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CB Financial Services, Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number: 001-36706

 

  CB FINANCIAL SERVICES, INC.  
  (Exact name of registrant as specified in its charter)  

 

Pennsylvania   51-0534721
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

100 N. Market Street, Carmichaels, PA   15320
(Address of principal executive offices)   (Zip Code)

 

  (724) 966-5041  
  (Registrant’s telephone number, including area code)  

 

  N/A  
  (Former name, former address and former fiscal year, if changed since last report)  

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common stock, par value $0.4167 per share   CBFV   The Nasdaq Stock Market, LLC
(Title of each class)   (Trading symbol)   (Name of each exchange on which registered)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐  Accelerated filer ☒
Non-accelerated filer ☐  Smaller reporting company ☒
Emerging growth company ☒   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 6, 2019, the number of shares outstanding of the Registrant’s Common Stock was 5,433,489.

 

 

FORM 10-Q

 

INDEX

 

Page

PART I – FINANCIAL INFORMATION  
Item 1.  Financial Statements (Unaudited) 1
Consolidated Statement of Financial Condition 1
Consolidated Statement of Income 2
Consolidated Statement of Comprehensive Income 3
Consolidated Statements of Changes In Stockholders’ Equity 4
Consolidated Statement of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 34
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 44
Item 4. Controls and Procedures. 44
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings. 46
Item 1A. Risk Factors. 46
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 46
Item 3.  Defaults Upon Senior Securities. 46
Item 4. Mine Safety Disclosures. 46
Item 5. Other Information. 46
Item 6. Exhibits 46
SIGNATURES 47

 

 

 

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

 

   (Unaudited)   
   September 30,  December 31,
(Dollars in thousands, except share data)  2019  2018
       
ASSETS          
Cash and Due From Banks:          
Interest Bearing  $71,267   $39,356 
Non-Interest Bearing   17,146    13,997 
Total Cash and Due From Banks   88,413    53,353 
           
Investment Securities:          
Available-for-Sale   217,545    225,409 
Loans, Net   922,448    903,314 
Premises and Equipment, Net   22,566    23,448 
Bank-Owned Life Insurance   24,080    22,922 
Goodwill   28,425    28,425 
Core Deposit Intangible, Net   9,480    10,934 
Accrued Interest and Other Assets   14,899    13,496 
TOTAL ASSETS  $1,327,856   $1,281,301 
           
LIABILITIES          
Deposits:          
Demand Deposits  $264,131   $253,201 
NOW Accounts   230,931    218,687 
Money Market Accounts   184,100    187,627 
Savings Accounts   214,883    209,985 
Time Deposits   224,857    214,891 
Brokered Deposits   7,006    2,267 
Total Deposits   1,125,908    1,086,658 
           
Short-Term Borrowings   29,118    30,979 
Other Borrowed Funds   17,000    20,000 
Accrued Interest and Other Liabilities   7,732    6,039 
TOTAL LIABILITIES   1,179,758    1,143,676 
           
STOCKHOLDERS' EQUITY          
Preferred Stock, No Par Value; 5,000,000 Shares Authorized   -    - 
Common Stock, $0.4167 Par Value; 35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,433,489 and 5,432,289 Shares Outstanding at September 30, 2019 and December 31, 2018, Respectively   2,367    2,367 
Capital Surplus   83,457    83,225 
Retained Earnings   63,582    57,843 
Treasury Stock, at Cost (247,504 and 248,704 Shares at September 30, 2019 and December 31, 2018, Respectively)   (4,350)   (4,370)
Accumulated Other Comprehensive Income (Loss)   3,042    (1,440)
TOTAL STOCKHOLDERS' EQUITY   148,098    137,625 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $1,327,856   $1,281,301 

 

The accompanying notes are an integral part of these consolidated financial statements

1

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
(Dollars in thousands, except share and per share data)  2019  2018  2019  2018
             
INTEREST AND DIVIDEND INCOME                    
Loans, Including Fees  $10,984   $10,044   $32,090   $27,272 
Federal Funds Sold   156    53    435    113 
Investment Securities:                    
Taxable   1,505    1,202    4,159    2,624 
Tax-Exempt   204    318    717    857 
Other Interest and Dividend Income   249    147    662    295 
TOTAL INTEREST AND DIVIDEND INCOME   13,098    11,764    38,063    31,161 
                     
INTEREST EXPENSE                    
Deposits   1,864    1,398    5,407    3,372 
Federal Funds Purchased   -    -    -    1 
Short-Term Borrowings   47    68    143    473 
Other Borrowed Funds   91    128    278    364 
TOTAL INTEREST EXPENSE   2,002    1,594    5,828    4,210 
                     
NET INTEREST INCOME   11,096    10,170    32,235    26,951 
Provision For Loan Losses   175    25    550    2,125 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   10,921    10,145    31,685    24,826 
                     
NONINTEREST INCOME                    
Service Fees on Deposit Accounts   811    866    2,362    2,176 
Insurance Commissions   985    920    3,219    2,731 
Other Commissions   159    127    448    823 
Net Gain on Sales of Loans   48    52    190    106 
Net Gain (Loss) on Sales of Investment Securities   3    -    (50)   - 
Fair Value of Marketable Equity Securities   (25)   35    104    54 
Net Gain on Purchased Tax Credits   9    11    27    33 
Net (Loss) Gain on Disposal of Fixed Assets   -    (74)   2    (74)
Income from Bank-Owned Life Insurance   142    135    408    370 
Other   67    16    203    80 
TOTAL NONINTEREST INCOME   2,199    2,088    6,913    6,299 
                     
NONINTEREST EXPENSE                    
Salaries and Employee Benefits   4,628    4,708    14,271    13,268 
Occupancy   597    855    2,019    2,213 
Equipment   636    786    2,005    1,916 
FDIC Assessment   5    67    368    361 
PA Shares Tax   226    197    743    593 
Contracted Services   312    273    945    583 
Legal and Professional Fees   117    171    458    456 
Advertising   244    245    651    587 
Bankcard Processing   225    180    652    448 
Other Real Estate Owned (Income)   13    49    (81)   37 
Amortization of Core Deposit Intangible   484    452    1,454    986 
Merger-Related   -    61    -    854 
Other   1,003    1,321    3,117    3,224 
TOTAL NONINTEREST EXPENSE   8,490    9,365    26,602    25,526 
                     
Income Before Income Taxes   4,630    2,868    11,996    5,599 
Income Taxes   884    576    2,346    977 
NET INCOME  $3,746   $2,292   $9,650   $4,622 
                     
EARNINGS PER SHARE                    
Basic  $0.69   $0.42   $1.78   $0.96 
Diluted   0.69    0.42    1.77    0.95 
                     
WEIGHTED AVERAGE SHARES OUTSTANDING                    
Basic   5,433,289    5,414,299    5,433,296    4,834,948 
Diluted   5,458,723    5,476,792    5,451,705    4,889,553 

 

The accompanying notes are an integral part of these consolidated financial statements

2

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months Ended  Nine Months Ended
   September 30,  September 30,
(Dollars in thousands)  2019  2018  2019  2018
             
Net Income  $3,746   $2,292   $9,650   $4,622 
                     
Other Comprehensive Income (Loss):                    
Unrealized Gains (Losses) on Available-for-Sale Securities Net of Income Tax Expense (Benefit) of $47 and ($325) for the Three Months Ended September 30, 2019 and 2018, Respectively, and $1,209 and ($734) for the Nine Months Ended September 30, 2019 and 2018, Respectively   74    (1,224)   4,443    (2,715)
                     
Reclassification Adjustment for (Gains) Losses on Securities: Included in Net Income, Net of Income Tax (Expense) Benefit of ($1) and $11 for the Three and Nine Months Ended September 30, 2019, Respectively (1)    (2)   -    39    - 
Other Comprehensive Income (Loss), Net of Income Tax Expense (Benefit)   72    (1,224)   4,482    (2,715)
Total Comprehensive Income  $3,818   $1,068   $14,132   $1,907 

 

(1)The gross amount of gains (losses) on securities of $3 and ($50) for the Three and Nine Months Ended September 30, 2019, respectively are reported as Net Gain (Loss) on Sales of Investment Securities on the Consolidated Statement of Income. The income tax expense (benefit) is included in Income Taxes on the Consolidated Statement of Income.

 

The accompanying notes are an integral part of these consolidated financial statements

3

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

(Dollars in thousands, except share and per share data)  Shares Issued  Common Stock  Capital Surplus  Retained Earnings  Treasury Stock  Accumulated Other Comprehensive Income (Loss)  Total Stockholders' Equity
                      
December 31, 2018   5,680,993   $2,367   $83,225   $57,843   $(4,370)  $(1,440)  $137,625 
Comprehensive Income:                                   
Net Income   -    -    -    2,925    -    -    2,925 
Other Comprehensive Income   -    -    -    -    -    2,384    2,384 
Stock-Based Compensation Expense   -    -    77    -    -    -    77 
Exercise of Stock Options   -    -    5    -    36    -    41 
Treasury stock purchased, at cost (800 shares)   -    -    -    -    (19)   -    (19)
Dividends Paid ($0.24 Per Share)   -    -    -    (1,304)   -    -    (1,304)
March 31, 2019   5,680,993    2,367    83,307    59,464    (4,353)   944    141,729 
Comprehensive Income:                                   
Net Income   -    -    -    2,979    -    -    2,979 
Other Comprehensive Income   -    -    -    -    -    2,026    2,026 
Restricted Stock Awards Granted   -    -    (11)   -    11    -    - 
Restricted Stock Awards Forfeited   -    -    8    -    (8)   -    - 
Stock-Based Compensation Expense   -    -    76    -    -    -    76 
Dividends Paid ($0.24 Per Share)   -    -    -    (1,303)   -    -    (1,303)
June 30, 2019   5,680,993    2,367    83,380    61,140    (4,350)   2,970    145,507 
Comprehensive Income:                                   
Net Income   -    -    -    3,746    -    -    3,746 
Other Comprehensive Income   -    -    -    -    -    72    72 
Stock-Based Compensation Expense   -    -    77    -    -    -    77 
Dividends Paid ($0.24 Per Share)   -    -    -    (1,304)   -    -    (1,304)
September 30, 2019   5,680,993   $2,367   $83,457   $63,582   $(4,350)  $3,042   $148,098 

 

(Dollars in thousands, except share and per share data)  Shares Issued  Common Stock  Capital Surplus  Retained Earnings  Treasury Stock  Accumulated Other Comprehensive Loss  Total Stockholders' Equity
                      
December 31, 2017   4,363,346   $1,818   $42,089   $55,280   $(4,590)  $(1,341)  $93,256 
Comprehensive Income:                                   
Net Income   -      -      -      1,360    -      -      1,360 
Other Comprehensive Loss   -      -      -      -      -      (1,421)   (1,421)
Impact of change in method of accounting formarketable equity securities (1)   -      -      -      40    -      (40)   -   
Stock-Based Compensation Expense   -      -      119    -      -      -      119 
Exercise of Stock Options   -      -      3    -      29    -      32 
Treasury Stock Purchased, at cost (895 shares)   -      -      -      -      (27)   -      (27)
Dividends Paid ($0.22 Per Share)   -      -      -      (901)   -      -      (901)
March 31, 2018   4,363,346    1,818    42,211    55,779    (4,588)   (2,802)   92,418 
Comprehensive Income:                                   
Net Income   -      -      -      970    -      -      970 
Other Comprehensive Loss   -      -      -      -      -      (70)   (70)
Issuance of Common Stock                                   
(net of issuance expenses of $515)   1,317,647    549    40,978    -      -      -      41,527 
Stock-Based Compensation Expense   -      -      120    -      -      -      120 
Exercise of Stock Options   -      -      2    -      179    -      181 
Treasury Stock Purchased, at cost (7,729 shares)   -      -      -      -      (271)   -      (271)
Dividends Paid ($0.22 Per Share)   -      -      -      (1,191)   -      -      (1,191)
June 30, 2018   5,680,993    2,367    83,311    55,558    (4,680)   (2,872)   133,684 
Comprehensive Income:                                   
Net Income   -      -      -      2,292    -      -      2,292 
Other Comprehensive Loss   -      -      -      -      -      (1,224)   (1,224)
Stock-Based Compensation Expense   -      -      122    -      -      -      122 
Dividends Paid ($0.22 Per Share)   -      -      -      (1,191)   -      -      (1,191)
September 30, 2018   5,680,993   $2,367   $83,433   $56,659   $(4,680)  $(4,096)  $133,683 

 

(1)Reclassification due to the adoption of Accounting Standards Update (“ASU”) 2016-01.

 

The accompanying notes are an integral part of these consolidated financial statements

4

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

   Nine Months Ended
   September 30,
(Dollars in thousands)  2019  2018
       
OPERATING ACTIVITIES          
Net Income  $9,650   $4,622 
Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities:          
Net (Accretion) Amortization on Investments   (145)   96 
Depreciation and Amortization   2,730    2,263 
Provision for Loan Losses   550    2,125 
Fair Value of Marketable Equity Securities   (104)   (54)
Net Gain on Purchased Tax Credits   (27)   (33)
Income from Bank-Owned Life Insurance   (408)   (370)
Proceeds From Mortgage Loans Sold   7,378    6,434 
Originations of Mortgage Loans for Sale   (7,188)   (6,328)
Net Gain on Sales of Loans   (190)   (106)
Net Loss on Sales of Investment Securities   50    -   
Net Loss (Gain) on Saless of Other Real Estate Owned and Repossessed Assets   6    (19)
Noncash Expense for Stock-Based Compensation   230    361 
Decrease (Increase) in Accrued Interest Receivable   33    (996)
Net (Gain) Loss on Disposal of Fixed Assets   (2)   74 
Increase (Decrease) in Taxes Payable   259    (954)
Increase in Accrued Interest Payable   331    191 
Net Payment of Federal/State Income Taxes   -      (850)
Other, Net   (448)   568 
NET CASH PROVIDED BY OPERATING ACTIVITIES   12,705    7,024 
           
INVESTING ACTIVITIES          
Investment Securities Available for Sale:          
Proceeds From Principal Repayments and Maturities   34,490    11,624 
Purchases of Securities   (50,185)   (1,069)
Proceeds from Sales of Securities   29,460    80,314 
Net Increase in Loans   (21,531)   (63,176)
Purchase of Premises and Equipment   (66)   (4,529)
Asset Acquisition of a Customer List   (900)   -   
Proceeds From a Claim on Bank-Owned Life Insurance   -      950 
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets   1,123    214 
Decrease in Restricted Equity Securities   214    389 
Net Cash Received from Acquisition   -      20,632 
Acquisition of Bank-Owned Life Insurance   (750)   -   
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES   (8,145)   45,349 
           
FINANCING ACTIVITIES          
Net Increase (Decrease) in Deposits   39,250    7,927 
Net Decrease in Short-Term Borrowings   (1,861)   (28,056)
Principal Payments on Other Borrowed Funds   (3,000)   (3,541)
Cash Dividends Paid   (3,911)   (3,283)
Treasury Stock, Purchases at Cost   (19)   (298)
Exercise of Stock Options   41    213 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES   30,500    (27,038)
           
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS   35,060    25,335 
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR   53,353    20,622 
CASH AND DUE FROM BANKS AT END OF PERIOD  $88,413   $45,957 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for:          
Interest on deposits and borrowings (including interest credited to deposit accounts of $3,543 and $3,372, respectively)  $5,497   $4,019 
Income taxes   2,260    850 
           
Real estate acquired in settlement of loans   427    46 
Non-cash transaction related to FWVB acquisition   -      41,527 
Non-cash transaction related to loan payoff receivable   1,644    -   
           
SUPPLEMENTAL NONCASH DISCLOSURE:          
Right of use asset recognized   1,707    -   
Lease liability recognized   1,712    -   

 

The accompanying notes are an integral part of these consolidated financial statements

5

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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” or “EU”). CB Financial and the Bank 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”). 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 and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during 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, evaluation of securities for other-than-temporary impairment including related cash flow projections, 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, 2018. 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 earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities 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 operates from twenty offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, seven offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio. 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, a full-service, independent insurance agency.

 

Acquired Loans

 

Loans that were acquired in previous mergers were recorded at fair value with no carryover of the related allowance for credit losses. The fair value of the acquired loans was estimated by management with the assistance of a third-party valuation specialist.

 

For performing loans acquired in a merger, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. For purchased credit impaired loans acquired in a merger, the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require an evaluation to determine the need for an allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which is then reclassified as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. The evaluation of the amount of future cash flows that is expected to be collected is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.

 

6

Recognition of Prior Period Errors

 

In April 2018, the Company discovered an error with the collateral position on a commercial and industrial classified loan relationship that had occurred in April 2017. This error resulted in the loss of the Company’s first lien position, leaving the loan with insufficient collateral. The Company recognized the error by recording a specific reserve and recognizing an additional $300,000 (pre-tax) of provision for loan losses for the quarter-ended March 31, 2018. There was no financial statement impact for the three months ended September 30, 2018. The impact of the correction of the error resulted in a decrease of $300,000 in income before income taxes and a decrease of $63,000 in income taxes. This resulted in a decrease of $237,000 (after-tax) in net income ($0.05 per share) for the nine months ended September 30, 2018. As a result of this error, the Company’s 2017 results were overstated by $237,000 and the Company’s March 31, 2018 quarterly and nine months ended September 30, 2018 results were understated by the same amount. Management of the Company concluded the effect of the error was immaterial to the Company’s 2017 and 2018 results.

 

In March 2019, the Company discovered an error in loan classifications within the commercial and industrial segment of the loan portfolio. The loan reclassifications were due to term loans and revolving lines of credit that were classified as commercial and industrial loans but were partially or primarily secured by commercial and residential real estate. The error resulted in loan reclassifications of $21.7 million from commercial and industrial segment to commercial real estate and residential real estate segments as of and for the year ended December 31, 2018. In addition, as a result of the loan segment reclassifications, the allocated components of the allowance for loan losses were adjusted to reflect the revised loan balances with the residual of $257,000 added to the unallocated component of the allowance for loan loss as of December 31, 2018. Management of the Company has evaluated the loan reclassification error and determined that, based on quantitative and qualitative analysis, this error was not material to the December 31, 2018 consolidated financial statements as presented.

 

Reclassifications

 

Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation. Such reclassifications did not affect net income or stockholders’ equity.

 

Recent Accounting Standards

 

In January 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-01, Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 is intended to be effective with ASU 2016-02, as amended. The amendments in ASU 2018-01 are as follows: provide an optional transition practical expedient for the adoption of ASU 2016-02 that, if elected, would not require an organization to reconsider their accounting for existing land easements that are not currently accounted for under the old lease standards; and clarify that new or modified land easements should be evaluated under ASU 2016-02, once an entity has adopted the new standard. ASU 2016-02 will require lessees to recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation for leases with terms of more than twelve months. Both the ROU asset and lease liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Accounting by lessors will remain largely unchanged from current U.S. GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted, and is to be applied as of the beginning of the earliest period presented using a modified retrospective approach. The Company adopted the provisions of ASU 2016-02 effective January 1, 2019, which increased assets and liabilities approximately $1.7 million at the time of adoption, as a result of reporting additional leases on the Company's consolidated statement of financial condition.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 amendments simplify the accounting for certain financial instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered and will also recognize the effect of the trigger within equity. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The Company adopted the provisions of ASU 2017-11 effective January 1, 2019 and the adoption did not have a material impact on the Company's consolidated financial condition or results of operations.

 

In March 2017, the FASB issued ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchases of Callable Debt Securities. ASU 2017-08 amends guidance on the amortization period of premiums on certain purchases of callable debt securities. The amendments shorten the amortization period of premiums on certain purchases of callable debt securities to the earliest call date. ASU 2017-08 is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted the provisions of ASU 2017-08 effective January 1, 2019 and the adoption did not have a material impact on the Company's consolidated statement of financial condition or results of operations.

 

7

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the second step of the goodwill impairment test. Instead, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for public business entities that are SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted, and is to be applied on a prospective basis. The Company is currently evaluating the provisions of ASU 2017-04, but does not believe that its adoption will have a material impact on the Company's consolidated financial condition or results of operations.

 

In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. In October 2019, the FASB approved to delay the required implementation date of ASU 2016-13 for smaller reporting companies until January 1, 2023. Early adoption will continue to be permitted. The Company is evaluating the impact of this ASU and expects to recognize a one-time adjustment to the allowance for loan losses upon adoption, but we cannot yet determine the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.

 

Note 2. Earnings Per 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 Statement 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  Nine Months Ended
   September 30,  September 30,
   2019  2018  2019  2018
Weighted-Average Common Shares Outstanding   5,680,993    5,680,993    5,680,993    5,101,808 
Average Treasury Stock Shares   (247,704)   (266,694)   (247,697)   (266,860)
Weighted-Average Common Shares and Common Stock                    
Equivalents Used to Calculate Basic Earnings Per Share   5,433,289    5,414,299    5,433,296    4,834,948 
Additional Common Stock Equivalents (Stock Options and                    
Restricted Stock) Used to Calculate Diluted Earnings Per Share   25,434    62,493    18,409    54,605 
Weighted-Average Common Shares and Common Stock                    
Equivalents Used to Calculate Diluted Earnings Per Share   5,458,723    5,476,792    5,451,705    4,889,553 
                     
Earnings per share:                    
Basic  $0.69   $0.42   $1.78   $0.96 
Diluted   0.69    0.42    1.77    0.95 

  

8

Note 3. Investment Securities

 

The following table presents the amortized cost and fair value of investment securities available-for-sale at the dates indicated:

 

   (Dollars in thousands)
   September 30, 2019
      Gross  Gross   
   Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
Debt Securities                    
U.S. Government Agencies  $57,484   $348   $(117)  $57,715 
Obligations of States and Political Subdivisions   26,415    973    (4)   27,384 
Mortgage-Backed Securities - Government-Sponsored Enterprises   127,164    2,787    (112)   129,839 
Total Debt Securities  $211,063   $4,108   $(233)   214,938 
                     
Marketable Equity Securities                    
Mutual Funds                  1,006 
Other                  1,601 
Total Marketable Equity Securities                  2,607 
Total Available-for-Sale Securities                 $217,545 

 

   December 31, 2018
      Gross  Gross   
   Amortized  Unrealized  Unrealized  Fair
   Cost  Gains  Losses  Value
Debt Securities                    
U.S. Government Agencies  $82,506   $160   $(2,087)  $80,579 
Obligations of States and Political Subdivisions   44,737    230    (366)   44,601 
Mortgage-Backed Securities - Government-Sponsored Enterprises   97,535    582    (346)   97,771 
Total Debt Securities  $224,778   $972   $(2,799)   222,951 
                     
Marketable Equity Securities                    
Mutual Funds                  968 
Other                  1,490 
Total Marketable Equity Securities                  2,458 
Total Available-for-Sale Securities                 $225,409 

 

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:

 

   (Dollars in thousands)
   September 30, 2019
   Less than 12 months  12 Months or Greater  Total
   Number     Gross  Number     Gross  Number     Gross
   of  Fair  Unrealized  of  Fair  Unrealized  of  Fair  Unrealized
   Securities  Value  Losses  Securities  Value  Losses  Securities  Value  Losses
U.S. Government Agencies   3   $7,173   $(26)   6   $13,928   $(91)   9   $21,101   $(117)
Obligations of States and                                             
Political Subdivisions   -    -    -    1    508    (4)   1    508    (4)
Mortgage-Backed Securities -                                             
Government Sponsored Enterprises   5    13,993    (96)   2    4,123    (16)   7    18,116    (112)
Total   8   $21,166   $(122)   9   $18,559   $(111)   17   $39,725   $(233)

 

9

   December 31, 2018
   Less than 12 months  12 Months or Greater  Total
   Number     Gross  Number     Gross  Number     Gross
   of  Fair  Unrealized  of  Fair  Unrealized  of  Fair  Unrealized
   Securities  Value  Losses  Securities  Value  Losses  Securities  Value  Losses
U.S. Government Agencies   -   $-   $-    23   $65,450   $(2,087)   23   $65,450   $(2,087)
Obligations of States and                                             
Political Subdivisions   24    13,212    (133)   25    11,918    (233)   49    25,130    (366)
Mortgage-Backed Securities -                                             
Government Sponsored Enterprises   -    -    -    9    13,874    (346)   9    13,874    (346)
Total   24   $13,212   $(133)   57   $91,242   $(2,666)   81   $104,454   $(2,799)

 

For debt securities, the Company does not believe that any individual unrealized loss as of September 30, 2019 or December 31, 2018, represents an other-than-temporary impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary 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 securities that are temporarily impaired at September 30, 2019 and December 31, 2018 relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell, or it is not 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.

 

As a result of the adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), effective January 1, 2018, marketable equity securities are measured at fair value with changes in fair value included in Fair Value of Marketable Equity Securities on the Consolidated Statement of Income. Realized gains and losses on sales of marketable equity securities would be included in Net Gain (Loss) on Sales of Investment Securities on the Consolidated Statement of Income. There were no sales of marketable equity securities for the three and nine months ended September 30, 2019 and 2018, respectively.

 

The following table presents the scheduled maturities of debt securities as of the date indicated:

 

   (Dollars in thousands)
   September 30, 2019
   Available-for-Sale
   Amortized  Fair
   Cost  Value
Due in One Year or Less  $3,412   $3,419 
Due after One Year through Five Years   52,039    52,258 
Due after Five Years through Ten Years   30,907    31,588 
Due after Ten Years   124,705    127,673 
Total  $211,063   $214,938 

 

10

Note 4. Loans and Related Allowance for Loan Loss

 

The Company’s loan portfolio consists of four classifications: real estate loans, commercial and industrial loans, consumer loans, and other loans. These segments are further segregated between loans accounted for under the amortized cost method (“Originated Loans”) and acquired loans that were originally recorded at fair value with no carryover of the related pre-merger allowance for loan losses (“Loans Acquired at Fair Value”). The following table presents the classifications of loans as of the dates indicated.

 

   (Dollars in thousands)
   September 30, 2019  December 31, 2018
   Amount  Percent  Amount  Percent
Originated Loans                    
Real Estate:                    
Residential  $260,245    33.8%  $235,492    32.6%
Commercial   250,064    32.5    229,455    31.8 
Construction   58,324    7.6    46,824    6.5 
Commercial and Industrial   78,588    10.2    78,466    10.9 
Consumer   110,624    14.4    119,731    16.6 
Other   11,763    1.5    11,623    1.6 
Total Originated Loans   769,608    100.0%   721,591    100.0%
Allowance for Loan Losses   (9,172)        (8,942)     
Loans, Net  $760,436        $712,649      
                     
Loans Acquired at Fair Value                    
Real Estate:                    
Residential  $78,877    48.5%  $91,277    47.7%
Commercial   64,113    39.4    77,609    40.6 
Construction   -    0.0    2,000    1.0 
Commercial and Industrial   13,546    8.3    12,997    6.8 
Consumer   1,564    1.0    2,510    1.3 
Other   4,490    2.8    4,888    2.6 
Total Loans Acquired at Fair Value   162,590    100.0%   191,281    100.0%
Allowance for Loan Losses   (578)        (616)     
Loans, Net  $162,012        $190,665      
                     
Total Loans                    
Real Estate:                    
Residential  $339,122    36.4%  $326,769    35.9%
Commercial   314,177    33.7    307,064    33.6 
Construction   58,324    6.3    48,824    5.3 
Commercial and Industrial   92,134    9.9    91,463    10.0 
Consumer   112,188    12.0    122,241    13.4 
Other   16,253    1.7    16,511    1.8 
Total Loans   932,198    100.0%   912,872    100.0%
Allowance for Loan Losses   (9,750)        (9,558)     
Loans, Net  $922,448        $903,314      

 

Total unamortized net deferred loan fees were $734,000 and $926,000 at September 30, 2019 and December 31, 2018, respectively.

 

Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $99.9 million and $99.0 million at September 30, 2019 and December 31, 2018, respectively.

 

11

The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated. At September 30, 2019 and December 31, 2018, there were no loans in the criticized category of Loss within the internal risk rating system.

 

   (Dollars in thousands)
   September 30, 2019
      Special         
   Pass  Mention  Substandard  Doubtful  Total
Originated Loans                         
Real Estate:                         
Residential  $258,702   $1,021   $522   $-   $260,245 
Commercial   235,292    9,966    3,745    1,061    250,064 
Construction   58,044    -    280    -    58,324 
Commercial and Industrial   73,103    4,493    37    955    78,588 
Consumer   110,570    -    54    -    110,624 
Other   11,763    -    -    -    11,763 
Total Originated Loans  $747,474   $15,480   $4,638   $2,016   $769,608 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $77,791   $46   $1,040   $-   $78,877 
Commercial   57,452    6,159    502    -    64,113 
Commercial and Industrial   13,546    -    -    -    13,546 
Consumer   1,564    -    -    -    1,564 
Other   4,398    92    -    -    4,490 
Total Loans Acquired at Fair Value  $154,751   $6,297   $1,542   $-   $162,590 
                          
Total Loans                         
Real Estate:                         
Residential  $336,493   $1,067   $1,562   $-   $339,122 
Commercial   292,744    16,125    4,247    1,061    314,177 
Construction   58,044    -    280    -    58,324 
Commercial and Industrial   86,649    4,493    37    955    92,134 
Consumer   112,134    -    54    -    112,188 
Other   16,161    92    -    -    16,253 
Total Loans  $902,225   $21,777   $6,180   $2,016   $932,198 

 

The increase of $2.8 million in the substandard loan category as of September 30, 2019 was mainly due to a commercial real estate relationship that was placed on nonaccrual in the current period due to alleged fraudulent activity. The relationship has been assigned to a receiver to manage the property. Based on the most recent appraisal, the loan was not impaired and therefore, the Bank does not expect to incur a loss. At December 31, 2018, the loan was classified as special mention in the construction loan category.

 

12

   December 31, 2018
      Special         
   Pass  Mention  Substandard  Doubtful  Total
Originated Loans                         
Real Estate:                         
Residential  $233,872   $1,071   $549   $-   $235,492 
Commercial   222,279    5,301    704    1,171    229,455 
Construction   43,522    2,902    400    -    46,824 
Commercial and Industrial   68,553    8,618    228    1,067    78,466 
Consumer   119,648    -    83    -    119,731 
Other   11,623    -    -    -    11,623 
Total Originated Loans  $699,497   $17,892   $1,964   $2,238   $721,591 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $89,490   $851   $936   $-   $91,277 
Commercial   69,954    7,175    480    -    77,609 
Construction   2,000    -    -    -    2,000 
Commercial and Industrial   12,981    -    16    -    12,997 
Consumer   2,510    -    -    -    2,510 
Other   4,785    103    -    -    4,888 
Total Loans Acquired at Fair Value  $181,720   $8,129   $1,432   $-   $191,281 
                          
Total Loans                         
Real Estate:                         
Residential  $323,362   $1,922   $1,485   $-   $326,769 
Commercial   292,233    12,476    1,184    1,171    307,064 
Construction   45,522    2,902    400    -    48,824 
Commercial and Industrial   81,534    8,618    244    1,067    91,463 
Consumer   122,158    -    83    -    122,241 
Other   16,408    103    -    -    16,511 
Total Loans  $881,217   $26,021   $3,396   $2,238   $912,872 

 

13

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.

 

   (Dollars in thousands)
   September 30, 2019
      30-59  60-89  90 Days         
   Loans  Days  Days  Or More  Total  Non-  Total
   Current  Past Due  Past Due  Past Due  Past Due  Accrual  Loans
Originated Loans                                   
Real Estate:                                   
Residential  $259,502   $138   $64   $19   $221   $522   $260,245 
Commercial   246,934    -    28    -    28    3,102    250,064 
Construction   58,324    -    -    -    -    -    58,324 
Commercial and Industrial   77,822    -    -    -    -    766    78,588 
Consumer   109,563    949    11    47    1,007    54    110,624 
Other   11,763    -    -    -    -    -    11,763 
Total Originated Loans  $763,908   $1,087   $103   $66   $1,256   $4,444   $769,608 
                                    
Loans Acquired at Fair Value                                   
Real Estate:                                   
Residential  $77,098   $108   $267   $364   $739   $1,040   $78,877 
Commercial   64,039    -    74    -    74    -    64,113 
Construction   -    -    -    -    -    -    - 
Commercial and Industrial   13,546    -    -    -    -    -    13,546 
Consumer   1,564    -    -    -    -    -    1,564 
Other   4,490    -    -    -    -    -    4,490 
Total Loans Acquired at Fair Value  $160,737   $108   $341   $364   $813   $1,040   $162,590 
                                    
Total Loans                                   
Real Estate:                                   
Residential  $336,600   $246   $331   $383   $960   $1,562   $339,122 
Commercial   310,973    -    102    -    102    3,102    314,177 
Construction   58,324    -    -    -    -    -    58,324 
Commercial and Industrial   91,368    -    -    -    -    766    92,134 
Consumer   111,127    949    11    47    1,007    54    112,188 
Other   16,253    -    -    -    -    -    16,253 
Total Loans  $924,645   $1,195   $444   $430   $2,069   $5,484   $932,198 

 

14

   December 31, 2018
      30-59  60-89  90 Days         
   Loans  Days  Days  Or More  Total  Non-  Total
   Current  Past Due  Past Due  Past Due  Past Due  Accrual  Loans
Originated Loans                                   
Real Estate:                                   
Residential  $232,967   $1,374   $72   $324   $1,770   $755   $235,492 
Commercial   229,189    84    182    -    266    -    229,455 
Construction   46,824    -    -    -    -    -    46,824 
Commercial and Industrial   77,222    216    -    -    216    1,028    78,466 
Consumer   118,256    1,319    70    3    1,392    83    119,731 
Other   11,623    -    -    -    -    -    11,623 
Total Originated Loans  $716,081   $2,993   $324   $327   $3,644   $1,866   $721,591 
                                    
Loans Acquired at Fair Value                                   
Real Estate:                                   
Residential  $89,405   $408   $65   $-   $473   $1,399   $91,277 
Commercial   77,532    77    -    -    77    -    77,609 
Construction   2,000    -    -    -    -    -    2,000 
Commercial and Industrial   12,929    52    -    -    52    16    12,997 
Consumer   2,491    18    1    -    19    -    2,510 
Other   4,888    -    -    -    -    -    4,888 
Total Loans Acquired at Fair Value  $189,245   $555   $66   $-   $621   $1,415   $191,281 
                                    
Total Loans                                   
Real Estate:                                   
Residential  $322,372   $1,782   $137   $324   $2,243   $2,154   $326,769 
Commercial   306,721    161    182    -    343    -    307,064 
Construction   48,824    -    -    -    -    -    48,824 
Commercial and Industrial   90,151    268    -    -    268    1,044    91,463 
Consumer   120,747    1,337    71    3    1,411    83    122,241 
Other   16,511    -    -    -    -    -    16,511 
Total Loans  $905,326   $3,548   $390   $327   $4,265   $3,281   $912,872 

 

15

The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“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.

 

   (Dollars in Thousands)
   September 30,  December 31,
   2019  2018
Nonaccrual Loans:          
Originated Loans:          
Real Estate:          
Residential  $522   $755 
Commercial   3,102    - 
Commercial and Industrial   766    1,028 
Consumer   54    83 
Total Originated Nonaccrual Loans   4,444    1,866 
           
Loans Acquired at Fair Value:          
Real Estate:          
Residential   1,040    1,399 
Commercial and Industrial   -    16 
Total Loans Acquired at Fair Value Nonaccrual Loans   1,040    1,415 
Total Nonaccrual Loans   5,484    3,281 
           
Accruing Loans Past Due 90 Days or More:          
Originated Loans:          
Real Estate:          
Residential   19    324 
Consumer   47    3 
Total Originated Accruing Loans Past Due 90 Days or More   66    327 
           
Loans Acquired at Fair Value:          
Real Estate:          
Residential   364    - 
Total Loans Acquired at Fair Value Accruing Loans          
Past Due 90 Days or More   364    - 
Total Accruing Loans Past Due 90 Days or More   430    327 
Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More   5,914    3,608 
           
Troubled Debt Restructurings, Accruing:          
Originated Loans:          
Real Estate          
Residential   70    26 
Commercial   1,059    980 
Commercial and Industrial   113    154 
Total Originated Loans   1,242    1,160 
Loans Acquired at Fair Value:          
Real Estate          
Residential   346    1,212 
Commercial   303    333 
Total Loans Acquired at Fair Value   649    1,545 
Total Troubled Debt Restructurings, Accruing   1,891    2,705 
           
Total Nonperforming Loans   7,805    6,313 
           
Real Estate Owned:          
Residential   41    46 
Commercial   174    871 
Total Real Estate Owned   215    917 
           
Total Nonperforming Assets  $8,020   $7,230 
           
Nonperforming Loans to Total Loans   0.84%   0.69%
Nonperforming Assets to Total Assets   0.60    0.56 

 

16

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 $1.1 million and $1.4 million at September 30, 2019 and December 31, 2018, respectively.

 

TDRs typically are the result of our loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of 14 loans totaling $2.6 million and 12 loans totaling $3.6 million at September 30, 2019 and December 31, 2018, respectively. Originated loans classified as TDRs consisted of nine loans totaling $2.0 million and six loans totaling $2.1 million at September 30, 2019 and December 31, 2018, respectively. Loans acquired at fair value classified as TDRs consisted of five loans totaling $649,000 and six loans totaling $1.5 million at September 30, 2019 and December 31, 2018, respectively.

 

For the three months ended September 30, 2019, one residential real estate loan modified in a TDR transaction by extending the term of the loan. For the nine months ended September 30, 2019, two residential real estate loans and one commercial real estate loan modified in TDR transactions by extending the term of the loan.

 

For the three months ended September 30, 2018, there were no loans modified in a TDR transaction. For the nine months ended September 30, 2018, one commercial and industrial loan modified in a TDR transaction and was termed-out due to declining financial information and one residential real estate loan acquired at fair value modified in a TDR transaction and was identified as part of the FWVB merger.

 

For the three months ended September 30, 2019, there were no TDRs that paid off. For the nine months ended September 30, 2019, one residential real estate TDR loan acquired at fair value paid off.

 

For the three months ended September 30, 2018, one commercial real estate TDR loan paid off. During the nine months ended September 30, 2018, one commercial and industrial TDR loan was fully charged-off due to declining financial information. In addition, a commercial real estate TDR loan and consumer TDR loan paid off in-full as well as a commercial real estate TDR loan acquired at fair value and commercial and industrial TDR loan acquired at fair value paid off in-full.

 

Other than the one commercial and industrial TDR loan that was fully charged-off due to declining financial information during the nine months ended September 30, 2018, no TDRs subsequently defaulted during the three and nine months ended September 30, 2019 and 2018, respectively.

 

17

The following table presents information at the time of modification related to loans modified in a TDR during the three months ended September 30, 2019 and 2018, and the nine months ended September 30, 2019. There were no loans modified in a TDR transaction during the quarter-ended September 30, 2018.

 

   (Dollars in thousands)
   Three Months Ended September 30, 2019
      Pre-  Post-   
      Modification  Modification   
   Number  Outstanding  Outstanding   
   of  Recorded  Recorded  Related
   Contracts  Investment  Investment  Allowance
Originated Loans                    
Real Estate                    
Residential   1   $10   $10   $- 

 

   Nine Months Ended September 30, 2019
      Pre-  Post-   
      Modification  Modification   
   Number  Outstanding  Outstanding   
   of  Recorded  Recorded  Related
   Contracts  Investment  Investment  Allowance
Originated Loans                    
Real Estate                    
Residential   2   $71   $71   $- 
Commercial   1    114    114    - 
Total   3   $185   $185   $- 

 

   Nine Months Ended September 30, 2018
      Pre-  Post-   
      Modification  Modification   
   Number  Outstanding  Outstanding   
   of  Recorded  Recorded  Related
   Contracts  Investment  Investment  Allowance
Originated Loans                    
Real Estate                    
Commercial and Industrial   1   $161   $161   $- 
Total   1   $161   $161   $- 
                     
Loans Acquired at Fair Value                    
Real Estate                    
Residential   1   $7   $7   $- 
Total   1   $7   $7   $- 

 

18

The following table presents a summary of the loans considered to be impaired as of the dates indicated.

 

   (Dollars in thousands)
   September 30, 2019
         Unpaid  Average  Interest
   Recorded  Related  Principal  Recorded  Income
   Investment  Allowance  Balance  Investment  Recognized
With No Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Residential  $153   $-   $158   $173   $3 
Commercial   3,573    -    3,625    3,633    70 
Construction   280    -    280    336    15 
Commercial and Industrial   149    -    151    166    5 
Total With No Related Allowance Recorded  $4,155   $-   $4,214   $4,308   $93 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $346   $-   $346   $353   $12 
Commercial   805    -    805    830    33 
Total With No Related Allowance Recorded  $1,151   $-   $1,151   $1,183   $45 
                          
Total Loans                         
Real Estate:                         
Residential  $499   $-   $504   $526   $15 
Commercial   4,378    -    4,430    4,463    103 
Construction   280    -    280    336    15 
Commercial and Industrial   149    -    151    166    5 
Total With No Related Allowance Recorded  $5,306   $-   $5,365   $5,491   $138 
                          
With A Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Commercial  $1,677   $300   $1,677   $1,716   $61 
Commercial and Industrial   955    503    1,095    1,011    11 
Total With A Related Allowance Recorded  $2,632   $803   $2,772   $2,727   $72 
                          
Total Impaired Loans:                         
Originated Loans                         
Real Estate:                         
Residential  $153   $-   $158   $173   $3 
Commercial   5,250    300    5,302    5,349    131 
Construction   280    -    280    336    15 
Commercial and Industrial   1,104    503    1,246    1,177    16 
Total Impaired Loans  $6,787   $803   $6,986   $7,035   $165 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $346   $-   $346   $353   $12 
Commercial   805    -    805    830    33 
Total Impaired Loans  $1,151   $-   $1,151   $1,183   $45 
                          
Total Loans                         
Real Estate:                         
Residential  $499   $-   $504   $526   $15 
Commercial   6,055    300    6,107    6,179    164 
Construction   280    -    280    336    15 
Commercial and Industrial   1,104    503    1,246    1,177    16 
Total Impaired Loans  $7,938   $803   $8,137   $8,218   $210 

 

19

 

   December 31, 2018
         Unpaid  Average  Interest
   Recorded  Related  Principal  Recorded  Income
   Investment  Allowance  Balance  Investment  Recognized
With No Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Residential  $71   $-   $74   $82   $4 
Commercial   1,550    -    1,550    1,626    74 
Construction   400    -    400    466    25 
Commercial and Industrial   382    -    394    403    5 
Total With No Related Allowance Recorded  $2,403   $-   $2,418   $2,577   $108 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,212   $-   $1,212   $1,234   $63 
Commercial   2,466    -    2,466    1,868    123 
Total With No Related Allowance Recorded  $3,678   $-   $3,678   $3,102   $186 
                          
Total Loans                         
Real Estate:                         
Residential  $1,283   $-   $1,286   $1,316   $67 
Commercial   4,016    -    4,016    3,494    197 
Construction   400    -    400    466    25 
Commercial and Industrial   382    -    394    403    5 
Total With No Related Allowance Recorded  $6,081   $-   $6,096   $5,679   $294 
                          
With A Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Commercial  $674   $211   $674   $716   $40 
Commercial and Industrial   1,066    787    1,171    1,193    63 
Total With A Related Allowance Recorded  $1,740   $998   $1,845   $1,909   $103 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Commercial  $44   $8   $44   $29   $3 
Commercial and Industrial   16    6    16    16    - 
Total With A Related Allowance Recorded  $60   $14   $60   $45   $3 
                          
Total Loans                         
Real Estate:                         
Commercial  $718   $219   $718   $745   $43 
Commercial and Industrial   1,082    793    1,187    1,209    63 
Total With A Related Allowance Recorded  $1,800   $1,012   $1,905   $1,954   $106 

 

20

   December 31, 2018 (cont.)
         Unpaid  Average  Interest
   Recorded  Related  Principal  Recorded  Income
   Investment  Allowance  Balance  Investment  Recognized
Total Impaired Loans                         
Originated Loans                         
Real Estate:                         
Residential  $71   $-   $74   $82   $4 
Commercial   2,224    211    2,224    2,342    114 
Construction   400    -    400    466    25 
Commercial and Industrial   1,448    787    1,565    1,596    68 
Total Impaired Loans  $4,143   $998   $4,263   $4,486   $211 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,212   $-   $1,212   $1,234   $63 
Commercial   2,510    8    2,510    1,897    126 
Commercial and Industrial   16    6    16    16    - 
Total Impaired Loans  $3,738   $14   $3,738   $3,147   $189 
                          
Total Loans                         
Real Estate:                         
Residential  $1,283   $-   $1,286   $1,316   $67 
Commercial   4,734    219    4,734    4,239    240 
Construction   400    -    400    466    25 
Commercial and Industrial   1,464    793    1,581    1,612    68 
Total Impaired Loans  $7,881   $1,012   $8,001   $7,633   $400 

 

21

The following table presents the activity in the allowance for loan losses summarized by major classifications 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.

 

   (Dollars in thousands)
   Real  Real  Real  Commercial            
   Estate  Estate  Estate  and            
   Residential  Commercial  Construction  Industrial  Consumer  Other  Unallocated  Total
Originated Loans                                        
June 30, 2019  $1,096   $3,000   $488   $2,605   $1,500   $-   $402   $9,091 
Charge-offs   (7)   -    -    -    (144)   -    -    (151)
Recoveries   1    8    -    1    47    -    -    57 
Provision   561    (409)   49    (272)   60    -    186    175 
September 30, 2019  $1,651   $2,599   $537   $2,334   $1,463   $-   $588   $9,172 
                                         
Loans Acquired at Fair Value                                        
June 30, 2019  $-   $446   $-   $113   $-   $-   $41   $600 
Charge-offs   (21)   -    -    (16)   (21)   -    -    (58)
Recoveries   -    27    -    4    5    -    -    36 
Provision   21    (99)   -    (6)   16    -    68    - 
September 30, 2019  $-   $374   $-   $95   $-   $-   $109   $578 
                                         
Total Allowance for Loan Losses                                        
June 30, 2019  $1,096   $3,446   $488   $2,718   $1,500   $-   $443   $9,691 
Charge-offs   (28)   -    -    (16)   (165)   -    -    (209)
Recoveries   1    35    -    5    52    -    -    93 
Provision   582    (508)   49    (278)   76    -    254    175 
September 30, 2019  $1,651   $2,973   $537   $2,429   $1,463   $-   $697   $9,750 
                                         
Originated Loans                                        
December 31, 2018  $1,050   $2,217   $395   $2,698   $2,027   $-   $555   $8,942 
Charge-offs   (28)   -    -    -    (429)   -    -    (457)
Recoveries   10    27    -    3    97    -    -    137 
Provision   619    355    142    (367)   (232)   -    33    550 
September 30, 2019  $1,651   $2,599   $537   $2,334   $1,463   $-   $588   $9,172 
                                         
Loans Acquired at Fair Value                                        
December 31, 2018  $-   $476   $-   $109   $-   $-   $31   $616 
Charge-offs   (43)   -    -    (16)   (22)   -    -    (81)
Recoveries   -    29    -    4    10    -    -    43 
Provision   43    (131)   -    (2)   12    -    78    - 
September 30, 2019  $-   $374   $-   $95   $-   $-   $109   $578 
                                         
Total Allowance for Loan Losses                                        
December 31, 2018  $1,050   $2,693   $395   $2,807   $2,027   $-   $586   $9,558 
Charge-offs   (71)   -    -    (16)   (451)   -    -    (538)
Recoveries   10    56    -    7    107    -    -    180 
Provision   662    224    142    (369)   (220)   -    111    550 
September 30, 2019  $1,651   $2,973   $537   $2,429   $1,463   $-   $697   $9,750 

 

22

   September 30, 2019
   Real  Real  Real  Commercial            
   Estate  Estate  Estate  and            
   Residential  Commercial  Construction  Industrial  Consumer  Other  Unallocated  Total
Originated Loans                                        
Individually Evaluated for Impairment  $-   $300   $-   $503   $-   $-   $-   $803 
Collectively Evaluated for Potential Impairment  $1,651   $2,299   $537   $1,831   $1,463   $-   $588   $8,369 
                                         
Loans Acquired at Fair Value                                        
Individually Evaluated for Impairment  $-   $-   $-   $-   $-   $-   $-   $- 
Collectively Evaluated for Potential Impairment  $-   $374   $-   $95   $-   $-   $109   $578 
                                         
Total Allowance for Loan Losses                                        
Individually Evaluated for Impairment  $-   $300   $-   $503   $-   $-   $-   $803 
Collectively Evaluated for Potential Impairment  $1,651   $2,673   $537   $1,926   $1,463   $-   $697   $8,947 

 

   December 31, 2018
   Real  Real  Real  Commercial            
   Estate  Estate  Estate  and            
   Residential  Commercial  Construction  Industrial  Consumer  Other  Unallocated  Total
Originated Loans                                        
Individually Evaluated for Impairment  $-   $211   $-   $787   $-   $-   $-   $998 
Collectively Evaluated for Potential Impairment  $1,050   $2,006   $395   $1,911   $2,027   $-   $555   $7,944 
                                         
Loans Acquired at Fair Value                                        
Individually Evaluated for Impairment  $-   $8   $-   $6   $-   $-   $-   $14 
Collectively Evaluated for Potential Impairment  $-   $468   $-   $103   $-   $-   $31   $602 
                                         
Total Allowance for Loan Losses                                        
Individually Evaluated for Impairment  $-   $219   $-   $793   $-   $-   $-   $1,012 
Collectively Evaluated for Potential Impairment  $1,050   $2,474   $395   $2,014   $2,027   $-   $586   $8,546 

 

23

   (Dollars in thousands)
   Real  Real  Real  Commercial            
   Estate  Estate  Estate  and            
   Residential  Commercial  Construction  Industrial  Consumer  Other  Unallocated  Total
Originated Loans                                        
June 30, 2018  $863   $2,311   $259   $2,799   $2,130   $-   $336   $8,698 
Charge-offs   -    -    -    -    (126)   -    -    (126)
Recoveries   4    22    -    1    48    -    -    75 
Provision   78    (12)   96    (43)   (72)   -    (22)   25 
September 30, 2018  $945   $2,321   $355   $2,757   $1,980   $-   $314   $8,672 
                                         
Loans Acquired at Fair Value                                        
June 30, 2018  $-   $493   $-   $119   $-   $-   $61   $673 
Charge-offs   (4)   -    -    (58)   -    -    -    (62)
Recoveries   -    1    -    -    1    -    -    2 
Provision   4    1    -    39    (1)   -    (43)   - 
September 30, 2018  $-   $495   $-   $100   $-   $-   $18   $613 
                                         
Total Allowance for Loan Losses                                        
June 30, 2018  $863   $2,804   $259   $2,918   $2,130   $-   $397   $9,371 
Charge-offs   (4)   -    -    (58)   (126)   -    -    (188)
Recoveries   4    23    -    1    49    -    -    77 
Provision   82    (11)   96    (4)   (73)   -    (65)   25 
September 30, 2018  $945   $2,816   $355   $2,857   $1,980   $-   $332   $9,285 
                                         
Originated Loans                                        
December 31, 2017  $891   $1,799   $276   $2,461   $2,358   $-   $430   $8,215 
Charge-offs   (27)   -    -    (1,398)   (424)   -    -    (1,849)
Recoveries   16    40    -    4    120    -    -    180 
Provision   65    482    79    1,690    (74)   -    (116)   2,126 
September 30, 2018  $945   $2,321   $355   $2,757   $1,980   $-   $314   $8,672 
                                         
Loans Acquired at Fair Value                                        
December 31, 2017  $-   $490   $-   $83   $-   $-   $8    581 
Charge-offs   (36)   -    -    (58)   -    -    -    (94)
Recoveries   9    115    -    -    3    -    -    127 
Provision   27    (110)   -    75    (3)   -    10    (1)
September 30, 2018  $-   $495   $-   $100   $-   $-   $18   $613 
                                         
Total Allowance for Loan Losses                                        
December 31, 2017  $891   $2,289   $276   $2,544   $2,358   $-   $438   $8,796 
Charge-offs   (63)   -    -    (1,456)   (424)   -    -    (1,943)
Recoveries   25    155    -    4    123    -    -    307 
Provision   92    372    79    1,765    (77)   -    (106)   2,125 
September 30, 2018  $945   $2,816   $355   $2,857   $1,980   $-   $332   $9,285 

 

   September 30, 2018
   Real  Real  Real  Commercial            
   Estate  Estate  Estate  and            
   Residential  Commercial  Construction  Industrial  Consumer  Other  Unallocated  Total
Originated Loans                                        
Individually Evaluated for Impairment  $-   $185   $-   $605   $-   $-   $-   $790 
Collectively Evaluated for Potential Impairment  $945   $2,136   $355   $2,152   $1,980   $-   $314   $7,882 
                                         
Loans Acquired at Fair Value                                        
Individually Evaluated for Impairment  $-   $11   $-   $6   $-   $-   $-   $17 
Collectively Evaluated for Potential Impairment  $-   $484   $-   $94   $-   $-   $18   $596 
                                         
Total Allowance for Loan Losses                                        
Individually Evaluated for Impairment  $-   $196   $-   $611   $-   $-   $-   $807 
Collectively Evaluated for Potential Impairment  $945   $2,620   $355   $2,246   $1,980   $-   $332   $8,478 

 

24

The following table presents changes in the accretable discount on the loans acquired at fair value for the dates indicated (dollars in thousands).

 

  

Accretable

Discount

Balance at December 31, 2018  $1,912 
Accretable Yield   (203)
Balance at September 30, 2019  $1,709 

 

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.

 

   (Dollars in thousands)
   September 30, 2019
   Real  Real  Real  Commercial         
   Estate  Estate  Estate  and         
   Residential  Commercial  Construction  Industrial  Consumer  Other  Total
Originated Loans                                   
Individually Evaluated for Impairment  $153   $5,250   $280   $1,104   $-   $-   $6,787 
Collectively Evaluated for Potential Impairment   260,092    244,814    58,044    77,484    110,624    11,763    762,821 
   $260,245   $250,064   $58,324   $78,588   $110,624   $11,763   $769,608 
                                    
Loans Acquired at Fair Value                                   
Individually Evaluated for Impairment  $346   $805   $-   $-   $-   $-   $1,151 
Collectively Evaluated for Potential Impairment   78,531    63,308    -    13,546    1,564    4,490    161,439 
   $78,877   $64,113   $-   $13,546   $1,564   $4,490   $162,590 
                                    
Total Loans                                   
Individually Evaluated for Impairment  $499   $6,055   $280   $1,104   $-   $-   $7,938 
Collectively Evaluated for Potential Impairment   338,623    308,122    58,044    91,030    112,188    16,253    924,260 
   $339,122   $314,177   $58,324   $92,134   $112,188   $16,253   $932,198 

 

   December 31, 2018
   Real  Real  Real  Commercial         
   Estate  Estate  Estate  and         
   Residential  Commercial  Construction  Industrial  Consumer  Other  Total
Originated Loans                                   
Individually Evaluated for Impairment  $71   $2,224   $400   $1,448   $-   $-   $4,143 
Collectively Evaluated for Potential Impairment   235,421    227,231    46,424    77,018    119,731    11,623    717,448 
   $235,492   $229,455   $46,824   $78,466   $119,731   $11,623   $721,591 
                                    
Loans Acquired at Fair Value                                   
Individually Evaluated for Impairment  $1,212   $2,510   $-   $16   $-   $-   $3,738 
Collectively Evaluated for Potential Impairment   90,065    75,099    2,000    12,981    2,510    4,888    187,543 
   $91,277   $77,609   $2,000   $12,997   $2,510   $4,888   $191,281 
                                    
Total Loans                                   
Individually Evaluated for Impairment  $1,283   $4,734   $400   $1,464   $-   $-   $7,881 
Collectively Evaluated for Potential Impairment   325,486    302,330    48,424    89,999    122,241    16,511    904,991 
   $326,769   $307,064   $48,824   $91,463   $122,241   $16,511   $912,872 

 

25

Note 5. Leases

 

The Company evaluates all contracts at commencement to determine if a lease is present. The Company adopted ASC 842 using the prospective method approach to all identified lease contracts or agreements, which permits us not to restate comparative periods. The current period adoption also recognized the use of several practical measures that permitted the Company not to reevaluate prior assumptions regarding the identification and classification of leases. In accordance with ASC 842, leases are defined as either operating or finance leases.

 

The Company identified 12 lease contracts as of ASC 842 adoption date, January 1, 2019. All lease contracts were classified as operating leases and created operating right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The leases are ROU assets of land and building for branch and loan production locations. These ROU assets are reported on the accrued interest and other assets line and the related lease liabilities on the accrued interest and other liabilities line on the Consolidated Statement of Financial Condition.

 

The following tables present the ROU assets, lease expense, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods indicated.

 

   Three Months  Nine Months
   Ended  Ended
   September 30,  September 30,
(dollars in thousands)  2019  2019
Operating Lease Expense  $115   $344 
           
Operating Leases          
ROU Assets       $1,395 
Operating Cash Flows        312 
           
Weighted Average Lease Term in Years          
Operating Leases        6.98 
           
Weighted Average Discount Rate          
Operating Leases        2.88%

 

   September 30,
(dollars in thousands)  2019
Maturity Analysis   
Due in One Year  $437 
Due After One Year to Two Years   335 
Due After Two Years to Three Years   217 
Due After Three Years to Four Years   98 
Due After Four to Five Years   54 
Due After Five Years   420 
Total  $1,561 
Less: Present Value Discount   161 
Lease Liabilities  $1,400 

 

26

Note 6. Deposits

 

The following table shows the maturities of time deposits for the next five years and beyond at the date indicated (dollars in thousands).

 

   September 30,
Maturity Period:  2019
One Year or Less  $88,217 
Over One Through Two Years   60,938 
Over Two Through Three Years   17,995 
Over Three Through Four Years   44,744 
Over Four Through Five Years   7,686 
Over Five Years   5,277 
Total  $224,857 

 

The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $71.3 million and $68.0 million as of September 30, 2019 and December 31, 2018, respectively.

 

Note 7. Short-Term Borrowings

 

The following table sets forth the components of short-term borrowings as of the dates indicated.

 

   (Dollars in thousands)
   September 30, 2019  December 31, 2018
      Weighted     Weighted
      Average     Average
   Amount  Rate  Amount  Rate
Federal Funds Purchased:                    
Average Balance Outstanding During the Period  $-    -%  $37    2.70%
Maximum Amount Outstanding at any Month End   -         1,500      
                     
FHLB Borrowings:                    
Balance at Period End   -    -    -    - 
Average Balance Outstanding During the Period   -    -    19,726    1.86 
Maximum Amount Outstanding at any Month End   -         98,960      
                     
Securities Sold Under Agreements to Repurchase:                    
Balance at Period End   29,118    0.58    30,979    0.54 
Average Balance Outstanding During the Period   30,261    0.63    29,300    0.53 
Maximum Amount Outstanding at any Month End   34,197         35,661      
Securities Collaterizing the Agreements at Period-End:                    
Carrying Value   44,324         48,131      
Market Value   44,649         47,083      

 

27

Note 8. Other Borrowed Funds

 

Other borrowed funds consist of fixed rate advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”). The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated.

 

   (Dollars in thousands)
   September 30, 2019  December 31, 2018
      Weighted     Weighted
      Average     Average
   Amount  Rate  Amount  Rate
Due in One Year  $6,000    1.88%  $6,000    1.78%
Due After One Year to Two Years   5,000    2.09    6,000    1.97 
Due After Two Years to Three Years   3,000    2.23    5,000    2.18 
Due After Three Years to Four Years   3,000    2.41    3,000    2.41 
Total  $17,000    2.09   $20,000    2.03 

 

As of September 30, 2019, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $369.1 million with the FHLB. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on outstanding residential mortgage loans and the Company’s investment in FHLB stock. Under this arrangement the Company had available a variable rate Line of Credit in the amount of $147.0 million as of September 30, 2019 and December 31, 2018, respectively, of which, there was no outstanding balance as of September 30, 2019 and December 31, 2018.

 

The Company maintains a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $99.7 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by commercial and consumer indirect auto loans. The Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million as of September 30, 2019, and December 31, 2018, respectively. As of September 30, 2019, and December 31, 2018, no draws had been taken on these facilities.

 

Note 9. 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 Statement 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.

 

Commitments and conditional obligations are evaluated the same as on-balance-sheet instruments but do not have a corresponding reserve recorded. The Company’s opinion on not implementing a corresponding reserve for off-balance-sheet instruments is supported by historical factors of no losses recorded due to these items. The Company is continually evaluating these items for credit quality and any future need for the corresponding reserve.

28

 

The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.

 

   (Dollars in thousands)
   September 30,  December 31,
   2019  2018
Standby Letters of Credit  $36,764   $37,559 
Performance Letters of Credit   2,966    3,544 
Commitments to Extend Credit   1,974    2,783 
Construction Mortgages   50,145    56,691 
Personal Lines of Credit   6,511    6,186 
Overdraft Protection Lines   6,295    6,140 
Home Equity Lines of Credit   20,720    21,520 
Commercial Lines of Credit   80,410    74,602 
   $205,785   $209,025 

 

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. 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 10. 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 I –      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 II –     Fair value is based on significant inputs, other than Level I inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level II 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 III –   Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level III 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 Statement 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 II of the fair value hierarchy. Fair values for Level II 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 from Level I to Level II and no transfers into or out of Level III during the nine months ended September 30, 2019 or year ended December 31, 2018.

29

 

      (Dollars in thousands)
   Fair Value  September 30,  December 31,
   Hierarchy  2019  2018
Available for Sales Securities:             
Debt Securities             
U.S. Government Agencies  Level II  $57,715   $80,579 
Obligations of States and Political Subdivisions  Level II   27,384    44,601 
Mortgage-Backed Securities - Government-Sponsored Enterprises  Level II   129,839    97,771 
Total Debt Securities      214,938    222,951 
              
Marketable Equity Securities             
Mutual Funds  Level I   1,006    968 
Other  Level I   1,601    1,490 
Total Marketable Equity Securities      2,607    2,458 
Total Available-for-Sale Securities     $217,545   $225,409 

 

The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statement of Financial Condition as of the dates indicated by level within the fair value hierarchy. The table also presents the significant unobservable inputs used in the fair value measurements. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include quoted market prices for identical assets classified as Level I inputs or observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

 

      (Dollars in thousands)         
      Fair Value at        Significant
   Fair Value  September 30,  December 31,  Valuation  Significant  Unobservable
Financial Asset  Hierarchy  2019  2018  Techniques  Unobservable Inputs  Input Value
Impaired Loans  Level III  $1,829   $788   Market Comparable Properties  Marketability Discount   10%  to  30%(1)
OREO  Level III   41    46   Market Comparable Properties  Marketability Discount   10%  to  50%(1)

 

  (1)Range includes discounts taken since appraisal and estimated values.    

 

Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Fair value is measured based on the value of the collateral securing these loans and is classified as Level III in the fair value hierarchy. At September 30, 2019 and December 31, 2018, the fair value of impaired loans consists of the loan balances of $2.6 million and $1.8 million, respectively, less their specific valuation allowances of $803,000 and $1.0 million, respectively.

 

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 III in the fair value hierarchy.

 

For the three months ended September 30, 2019, one residential real estate loan with a fair value of $270,000 was transferred to OREO and was subsequently sold at a loss of $16,000. In addition, a residential real estate OREO property with a fair value of $117,000 sold at a loss of $20,000.

 

For the three months ended September 30, 2018, one residential real estate loan for $46,000 transferred to OREO.

 

For the nine months ended September 30, 2019, one commercial real estate OREO property with a fair value of $697,000 was sold at a $33,000 gain and one residential real estate property with a fair value of $46,000 was sold at a loss of $3,000. In addition, three residential real estate loans with a fair value of $427,000 transferred into OREO, of which two properties with a fair value of $386,000 were subsequently sold at a net loss of $36,000.

 

30

For the nine months ended September 30, 2018, one commercial real estate OREO property with a $697,000 fair value was acquired as part of the FWVB merger, one residential real estate loan for $46,000 transferred to OREO, and one residential real estate OREO property was sold at a gain of $19,000.

 

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.

 

      (Dollars in thousands)
      September 30, 2019  December 31, 2018
   Fair Value  Carrying  Fair  Carrying  Fair
   Hierarchy  Value  Value  Value  Value
Financial Assets:                       
Cash and Due From Banks:                       
Interest Bearing  Level I  $71,267   $71,267   $39,356   $39,356 
Non-Interest Bearing  Level I   17,146    17,146    13,997    13,997 
Investment Securities:                       
Available for Sale  See Above   217,545    217,545    225,409    225,409 
Loans, Net  Level III   922,448    942,137    903,314    899,673 
Restricted Stock  Level II   3,695    3,695    3,909    3,909 
Bank-Owned Life Insurance  Level II   24,080    24,080    22,922    22,922 
Accrued Interest Receivable  Level II   3,403    3,403    3,436    3,436 
                        
Financial Liabilities:                       
Deposits  Level II   1,125,908    1,130,523    1,086,658    1,085,708 
Short-term Borrowings  Level II   29,118    29,118    30,979    30,979 
Other Borrowed Funds  Level II   17,000    18,475    20,000    19,733 
Accrued Interest Payable  Level II   925    925    594    594 

 

31

 

Note 11. Other Noninterest Expense

 

The details of other noninterest expense for the Company’s consolidated statement of income for the three and nine months ended September 30, 2019 and 2018, are as follows:

 

   (Dollars in thousands)
   Three Months Ended  Nine Months Ended
   September 30,  September 30,
   2019  2018  2019  2018
Other Noninterest Expense                    
Non-employee compensation  $131   $176   $402   $444 
Printing and supplies   96    153    289    420 
Postage   62    63    195    171 
Telephone   155    161    455    411 
Charitable contributions   17    12    41    33 
Dues and subscriptions   34    46    132    174 
Loan expenses   133    140    343    345 
Meals and entertainment   23    42    124    142 
Travel   50    61    147    171 
Training   18    19    40    56 
Miscellaneous   284    448    949    857 
Total Other Noninterest Expense  $1,003   $1,321   $3,117   $3,224 

 

Note 12. Segment and Related Information

 

At September 30, 2019, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services. CB Financial Services, Inc. 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.

 

 

 

 

 

 

 

 

32

 

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.

 

(Dollars in thousands)  Community Bank  Exchange Underwriters, Inc.  CB Financial Services, Inc.  Net Eliminations  Consolidated
                
September 30, 2019               
 Assets  $1,327,256   $3,511   $148,117   $(151,028)  $1,327,856 
 Liabilities   1,182,902    897    19    (4,060)   1,179,758 
 Stockholders' equity   144,354    2,614    148,098    (146,968)   148,098 
                          
December 31, 2018                         
 Assets  $1,278,513   $5,155   $137,908   $(140,275)  $1,281,301 
 Liabilities   1,144,293    2,445    283    (3,345)   1,143,676 
 Stockholders' equity   134,220    2,710    137,625    (136,930)   137,625 
                          
Three Months Ended September 30, 2019                         
 Interest and dividend income  $13,083   $1   $1,318   $(1,304)  $13,098 
 Interest expense   2,002    -    -    -    2,002 
 Net interest income   11,081    1    1,318    (1,304)   11,096 
 Provision for loan losses   175    -    -    -    175 
 Net interest income after provision for loan losses   10,906    1    1,318    (1,304)   10,921 
 Noninterest income   1,251    984    (36)   -    2,199 
 Noninterest expense   7,634    853    3    -    8,490 
 Undistributed net income of subsidiary   90    -    2,463    (2,553)   - 
 Income before income tax expense (benefit)   4,613    132    3,742    (3,857)   4,630 
 Income tax expense (benefit)   846    42    (4)   -    884 
 Net income of CB Financial Services Inc.  $3,767   $90   $3,746   $(3,857)  $3,746 
                          
Nine Months Ended September 30, 2019                         
 Total interest income  $38,018   $2   $3,955   $(3,912)  $38,063 
 Total interest expense   5,828    -    -    -    5,828 
 Net interest income   32,190    2    3,955    (3,912)   32,235 
 Provision for loan losses   550    -    -    -    550 
 Net interest income after provision for loan losses   31,640    2    3,955    (3,912)   31,685 
 Noninterest income   3,634    3,212    67    -    6,913 
 Noninterest expense   23,877    2,716    9    -    26,602 
 Undistributed net income of subsidiary   340    -    5,654    (5,994)   - 
 Income before income tax expense (benefit)   11,737    498    9,667    (9,906)   11,996 
 Income tax expense (benefit)   2,171    158    17    -    2,346 
 Net income of CB Financial Services Inc.  $9,566   $340   $9,650   $(9,906)  $9,650 
                          
Three Months Ended September 30, 2018                         
 Total interest income  $11,749   $-   $1,206   $(1,191)  $11,764 
 Total interest expense   1,594    -    -    -    1,594 
 Net interest income   10,155    -    1,206    (1,191)   10,170 
 Provision for loan losses   25    -    -    -    25 
 Net interest income after provision for loan losses   10,130    -    1,206    (1,191)   10,145 
 Noninterest income   1,131    916    50    (9)   2,088 
 Noninterest expense   8,258    893    223    (9)   9,365 
 Undistributed net income of subsidiary   10    -    1,256    (1,266)   - 
 Income before income tax expense (benefit)   3,013    23    2,289    (2,457)   2,868 
 Income tax expense (benefit)   566    13    (3)   -    576 
 Net income of CB Financial Services Inc.  $2,447   $10   $2,292   $(2,457)  $2,292 
                          
Nine Months Ended September 30, 2018                         
 Total interest income  $31,121   $1   $13,123   $(13,084)  $31,161 
 Total interest expense   4,210    -    -    -    4,210 
 Net interest income   26,911    1    13,123    (13,084)   26,951 
 Provision for loan losses   2,125    -    -    -    2,125 
 Net interest income after provision for loan losses   24,786    1    13,123    (13,084)   24,826 
 Noninterest income   3,502    2,721    85    (9)   6,299 
 Noninterest expense   22,421    2,250    864    (9)   25,526 
 Undistributed net income of subsidiary   321    -    (7,813)   7,492    - 
 Income before income tax expense (benefit)   6,188    472    4,531    (5,592)   5,599 
 Income tax expense (benefit)   917    151    (91)   -    977 
 Net income of CB Financial Services Inc.  $5,271   $321   $4,622   $(5,592)  $4,622 

 

33

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, 2018.

 

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;
·Changes in 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;
·Inflation, market and monetary fluctuations;
·Our ability to control costs and expenses;
·Changes in federal and state legislation and regulation applicable to our business; and
·Other factors disclosed in the Company’s periodic filings with the Securities and Exchange Commission.

 

The Company uses the current statutory federal income tax rate of 21.0% to value its deferred tax assets and liabilities. In addition, all deferred tax assets and liabilities including deferred tax assets and liabilities that were retained from the FWVB merger have been tax effected at the WV state income tax rate of 6.5% times the appropriate WV state apportionment according to state revenue laws regarding nexus.

 

The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

 

General

 

CB Financial Services, Inc. is a bank holding company established in 2006 and headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned banking subsidiary Community Bank.

 

The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from twenty offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, seven offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio. 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.

 

On April 30, 2018, the Company completed its merger with FWVB. For additional information regarding the merger, refer to Note 2 in the Notes to Consolidated Financial Statements.

 

On August 1, 2018, the Bank’s insurance subsidiary, Exchange Underwriters, completed its acquisition of the Beynon Insurance customer list.

 

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, 2019, compared to the financial condition as of December 31, 2018 and the consolidated results of operations for the three and nine months ended September 30, 2019 and 2018.

 

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, fees and charges on loans, 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, contracted services, legal fees, OREO, advertising and promotion, stationery and supplies, deposit and general insurance and other expenses.

34

 

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.

 

Statement of Financial Condition Analysis

 

Assets. Total assets increased $46.6 million, or 3.6%, to $1.33 billion at September 30, 2019, from $1.28 billion at December 31, 2018.

 

·Cash and due from banks increased $35.1 million, or 65.7%, to $88.4 million at September 30, 2019, compared to $53.4 million at December 31, 2018. This is primarily the result of an increase in deposits as well as investment security activity that was not fully repurposed through loan production due to unexpected loan payoffs.

 

·Investment securities classified as available-for-sale decreased $7.9 million, or 3.5%, to $217.5 million at September 30, 2019, compared to $225.4 million at December 31, 2018. This was primarily the result of $64.0 million of security sales, repayments and calls partially offset by $50.2 million of purchases and an increase in market value of the portfolio. A portion of the portfolio was restructured in the current year to mitigate deteriorating investments-credit risk and to reinvest in higher yielding, longer-term investments as well as to mitigate call risk in a declining interest rate environment.

 

·Net loans increased $19.1 million, or 2.1%, to $922.4 million at September 30, 2019, compared to $903.3 million at December 31, 2018. This was primarily due to net loan originations of $12.4 million in residential mortgage loans, $9.5 million in construction loans, and $7.1 million in commercial real estate loans, partially offset by a decrease of $10.1 million in consumer loans. Nonperforming loans, which includes nonaccrual loans, accruing loans past due 90 days or more and troubled debt restructurings, increased $1.5 million to $7.8 million at September 30, 2019 primarily due to a $2.9 million commercial real estate loan that was placed on nonaccrual due to alleged fraudulent activity. Based on the most recent appraisal, the loan was not impaired and therefore, the Bank does not expect to incur a loss. This was partially offset by an $851,000 residential TDR payoff in-full. As a result, nonperforming loans to total loans ratio increased 15 basis points to 0.84% at September 30, 2019, compared to 0.69% at December 31, 2018.

 

Liabilities. Total liabilities increased $36.1 million, or 3.2%, to $1.18 billion at September 30, 2019 compared to $1.14 billion at December 31, 2018.

 

·Total deposits increased $39.3 million, or 3.6%, to $1.13 billion at September 30, 2019, from $1.09 billion at December 31, 2018. There were increases of $12.2 million in NOW accounts, $10.9 million in demand deposits, $10.0 million in time deposits, $4.9 million in savings accounts, and $4.7 million in brokered deposits, partially offset by a decrease of $3.5 million in money market accounts. This increase is largely the result of cyclical tax deposits received on municipal demand deposit and NOW account as well as an increase in time deposits greater than $100,000. The Bank has been selective on offering promotional interest rates and continues to evaluate its rate structure in light of recent rate decreases by the Federal Reserve.

 

·Short-term borrowings decreased $1.9 million, or 6.0%, to $29.1 million at September 30, 2019, compared to $31.0 million at December 31, 2018. At September 30, 2019 and December 31, 2018, short-term borrowings were comprised entirely of securities sold under agreements to repurchase. The decrease is related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase.

 

·Other borrowed funds decreased $3.0 million, due to a FHLB borrowing that matured in the current period.

 

Stockholders’ Equity. Stockholders’ equity increased $10.5 million, or 7.6%, to $148.1 million at September 30, 2019, compared to $137.6 million at December 31, 2018. Net income was $9.7 million for the nine months ended September 30, 2019. Book value per share was $27.26 , an increase of $1.93 , or 7.1%, at September 30, 2019, compared to $25.33 for December 31, 2018. The Company paid $3.9 million in dividends to stockholders and accumulated other comprehensive income increased $4.5 million primarily due to improved market interest rate conditions in the current period on the Bank’s available-for-sale debt securities.

35

 

Results of Operations for the Three Months Ended September 30, 2019 and 2018

 

Overview. Net income increased $1.5 million to $3.7 million for the three months ended September 30, 2019, compared to $2.3 million for the three months ended September 30, 2018. The quarterly results were mainly impacted by average period over period loan growth, which produced increased net interest income, and decreases in various noninterest expenses.

 

Net Interest Income. Net interest income increased $926,000, or 9.1%, to $11.1 million for the three months ended September 30, 2019, compared to $10.2 million for the three months ended September 30, 2018.

 

Interest and dividend income increased $1.3 million, or 11.3%, to $13.1 million for the three months ended September 30, 2019 compared to $11.8 million for the three months ended September 30, 2018.

 

·Interest income on loans increased $940,000 for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. Average net loans increased by $35.4 million for the three months ended September 30, 2019, compared to the three months ended September 30, 2018 primarily due to organic commercial and residential real estate loan growth which increased $30.3 million and $17.5 million respectively, and also contributed to an increase of 23 basis points in loan yield.

 

·Interest income on taxable securities increased $303,000, mainly due to an increase of $16.0 million in the average balance and 40 basis points in yield in the current period. A portion of the portfolio was restructured in the current year to increase net yields.

 

·Interest income on federal funds sold increased $103,000 and other interest and dividend income increased $102,000 due to an increase of $22.0 million in the average balance of other interest-earning assets primarily from increased deposits at correspondent banks. The Company is maintaining cash to support expected future loan demand.

 

·Interest income on tax-exempt securities decreased $114,000 in the current period. This was due to lower yielding security calls and sales, which attributed to an average balance decrease of $19.3 million.

 

Interest expense increased $408,000, or 25.6%, to $2.0 million for the three months ended September 30, 2019, compared to $1.6 million for the three months ended September 30, 2018.

 

·Interest expense on deposits increased $466,000 due to an increase in average interest-bearing deposits of $58.3 million combined with a 17 basis point increase in average cost. Average interest-bearing demand deposits increased $35.2 million driven by higher-cost municipal deposits, which increased average cost by 17 basis points. In addition, average time deposits increase $14.2 million primarily from time deposits with balances greater than $100,000 from special promotions, which increased average cost by 49 basis points.

 

·Interest expense on other borrowed funds decreased $37,000 primarily due to a FHLB long-term borrowing that matured in the current period and was retired.

 

36

Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

 

   (Dollars in thousands) (Unaudited)
   Three Months Ended September 30,
   2019  2018
      Interest        Interest   
   Average  and  Yield/  Average  and  Yield/
   Balance  Dividends  Cost (1)  Balance  Dividends  Cost (1)
Assets:                  
Interest-Earning Assets:                              
Loans, Net  $920,029   $11,015    4.75%  $884,623   $10,080    4.52%
Investment Securities                              
Taxable   194,240    1,505    3.10    178,284    1,202    2.70 
Exempt From Federal Tax   27,592    246    3.57    46,901    394    3.36 
Other Interest-Earning Assets   41,863    405    3.84    19,894    200    3.99 
Total Interest-Earning Assets   1,183,724    13,171    4.41    1,129,702    11,876    4.17 
Noninterest-Earning Assets   135,172              110,513           
Total Assets  $1,318,896             $1,240,215           
                               
Liabilities and Stockholders' equity:                              
Interest-Bearing Liabilities:                              
Interest-Bearing Demand Deposits  $225,805    303    0.53%  $190,582    171    0.36%
Savings   216,923    118    0.22    206,513    143    0.27 
Money Market   178,485    241    0.54    179,998    221    0.49 
Time Deposits   224,483    1,202    2.12    210,302    863    1.63 
Total Interest-Bearing Deposits   845,696    1,864    0.87    787,395    1,398    0.70 
                               
Borrowings   45,066    138    1.21    58,454    196    1.33 
Total Interest-Bearing Liabilities   890,762    2,002    0.89    845,849    1,594    0.75 
                               
Noninterest-Bearing Demand Deposits   271,013              254,727           
Other Liabilities   9,949              5,333           
Total Liabilities   1,171,724              1,105,909           
                               
Stockholders' Equity   147,172              134,306           
Total Liabilities and Stockholders' Equity  $1,318,896             $1,240,215           
                               
Net Interest Income       $11,169             $10,282      
                               
Net Interest Rate Spread (2)             3.52%             3.42%
Net Interest-Earning Assets (3)  $292,962             $283,853           
Net Interest Margin (4)             3.74              3.61 
Return on Average Assets             1.13              0.73 
Return on Average Equity             10.10              6.77 
Average Equity to Average Assets             11.16              10.83 
Average Interest-Earning Assets to                              
Average Interest-Bearing Liabilities             132.89              133.56 

 

(1)Annualized.
(2)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.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents annualized net interest income divided by average total interest-earning assets. Interest income and yields are on a fully tax equivalent basis utilizing a marginal tax rate of 21% for the three months ended September 30, 2019, and 2018, respectively.

 

37

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent 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.

 

   (Dollars in thousands) (Unaudited)
   Three Months Ended September 30, 2019
   Compared To
   Three Months Ended September 30, 2018
   Increase (Decrease) Due to
   Volume  Rate  Total
Interest and Dividend Income:               
Loans, net  $410   $525   $935 
Investment Securities:               
Taxable   115    188    303 
Exempt From Federal Tax   (172)   24    (148)
Other Interest-Earning Assets   211    (6)   205 
Total Interest-Earning Assets   564    731    1,295 
                
Interest Expense:               
Deposits   110    356    466 
Borrowings   (41)   (17)   (58)
Total Interest-Bearing Liabilities   69    339    408 
Change in Net Interest Income  $495   $392   $887 

 

Provision for Loan Losses. The provision for loan losses was $175,000 for the three months ended September 30, 2019, compared to $25,000, for the three months ended September 30, 2018. Net charge-offs for the three months ended September 30, 2019 were $116,000, which included net-charge-offs of $113,000 on automobile loans, compared to $111,000 of net charge-offs for the three months ended September 30, 2018, which included $63,000 of net charge-offs on automobile loans. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses and the need for additional provisions for loan losses. While several unexpected commercial loan payoffs offset loan production in the current quarterly period and net charge-offs were comparable to the prior period, declining economic indicators triggered an adjustment to the qualitative factors, which was the primary driver of the current period provision. In addition, updated impairment analyses on two commercial real estate loans indicated improved market value of collateral and financial information resulting in a decrease in specific reserves. The minimal quarterly provision in the prior period was primarily due to loan payoffs mainly offsetting loan growth.

 

Noninterest Income. Noninterest income increased $111,000, or 5.3%, to $2.2 million for the three months ended September 30, 2019, compared to $2.1 million for the three months ended September 30, 2018.

 

·In the prior period, the Company recognized a $74,000 net loss on the disposal of fixed assets due to the write-off of the leasehold improvements of the former Washington Business Center that was vacated on September 30, 2018.

 

·Insurance commissions increased $65,000 due to increased direct bill personal lines and property and casualty commission and fee income as a result of the Beynon customer list acquisition partially offset by a decrease in contingency fees received. Contingency fees are commissions that are contingent upon several factors including, but not limited to, eligible written premiums, earned premiums, incurred losses, policy cancellations and stop loss charges.

 

·Other noninterest income increased $51,000 primarily due to decreased amortization of mortgage servicing rights on sold mortgages.

 

·The change in fair value of equity securities portfolio resulted in a $60,000 decrease in income in the current period.

 

·Service fees on deposit accounts decreased $55,000 due to decreased volume in ATM and Mastercard debit card fees and nonsufficient funds and overdraft fees in the current quarter.

38

Noninterest Expense. Noninterest expense decreased $875,000, or 9.3%, to $8.5 million for the three months ended September 30, 2019, compared to $9.4 million for the three months ended September 30, 2018.

 

·Merger-related expense decreased $61,000 due to recognition of final merger costs in the prior period from the FWVB merger.

 

·Occupancy decreased $258,000 primarily due to the lease termination of the former FWVB corporate center and former Washington Business Center as the Bank moved into the BPMCC in the prior period.

 

·Equipment expense decreased $150,000 primarily due to fully depreciated items and a decrease in data processing and maintenance expenses.

 

·Salaries and employee benefits decreased $80,000, primarily related to a decrease in commissions for producers of the insurance subsidiary.

 

·The Federal Deposit Insurance Corporation (“FDIC”) assessment expense decreased $62,000 due to deposit insurance fund credits approved for banks with less than $10 billion in assets.

 

·Other noninterest expense decreased $318,000 primarily due to other losses that were written off as a result of the FWVB merger as well as decreases in printing and office supplies and director-related restricted stock compensation expenses.

 

Income Tax Expense. Income taxes increased $308,000 to $884,000 for the three months ended September 30, 2019, compared to $576,000, for the three months ended September 30, 2018. The effective tax rate for the three months ended September 30, 2019 was 19.1%, compared to 20.1%, for the three months ended September 30, 2018. The increase in income taxes was due to an increase of $1.8 million in pre-tax income.

 

Results of Operations for the Nine Months Ended September 30, 2019 and 2018

 

Overview. Net income increased $5.0 million, to $9.7 million for the nine months ended September 30, 2019 compared to $4.6 million for the nine months ended September 30, 2018. Results for the nine months ended September 30, 2019 were largely impacted by the full period effect of the FWVB merger that was completed on April 30, 2018.

 

Net Interest Income. Net interest income increased $5.3 million, or 19.6%, to $32.2 million for the nine months ended September 30, 2019, compared to $27.0 million for the nine months ended September 30, 2018.

 

Interest and dividend income increased $6.9 million, or 22.1%, to $38.1 million for the nine months ended September 30, 2019, compared to $31.2 million for the nine months ended September 30, 2018.

 

·Interest income on loans increased $4.8 million due to an increase in average loans outstanding of $82.4 million, primarily commercial and residential real estate, and an increase of 31 basis points in loan yield.

 

·Interest income on taxable securities increased $1.5 million in the current period. The average balance for taxable securities increased $55.1 million combined with an increase of 34 basis points in yield. A portion of the portfolio was restructured in the current year to increase net yields.

 

·Other interest and dividend income increased $367,000 and interest income on federal funds sold increased $322,000 as a result of an increase of $32.0 million in deposits with correspondent banks in the current period.

 

·Interest income on tax-exempt securities decreased $140,000 due to a decrease of $11.1 million in the average balance on securities exempt from federal tax. Despite the average balance decrease, there was an increase of 34 basis points in yield as a result of calls and sales of securities with lower prevailing yields. A portion of the portfolio was restructured in the current year to increase net yields and to mitigate call risk.

 

Interest expense increased $1.6 million, or 38.4%, to $5.8 million for the nine months ended September 30, 2019, compared to $4.2 million for the nine months ended September 30, 2018.

 

·Interest expense on deposits increased $2.0 million due to an increase in average interest-bearing deposits of $145.5 million. The average cost of interest-bearing deposits increased 22 basis points in the current period driven by higher cost municipal and time deposits. Although recent market interest rate cuts have occurred, higher cost certificates of deposit will continue to impact interest expense until maturity.

 

·Interest expense on short-term borrowings decreased $330,000 in the current period primarily due to retired FHLB overnight borrowings that had an average balance of $26.4 million.

 

·Interest expense on other borrowed funds decreased $86,000 primarily due to maturity of a FHLB long-term borrowing that was retired.

 

39

Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

 

   (Dollars in thousands) (Unaudited)
   Nine Months Ended September 30,
   2019  2018
      Interest        Interest   
   Average  and  Yield/  Average  and  Yield/
   Balance  Dividends  Cost  Balance  Dividends  Cost
Assets:                  
Interest-Earning Assets:                              
Loans, Net  $908,198   $32,189    4.74%  $825,781   $27,374    4.43%
Investment Securities                              
Taxable   194,533    4,159    2.85    139,456    2,624    2.51 
Exempt From Federal Tax   33,023    875    3.53    44,097    1,054    3.19 
Other Interest-Earning Assets   47,004    1,097    3.12    14,980    408    3.64 
Total Interest-Earning Assets   1,182,758    38,320    4.33    1,024,314    31,460    4.11 
Noninterest-Earning Assets   120,291              86,168           
Total Assets  $1,303,049             $1,110,482           
                               
Liabilities and Stockholders' equity:                              
Interest-Bearing Liabilities:                              
Interest-Bearing Demand Deposits  $217,762    872    0.54%  $162,210    412    0.34%
Savings   215,835    413    0.26    176,742    329    0.25 
Money Market   180,494    778    0.58    159,225    541    0.45 
Time Deposits   220,993    3,344    2.02    191,372    2,090    1.46 
Total Interest-Bearing Deposits   835,084    5,407    0.87    689,549    3,372    0.65 
                               
Borrowings   47,887    421    1.18    77,236    838    1.45 
Total Interest-Bearing Liabilities   882,971    5,828    0.88    766,785    4,210    0.73 
                               
Noninterest-Bearing Demand Deposits   267,155              224,883           
Other Liabilities   9,601              4,764           
Total Liabilities   1,159,727              996,432           
                               
Stockholders' Equity   143,322              114,050           
Total Liabilities and Stockholders' Equity  $1,303,049             $1,110,482           
                               
Net interest income       $32,492             $27,250      
                               
Net Interest Rate Spread (2)             3.45%             3.38%
Net Interest-Earning Assets (3)  $299,787             $257,529           
Net Interest Margin (4)             3.67              3.56 
Return on Average Assets             0.99              0.56 
Return on Average Equity             9.00              5.42 
Average Equity to Average Assets             11.00              10.27 
Average Interest-Earning Assets to                              
Average Interest-Bearing Liabilities             133.95              133.59 

 

(1)Annualized.
(2)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.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents annualized net interest income divided by average total interest-earning assets. Interest income and yields are on a fully tax equivalent basis utilizing a marginal tax rate of 21% for the nine months ended September 30, 2019, and 2018, respectively.

 

40

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent 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.

 

   (Dollars in thousands) (Unaudited)
   Nine Months Ended September 30, 2019
   Compared To
   Nine Months Ended September 30, 2018
   Increase (Decrease) Due to
   Volume  Rate  Total
          
Interest and Dividend Income:               
Loans, net  $2,821   $1,994   $4,815 
Investment Securities:               
Taxable   1,143    392    1,535 
Exempt From Federal Tax   (283)   104    (179)
Other Interest-Earning Assets   755    (66)   689 
Total Interest-Earning Assets   4,436    2,424    6,860 
                
Interest Expense:               
Deposits   753    1,282    2,035 
Borrowings   (280)   (137)   (417)
Total Interest-Bearing Liabilities   473    1,145    1,618 
Change in Net Interest Income  $3,963   $1,279   $5,242 

 

Provision for Loan Losses. The provision for loan losses decreased $1.6 million, to $550,000, for the nine months ended September 30, 2019, compared to $2.1 million of provision for loan losses for the nine months ended September 30, 2018. Net charge-offs for the nine months ended September 30, 2019 were $358,000, which included $293,000 of net charge-offs on automobile loans, compared to net charge-offs of $1.6 million for the nine months ended September 30, 2018. The decrease in net charge-offs for the current period was due to charge-offs of $1.2 million for three commercial and industrial relationships in the first quarter of 2018. The provision for loan losses was impacted in the prior period due to the above-mentioned loan charge-offs and to appropriately reflect risk associated within the portfolio as of the nine months ended September 30, 2018. Additionally, updated appraisals on two commercial real estate loans indicated improved market value of collateral, along with improved borrower’s financial information, resulted in a decrease in specific reserves. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses with the possible need for additional provisions for loan losses.

 

Noninterest Income. Noninterest income increased $614,000, or 9.7%, to $6.9 million for the nine months ended September 30, 2019 compared to $6.3 million for the nine months ended September 30, 2018.

 

·Insurance commissions increased $488,000 from Exchange Underwriters mainly due to the Beynon customer list acquisition in the prior year, which also increased contingency fees.

 

·Service fees on deposit accounts increased $186,000 primarily due to volume-based increase in ATM and check card fees.

 

·Net gains on sales of residential mortgage loans increased $84,000 primarily due to an increase in the number of loans originated and subsequently sold to the FHLB as part of the Mortgage Partnership Finance® (“MPF®”) program and a stabilization in mortgage rates. The MPF® program enables member financial institutions to offer competitive interest rates for fixed-rate mortgage loans without assuming any of the interest rate risk associated with a long-term asset.

 

·In the prior period, the Company recognized a $74,000 net loss on the disposal of fixed assets due to the write-off of the leasehold improvements of the former Washington Business Center that was vacated on September 30, 2018.

 

·The change in fair value of equity securities portfolio resulted in a $50,000 increase in income.in the current period.

 

41

·Other noninterest income increased $123,000 due to decreased amortization of mortgage servicing rights on sold mortgages and reduced student loan origination fees as a result of the student loan insurance company insolvency, and the discontinuing of student loan originations in the prior year.

 

·Other commissions income decreased $375,000, due to prior period items including receipt of insurance proceeds from a claim on a bank-owned life insurance policy, recognition of an Assumable Rate Conversion loan referral fee, and liquidation of a partnership interest in the West Virginia Bankers Title Company, a legacy item from the FWVB merger.

 

Noninterest Expense. Noninterest expense increased $1.1 million, or 4.2%, to $26.6 million for the nine months ended September 30, 2019, compared to $25.5 million for the nine months ended September 30, 2018.

 

·Salaries and employee benefits increased $1.0 million, primarily due to additional employees, salary increases, and employee group health insurance as a direct result of the FWVB merger.

 

·Amortization of core deposit intangible increased $468,000 due to the core deposit intangible recorded for the FWVB merger.

 

·Contracted services increased $362,000, due to the additional branch locations acquired in the FWVB merger.

 

·Bankcard processing expense increased $204,000, due to an increase in volume of ATM and debit card transactions as a result of the FWVB merger.

 

·PA shares tax expense increased $150,000 due to the increase in equity based on the FWVB merger.

 

·OREO expense decreased $118,000, primarily due to recognized income for the leasing of mineral rights partially offset by expenses related to properties placed in OREO in the current period.

 

·Equipment expense increased $89,000, primarily due to equipment purchases and new maintenance contracts related to the FWVB merger.

 

·Advertising increased $64,000 related to the Bank’s expanded marketing initiatives in various media outlet and promotional items to promote the FWVB merger.

 

·Although deposits increased $39.3 million in the current period, FDIC assessment expense only increased $7,000 due to deposit insurance fund credits approved for banks with less than $10 billion in assets.

 

·Merger-related expenses decreased $854,000 due to the prior year merger.

 

·Occupancy decreased $194,000 primarily due to the lease termination of the former FWVB corporate center and former Washington Business Center as the Bank moved into the BPMCC in the prior period. This partially offset by an increase in general occupancy expenses from addition of branches.

 

·Other noninterest expense decreased $107,000, primarily due to charged-off of losses from fraudulent phishing transactions on customer accounts in the prior period, as well as a decrease in office supplies and dues and subscriptions partially offset by an increase in amortization related to the Exchange Underwriters acquisition of the Beynon customer list and increased telephone cost due to merger.

 

Income Tax Expense. Income taxes increased $1.4 million to $2.3 million for the nine months ended September 30, 2019, compared to $977,000 for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 was 19.6% compared to 17.4% for the nine months ended September 30, 2018. The increase in income taxes was related to an increase of $6.4 million in pre-tax income. The increase in the current period effective tax rate was due to the prior period recognition of the one-time income on a bank-owned life insurance claim of approximately $421,000, which was a discrete tax item for the first quarter of 2018. In addition, there was a decrease in income on securities exempt from federal income tax.

 

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 11 in the Notes to Consolidated Financial Statements for a summary of commitments outstanding as of September 30, 2019.

 

42

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 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, 2019 to satisfy its short- and long-term liquidity needs.

 

The Company’s most liquid assets are cash and due from banks, which totaled $88.4 million at September 30, 2019. 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 $45.9 million at September 30, 2019. In addition, at September 30, 2019, the Company had the ability to borrow up to $369.1 million from the FHLB of Pittsburgh, of which $36.4 million was utilized toward standby letters of credit. The Company also has the ability to borrow up to $99.7 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 $60.0 million as of both September 30, 2019 and December 31, 2018.

 

At September 30, 2019, time deposits due within one year of that date totaled $88.2 million, or 39.2% of total time deposits. 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 certificates of deposit. The Company believes, however, based on past experience that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

 

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, 2019, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $3.1 million.

 

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.

 

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. The capital conservation buffer, which is composed of common equity Tier I capital, began on January 1, 2016 at the 0.625% level and was phased in over a three-year period (increasing by that amount on each January 1, until it reached 2.5% on January 1, 2019).

43

 

At September 30, 2019 and December 31, 2018, 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.

 

   (Dollars in thousands)
   September 30, 2019  December 31, 2018
   Amount  Ratio  Amount  Ratio
Common Equity Tier 1 (to risk weighted assets)                    
Actual  $103,438    11.97%  $96,985    11.44%
For Capital Adequacy Purposes   38,898    4.50    38,137    4.50 
To Be Well Capitalized   56,186    6.50    55,086    6.50 
                     
Tier 1 Capital (to risk weighted assets)                    
Actual   103,438    11.97    96,985    11.44 
For Capital Adequacy Purposes   51,864    6.00    50,849    6.00 
To Be Well Capitalized   69,152    8.00    67,799    8.00 
                     
Total Capital (to risk weighted assets)                    
Actual   113,188    13.09    106,543    12.57 
For Capital Adequacy Purposes   69,152    8.00    67,799    8.00 
To Be Well Capitalized   86,440    10.00    84,748    10.00 
                     
Tier 1 Leverage (to adjusted total assets)                    
Actual   103,438    8.09    96,985    7.82 
For Capital Adequacy Purposes   51,169    4.00    49,637    4.00 
To Be Well Capitalized   63,962    5.00    62,046    5.00 

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

 

The Company believes that as of September 30, 2019, there was no material change in the quantitative and qualitative disclosure about market risk data as of December 31, 2018, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 4. Controls and Procedures.

 

(a)Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

 

Based on this evaluation, management concluded as of September 30, 2019, that our disclosure controls and procedures were not effective at the reasonable assurance level due to the following:

 

In connection with the preparation of our interim consolidated financial statements as of and for the three months ended March 31, 2019, we concluded that there was a material weakness in the design and operating effectiveness of our internal control over financial reporting as defined in SEC Regulation S-X. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in the annual or interim financial statements will not be prevented or detected on a timely basis. A description of the identified material weakness in internal control over financial reporting is as follows:

44

 

The design and operating effectiveness of internal controls related to management’s review of our consolidated financial results did not operate at a level of precision sufficient to allow for accurate reporting of our consolidated financial results. Our consolidation process is substantially a manual process and inherently subject to error. During the preparation and review of our interim and annual consolidated financial statements, management was unable to perform adequate review and detect a classification error within the loan classification segments impacting commercial and industrial, commercial real estate and residential real estate loans, which are disclosed in the Company’s notes to the consolidated financial statements at a sufficient level of precision to prevent or detect reclassification misstatement. As a result, we corrected loan classifications for related loan segments in order to prepare the consolidated financial statements included in the Form 10-Q for the period ended March 31, 2019.

 

Although this control deficiency did not result in a material misstatement in our interim and annual consolidated financial statements as of and for the year ended December 31, 2018, it created a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis. Therefore, we concluded the deficiency represented a material weakness in our internal control over financial reporting.

 

Also, the material weakness in our internal control over financial reporting discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on March 18, 2019 continues to exist as of September 30, 2019.

 

As a result of the material weakness identified as of March 31, 2019 and noted above and material weakness discussed in our Annual Report on Form 10-K, we performed additional analysis and other post-closing procedures to ensure our condensed consolidated financial statements were prepared in accordance with GAAP. Accordingly, management believes that the consolidated financial statements and related notes thereto included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

(b)Changes to Internal Control Over Financial Reporting

 

During the quarter ended March 31, 2019, the Company made the following changes to its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act in order to remediate the above material weaknesses:

 

·implementation of recruitment for experienced accounting staff;
·athorough review of the finance and loan departments to ensure that the areas of responsibilities are properly matched to the staff competencies and that the lines of communication and processes are as effective as possible;
·a thorough review of the processes and procedures used in the Company’s loan classification; and
·development of a standardized method for the review of loan disclosures.

 

The Company previously filed a Form 8-K on May 24, 2019 discussing the transition at the CFO role and during the quarter-ended September 30, 2019, the Company hired a Senior Vice President that has accreditation as a Certified Public Accountant (“CPA”) with extensive SEC reporting experience. The remaining changes are being evaluated in conjunction with the implementation of Section 404 of Sarbanes Oxley, assessment and documentation of internal controls. The Company’s independent auditors will test the internal controls and procedures in place by year-end and the Company’s independent public accounting firm will provide an attestation report on the Company’s internal control over financial reporting for the year ending December 31, 2019.

 

Management believes the measures described above strengthen its internal control over financial reporting and will remediate the control deficiencies the Company has identified. Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review the Company’s financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, the Company may determine to take additional measures to address control deficiencies or determine to modify certain of the remediation measures described above. The material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Although this control deficiency did not result in a material misstatement in our interim and annual consolidated financial statements, it created a reasonable possibility that a material misstatement would not have been prevented or detected on a timely basis. Therefore, we concluded the deficiency represented a material weakness in our internal control over financial reporting.

 

45

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, claims seeking damages for improper collection procedures or misrepresentations, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any other pending legal proceedings that we believe would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors.

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits

3.1Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 filed on September 13, 2014 (File No. 333-196749))
3.2Bylaws (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-4 filed on September 13, 2014 (File No. 333-196749))
31.1Rule 13a-14(a) / 15d-14(a) Certification (Chief Executive Officer)
31.2Rule 13a-14(a) / 15d-14(a) Certification (Chief Financial Officer)
32.1Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Chief Financial Officer Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0The following materials for the quarter ended September 30, 2019, formatted in XBRL (Extensible Business Reporting Language); (i) the Consolidated Statement of Financial Condition, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to the Unaudited Consolidated Financial Statements

 

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SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

      CB FINANCIAL SERVICES, INC.
      (Registrant)
       
Date:   November 6, 2019   /s/ Patrick G. O’Brien
      Patrick G. O’Brien
      President and Chief Executive Officer
       
Date:   November 6, 2019   /s/ Jamie L. Prah
      Jamie L. Prah
      Executive Vice President and Chief Financial Officer
      (Principal Financial Officer and Chief Accounting Officer)

 

 

 

 

 

 

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