CB Financial Services, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This discussion should be read in conjunction with the unaudited consolidated financial statements, notes and tables included in this report. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Forward-Looking Statements This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the Company’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include, but are not limited to, the following: • General and local economic conditions; • Our ability to realize the expected cost savings and other efficiencies related to our branch optimization and operational efficiency initiatives; • Changes in market interest rates, deposit flows, demand for loans, real estate values and competition; • Competitive products and pricing; • The ability of our customers to make scheduled loan payments; • Loan delinquency rates and trends; • Our ability to manage the risks involved in our business; • Our ability to integrate the operations of businesses we acquire; • Our ability to control costs and expenses; • Inflation, market and monetary fluctuations; • Changes in federal and state legislation and regulation applicable to our business; • Actions by our competitors; and • Other factors disclosed in the Company’s periodic reports as filed with the Securities and Exchange Commission. 32 Table of Contents These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation. General CB Financial Services is a bank holding company established in 2006 and headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned bank subsidiary, Community Bank. The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from 10 branches in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania and three offices in Marshall and Ohio Counties in West Virginia. The Bank also has 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. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s wholly owned subsidiary that is a full-service, independent insurance agency located in Washington County. Overview The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of September 30, 2023, compared to the consolidated financial condition as of December 31, 2022 and the consolidated results of operations for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022. Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for credit losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, insurance commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contracted services, legal and professional fees, advertising, deposit and general insurance and other expenses. Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in southwestern Pennsylvania and Ohio Valley market areas. Explanation of Use of Non-GAAP Financial Measures In addition to financial measures presented in accordance with U.S. GAAP, we present certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information in understanding our underlying results of operations or financial position and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Non-GAAP adjusted items impacting the Company's financial performance are identified to assist investors in providing a complete understanding of factors and trends affecting the Company’s business and in analyzing the Company’s operating results on the same basis as that applied by management. Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, they should not be considered an alternative to GAAP or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with similar non-GAAP measures which may be presented by other companies. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein. The interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent (“FTE”) basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21.0%. We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. 33 Table of Contents The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 (Dollars in thousands) Interest Income (GAAP) $ 15,874 $ 12,287 $ 45,321 $ 33,861 Adjustment to FTE Basis 43 31 111 105 Interest Income (FTE) (Non-GAAP) 15,917 12,318 45,432 33,966 Interest Expense (GAAP) 5,157 1,272 11,902 2,792 Net Interest Income (FTE) (Non-GAAP) $ 10,760 $ 11,046 $ 33,530 $ 31,174 Net Interest Rate Spread (GAAP) 2.54 % 3.10 % 2.80 % 3.03 % Adjustment to FTE Basis 0.01 0.01 0.01 0.01 Net Interest Rate Spread (FTE) (Non-GAAP) 2.55 3.11 2.81 3.04 Net Interest Margin (GAAP) 3.13 % 3.29 % 3.31 % 3.17 % Adjustment to FTE Basis 0.01 0.01 0.01 0.01 Net Interest Margin (FTE) (Non-GAAP) 3.14 3.30 3.32 3.18 Tangible book value per common share is a non-GAAP measure calculated based on tangible common equity divided by period-end common shares outstanding. We believe this non-GAAP measure serves as a useful tool to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value. September 30, 2023 December 31, 2022 (Dollars in thousands, except share and per share data) Stockholders' Equity (GAAP) $ 114,846 $ 110,155 Goodwill and Other Intangible Assets, Net (11,909) (13,245) Tangible Common Equity or Tangible Book Value (Non-GAAP) (Numerator) $ 102,937 $ 96,910 Common Shares Outstanding (Denominator) 5,120,678 5,100,189 Book Value per Common Share (GAAP) $ 22.43 $ 21.60 Tangible Book Value per Common Share (Non-GAAP) $ 20.10 $ 19.00 34 Table of Contents Consolidated Statements of Financial Condition Analysis Assets Total assets decreased $9.4 million, or 0.7%, to $1.40 billion at September 30, 2023 compared to $1.41 billion at December 31, 2022. Cash and Securities • Cash and due from banks decreased $51.1 million, or 49.3%, to $52.6 million at September 30, 2023, compared to $103.7 million at December 31, 2022, due to loan growth. • Securities decreased $17.2 million, or 9.0%, to $172.9 million at September 30, 2023, compared to $190.1 million at December 31, 2022. The securities balance was primarily impacted by $12.4 million of repayments on mortgage-backed and collateralized mortgage obligation securities and a $369,000 decrease in the market val ue of the equity securities portfolio, which is primarily comprised of bank stocks. Loans, Allowance for Credit Losses (ACL) and Credit Quality • Total loans increased $52.6 million, or 5.0%, to $1.10 billion at September 30, 2023 compared to $1.05 billion at December 31, 2022. Loan growth was driven by increases in commercial and industrial loans, commercial real estate loans and residential mortgage loans of $30.8 million, $30.1 million, and $15.8 million, respectively, partially offset by a decrease in consumer loans of $24.4 million. Growth in commercial and industrial loans included the purchase of $8.9 million of syndicated loans. The decrease in consumer loans resulted from a reduction in indirect automobile loan production due to rising market interest rates and the discontinuation of this product offering as of June 30, 2023. • The ACL - Loans was $10.8 million at September 30, 2023 and $12.8 million at December 31, 2022. As a result, the ACL - Loans to total loans was 0.98% at September 30, 2023 compared to 1.22% at December 31, 2022. The change in the ACL -Loans was primarily due to the Company's adoption of CECL. At adoption, the Company decreased its ACL - Loans by $3.4 million. Contributing to the change in ACL - Loans was a prior year charge-off of $2.7 million and qualitative factors that significantly impacted the incurred loss model driven by historical activity compared to the newly adopted CECL methodology that is centered around using a forecast approach. • Net charge-offs for the three months ended September 30, 2023 were $109,000, or 0.04% of average loans on an annualized basis. Net recoveries for the three months ended September 30, 2022 were $21,000, or 0.01% of average loans on an annualized basis. Net recoveries for the nine months ended September 30, 2023 were $551,000 primarily due to recoveries totaling $750,000 related to the aforementioned prior year charged-off loan. Net charge-offs for the nine months ended September 30, 2022 were $2.5 million. • Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, were $3.3 million at September 30, 2023 compared to $5.8 million at December 31, 2022. The decrease of $2.5 million was due to ten loans totaling $1.7 million transferred from nonaccrual to accrual status during the current period and the repayment of a $1.6 million commercial real estate loan that was previously on nonaccrual status. Partially offsetting these favorable movements, a $757,000 commercial real estate loan moved to nonaccrual status during the period. Nonperforming loans to total loans ratio was 0.30% at September 30, 2023 compared to 0.55% at December 31, 2022. Other • Intangible assets decreased $1.3 million, or 37.0%, to $2.2 million at September 30, 2023 compared to $3.5 million at December 31, 2022 primarily due to amortization expense recognized during the period. • Accrued interest and other assets increased $5.5 million or 26.0%, to $26.7 million at September 30, 2023, compared to $21.1 million at December 31, 2022 due to the sale of a $2.0 million syndicated loan which was sold but not yet settled at September 30, 2023, and increases in prepaid expenses and accrued interest receivable of $1.2 million and $600,000. Liabilities Total liabilities decreased $14.1 million, or 1.1%, to $1.28 billion at September 30, 2023 compared to $1.30 billion at December 31, 2022. Deposits • Total deposits decreased $32.2 million to $1.24 billion as of September 30, 2023 compared to $1.27 billion at December 31, 2022. Noninterest-bearing demand deposits decreased $85.3 million, savings deposits decreased $40.9 million and money market deposits decreased $19.9 million, while interest-bearing demand deposits increased $45.6 million and time deposits increased $68.3 million,. The increase in interest-bearing demand deposits was primarily the result of higher interest rates attracting more customers and/or additional deposits from existing customers while higher 35 Table of Contents time deposits resulted from the offering of a higher-rate certificate of deposit product. FDIC insured deposits totaled approximately 60.5% of total deposits while an additional 16.9% of deposits were collateralized with investment securities at September 30, 2023. Borrowings • Long-term borrowings increased $20.0 million, or 136.6%, to $34.7 million at September 30, 2023, compared to $14.6 million at December 31, 2022. During the second quarter, the Bank entered into $20.0 million of FHLB advances for a term of 24 months at 4.92% per annum, the proceeds of which were utilized to match fund originations within the Bank's commercial and industrial loan portfolio. • Short-term borrowings decreased $8.1 million, or 100.0%, as there were no short-term borrowings at September 30, 2023, compared to $8.1 million at December 31, 2022. At December 31, 2022, short-term borrowings were comprised entirely of securities sold under agreements to repurchase. These accounts were transitioned into other deposit products and account for a portion of the interest-bearing demand deposit increase. Accrued Interest Payable and Other Liabilities • Accrued interest payable and other liabilities increased $6.1 million, or 80.5%, to $13.7 million at September 30, 2023, compared to $7.6 million at December 31, 2022 primarily due to the purchase of $3.9 million of syndicated loans which were unfunded at the end of the period and a $1.1 million increase in accrued interest payable on certificate accounts. Stockholders’ Equity Stockholders’ equity increased $4.7 million, or 4.3%, to $114.8 million at September 30, 2023, compared to $110.2 million at December 31, 2022. • Net income was $9.6 million for the nine months ended September 30, 2023. • The Company declared and paid $3.8 million in dividends to common stockholders in the current period. • The Company's January 1, 2023 adoption of CECL resulted in a $2.1 million positive adjustment to stockholders' equity, net of tax. • On April 21, 2022, a $10.0 million repurchase program was authorized, with the Company repurchasing 74,656 shares at an average price of $22.38 per share since the inception of the program. In total, the Company repurchased $274,000 of common stock since December 31, 2022. The program expired May 1, 2023. • Book value per share (GAAP) was $22.43 at September 30, 2023 compared to $21.60 at December 31, 2022, an increase of $0.83. Tangible book value per share (Non-GAAP) increased $1.10, or 5.8%, to $20.10 compared to $19.00 at December 31, 2022. Refer to Explanation of Use of Non-GAAP Financial Measures in this Report. 36 Table of Contents Consolidated Results of Operations for the Three Months Ended September 30, 2023 and 2022 Overview. Net income was $2.7 million for the three months ended September 30, 2023, a decrease of $1.3 million compared to net income of $3.9 million for the three months ended September 30, 2022. Net Interest and Dividend Income. Net interest and dividend income decreased $298,000, or 2.7%, to $10.7 million for the three months ended September 30, 2023 compared to $11.0 million for the three months ended September 30, 2022. Net interest margin (GAAP) decreased to 3.13% for the three months ended September 30, 2023 compared to 3.29% for the three months ended September 30, 2022. Fully Tax Equivalent (FTE) net interest margin (Non-GAAP) decreased 16 basis points (bps) to 3.14% for the three months ended September 30, 2023 compared to 3.30% for the three months ended September 30, 2022. Interest and Dividend Income • Interest and dividend income increased $3.6 million, or 29.2%, to $15.9 million for the three months ended September 30, 2023 compared to $12.3 million the three months ended September 30, 2022. ◦ Interest income on loans increased $3.2 million, or 29.9%, to $14.0 million for the three months ended September 30, 2023 compared to $10.8 million for the three months ended September 30, 2022. The average balance of loans increased $64.3 million to $1.09 billion from $1.02 billion, generating $729,000 of additional interest income on loans, and the average yield increased 93 bps to 5.13% compared to 4.20% resulting in a $2.5 million increase in interest income on loans. ◦ Interest income on interest-earning deposits at other banks increased $372,000, to $750,000 for the three months ended September 30, 2023 compared to $378,000 for the three months ended September 30, 2022 as the average yield increased 347 bps, partially offset by a decrease of $15.2 million in average balances. The increase in the average yield was the result of the Federal Reserve Board's interest rate increases. Interest Expense • Interest expense increased $3.9 million, or 305.4%, to $5.2 million for the three months ended September 30, 2023 compared to $1.3 million for the three months ended September 30, 2022. ◦ Interest expense on deposits increased $3.7 million, or 340.2%, to $4.8 million for the three months ended September 30, 2023 compared to $1.1 million for the three months ended September 30, 2022. Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from non interest-bearing to interest-bearing demand and time deposits and resulted in a 150 bps, or 295.2%, increase in the average cost of interest-bearing deposits compared to the three months ended September 30, 2022. This accounted for a $3.5 million increase in interest expense. Additionally, interest-bearing deposit balances increased $95.4 million, or 11.3%, to $937.8 million as of September 30, 2023 compared to $842.4 million as of September 30, 2022, accounting for a $138,000 increase in interest expense. 37 Table of Contents Average Balances and Yields . 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. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21.0% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. 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 September 30, 2023 2022 Average Balance Interest and Dividends Yield/ Cost (1) Average Balance Interest and Dividends Yield/ Cost (1) (Dollars in thousands) (Unaudited) Assets: Interest-Earning Assets: Loans, Net (2) $ 1,088,691 $ 14,081 5.13 % $ 1,024,363 $ 10,833 4.20 % Debt Securities Taxable 204,848 940 1.84 222,110 985 1.77 Exempt From Federal Tax 6,013 52 3.46 7,998 62 3.10 Equity Securities 2,693 25 3.71 2,693 21 3.12 Interest-Earning Deposits at Banks 52,642 750 5.70 67,870 378 2.23 Other Interest-Earning Assets 3,292 69 8.32 2,784 39 5.56 Total Interest-Earning Assets 1,358,179 15,917 4.65 1,327,818 12,318 3.68 Noninterest-Earning Assets 52,709 68,796 Total Assets $ 1,410,888 $ 1,396,614 Liabilities and Stockholders' Equity: Interest-Bearing Liabilities: Interest-Bearing Demand Deposits $ 363,997 2,003 2.18 % $ 278,412 393 0.56 % Savings Accounts 212,909 54 0.10 251,148 20 0.03 Money Market Accounts 187,012 1,141 2.42 189,371 269 0.56 Time Deposits 173,832 1,552 3.54 123,438 397 1.28 Total Interest-Bearing Deposits 937,750 4,750 2.01 842,369 1,079 0.51 Short-Term Borrowings — — — 28,738 19 0.26 Other Borrowings 34,662 407 4.66 17,621 174 3.92 Total Interest-Bearing Liabilities 972,412 5,157 2.10 888,728 1,272 0.57 Noninterest-Bearing Demand Deposits 312,016 390,658 Other Liabilities 9,025 2,636 Total Liabilities 1,293,453 1,282,022 Stockholders' Equity 117,435 114,592 Total Liabilities and Stockholders' Equity $ 1,410,888 $ 1,396,614 Net Interest Income (FTE) (Non-GAAP) (3) $ 10,760 $ 11,046 Net Interest Rate Spread (FTE) (Non-GAAP) (3)(5) 2.55 % 3.11 % Net Interest-Earning Assets (4) $ 385,767 $ 439,090 Net Interest Margin (GAAP) (6) 3.13 3.29 Net Interest Margin (FTE) (Non-GAAP) (3)(6) 3.14 3.30 Return on Average Assets (1) 0.75 1.12 Return on Average Equity (1) 9.03 13.60 Average Equity to Average Assets 8.32 8.20 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 139.67 149.41 PPP Loans $ 24 $ 1 16.53 $ 2,424 $ 123 20.13 (1) Annualized based on three months ended results. (2) Net of the allowance for credit losses and includes nonaccrual loans with a zero yield. (3) 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. (4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (5) 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. (6) Net interest margin represents annualized net interest income divided by average total interest-earning assets. 38 Table of Contents Rate/Volume Analysis . The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21.0%. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns. Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) (Unaudited) Interest and Dividend Income: Loans, net $ 729 $ 2,519 $ 3,248 Debt Securities: Taxable (83) 38 (45) Exempt From Federal Tax (16) 6 (10) Equity Securities — 4 4 Cash at Other Banks (107) 479 372 Other Interest-Earning Assets 8 22 30 Total Interest-Earning Assets 531 3,068 3,599 Interest Expense: Deposits 138 3,533 3,671 Short-Term Borrowings (10) (9) (19) Other Borrowings 195 38 233 Total Interest-Bearing Liabilities 323 3,562 3,885 Change in Net Interest and Dividend Income $ 208 $ (494) $ (286) Provision for Credit Losses. Effective January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The provision for credit losses recorded for the three months ended September 30, 2023 was $406,000 and was required primarily due to changes in qualitative factors coupled with a modeled slowdown in loan prepayment speeds. This compared to no provision for credit losses recorded for the three months ended September 30, 2022. Noninterest Income . Noninterest income decreased $327,000, or 11.9%, to $2.4 million for the three months ended September 30, 2023, compared to $2.7 million for the three months ended September 30, 2022. This decrease was primarily related to a $439,000 decrease in net gain on disposal of fixed assets as compared to the prior period which included gains from the sale of assets of two closed branch locations. Noninterest Expense. Noninterest expense increased $660,000, or 7.5%, to $9.5 million for the three months ended September 30, 2023 compared to $8.8 million for the three months ended September 30, 2022. Salaries and benefits increased $630,000, or 13.3%, to $5.4 million primarily due to merit increases and revenue producing staff additions. Data processing expense increased $174,000, or 32.2%, to $714,000, due to increased ongoing costs related to the fourth quarter 2022 core conversion and equipment expense increased $95,000 or 55.9%, to $265,000, due to costs associated with the implementation and operation of new interactive teller machines. Income Taxes. Income tax expense was $564,000 for the three months ended September 30, 2023 compared to $998,000 for the three months ended September 30, 2022. This change was primarily driven by an decrease in pre-tax income to $3.2 million for the three months ended September 30, 2023 compared to $4.9 million for the three months ended September 30, 2022 and a $117,000 income tax refund received during three months ended September 30, 2023. 39 Table of Contents Results of Operations for the Nine Months Ended September 30, 2023 and 2022 Overview. Net income was $9.6 million for the nine months ended September 30, 2023, an increase of $2.5 million compared to $7.1 million for the nine months ended September 30, 2022. Net Interest and Dividend Income. Net interest and dividend income increased $2.4 million, or 7.6% to $33.4 million for the nine months ended September 30, 2023 compared to $31.1 million for the nine months ended September 30, 2022. Net interest margin (GAAP) increased to 3.31% for the nine months ended September 30, 2023 compared to 3.17% for the nine months ended September 30, 2022. Net interest margin (Non-GAAP FTE) increased 14 bps to 3.32% for the nine months ended September 30, 2023 compared to 3.18% the nine months ended September 30, 2022. Interest and Dividend Income • Interest and dividend income increased $11.5 million, or 33.8%, to $45.3 million for the nine months ended September 30, 2023 compared to $33.9 million for the nine months ended September 30, 2022. ◦ Interest income on loans increased $9.7 million or 32.4% to $39.8 million during the nine months ended September 30, 2023 compared to $30.1 million for the nine months ended September 30, 2022. Average loans increased $55.9 million, while the loan yield for the nine months ended September 30, 2023 increased 101 bps to 4.99% compared to 3.98% for the nine months ended September 30, 2022. ◦ Interest income on interest-earning deposits at other banks increased $1.7 million, to $2.3 million for the nine months ended September 30, 2023 compared to $534,000 for the nine months ended September 30, 2022 as the average yield increased 386 bps, while average balances decreased $739,000. The increase in the average yield was the result of the Federal Reserve Board's interest rate increases. Interest Expense • Interest expense increased $9.1 million, or 326.3%, to $11.9 million for the nine months ended September 30, 2023 compared to $2.8 million for the nine months ended September 30, 2022. ◦ Interest expense on deposits increased $8.9 million, or 401.2%, to $11.1 million for the nine months ended September 30, 2023 compared to $2.2 million for the nine months ended September 30, 2022. Rising market interest rates led to the repricing of interest-bearing demand and money market deposits and a shift in deposits from non interest-bearing to interest-bearing demand and time deposits and resulted in a 126 bps increase in average cost of interest-bearing deposits compared to the nine months ended September 30, 2022. This accounted for a $8.7 million increase in interest expense. Additionally, average interest-bearing deposits increased $82.6 million, or 9.9%, accounting for a $232,000 increase in interest expense. 40 Table of Contents Average Balances and Yields. 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. 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. Nine Months Ended September 30, 2023 2022 Average Balance Interest and Dividends Yield/ Cost (1) Average Balance Interest and Dividends Yield/ Cost (1) (Dollars in thousands) (Unaudited) Assets: Interest-Earning Assets: Loans, Net (2) $ 1,069,729 $ 39,924 4.99 % $ 1,013,871 $ 30,157 3.98 % Debt Securities Taxable 209,069 2,853 1.82 222,132 2,878 1.73 Tax Exempt 6,154 157 3.40 9,093 218 3.20 Equity Securities 2,693 74 3.66 2,693 64 3.17 Interest-Earning Deposits at Banks 60,474 2,276 5.02 61,213 534 1.16 Other Interest-Earning Assets 2,905 148 6.81 3,165 115 4.86 Total Interest-Earning Assets 1,351,024 45,432 4.50 1,312,167 33,966 3.46 Noninterest-Earning Assets 51,018 91,607 Total Assets $ 1,402,042 $ 1,403,774 Liabilities and Stockholders' Equity: Interest-Bearing Liabilities: Interest-Bearing Demand Deposits $ 351,379 4,776 1.82 % $ 271,897 554 0.27 % Savings Accounts 226,686 145 0.09 247,790 58 0.03 Money Market Accounts 198,243 3,113 2.10 190,189 371 0.26 Time Deposits 143,881 3,063 2.85 127,732 1,231 1.29 Total Interest-Bearing Deposits 920,189 11,097 1.61 837,608 2,214 0.35 Short-Term Borrowings 604 5 1.11 33,553 56 0.22 Other Borrowings 23,516 800 4.55 17,612 522 3.96 Total Interest-Bearing Liabilities 944,309 11,902 1.69 888,773 2,792 0.42 Noninterest-Bearing Demand Deposits 333,356 388,964 Other Liabilities 7,655 5,177 Total Liabilities 1,285,320 1,282,914 Stockholders' Equity 116,722 120,860 Total Liabilities and Stockholders' Equity $ 1,402,042 $ 1,403,774 Net Interest Income (FTE) (Non-GAAP) (3) $ 33,530 $ 31,174 Net Interest Rate Spread (FTE) (Non-GAAP) (3)(5) 2.81 % 3.04 % Net Interest-Earning Assets (4) $ 406,715 $ 423,394 Net Interest Margin (GAAP) (6) 3.31 3.17 Net Interest Margin (FTE) (Non-GAAP) (3)(6) 3.32 3.18 Return on Average Assets (1) 0.91 0.68 Return on Average Equity (1) 10.98 7.85 Average Equity to Average Assets 8.33 8.61 Average Interest-Earning Assets to Average Interest-Bearing Liabilities 143.07 147.64 PPP Loans $ 54 $ 5 12.38 $ 7,503 $ 712 12.69 (1) Annualized based on nine months ended results. (2) Net of the allowance for credit losses and includes nonaccrual loans with a zero yield. (3) 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. (4) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (5) 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. (6) Net interest margin represents annualized net interest income divided by average total interest-earning assets. 41 Table of Contents Rate Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%. 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. Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022 Increase (Decrease) Due to Volume Rate Total (Dollars in thousands) (Unaudited) Interest and Dividend Income: Loans, net $ 1,761 $ 8,006 $ 9,767 Debt Securities: Taxable (171) 146 (25) Exempt From Federal Tax (74) 13 (61) Equity Securities — 10 10 Cash at Other Banks (9) 1,751 1,742 Other Interest-Earning Assets (10) 43 33 Total Interest-Earning Assets 1,497 9,969 11,466 Interest Expense: Deposits 232 8,651 8,883 Short-Term Borrowings (98) 47 (51) Other Borrowings 192 86 278 Total Interest-Bearing Liabilities 326 8,784 9,110 Change in Net Interest and Dividend Income $ 1,171 $ 1,185 $ 2,356 Provision for Credit Losses. The provision for credit losses was $917,000 for the nine months ended September 30, 2023, and $3.8 million for the nine months ended September 30, 2022. The increased provision for credit losses for the nine months ended September 30, 2022 was primarily due to a provision for a single loan charge-of f of $2.7 million with respect to a commercial and industrial loan to a borrower who ceased operations. Noninterest Income. Noninterest income increased $34,000, or 0.5%, to $7.49 million for the nine months ended September 30, 2023, compared to $7.46 million for the nine months ended September 30, 2022. This increase was primarily related to a $303,000 increase in net gains of bank-owned life insurance claims resulting from two death claims and an increase of $335,000, or 7.4%, in insurance commissions to $4.9 million for the nine months ended September 30, 2023, compared to $4.5 million for the nine months ended September 30, 2022 due to higher lock-in amounts received and core business including commercial and personal insurance lines. Partially offsetting these increases, net gain on disposal of fixed assets decreased $420,000, or 97.4%, to $11,000 for the nine months ended September 30, 2023, compared to $431,000 for the nine months ended September 30, 2022 due to a $439,000 gain resulting from the sale of assets of two closed branch locations recorded during the nine months ended September 30, 2022. Additionally, service fees decreased $270,000, or 16.6%, to $1.4 million for nine months ended September 30, 2023, compared to $1.6 million for the nine months ended September 30, 2022 and the net loss on equity securities increased to $369,000 for the nine months ended September 30, 2023 compared to $252,000 for the nine months ended September 30, 2022, which was due to a decline of $117,000 in the market value of equity securities, comprised mainly of bank stocks. 42 Table of Contents Noninterest Expense. Noninterest expense increased $2.1 million, or 8.2%, to $28.0 million for the nine months ended September 30, 2023 compared to $25.9 million for the nine months ended September 30, 2022. Salaries and benefits increased $1.8 million primarily due to revenue producing staffing additions, recruiting costs and severance related to the discontinuation of indirect automobile lending. Data processing expense increased $818,000 due to increased ongoing costs related to the fourth quarter 2022 core conversion and equipment expense increased $205,000 due to costs associated with the implementation and operation of new interactive teller machines. Conversely, contracted services decreased $355,000 due primarily to costs associated with project management of strategic initiatives during 2022. Income Taxes. Income tax expense increased $635,000 to $2.4 million for the nine months ended September 30, 2023 compared to $1.8 million for the nine months ended September 30, 2022. The change between the periods is consistent with the change in pre-tax income, as pre-tax income was $12.0 million for the nine months ended September 30, 2023 compared to pre-tax income of $8.9 million for the nine months ended September 30, 2022. 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 6 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of September 30, 2023 and December 31, 2022. Liquidity and Capital Management Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities, calls and sales of securities. While maturities and scheduled amortization of loans and securities are typically predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at September 30, 2023 to satisfy its short- and long-term liquidity needs. The Company’s most liquid assets are cash and due from banks, which totaled $52.6 million at September 30, 2023. 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 $20.8 million at September 30, 2023. In addition, at September 30, 2023, the Company had the ability to borrow up to $467.9 million from the FHLB of Pittsburgh, of which $415.3 million is available. The Company also has the ability to borrow up to $109.2 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 September 30, 2023 and December 31, 2022, currently these credit arrangements have remained unused. At September 30, 2023, $83.4 million, or 47.0% of total time deposits mature within one year. If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than it currently pays on these time deposits. The Company believes, however, based on past experience that a significant portion of its time deposits will remain with it, either as time deposits or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered. The Bank's current deposit portfolio is 60.5% insured by the FDIC, and with additional coverage of 16.9% from the Bank's investment securities; of the total deposits held at the Bank only 22.6% are uninsured. We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLB, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the FHLB in the future. CB Financial is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders and for other corporate purposes. Its primary source of liquidity is dividend payments it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations. At September 30, 2023, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $16.0 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. 43 Table of Contents Capital Management. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. At September 30, 2023 and December 31, 2022, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. 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. September 30, 2023 December 31, 2022 Amount Ratio Amount Ratio (Dollars in thousands) Common Equity Tier 1 (to risk weighted assets) Actual $ 130,934 12.77 % $ 121,188 12.33 % For Capital Adequacy Purposes 46,141 4.50 44,221 4.50 To Be Well Capitalized 66,648 6.50 63,875 6.50 Tier 1 Capital (to risk weighted assets) Actual 130,934 12.77 121,188 12.33 For Capital Adequacy Purposes 61,521 6.00 58,961 6.00 To Be Well Capitalized 82,028 8.00 78,615 8.00 Total Capital (to risk weighted assets) Actual 142,555 13.90 133,478 13.58 For Capital Adequacy Purposes 82,028 8.00 78,615 8.00 To Be Well Capitalized 102,535 10.00 98,269 10.00 Tier 1 Leverage (to adjusted total assets) Actual 130,934 9.37 121,188 8.66 For Capital Adequacy Purposes 55,901 4.00 55,969 4.00 To Be Well Capitalized 69,876 5.00 69,962 5.00