercial 3,442 — — 3,442 Commercial and Industrial 402 — — 402 Consumer 191 — — 191 Total Nonaccrual Loans $ 5,413 $ — $ — 5,413 Other Real Estate Owned: Residential 211 Commercial 37 Total Other Real Estate Owned 248 Total Nonperforming Assets $ 5,661 No interest income on nonaccrual loans was recognized during the three months ended March 31, 2023. In conjunction with the adoption of ASU 2016-13, ASU 2022-02 was adopted and eliminates the troubled debt restructurings ("TDR") recognition and measurement. With the elimination of TDRs, ASU 2022-02 requires that all modifications and refinancing, including those with borrowers that are experiencing financial difficulty are subject to the modification guidance in ASC 310-20. Loan modifications could meet the definition of a new loan if certain terms of the loan are modified to the benefit of the lender and the modification to the terms of the loan are more than minor. Both of these criteria have to be met to define the modification as a new loan. If a loan modification meets the criteria of new loan, then the new loan should include the remaining net investment in the original loan, additional funds advanced, fees received, and direct loan origination costs with the refinancing or restructuring. Additionally, the effective interest rate should be recalculated based on the amortized cost basis of the new loan and reassess contractual cash flow. For the three months ended March 31, 2023, there were no new loan modifications to borrowers experiencing financial difficulty in the past 12 months under the current guidance. 17 Table of Contents The following table sets forth the amounts and categories of nonperforming assets at the dates indicated as of December 31, 2022, prior to the adoption of ASU 2016-13. Included in nonperforming loans and assets are TDRs, which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section. December 31, 2022 (Dollars in Thousands) Nonaccrual Loans: Real Estate: Residential $ 1,649 Commercial 1,814 Commercial and Industrial 415 Consumer 120 Total Nonaccrual Loans 3,998 Accruing Loans Past Due 90 Days or More: Total Accruing Loans Past Due 90 Days or More — Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More 3,998 Troubled Debt Restructurings, Accruing: Real Estate Residential 534 Commercial 1,260 Commercial and Industrial 7 Total Troubled Debt Restructurings, Accruing 1,801 Total Nonperforming Loans 5,799 Total Nonperforming Assets $ 5,799 The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $ 855 ,000 and $ 1.4 million at March 31, 2023 and December 31, 2022, respectively. The activity in the ACL - Loans is summarized below by primary segments as of March 31, 2023 : Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) December 31, 2022 $ 2,074 $ 5,810 $ 502 $ 2,313 $ 1,517 $ — $ 603 $ 12,819 Impact of ASC 326 - Loans 137 ( 3,244 ) 488 ( 1,057 ) 774 120 ( 603 ) ( 3,385 ) Charge-offs — — — — ( 53 ) — — ( 53 ) Recoveries 13 — — 758 38 — — 809 (Recovery) Provision for Credit Losses - Loans ( 68 ) 490 ( 185 ) ( 17 ) ( 178 ) 38 — 80 March 31, 2023 $ 2,156 $ 3,056 $ 805 $ 1,997 $ 2,098 $ 158 $ — $ 10,270 18 Table of Contents The Company’s allowance for credit losses on unfunded commitments is recognized as a liability (accrued interest payable and other liabilities on the Consolidated Statement of Financial Condition), with adjustments to the reserve recognized in provision for credit losses - unfunded commitments on the Consolidated Statement of Income. The Company’s activity in the allowance for credit losses on unfunded commitments for the periods ended was as follows: (in thousands) Allowance for Credit Losses Balance at December 31, 2022 $ — Impact of CECL adoption 718 Provision for credit losses — Balance at March 31, 2023 $ 718 Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL - Loans is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. During the three months ended March 31, 2023, there were no loans that required a credit loss to be individually assigned. The following tables present the activity in the allowance for credit losses summarized by primary segments and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated, prior to the adoption of ASU 2016-13. December 31, 2022 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) Individually Evaluated for Impairment $ — $ 21 $ — $ 3 $ — $ — $ — $ 24 Collectively Evaluated for Potential Impairment $ 2,074 $ 5,789 $ 502 $ 2,310 $ 1,517 $ — $ 603 $ 12,795 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) December 31, 2021 $ 1,420 $ 5,960 $ 1,249 $ 1,151 $ 1,050 $ — $ 752 $ 11,582 Charge-offs ( 17 ) — — — ( 20 ) — — ( 37 ) Recoveries 2 — — 11 37 — — 50 Provision (Recovery) 67 366 ( 545 ) ( 32 ) 225 — ( 81 ) — March 31, 2022 $ 1,472 $ 6,326 $ 704 $ 1,130 $ 1,292 $ — $ 671 $ 11,595 19 Table of Contents March 31, 2022 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Unallocated Total (Dollars in thousands) Individually Evaluated for Impairment $ — $ — $ 84 $ 96 $ — $ — $ — $ 180 Collectively Evaluated for Potential Impairment $ 1,472 $ 6,326 $ 620 $ 1,034 $ 1,292 $ — $ 671 $ 11,415 The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated, prior to the adoption of ASU 2016-13. At December 31, 2022, commercial and industrial loans include $ 126,000 of PPP loans collectively evaluated for potential impairment. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee. December 31, 2022 Real Estate Residential Real Estate Commercial Real Estate Construction Commercial and Industrial Consumer Other Total (Dollars in thousands) Individually Evaluated for Impairment $ 1,042 $ 13,217 $ 318 $ 512 $ — $ — $ 15,089 Collectively Evaluated for Potential Impairment 329,683 423,588 44,605 69,532 146,927 20,449 1,034,784 Total Loans $ 330,725 $ 436,805 $ 44,923 $ 70,044 $ 146,927 $ 20,449 $ 1,049,873 The following table presents changes in the accretable discount on the loans acquired at fair value at the dates indicated. Accretable Discount (Dollars in Thousands) December 31, 2022 $ 487 Accretable Yield ( 61 ) March 31, 2023 $ 426 20 Table of Contents Pre Adoption of ASC 326 – Impaired Loans For periods prior to the adoption of CECL, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. The following table presents a summary of the loans considered to be impaired as of the date indicated. December 31, 2022 Recorded Investment Related Allowance Unpaid Principal Balance Average Recorded Investment Interest Income Recognized (Dollars in thousands) With No Related Allowance Recorded: Real Estate: Residential $ 1,042 $ — $ 1,047 $ 1,085 $ 51 Commercial 11,609 — 11,766 10,928 549 Construction 318 — 318 403 19 Commercial and Industrial 505 — 777 734 35 Total With No Related Allowance Recorded $ 13,474 $ — $ 13,908 $ 13,150 $ 654 With A Related Allowance Recorded: Real Estate: Commercial $ 1,608 $ 21 $ 1,608 $ 954 $ 79 Construction — — — 830 36 Commercial and Industrial 7 3 7 253 1 Total With A Related Allowance Recorded $ 1,615 $ 24 $ 1,615 $ 2,037 $ 116 Total Impaired Loans Real Estate: Residential $ 1,042 $ — $ 1,047 $ 1,085 $ 51 Commercial 13,217 21 13,374 11,882 628 Construction 318 — 318 1,233 55 Commercial and Industrial 512 3 784 987 36 Total Impaired Loans $ 15,089 $ 24 $ 15,523 $ 15,187 $ 770 The recorded investment of loans evaluated for impairment decreased $ 1.4 million at March 31, 2023 compared to December 31, 2022 and was primarily related to commercial real estate loans. Note 5. Short-Term Borrowings Borrowings with original maturities of one year or less are classified as short-term and may consist of borrowings with the Federal Home Loan Bank ("FHLB"), securities sold under agreements to repurchase or borrowings on revolving lines of credit with the Federal Reserve Bank or other correspondent banks. Securities sold under repurchase agreements are comprised of customer repurchase agreements, which are overnight sweep accounts with next-day maturities utilized by commercial customers to earn interest on their funds. Securities are pledged as collateral under these agreements in an amount at least equal to the outstanding balance and the collateral pledging requirements are monitored on a daily basis. 21 Table of Contents The following table sets forth the components of short-term borrowings as of the dates indicated. March 31, 2023 December 31, 2022 Amount Weighted Average Rate Amount Weighted Average Rate (Dollars in thousands) Federal Funds Purchased: Average Balance Outstanding During the Period $ 2 5.40 % $ — — % Maximum Amount Outstanding at any Month End — — Securities Sold Under Agreements to Repurchase: Balance at Period End $ 121 0.10 % $ 8,060 0.19 % Average Balance Outstanding During the Period 1,342 0.60 27,381 0.23 Maximum Amount Outstanding at any Month End 121 39,219 Securities Collaterizing the Agreements at Period-End: Carrying Value 10,935 10,947 Market Value 9,587 9,396 Note 6. Fair Value Disclosure FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value. The three levels of fair value hierarchy are as follows: Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques. This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statements of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values for Level 2 securities were primarily determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. There were no transfers into or out of Level 3 during the three months ended March 31, 2023 or year ended December 31, 2022. 22 Table of Contents Fair Value Hierarchy March 31, 2023 December 31, 2022 (Dollars in thousands) Securities: Available-for-Sale Debt Securities U.S. Government Agencies Level 2 $ 45,751 $ 44,634 Obligations of States and Political Subdivisions Level 2 13,690 13,342 Mortgage-Backed Securities - Government-Sponsored Enterprises Level 2 40,458 41,427 Collateralized Mortgage Obligations - Government Sponsored Enterprises Level 2 79,175 79,642 Corporate Debt Level 2 7,485 8,315 Total Available-for-Sale Debt Securities 186,559 187,360 Equity Securities Mutual Funds Level 1 889 875 Other Level 1 1,577 1,823 Total Equity Securities 2,466 2,698 Total Securities $ 189,025 $ 190,058 The following table presents the financial assets on the Consolidated Statements of Financial Condition measured at fair value on a nonrecurring basis as of the dates indicated by level within the fair value hierarchy for only those nonrecurring assets that had a fair value below the carrying amount. The table also presents the significant unobservable inputs used in the fair value measurements. Financial Asset Fair Value Hierarchy March 31, 2023 Valuation Techniques Significant Unobservable Inputs Range Weighted Average (Dollars in thousands) OREO Level 3 248 Appraisal of Collateral (1) Liquidation Expenses (2) 10 % to 30 % 26.6 % Financial Asset Fair Value Hierarchy December 31, 2022 Valuation Techniques Significant Unobservable Inputs Range Weighted Average (Dollars in thousands) Individually Evaluated Loans Level 3 $ 1,591 Appraisal of Collateral (1) Appraisal Adjustments (2) 0 % to 8 % 7.2 % (1) Fair value is generally determined through independent appraisals of the underlying collateral, which may include various Level 3 inputs, which are not identifiable. (2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of appraisal adjustments and liquidation expense are presented as a percent of the appraisal. Expected credit losses on individually evaluated loans deemed to be collateral dependent are valued based upon the lower of amortized cost or fair value of the underlying collateral less costs to sell. Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. At March 31, 2023, the Company did not have any loans that would be required to be remeasured. At December 31, 2022, the fair value of individually evaluated loans consists of the loan balances of $ 1.6 million less their specific valuation allowances of $ 24,000 . The fair value of mortgage servicing rights ("MSRs") is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in Other Assets in the Consolidated Statements of Financial Condition and are amortized into mortgage servicing income in Other Income in the Consolidated Statements of Income. At March 31, 2023 and December 31, 2022, the Company did not have any MSRs that would be required to be remeasured. 23 Table of Contents OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy. Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values. As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company. The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated. March 31, 2023 December 31, 2022 Fair Value Hierarchy Carrying Value Fair Value Carrying Value Fair Value (Dollars in thousands) Financial Assets: Cash and Due From Banks: Interest Bearing Level 1 $ 85,533 $ 85,533 $ 82,957 $ 82,957 Non-Interest Bearing Level 1 18,012 18,012 20,743 20,743 Securities See Above 189,025 189,025 190,058 190,058 Loans, Net Level 3 1,061,595 1,027,571 1,037,054 1,011,098 Restricted Stock Level 2 2,526 2,526 2,749 2,749 Mortgage Servicing Rights Level 3 608 961 633 1,000 Accrued Interest Receivable Level 2 4,016 4,016 3,983 3,983 Financial Liabilities: Deposits Level 2 1,281,520 1,276,964 1,268,503 1,264,846 Short-Term Borrowings Level 2 121 121 8,060 8,060 Other Borrowed Funds FHLB Borrowings Level 2 — — — — Subordinated Debt Level 2 14,648 12,628 14,638 13,490 Accrued Interest Payable Level 2 464 464 355 355 Note 7. Commitments and Contingent Liabilities The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and performance letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and performance letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 24 Table of Contents The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated. March 31, 2023 December 31, 2022 (Dollars in thousands) Standby Letters of Credit $ 110 $ 110 Performance Letters of Credit 1,056 1,064 Construction Mortgages 54,564 45,722 Personal Lines of Credit 7,507 6,824 Overdraft Protection Lines 5,061 5,241 Home Equity Lines of Credit 23,043 22,784 Commercial Lines of Credit 77,907 74,921 Total Commitments $ 169,248 $ 156,666 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Performance letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the letter. For secured letters of credit, the collateral is typically Company deposit instruments or customer business assets. Note 8. Leases The Company evaluates contracts at commencement to determine if a lease is present. The Company’s lease contracts are all classified as operating leases and create operating right-of-use (“ROU”) assets and corresponding lease liabilities on the Consolidated Statements of Financial Condition. The leases are primarily ROU assets of land and building for branch and loan production locations. ROU assets are reported in Accrued Interest Receivable and Other Assets and the related lease liabilities in Accrued Interest Payable and Other Liabilities on the Consolidated Statements of Financial Condition. The following tables present the lease expense, ROU assets, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods and dates indicated. Three Months Ended March 31, 2023 2022 (Dollars in thousands) Operating Lease Expense $ 77 $ 82 Short-Term Lease Expense — — Variable Lease Expense 7 7 Total Lease Expense $ 84 $ 89 25 Table of Contents March 31, 2023 December 31, 2022 (Dollars in thousands) Operating Leases: ROU Assets $ 1,864 $ 1,926 Weighted Average Lease Term in Years 7.97 8.13 Weighted Average Discount Rate 2.87 % 2.87 % March 31, 2023 (Dollars in thousands) Maturity Analysis: Due in One Year $ 359 Due After One Year to Two Years 347 Due After Two Years to Three Years 248 Due After Three Years to Four Years 233 Due After Four to Five Years 231 Due After Five Years 832 Total $ 2,250 Less: Present Value Discount 237 Lease Liabilities $ 2,013 There were no new lease agreements entered into during the three months ended March 31, 2023. During the three months ended March 31, 2022, the Company entered into a new lease agreement for the McMurray, PA branch, for a 10-year term ending March 31, 2032. 26 Table of Contents Note 9. Other Noninterest Expense The details of other noninterest expense for the Company’s Consolidated Statements of Income for the periods indicated are as follows: Three Months Ended March 31, 2023 2022 (Dollars in thousands) Non-Employee Compensation $ 151 $ 131 Printing and Supplies 54 80 Postage 103 103 Telephone 144 139 Charitable Contributions 34 42 Dues and Subscriptions 79 58 Loan Expenses 57 127 Meals and Entertainment 15 30 Travel 54 39 Training 33 18 Bank Assessment 52 47 Insurance 74 62 Miscellaneous 95 123 Total Other Noninterest Expense $ 945 $ 999 Note 10. Segment and Related Information At March 31, 2023, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services. CB Financial is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank. Exchange Underwriters has an independent board of directors from the Company and is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters is an independent insurance agency that offers property, casualty, commercial liability, surety and other insurance products. 27 Table of Contents The following is a table of selected financial data for the Company’s subsidiaries and consolidated results at the dates and for the periods indicated. Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated (Dollars in thousands) March 31, 2023 Assets $ 1,432,201 $ 5,638 $ 132,069 $ ( 139,200 ) $ 1,430,708 Liabilities 1,317,172 1,441 14,874 ( 19,974 ) 1,313,513 Stockholders' Equity 115,029 4,197 117,195 ( 119,226 ) 117,195 December 31, 2022 Assets $ 1,409,510 $ 5,585 $ 124,879 $ ( 131,036 ) $ 1,408,938 Liabilities 1,301,783 1,996 14,724 ( 19,720 ) 1,298,783 Stockholders' Equity 107,727 3,589 110,155 ( 111,316 ) 110,155 Three Months Ended March 31, 2023 Interest and Dividend Income $ 14,223 $ 2 $ 1,294 $ ( 1,275 ) $ 14,244 Interest Expense 2,506 — 155 — 2,661 Net Interest and Dividend Income 11,717 2 1,139 ( 1,275 ) 11,583 Provision for Credit Losses 80 — — — 80 Net Interest and Dividend Income After Provision for Credit Losses 11,637 2 1,139 ( 1,275 ) 11,503 Noninterest Income (Loss) 1,100 1,956 ( 246 ) — 2,810 Noninterest Expense 7,924 1,099 5 — 9,028 Undistributed Net Income of Subsidiary 608 — 3,187 ( 3,795 ) — Income Before Income Tax Expense (Benefit) 5,421 859 4,075 ( 5,070 ) 5,285 Income Tax Expense (Benefit) 959 251 ( 81 ) — 1,129 Net Income $ 4,462 $ 608 $ 4,156 $ ( 5,070 ) $ 4,156 Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated (Dollars in thousands) Three Months Ended March 31, 2022 Interest and Dividend Income $ 10,596 $ 1 $ 1,279 $ ( 1,260 ) $ 10,616 Interest Expense 567 — 156 — 723 Net Interest and Dividend Income 10,029 1 1,123 ( 1,260 ) 9,893 Provision for Credit Losses — — — — — Net Interest and Dividend Income After Provision for Credit Losses 10,029 1 1,123 ( 1,260 ) 9,893 Noninterest Income 777 1,797 39 — 2,613 Noninterest Expense 7,645 1,007 4 — 8,656 Undistributed Net Income of Subsidiary 561 — 1,852 ( 2,413 ) — Income Before Income Tax Expense (Benefit) 3,722 791 3,010 ( 3,673 ) 3,850 Income Tax Expense (Benefit) 610 230 ( 37 ) — 803 Net Income (Loss) $ 3,112 $ 561 $ 3,047 $ ( 3,673 ) $ 3,047 28 Table of Contents Note 11. Stock Based Compensation The following table presents stock option information for the period indicated. Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Outstanding Options at December 31, 2022 283,748 $ 24.52 5.6 Granted 61,475 22.01 Exercised — — Forfeited ( 747 ) ( 28.02 ) Outstanding Options at March 31, 2023 344,476 $ 24.06 6.2 Exercisable Options at March 31, 2023 189,749 $ 24.53 3.7 Number of Shares Weighted Average Exercise Price Weighted Average Remaining Service Period in Years Nonvested Options at March 31, 2023 154,727 $ 23.49 9.3 Summary of Significant Assumptions for Newly Issued Stock Options Expected Term in Years 6.5 Expected Volatility 29.4 % Expected Dividends $ 1.00 Risk Free Rate of Return 3.64 % Weighted Average Grant Date Fair Value (per share) $ 4.50 The following table presents restricted stock award information for the period indicated Number of Shares Weighted Average Grant Date Fair Value Price Weighted Average Remaining Service Period in Years Nonvested Restricted Stock at December 31, 2022 64,125 $ 24.32 4.3 Granted 22,475 22.01 Vested ( 4,088 ) 26.25 Forfeited — — Nonvested Restricted Stock at March 31, 2023 82,512 $ 23.60 4.3 The Company recognizes expense over a five-year vesting period for the restricted stock awards and stock options. Stock-based compensation expense related to restricted stock awards and stock options was $ 174,000 and $ 130,000 for the three months ended March 31, 2023 and 2022. As of March 31, 2023 and December 31, 2022, total unrecognized compensation expense was $ 673,000 and $ 430,000 , respectively, related to stock options, and $ 1.8 million and $ 1.4 million, respectively, related to restricted stock awards. Intrinsic value represents the amount by which the fair value of the underlying stock at March 31, 2023 and December 31, 2022 exceeds the exercise price of the stock options. The intrinsic value of stock options was $ 28,000 and $ 25,000 at March 31, 2023 and December 31, 2022, respectively. At March 31, 2023 and December 31, 2022, respectively, there were 215,672 and 333,335 shares available under the Plan to be issued in connection with the exercise of stock options, and 86,269 and 133,334 shares that may be issued as restricted stock awards or units. Restricted stock awards or units may be issued above this amount provided that the number of shares reserved for stock options is reduced by two and one-half shares for each restricted stock award or unit share granted. 29 Table of Contents Note 12. Subsequent Events The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification ("ASC") 855, Subsequent Events , to be recognizable events .