CB Financial Services (CBFV) 10-Q 2017 Q3 Quarterly report

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, 2017

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 ☐ (Do not check if a smaller reporting company)	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, 2017, the number of shares outstanding of the Registrant’s Common Stock was 4,088,025.

 

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 Statement of Changes In Stockholders’ Equity	3
Consolidated Statement of Cash Flows	4
Notes to Unaudited Consolidated Financial Statements	5
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.	32
Item 3. Quantitative and Qualitative Disclosure about Market Risk.	44
Item 4. Controls and Procedures.	44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.	44
Item 1A. Risk Factors.	45
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.	45
Item 3.  Defaults Upon Senior Securities.	45
Item 4. Mine Safety Disclosures.	45
Item 5. Other Information.	45
Item 6. Exhibits	45
SIGNATURES	46

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

	(Unaudited)
(Dollars in thousands, except share data)	September 30, 2017			December 31, 2016
ASSETS
Cash and Due From Banks:
Interest Bearing	$	31,979		$	7,699
Non-Interest Bearing		11,766			6,583
Total Cash and Due From Banks		43,745			14,282
Investment Securities:
Available-for-Sale		115,889			106,208
Loans, Net		695,718			674,094
Premises and Equipment, Net		16,558			14,132
Bank-Owned Life Insurance		19,035			18,687
Goodwill		4,953			4,953
Core Deposit Intangible, Net		3,418			3,819
Accrued Interest and Other Assets		9,013			9,900
TOTAL ASSETS	$	908,329		$	846,075
LIABILITIES
Deposits:
Demand Deposits	$	187,968		$	165,400
NOW Accounts		139,191			105,962
Money Market Accounts		139,244			141,674
Savings Accounts		131,262			121,520
Time Deposits		160,466			155,028
Brokered Deposits		4,243			8,634
Total Deposits		762,374			698,218
Short-Term Borrowings		24,662			27,027
Other Borrowed Funds		24,500			28,000
Accrued Interest and Other Liabilities		3,639			3,361
TOTAL LIABILITIES		815,175			756,606
STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; 5,000,000 Shares Authorized		-			-
Common Stock, $0.4167 Par Value; 35,000,000 Shares Authorized, 4,363,346 Shares Issued and 4,088,025 and 4,086,625 Shares Outstanding at September 30, 2017 and December 31, 2016, Respectively		1,818			1,818
Capital Surplus		42,128			41,863
Retained Earnings		54,584			51,713
Treasury Stock, at Cost (275,321 and 276,721 Shares at September 30, 2017 and December 31, 2016, Respectively)		(4,722	)		(4,746	)
Accumulated Other Comprehensive Loss		(654	)		(1,179	)
TOTAL STOCKHOLDERS' EQUITY		93,154			89,469
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	908,329		$	846,075

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

1

 

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars in thousands, except share and per share data)	2017			2016		2017			2016
INTEREST AND DIVIDEND INCOME
Loans, Including Fees	$	7,459		$	7,093	$	21,830		$	21,913
Federal Funds Sold		64			3		120			15
Investment Securities:
Taxable		386			287		1,133			918
Exempt From Federal Income Tax		229			261		665			787
Other Interest and Dividend Income		75			40		205			123
TOTAL INTEREST AND DIVIDEND INCOME		8,213			7,684		23,953			23,756
INTEREST EXPENSE
Deposits		720			557		2,050			1,678
Federal Funds Purchased		-			1		-			2
Short-Term Borrowings		20			21		59			50
Other Borrowed Funds		120			129		361			383
TOTAL INTEREST EXPENSE		860			708		2,470			2,113
NET INTEREST INCOME		7,353			6,976		21,483			21,643
Provision For Loan Losses		300			450		1,020			1,600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,053			6,526		20,463			20,043
NONINTEREST INCOME
Service Fees on Deposit Accounts		630			619		1,839			1,811
Insurance Commissions		758			676		2,686			2,291
Other Commissions		125			112		336			341
Net Gains on Sales of Loans		137			249		389			559
Net Gains on Sales of Investments		10			22		132			80
Net Gains on Purchased Tax Credits		14			-		43			-
Income from Bank-Owned Life Insurance		116			123		348			362
Other		28			20		87			93
TOTAL NONINTEREST INCOME		1,818			1,821		5,860			5,537
NONINTEREST EXPENSE
Salaries and Employee Benefits		3,512			3,291		10,425			9,945
Occupancy		526			544		1,678			1,456
Equipment		464			463		1,376			1,317
FDIC Assessment		104			112		267			353
PA Shares Tax		186			138		562			543
Contracted Services		119			155		408			444
Legal and Professional Fees		81			140		324			395
Advertising		197			189		504			543
Bankcard Processing Expense		130			125		384			359
Other Real Estate Owned (Income) Expense		(349	)		4		(343	)		(531	)
Amortization of Core Deposit Intangible		134			134		401			401
Other		793			870		2,432			2,542
TOTAL NONINTEREST EXPENSE		5,897			6,165		18,418			17,767
Income Before Income Taxes		2,974			2,182		7,905			7,813
Income Taxes		910			607		2,336			2,255
NET INCOME	$	2,064		$	1,575	$	5,569		$	5,558
EARNINGS PER SHARE
Basic	$	0.50		$	0.38	$	1.36		$	1.36
Diluted		0.50			0.38		1.36			1.36
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		4,088,025			4,081,017		4,087,783			4,081,017
Diluted		4,108,723			4,087,337		4,104,157			4,084,730

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

2

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2017			2016			2017			2016
Net Income	$	2,064		$	1,575		$	5,569		$	5,558
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available-for-Sale Securities Net of Income Tax of $5 and ($106) for the Three Months Ended September 30, 2017 and 2016, Respectively, and $314 and $57 for the Nine Months Ended September 30, 2017 and 2016, Respectively		9			(205	)		612			111
Reclassification Adjustment for Gains on Securities:
Included in Net Income, Net of Income Tax of $4 and $7 for the Three Months Ended September 30, 2017 and 2016, Respectively, and $45 and $27 for the Nine Months Ended September 30, 2017 and 2016, Respectively (1)		(6	)		(15	)		(87	)		(53	)
Other Comprehensive Income (Loss), Net of Income Tax		3			(220	)		525			58
Total Comprehensive Income	$	2,067		$	1,355		$	6,094		$	5,616

⁽¹⁾ The gross amount of gains on securities of $10 and $22 for the three months ended September 30, 2017 and 2016, respectively and $132 and $80 for the nine months ended September 30, 2017 and 2016, respectively are reported as Net Gains on Sales of Investments on the Consolidated Statement of Income. The income tax effect is included in Income Taxes on the Consolidated Statement of Income.

CONSOLIDATED STATEMENT 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		Total Stockholders' Equity
December 31, 2015		4,363,346	$	1,818	$	41,614	$	47,725		$	(4,836	)	$	575	$	86,896
Comprehensive Income:
Net Income		-		-		-		5,558			-			-		5,558
Other Comprehensive Income		-		-		-		-			-			58		58
Stock-Based Compensation Expense		-		-		262		-			-			-		262
Dividends Paid ($0.22 Per Share)		-		-		-		(2,694	)		-			-		(2,694	)
September 30, 2016		4,363,346	$	1,818	$	41,876	$	50,589		$	(4,836	)	$	633	$	90,080

(Dollars in thousands, except share and per share data)	Shares Issued		Common Stock		Capital Surplus		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income			Total Stockholders' Equity
December 31, 2016		4,363,346	$	1,818	$	41,863	$	51,713		$	(4,746	)	$	(1,179	)	$	89,469
Comprehensive Income:
Net Income		-		-		-		5,569			-			-			5,569
Other Comprehensive Income		-		-		-		-			-			525			525
Stock-Based Compensation Expense		-		-		258		-			-			-			258
Exercise of Stock Options		-		-		7		-			24			-			31
Dividends Paid ($0.22 Per Share)		-		-		-		(2,698	)		-			-			(2,698	)
September 30, 2017		4,363,346	$	1,818	$	42,128	$	54,584		$	(4,722	)	$	(654	)	$	93,154

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

3

 

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
(Dollars in thousands)	2017			2016
OPERATING ACTIVITIES
Net Income	$	5,569		$	5,558
Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities:
Net Amortization on Investments		265			154
Depreciation and Amortization		1,867			2,051
Provision for Loan Losses		1,020			1,600
Income from Bank-Owned Life Insurance		(348	)		(362	)
Proceeds From Mortgage Loans Sold		16,941			18,945
Originations of Mortgage Loans for Sale		(16,552	)		(18,386	)
Gains on Sales of Loans		(389	)		(559	)
Gains on Sales of Investment Securities		(132	)		(80	)
Gains on Sales of Other Real Estate Owned and Repossessed Assets		(357	)		(49	)
Noncash Expense for Stock-Based Compensation		258			262
(Increase) Decrease in Accrued Interest Receivable		(131	)		197
Valuation Adjustment on Foreclosed Real Estate		-			(566	)
Retirements of Premises and Equipment		152			-
(Decrease) Increase in Taxes Payable		(808	)		1,123
Increase (Decrease) in Accrued Interest Payable		79			(10	)
Net Payment of Federal/State Income Taxes		(2,355	)		(2,115	)
Other, Net		4,327			419
NET CASH PROVIDED BY OPERATING ACTIVITIES		9,406			8,182
INVESTING ACTIVITIES
Investment Securities Available for Sale:
Proceeds From Principal Repayments and Maturities		11,683			59,023
Purchases of Securities		(32,346	)		(60,035	)
Proceeds from Sales of Securities		11,643			416
Net Increase in Loans		(23,413	)		(572	)
Purchase of Premises and Equipment		(3,444	)		(1,229	)
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets		357			175
(Increase) Decrease in Restricted Equity Securities		(47	)		122
NET CASH USED IN INVESTING ACTIVITIES		(35,567	)		(2,100	)
FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits		64,156			(951	)
Net (Decrease) Increase in Short-Term Borrowings		(2,365	)		1,167
Principal Payments on Other Borrowed Funds		(3,500	)		-
Cash Dividends Paid		(2,698	)		(2,694	)
Treasury Stock, Purchases at Cost		24			-
Exercise of Stock Options		7			-
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		55,624			(2,478	)
INCREASE IN CASH AND CASH EQUIVALENTS		29,463			3,604
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR		14,282			11,340
CASH AND DUE FROM BANKS AT END OF PERIOD	$	43,745		$	14,944
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $1,968 and $1,686 respectively)	$	2,390		$	2,123
Income taxes		2,355			2,115
Real estate acquired in settlement of loans		169			3,236
Transfer of real estate acquired in settlement of loans to premise and equipment		-			2,350

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

4

 

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 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 of 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, 2016. Interim results are not necessarily indicative of results for a full year.

The Company will continue to evaluate the provisions of Accounting Standards Codification (“ASC”) Topic 280 for segment reporting information related to Exchange Underwriters. During the first quarter, Exchange Underwriters insurance commissions comprised of approximately 11% of combined interest and noninterest income but less than 10% of the combined assets of the Company. While EU exceeded the 10% threshold of combined interest and noninterest income, this was primarily related to a unique income event of increased contingency income. Contingency fees are commissions that are contingent upon several factors including, but not limited to, eligible written premiums, earned premiums, incurred losses and stop loss charges. On a year-to-date basis, Exchange Underwriters fell below the 10% threshold of combined interest and noninterest income.

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 ASC Topic 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 primarily to communities in Greene, Allegheny, Washington, Fayette, and Westmoreland Counties located in southwestern Pennsylvania. The Company also conducts insurance brokerage activities through Exchange Underwriters.

Acquired Loans

Loans that were acquired in the merger with FedFirst Financial Corporation (the “merger”) 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 the 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 (“PCI”) loans acquired in the 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.

5

 

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 September 2017, the FASB issued Accounting Standards Update ("ASU") 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. ASU 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU No. 2016-02, Leases (Topic 842). The SEC staff stated the SEC would not object to a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting ASC Topic 606 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The SEC staff stated the SEC would not object to a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting ASC Topic 842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is evaluating the provisions of ASU 2017-13 but believes that its adoption will not have a material impact on the Company's consolidated financial condition or results of operations.

In July 2017, the FASB issued Accounting Standards Update ("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 public business entities that are SEC filers for annual periods beginning after December 15, 2018, and interim periods within those annual periods, for public entities that are not SEC filers for annual periods beginning after December 15, 2019 and for all other entities for annual periods beginning after December 15, 2020 with early adoption permitted. The Company is evaluating the provisions of ASU 2017-11 but believes that its adoption will not have a material impact on the Company's consolidated financial condition or results of operations.

In May 2017, the FASB issued ASU 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services. ASU 2017-10 amendments clarify that the grantor in a service concession arrangement is the customer of the operation services in all cases for those arrangements. ASU 2017-10 is effective for public business entities that are SEC filers for annual periods beginning after December 15, 2017, and interim periods within those annual periods, for public entities that are not SEC filers for annual periods beginning after December 15, 2018 and for all other entities for annual periods beginning after December 15, 2019 with early adoption permitted, including within an interim period, subject to specific transition requirements depending on whether an entity adopted Topic 606 before or after the issuance of ASU 2017-10. The Company is evaluating the provisions of ASU 2017-10 but believes that its adoption will not have a material impact on the Company's consolidated financial condition or results of operations.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under ASU Topic 718. ASU 2017-09 is effective for all entities for annual periods, including interim periods within those annual periods beginning after December 15, 2017 with early adoption permitted. The Company is evaluating the provisions of ASU 2017-09 but believes that its adoption will 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 public business entities that are SEC filers for annual periods beginning after December 15, 2018, and interim periods within those annual periods, for

6

 

Recent Accounting Standards (continued)

public entities that are not SEC filers for annual periods beginning after December 15, 2019 and for all other entities for annual periods beginning after December 15, 2020 with early adoption permitted. The Company is evaluating the provisions of ASU 2017-08 but believes that its adoption will not have a material impact on the Company's consolidated financial condition or results of operations.

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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and the amendments should be applied using a retrospective transition method to each period presented.  The Company is currently evaluating the provisions of ASU 2016-15, but does not believe that its adoption will have a material impact on the Company's consolidated financial condition or results of operations.

In June 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 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the provisions of ASU 2016-13, but does not believe that its adoption will have a material impact on the Company's consolidated financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 introduces amendments intended to simplify the accounting for stock compensation.  ASU 2016-09 requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement.  The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.  An entity should also recognize excess tax benefits and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period.  The ASU also requires excess tax benefits be classified along with other income tax cash flows as an operating activity in the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted.  The adoption of ASU 2016-09 as of January 1, 2017, had no effect on the Company's consolidated financial condition or results of operations.

7

 

Recent Accounting Standards (continued)

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet, and disclosing key information about leasing arrangements. 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 is currently evaluating the provisions of ASU 2016-02, but expects to report increased assets and liabilities as a result of reporting additional leases on the Company's consolidated statement of financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), which enhances the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. ASU 2016-01 (i) requires equity investments (except those accounted for under the equity method or that are consolidated) to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost; (iv) requires an entity to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently evaluating the provisions of ASU 2016-01, but does not believe that its adoption will have a material impact on the Company's consolidated financial condition or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which establishes a comprehensive revenue recognition standard for virtually all industries under GAAP, including those that previously followed industry-specific guidance, such as the real estate, construction and software industries. ASU 2014-09 specifies that an entity shall recognize revenue when, or as, the entity satisfies a performance obligation by transferring a promised good or service (i.e., an asset) to a customer. An asset is transferred when, or as, the customer obtains control of the asset. Entities are required to disclose qualitative and quantitative information on the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. The guidance is effective for the Company’s financial statements beginning January 1, 2018. The guidance allows an entity to apply the new standard either retrospectively or through a cumulative effect adjustment as of January 1, 2018. This guidance does not apply to revenue associated with financial instruments, including loans, securities, and derivatives that are accounted for under other U.S. GAAP guidance. For that reason, we do not expect it to have a material impact on our consolidated results of operations for elements of the statement of income associated with financial instruments, including securities gains, interest income, and interest expense. However, we do believe the new standard will result in new disclosure requirements. We are currently in the process of reviewing contracts to assess the impact of the new guidance on our service offerings that are in the scope of the guidance included in non-interest income, such as insurance commission fees, deposit related fees and service charges, payment processing fees, trust services fees and brokerage services fees. The Company is continuing to evaluate the effect of the new guidance on revenue sources other than financial instruments on its consolidated financial position or results of operations and will use modified retrospective method for transition in which the cumulative effect will be recognized at the date of adoption with no restatement of comparative periods presented.

8

 

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Weighted-Average Common Shares Outstanding		4,363,346			4,363,346			4,363,346			4,363,346
Average Treasury Stock Shares		(275,321	)		(282,329	)		(275,563	)		(282,329	)
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Basic Earnings Per Share		4,088,025			4,081,017			4,087,783			4,081,017
Additional Common Stock Equivalents (Stock Options and Restricted Stock) Used to Calculate Diluted Earnings Per Share		20,698			6,320			16,374			3,713
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Diluted Earnings Per Share		4,108,723			4,087,337			4,104,157			4,084,730
Earnings per share:
Basic	$	0.50		$	0.38		$	1.36		$	1.36
Diluted		0.50			0.38			1.36			1.36

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, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government Agencies	$	59,622	$	-	$	(1,242	)	$	58,380
Obligations of States and Political Subdivisions		37,616		314		(122	)		37,808
Mortgage-Backed Securities - Government-Sponsored Enterprises		17,890		14		(45	)		17,859
Equity Securities - Mutual Funds		500		10		-			510
Equity Securities - Other		1,253		94		(15	)		1,332
Total	$	116,881	$	432	$	(1,424	)	$	115,889

9

 

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Government Agencies	$	67,944	$	18	$	(1,806	)	$	66,156
Obligations of States and Political Subdivisions		35,856		366		(487	)		35,735
Mortgage-Backed Securities - Government-Sponsored Enterprises		2,588		31		-			2,619
Equity Securities - Mutual Funds		500		7		-			507
Equity Securities - Other		1,106		91		(6	)		1,191
Total	$	107,994	$	513	$	(2,299	)	$	106,208

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, 2017
	Less than 12 months							12 Months or Greater							Total
	Number of Securities		Fair Value		Gross Unrealized Losses			Number of Securities		Fair Value		Gross Unrealized Losses			Number of Securities		Fair Value		Gross Unrealized Losses
U.S. Government Agencies		12	$	33,733	$	(525	)		9	$	24,646	$	(717	)		21	$	58,379	$	(1,242	)
Obligations of States and Political Subdivisions		22		11,788		(80	)		7		3,489		(42	)		29		15,277		(122	)
Mortgage-Backed Securities - Government Sponsored Enterprises		4		9,191		(45	)		-		-		-			4		9,191		(45	)
Equity Securities - Other		6		483		(15	)		-		-		-			6		483		(15	)
Total		44	$	55,195	$	(665	)		16	$	28,135	$	(759	)		60	$	83,330	$	(1,424	)

	December 31, 2016
	Less than 12 months							12 Months or Greater							Total
	Number of Securities		Fair Value		Gross Unrealized Losses			Number of Securities		Fair Value		Gross Unrealized Losses			Number of Securities		Fair Value		Gross Unrealized Losses
U.S. Government Agencies		23	$	62,853	$	(1,806	)		-	$	-	$	-			23	$	62,853	$	(1,806	)
Obligations of States and Political Subdivisions		39		19,749		(485	)		1		260		(2	)		40		20,009		(487	)
Equity Securities - Other		2		160		(6	)		-		-		-			2		160		(6	)
Total		64	$	82,762	$	(2,297	)		1	$	260	$	(2	)		65	$	83,022	$	(2,299	)

For debt securities, the Company does not believe any individual unrealized loss as of September 30, 2017 and December 31, 2016 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, 2017 and December 31, 2016 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.

10

 

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

	(Dollars in thousands)
	September 30, 2017
	Available-for-Sale
	Amortized Cost		Fair Value
Due in One Year or Less	$	2,115	$	2,126
Due after One Year through Five Years		23,469		23,443
Due after Five Years through Ten Years		68,376		67,362
Due after Ten Years		22,921		22,958
Total	$	116,881	$	115,889

Equity Securities – Mutual Funds and Equity Securities – Other do not have a scheduled maturity date, but have been included in the Due After Ten Years category.

11

 

Note 4. Loans and Related Allowance for Loan Loss

The Company’s loan portfolio is made up 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, 2017						December 31, 2016
	Amount			Percent			Amount			Percent
Originated Loans
Real Estate:
Residential	$	193,214			34.1	%	$	186,077			35.4	%
Commercial		150,442			26.5			139,894			26.7
Construction		28,965			5.1			10,646			2.0
Commercial and Industrial		77,217			13.6			71,091			13.5
Consumer		113,822			20.1			114,007			21.7
Other		3,444			0.6			3,637			0.7
Total Originated Loans		567,104			100.0	%		525,352			100.0	%
Allowance for Loan Losses		(7,573	)					(7,283	)
Loans, Net	$	559,531					$	518,069
Loans Acquired at Fair Value
Real Estate:
Residential	$	75,217			55.0	%	$	85,511			54.7	%
Commercial		52,826			38.7			61,116			39.0
Commercial and Industrial		8,532			6.2			9,721			6.2
Consumer		195			0.1			197			0.1
Total Loans Acquired at Fair Value		136,770			100.0	%		156,545			100.0	%
Allowance for Loan Losses		(583	)					(520	)
Loans, Net	$	136,187					$	156,025
Total Loans
Real Estate:
Residential	$	268,431			38.1	%	$	271,588			39.8	%
Commercial		203,268			28.9			201,010			29.5
Construction		28,965			4.1			10,646			1.6
Commercial and Industrial		85,749			12.2			80,812			11.9
Consumer		114,017			16.2			114,204			16.7
Other		3,444			0.5			3,637			0.5
Total Loans		703,874			100.0	%		681,897			100.0	%
Allowance for Loan Losses		(8,156	)					(7,803	)
Loans, Net	$	695,718					$	674,094

Total unamortized net deferred loan fees were $682,000 and $818,000 at September 30, 2017 and December 31, 2016, respectively.

Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $94.6 million and $83.9 million at September 30, 2017 and December 31, 2016, respectively.

12

 

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, 2017 and December 31, 2016, there were no loans in the criticized category of Loss within the internal risk rating system.

	(Dollars in thousands)
	September 30, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
Originated Loans
Real Estate:
Residential	$	191,801	$	1,006	$	407	$	-	$	193,214
Commercial		133,529		13,909		2,467		537		150,442
Construction		28,356		-		550		59		28,965
Commercial and Industrial		66,415		8,326		1,111		1,365		77,217
Consumer		113,795		-		27		-		113,822
Other		3,444		-		-		-		3,444
Total Originated Loans	$	537,340	$	23,241	$	4,562	$	1,961	$	567,104
Loans Acquired at Fair Value
Real Estate:
Residential	$	73,213	$	-	$	2,004	$	-	$	75,217
Commercial		50,381		1,939		506		-		52,826
Commercial and Industrial		8,176		9		263		84		8,532
Consumer		195		-		-		-		195
Total Loans Acquired at Fair Value	$	131,965	$	1,948	$	2,773	$	84	$	136,770
Total Loans
Real Estate:
Residential	$	265,014	$	1,006	$	2,411	$	-	$	268,431
Commercial		183,910		15,848		2,973		537		203,268
Construction		28,356		-		550		59		28,965
Commercial and Industrial		74,591		8,335		1,374		1,449		85,749
Consumer		113,990		-		27		-		114,017
Other		3,444		-		-		-		3,444
Total Loans	$	669,305	$	25,189	$	7,335	$	2,045	$	703,874

13

 

	December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
Originated Loans
Real Estate:
Residential	$	184,721	$	1,050	$	306	$	-	$	186,077
Commercial		122,811		14,118		2,035		930		139,894
Construction		9,944		-		595		107		10,646
Commercial and Industrial		65,612		2,720		1,322		1,437		71,091
Consumer		113,847		-		160		-		114,007
Other		3,637		-		-		-		3,637
Total Originated Loans	$	500,572	$	17,888	$	4,418	$	2,474	$	525,352
Loans Acquired at Fair Value
Real Estate:
Residential	$	83,044	$	-	$	2,467	$	-	$	85,511
Commercial		58,411		2,358		347		-		61,116
Commercial and Industrial		9,117		42		441		121		9,721
Consumer		197		-		-		-		197
Total Loans Acquired at Fair Value	$	150,769	$	2,400	$	3,255	$	121	$	156,545
Total Loans
Real Estate:
Residential	$	267,765	$	1,050	$	2,773	$	-	$	271,588
Commercial		181,222		16,476		2,382		930		201,010
Construction		9,944		-		595		107		10,646
Commercial and Industrial		74,729		2,762		1,763		1,558		80,812
Consumer		114,044		-		160		-		114,204
Other		3,637		-		-		-		3,637
Total Loans	$	651,341	$	20,288	$	7,673	$	2,595	$	681,897

14

 

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, 2017
	Loans Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Non- Accrual		Total Loans
Originated Loans
Real Estate:
Residential	$	192,769	$	91	$	42	$	-	$	133	$	312	$	193,214
Commercial		150,154		-		-		-		-		288		150,442
Construction		28,906		-		-		-		-		59		28,965
Commercial and Industrial		75,108		-		-		496		496		1,613		77,217
Consumer		112,485		1,155		103		52		1,310		27		113,822
Other		3,444		-		-		-		-		-		3,444
Total Originated Loans	$	562,866	$	1,246	$	145	$	548	$	1,939	$	2,299	$	567,104
Loans Acquired at Fair Value
Real Estate:
Residential	$	73,977	$	45	$	-	$	75	$	120	$	1,120	$	75,217
Commercial		52,826		-		-		-		-		-		52,826
Commercial and Industrial		8,516		-		-		-		-		16		8,532
Consumer		190		5		-		-		5		-		195
Total Loans Acquired at Fair Value	$	135,509	$	50	$	-	$	75	$	125	$	1,136	$	136,770
Total Loans
Real Estate:
Residential	$	266,746	$	136	$	42	$	75	$	253	$	1,432	$	268,431
Commercial		202,980		-		-		-		-		288		203,268
Construction		28,906		-		-		-		-		59		28,965
Commercial and Industrial		83,624		-		-		496		496		1,629		85,749
Consumer		112,675		1,160		103		52		1,315		27		114,017
Other		3,444		-		-		-		-		-		3,444
Total Loans	$	698,375	$	1,296	$	145	$	623	$	2,064	$	3,435	$	703,874

15

 

	December 31, 2016
	Loans Current		30-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Non- Accrual		Total Loans
Originated Loans
Real Estate:
Residential	$	183,939	$	1,638	$	72	$	120	$	1,830	$	308	$	186,077
Commercial		139,821		-		-		-		-		73		139,894
Construction		10,539		-		-		-		-		107		10,646
Commercial and Industrial		68,310		952		-		-		952		1,829		71,091
Consumer		112,232		1,311		296		8		1,615		160		114,007
Other		3,637		-		-		-		-		-		3,637
Total Originated Loans	$	518,478	$	3,901	$	368	$	128	$	4,397	$	2,477	$	525,352
Loans Acquired at Fair Value
Real Estate:
Residential	$	82,523	$	893	$	307	$	223	$	1,423	$	1,565	$	85,511
Commercial		60,437		332		-		-		332		347		61,116
Commercial and Industrial		9,577		121		23		-		144		-		9,721
Consumer		197		-		-		-		-		-		197
Total Loans Acquired at Fair Value	$	152,734	$	1,346	$	330	$	223	$	1,899	$	1,912	$	156,545
Total Loans
Real Estate:
Residential	$	266,462	$	2,531	$	379	$	343	$	3,253	$	1,873	$	271,588
Commercial		200,258		332		-		-		332		420		201,010
Construction		10,539		-		-		-		-		107		10,646
Commercial and Industrial		77,887		1,073		23		-		1,096		1,829		80,812
Consumer		112,429		1,311		296		8		1,615		160		114,204
Other		3,637		-		-		-		-		-		3,637
Total Loans	$	671,212	$	5,247	$	698	$	351	$	6,296	$	4,389	$	681,897

16

 

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, 2017			December 31, 2016
Nonaccrual Loans:
Originated Loans:
Real Estate:
Residential	$	312		$	308
Commercial		288			73
Construction		59			107
Commercial and Industrial		1,613			1,829
Consumer		27			160
Total Originated Nonaccrual Loans		2,299			2,477
Loans Acquired at Fair Value:
Real Estate:
Residential		1,120			1,565
Commercial		-			347
Commercial and Industrial		16			-
Total Loans Acquired at Fair Value Nonaccrual Loans		1,136			1,912
Total Nonaccrual Loans		3,435			4,389
Accruing Loans Past Due 90 Days or More:
Originated Loans:
Real Estate:
Residential		-			120
Commercial and Industrial		496			-
Consumer		52			8
Total Originated Accruing Loans 90 Days or More Past Due		548			128
Loans Acquired at Fair Value:
Real Estate:
Residential		75			223
Total Loans Acquired at Fair Value Accruing Loans 90 Days or More Past Due		75			223
Total Accruing Loans 90 Days or More Past Due		623			351
Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due		4,058			4,740
Troubled Debt Restructurings, Accruing:
Originated Loans:
Real Estate - Residential		61			-
Real Estate - Commercial		1,285			1,325
Commercial and Industrial		5			6
Other		2			4
Total Originated Loans		1,353			1,335
Loans Acquired at Fair Value:
Real Estate - Residential		1,268			1,299
Real Estate - Commercial		438			660
Commercial and Industrial		247			393
Total Loans Acquired at Fair Value		1,953			2,352
Total Troubled Debt Restructurings, Accruing		3,306			3,687
Total Nonperforming Loans		7,364			8,427
Real Estate Owned:
Residential		236			-
Commercial		174			174
Total Real Estate Owned		410			174
Total Nonperforming Assets	$	7,774		$	8,601
Nonperforming Loans to Total Loans		1.05	%		1.24	%
Nonperforming Assets to Total Assets		0.86			1.02

17

 

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 $1.2 million and $2.2 million at September 30, 2017 and December 31, 2016, 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 16 loans totaling $4.7 million and 15 loans totaling $4.7 million at September 30, 2017 and December 31, 2016, respectively. Originated loans classified as TDRs consisted of 8 loans totaling $2.8 million and 6 loans totaling $2.3 million at September 30, 2017 and December 31, 2016, respectively. Loans acquired at fair value classified as TDRs consisted of 8 loans totaling $1.9 million and 9 loans totaling $2.4 million at September 30, 2017 and December 31, 2016, respectively.

During the three and nine months ended September 30, 2017, one residential real estate loan modified terms in a new TDR transaction. During the nine months ended September 30, 2016, one commercial loan previously identified as an acquired loan at fair value TDR paid off, an originated consumer loan modified terms in a new TDR transaction, and one commercial and one residential real estate loan that were acquired at fair value modified terms into new TDR transactions. No loans were modified in a TDR during the three months ended September 30, 2016. No TDRs subsequently defaulted during the three or nine months ended September 30, 2017 and 2016, respectively.

The following table presents information at the time of modification related to loans modified in a TDR during the three and nine months ended September 30, 2017 and nine months ended September 30, 2016.

	(Dollars in thousands)
	Three Months Ended September 30, 2017
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance
Originated Loans
Real Estate
Residential		1	$	61	$	61	$	-
Total		1	$	61	$	61	$	-

	(Dollars in thousands)
	Nine Months Ended September 30, 2017
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance
Originated Loans
Real Estate
Residential		1	$	61	$	61	$	-
Total		1	$	61	$	61	$	-

18

 

	(Dollars in thousands)
	Nine Months Ended September 30, 2016
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Related Allowance
Originated Loans
Real Estate
Other		1	$	7	$	7	$	-
Total		1	$	7	$	7	$	-
Loans Acquired at Fair Value
Real Estate
Residential		1	$	37	$	45	$	-
Commercial		1		539		539		-
Total		2	$	576	$	584	$	-

19

 

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

	(Dollars in thousands)
	September 30, 2017
	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Originated Loans
Real Estate:
Residential	$	124	$	-	$	126	$	133	$	3
Commercial		1,886		-		1,886		1,972		67
Construction		609		-		609		640		20
Commercial and Industrial		751		-		751		747		28
Other		2		-		2		3		-
Total With No Related Allowance Recorded	$	3,372	$	-	$	3,374	$	3,495	$	118
Loans Acquired at Fair Value
Real Estate:
Residential	$	1,268	$	-	$	1,268	$	1,284	$	49
Commercial		944		-		944		975		38
Commercial and Industrial		263		-		263		351		11
Total With No Related Allowance Recorded	$	2,475	$	-	$	2,475	$	2,610	$	98
Total Loans
Real Estate:
Residential	$	1,392	$	-	$	1,394	$	1,417	$	52
Commercial		2,830		-		2,830		2,947		105
Construction		609		-		609		640		20
Commercial and Industrial		1,014		-		1,014		1,098		39
Other		2		-		2		3		-
Total With No Related Allowance Recorded	$	5,847	$	-	$	5,849	$	6,105	$	216
With A Related Allowance Recorded:
Originated Loans
Real Estate:
Commercial	$	1,495	$	392	$	1,495	$	1,516	$	49
Commercial and Industrial		1,730		636		1,804		2,025		75
Total With A Related Allowance Recorded	$	3,225	$	1,028	$	3,299	$	3,541	$	124
Loans Acquired at Fair Value
Commercial and Industrial	$	84	$	10	$	84	$	103	$	4
Total With A Related Allowance Recorded	$	84	$	10	$	84	$	103	$	4
Total Loans
Real Estate:
Commercial	$	1,495	$	392	$	1,495	$	1,516	$	49
Commercial and Industrial		1,814		646		1,888		2,128		79
Total With A Related Allowance Recorded	$	3,309	$	1,038	$	3,383	$	3,644	$	128

20

 

	September 30, 2017 (cont.)
	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
Total Impaired Loans:
Originated Loans
Real Estate:
Residential	$	124	$	-	$	126	$	133	$	3
Commercial		3,381		392		3,381		3,488		116
Construction		609		-		609		640		20
Commercial and Industrial		2,481		636		2,555		2,772		103
Other		2		-		2		3		-
Total Impaired Loans	$	6,597	$	1,028	$	6,673	$	7,036	$	242
Loans Acquired at Fair Value
Real Estate:
Residential	$	1,268	$	-	$	1,268	$	1,284	$	49
Commercial		944		-		944		975		38
Commercial and Industrial		347		10		347		454		15
Total Impaired Loans	$	2,559	$	10	$	2,559	$	2,713	$	102
Total Loans
Real Estate:
Residential	$	1,392	$	-	$	1,394	$	1,417	$	52
Commercial		4,325		392		4,325		4,463		154
Construction		609		-		609		640		20
Commercial and Industrial		2,828		646		2,902		3,226		118
Other		2		-		2		3		-
Total Impaired Loans	$	9,156	$	1,038	$	9,232	$	9,749	$	344

21

 

	December 31, 2016
	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Originated Loans
Real Estate:
Commercial	$	2,112	$	-	$	2,112	$	2,228	$	100
Construction		702		-		702		843		28
Commercial and Industrial		825		-		825		891		45
Other		4		-		4		6		1
Total With No Related Allowance Recorded	$	3,643	$	-	$	3,643	$	3,968	$	174
Loans Acquired at Fair Value
Real Estate:
Residential	$	1,300	$	-	$	1,300	$	1,320	$	68
Commercial		660		-		660		763		47
Commercial and Industrial		441		-		441		543		21
Total With No Related Allowance Recorded	$	2,401	$	-	$	2,401	$	2,626	$	136
Total Loans
Real Estate:
Residential	$	1,300	$	-	$	1,300	$	1,320	$	68
Commercial		2,772		-		2,772		2,991		147
Construction		702		-		702		843		28
Commercial and Industrial		1,266		-		1,266		1,434		66
Other		4		-		4		6		1
Total With No Related Allowance Recorded	$	6,044	$	-	$	6,044	$	6,594	$	310
With A Related Allowance Recorded:
Originated Loans
Real Estate:
Commercial	$	1,249	$	360	$	1,249	$	1,277	$	66
Commercial and Industrial		1,940		655		1,946		1,951		27
Total With A Related Allowance Recorded	$	3,189	$	1,015	$	3,195	$	3,228	$	93
Loans Acquired at Fair Value
Real Estate:
Commercial	$	347	$	114	$	437	$	367	$	-
Commercial and Industrial		121		31		121		141		6
Total With A Related Allowance Recorded	$	468	$	145	$	558	$	508	$	6
Total Loans
Real Estate:
Commercial	$	1,596	$	474	$	1,686	$	1,644	$	66
Commercial and Industrial		2,061		686		2,067		2,092		33
Total With A Related Allowance Recorded	$	3,657	$	1,160	$	3,753	$	3,736	$	99

22

 

	December 31, 2016 (cont.)
	Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
Total Impaired Loans
Originated Loans
Real Estate:
Commercial	$	3,361	$	360	$	3,361	$	3,505	$	166
Construction		702		-		702		843		28
Commercial and Industrial		2,765		655		2,771		2,842		72
Other		4		-		4		6		1
Total Impaired Loans	$	6,832	$	1,015	$	6,838	$	7,196	$	267
Loans Acquired at Fair Value
Real Estate:
Residential	$	1,300	$	-	$	1,300	$	1,320	$	68
Commercial		1,007		114		1,097		1,130		47
Commercial and Industrial		562		31		562		684		27
Total Impaired Loans	$	2,869	$	145	$	2,959	$	3,134	$	142
Total Loans
Real Estate:
Residential	$	1,300	$	-	$	1,300	$	1,320	$	68
Commercial		4,368		474		4,458		4,635		213
Construction		702		-		702		843		28
Commercial and Industrial		3,327		686		3,333		3,526		99
Other		4		-		4		6		1
Total Impaired Loans	$	9,701	$	1,160	$	9,797	$	10,330	$	409

23

 

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 for the periods indicated.

	(Dollars in thousands)
	September 30, 2017
	Real Estate Residential			Real Estate Commercial			Real Estate Construction		Commercial and Industrial			Consumer			Other		Unallocated			Total
Originated Loans
June 30, 2017	$	940		$	2,017		$	142	$	1,760		$	2,223		$	-	$	385		$	7,467
Charge-offs		(22	)		-			-		-			(217	)		-		-			(239	)
Recoveries		6			-			-		1			38			-		-			45
Provision		(47	)		64			85		(155	)		317			-		36			300
September 30, 2017	$	877		$	2,081		$	227	$	1,606		$	2,361		$	-	$	421		$	7,573
Loans Acquired at Fair Value
June 30, 2017	$	-		$	613		$	-	$	109		$	-		$	-	$	(106	)	$	616
Charge-offs		(45	)		-			-		-			-			-		-			(45	)
Recoveries		11			1			-		-			-			-		-			12
Provision		34			(5	)		-		(7	)		-			-		(22	)		-
September 30, 2017	$	-		$	609		$	-	$	102		$	-		$	-	$	(128	)	$	583
Total Allowance for Loan Losses
June 30, 2017	$	940		$	2,630		$	142	$	1,869		$	2,223		$	-	$	279		$	8,083
Charge-offs		(67	)		-			-		-			(217	)		-		-			(284	)
Recoveries		17			1			-		1			38			-		-			57
Provision		(13	)		59			85		(162	)		317			-		14			300
September 30, 2017	$	877		$	2,690		$	227	$	1,708		$	2,361		$	-	$	293		$	8,156
Originated Loans
December 31, 2016	$	1,106		$	1,942		$	65	$	1,579		$	2,463		$	-	$	128		$	7,283
Charge-offs		(22	)		-			-		-			(661	)		-		-			(683	)
Recoveries		11			-			-		37			155			-		-			203
Provision		(218	)		139			162		(10	)		404			-		293			770
September 30, 2017	$	877		$	2,081		$	227	$	1,606		$	2,361		$	-	$	421		$	7,573
Loans Acquired at Fair Value
December 31, 2016	$	-		$	365		$	-	$	120		$	-		$	-	$	35		$	520
Charge-offs		(109	)		(132	)		-		-			-			-		-			(241	)
Recoveries		49			2			-		-			3			-		-			54
Provision		60			374			-		(18	)		(3	)		-		(163	)		250
September 30, 2017	$	-		$	609		$	-	$	102		$	-		$	-	$	(128	)	$	583
Total Allowance for Loan Losses
December 31, 2016	$	1,106		$	2,307		$	65	$	1,699		$	2,463		$	-	$	163		$	7,803
Charge-offs		(131	)		(132	)		-		-			(661	)		-		-			(924	)
Recoveries		60			2			-		37			158			-		-			257
Provision		(158	)		513			162		(28	)		401			-		130			1,020
September 30, 2017	$	877		$	2,690		$	227	$	1,708		$	2,361		$	-	$	293		$	8,156

	September 30, 2017
	Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Unallocated			Total
Originated Loans
Individually Evaluated for Impairment	$	-	$	392	$	-	$	636	$	-	$	-	$	-		$	1,028
Collectively Evaluated for Potential Impairment	$	877	$	1,689	$	227	$	970	$	2,361	$	-	$	421		$	6,545
Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	-	$	-	$	-	$	10	$	-	$	-	$	-		$	10
Collectively Evaluated for Potential Impairment	$	-	$	609	$	-	$	92	$	-	$	-	$	(128	)	$	573
Total Allowance for Loan Losses
Individually Evaluated for Impairment	$	-	$	392	$	-	$	646	$	-	$	-	$	-		$	1,038
Collectively Evaluated for Potential Impairment	$	877	$	2,298	$	227	$	1,062	$	2,361	$	-	$	293		$	7,118

24

 

	September 30, 2016
	Real Estate Residential			Real Estate Commercial			Real Estate Construction			Commercial and Industrial		Consumer			Other			Unallocated			Total
Originated Loans
June 30, 2016	$	1,110		$	1,956		$	82		$	1,468	$	2,143		$	1		$	295		$	7,055
Charge-offs		(4	)		(11	)		-			-		(166	)		(17	)		-			(198	)
Recoveries		4			-			-			-		21			5			-			30
Provision		(38	)		77			(20	)		50		360			12			-			441
September 30, 2016	$	1,072		$	2,022		$	62		$	1,518	$	2,358		$	1		$	295		$	7,328
Loans Acquired at Fair Value
June 30, 2016	$	-		$	11		$	-		$	115	$	-		$	-		$	10		$	136
Charge-offs		(8	)		-			-			-		-			(2	)		-			(10	)
Recoveries		2			-			-			-		1			-			-			3
Provision		6			(11	)		-			20		(1	)		2			(7	)		9
September 30, 2016	$	-		$	-		$	-		$	135	$	-		$	-		$	3		$	138
Total Allowance for Loan Losses
June 30, 2016	$	1,110		$	1,967		$	82		$	1,583	$	2,143		$	1		$	305		$	7,191
Charge-offs		(12	)		(11	)		-			-		(166	)		(19	)		-			(208	)
Recoveries		6			-			-			-		22			5			-			33
Provision		(32	)		66			(20	)		70		359			14			(7	)		450
September 30, 2016	$	1,072		$	2,022		$	62		$	1,653	$	2,358		$	1		$	298		$	7,466
Originated Loans
December 31, 2015	$	1,623		$	2,045		$	137		$	784	$	1,887		$	-		$	14		$	6,490
Charge-offs		(24	)		(11	)		-			-		(476	)		(43	)		-			(554	)
Recoveries		8			-			-			-		102			16			-			126
Provision		(535	)		(12	)		(75	)		734		845			28			281			1,266
September 30, 2016	$	1,072		$	2,022		$	62		$	1,518	$	2,358		$	1		$	295		$	7,328
Loans Acquired at Fair Value
December 31, 2015	$	-		$	-		$	-		$	-	$	-		$	-		$	-		$	-
Charge-offs		(24	)		(180	)		-			-		(7	)		-			-			(211	)
Recoveries		7			2			-			-		6			-			-			15
Provision		17			178			-			135		1			-			3			334
September 30, 2016	$	-		$	-		$	-		$	135	$	-		$	-		$	3		$	138
Total Allowance for Loan Losses
December 31, 2015	$	1,623		$	2,045		$	137		$	784	$	1,887		$	-		$	14		$	6,490
Charge-offs		(48	)		(191	)		-			-		(483	)		(43	)		-			(765	)
Recoveries		15			2			-			-		108			16			-			141
Provision		(518	)		166			(75	)		869		846			28			284			1,600
September 30, 2016	$	1,072		$	2,022		$	62		$	1,653	$	2,358		$	1		$	298		$	7,466

	September 30, 2016
	Real Estate Residential		Real Estate Commercial			Real Estate Construction		Commercial and Industrial		Consumer		Other		Unallocated		Total
Originated Loans
Individually Evaluated for Impairment	$	-	$	385		$	-	$	701	$	-	$	-	$	-	$	1,086
Collectively Evaluated for Potential Impairment	$	1,072	$	1,637		$	62	$	817	$	2,358	$	1	$	295	$	6,242
Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	-	$	122		$	-	$	39	$	-	$	-	$	-	$	161
Collectively Evaluated for Potential Impairment	$	-	$	(122	)	$	-	$	96	$	-	$	-	$	3	$	(23	)
Total Allowance for Loan Losses
Individually Evaluated for Impairment	$	-	$	507		$	-	$	740	$	-	$	-	$	-	$	1,247
Collectively Evaluated for Potential Impairment	$	1,072	$	1,515		$	62	$	913	$	2,358	$	1	$	298	$	6,219

25

 

	December 31, 2016
	Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Unallocated		Total
Originated Loans
Individually Evaluated for Impairment	$	-	$	360	$	-	$	655	$	-	$	-	$	-	$	1,015
Collectively Evaluated for Potential Impairment	$	1,106	$	1,582	$	65	$	924	$	2,463	$	-	$	128	$	6,268
Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	-	$	114	$	-	$	31	$	-	$	-	$	-	$	145
Collectively Evaluated for Potential Impairment	$	-	$	251	$	-	$	89	$	-	$	-	$	35	$	375
Total Allowance for Loan Losses
Individually Evaluated for Impairment	$	-	$	474	$	-	$	686	$	-	$	-	$	-	$	1,160
Collectively Evaluated for Potential Impairment	$	1,106	$	1,833	$	65	$	1,013	$	2,463	$	-	$	163	$	6,643

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

	Accretable Discount
Balance at December 31, 2016	$	1,640
Accretable Yield		(533	)
Nonaccretable Discount		(113	)
Balance at September 30, 2017	$	994

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, 2017
	Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Total
Originated Loans
Individually Evaluated for Impairment	$	124	$	3,381	$	609	$	2,481	$	-	$	2	$	6,597
Collectively Evaluated for Potential Impairment		193,090		147,061		28,356		74,736		113,822		3,442		560,507
	$	193,214	$	150,442	$	28,965	$	77,217	$	113,822	$	3,444	$	567,104
Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	1,268	$	944	$	-	$	347	$	-	$	-	$	2,559
Collectively Evaluated for Potential Impairment		73,949		51,882		-		8,185		195		-		134,211
	$	75,217	$	52,826	$	-	$	8,532	$	195	$	-	$	136,770
Total Loans
Individually Evaluated for Impairment	$	1,392	$	4,325	$	609	$	2,828	$	-	$	2	$	9,156
Collectively Evaluated for Potential Impairment		267,039		198,943		28,356		82,921		114,017		3,442		694,718
	$	268,431	$	203,268	$	28,965	$	85,749	$	114,017	$	3,444	$	703,874

26

 

	December 31, 2016
	Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Total
Originated Loans
Individually Evaluated for Impairment	$	-	$	3,361	$	702	$	2,765	$	-	$	4	$	6,832
Collectively Evaluated for Potential Impairment		186,077		136,533		9,944		68,326		114,007		3,633		518,520
	$	186,077	$	139,894	$	10,646	$	71,091	$	114,007	$	3,637	$	525,352
Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	1,300	$	1,007	$	-	$	562	$	-	$	-	$	2,869
Collectively Evaluated for Potential Impairment		84,211		60,109		-		9,159		197		-		153,676
	$	85,511	$	61,116	$	-	$	9,721	$	197	$	-	$	156,545
Total Loans
Individually Evaluated for Impairment	$	1,300	$	4,368	$	702	$	3,327	$	-	$	4	$	9,701
Collectively Evaluated for Potential Impairment		270,288		196,642		9,944		77,485		114,204		3,633		672,196
	$	271,588	$	201,010	$	10,646	$	80,812	$	114,204	$	3,637	$	681,897

Note 5. Deposits

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

Maturity Period:	September 30, 2017
One Year or Less	$	43,884
Over One Through Two Years		66,257
Over Two Through Three Years		20,973
Over Three Through Four Years		12,111
Over Four Through Five Years		9,112
Over Five Years		8,129
Total	$	160,466

The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $47.9 million and $46.0 million as of September 30, 2017 and December 31, 2016, respectively.

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Note 6. Short-Term Borrowings

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

	(Dollars in thousands)
	September 30, 2017					December 31, 2016
	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Short-term Borrowings
Federal Funds Purchased:
Average Balance Outstanding During the Period	$	11		-	%	$	307		0.65	%
Maximum Amount Outstanding at any Month End		550					6,000
FHLB Borrowings:
Balance at Period End		-		-			-		-
Average Balance Outstanding During the Period		-		-			596		0.67
Maximum Amount Outstanding at any Month End		-					6,160
Securities Sold Under Agreements to Repurchase:
Balance at Period End		24,662		0.25			27,027		0.24
Average Balance Outstanding During the Period		26,302		0.30			26,311		0.26
Maximum Amount Outstanding at any Month End		27,817					30,095
Securities Collaterizing the Agreements at Period-End:
Carrying Value		35,128					33,785
Market Value		34,510					32,931

Note 7. 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, 2017					December 31, 2016
	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due in One Year	$	3,500		1.35	%	$	-		-	%
Due After One Year to Two Years		4,000		1.67			3,500		0.94
Due After Two Years to Three Years		6,000		1.88			4,500		1.41
Due After Three Years to Four Years		5,000		2.09			6,000		1.78
Due After Four Years to Five Years		3,000		2.23			6,000		1.97
Due After Five Years		3,000		2.41			8,000		2.27
Total	$	24,500		1.92		$	28,000		1.80

As of September 30, 2017, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $286.3 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 $143.1 million and $148.5 million as of September 30, 2017 and December 31, 2016, respectively.

The Company maintains a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $88.3 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 $40.0 million. As of September 30, 2017 and December 31, 2016, no draws had been taken on these facilities.

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Note 8. 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 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.

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, 2017		December 31, 2016
Standby Letters of Credit	$	49,889	$	36,657
Performance Letters of Credit		4,396		2,471
Construction Mortgages		23,825		21,363
Personal Lines of Credit		6,271		5,905
Overdraft Protection Lines		6,183		5,680
Home Equity Lines of Credit		15,799		14,722
Commercial Lines of Credit		71,776		51,725
	$	178,139	$	138,523

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 9. 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.

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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.

			(Dollars in thousands)
	Fair Value Hierarchy		September 30, 2017		December 31, 2016
Available for Sales Securities:
U.S. Government Agencies		Level II	$	58,380	$	66,156
Obligations of States and Political Subdivisions		Level II		37,808		35,735
Mortgage-Backed Securities - Government-Sponsored Enterprises		Level II		17,859		2,619
Equity Securities - Mutual Funds		Level I		510		507
Equity Securities - Other		Level I		1,332		1,191
Total Available for Sale Securities			$	115,889	$	106,208

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
Financial Asset	Fair Value Hierarchy	September 30, 2017		December 31, 2016		Valuation Techniques	Significant Unobservable Inputs	Unobservable Input Value
Impaired Loans	Level III	$	2,271	$	2,497	Market Comparable Properties	Marketability Discount	10%	to	30%	(1)
OREO	Level III		169		-	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, 2017 and December 31, 2016, the fair value of impaired loans consists of the loan balances of $3.3 million and $3.7 million, respectively, less their specific valuation allowances of $1.0 million and $1.2 million, respectively.

Other real estate owned (OREO) properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, other real estate owned is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an other real estate owned property is determined from a qualified independent appraisal and is classified as Level III in the fair value hierarchy. During the three months ended September 30, 2017, one residential real estate loan for $14,000 moved into OREO. During the nine months ended September 30, 2017, two residential real estate loans for $155,000 and $14,000 moved into OREO. During the nine months ended September 30, 2016, two commercial real estate properties for $3.2 million were foreclosed on, moved into OREO, evaluated for fair value and recorded a prior first quarter gain on the valuation adjustment on foreclosed real estate for approximately $566,000. This recognized gain on the valuation adjustment was supported by independent appraisals of the two properties. One property was subject to a tentative sales agreement with a current customer which closed in the prior year. The other property was transferred into premises and equipment of the Company due to its location and the Company’s need of a new headquarters location.

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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 Company employs simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices are not available, based upon the following assumptions:

Cash and Due From Banks, Restricted Stock, Bank-Owned Life Insurance, Accrued Interest Receivable, Short-Term Borrowings, and Accrued Interest Payable

The fair value is equal to the current carrying value.

Investment Securities

The fair value of investment securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities or matrix pricing, which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices.

Loans Receivable

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities

The fair values disclosed for demand deposits, are, by definition, equal to the amount payable on demand at the reporting date. The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

Borrowed Funds

Fair values of borrowed funds are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

Commitments to Extend Credit

These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note 8.

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The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.

		(Dollars in thousands)
		September 30, 2017				December 31, 2016
	Fair Value Hierarchy	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and Due From Banks:
Interest Bearing	Level I	$	31,979	$	31,979	$	7,699	$	7,699
Non-Interest Bearing	Level I		11,766		11,766		6,583		6,583
Investment Securities:
Available for Sale	See Above		115,889		115,889		106,208		106,208
Loans, Net	Level III		695,718		706,433		674,094		684,777
Restricted Stock	Level II		3,712		3,712		3,665		3,665
Bank-Owned Life Insurance	Level II		19,035		19,035		18,687		18,687
Accrued Interest Receivable	Level II		2,572		2,572		2,441		2,441
Financial Liabilities:
Deposits	Level II		762,374		738,836		698,218		697,806
Short-term Borrowings	Level II		24,662		24,662		27,027		27,027
Other Borrowed Funds	Level II		24,500		24,671		28,000		28,098
Accrued Interest Payable	Level II		413		413		334		334

Note 10. Other Noninterest Expense

In accordance with SEC Regulation S-X, other noninterest expense that exceeds 10% of total noninterest expense is required to be disclosed by detailed expenses. The details for other noninterest expense for the Company’s consolidated statement of income for the three and nine months ended September 30, 2017 and 2016, are as follows:

	(Dollars in thousands)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Other Noninterest Expense
Non-employee compensation	$	101	$	135	$	301	$	403
Printing and supplies		107		88		310		296
Postage		36		55		166		158
Telephone		99		108		287		289
Charitable contributions		30		18		111		87
Dues and subscriptions		54		56		172		148
Loan expenses		110		87		271		231
Meals and entertainment		41		36		108		94
Travel		36		41		105		110
Training		-		10		20		28
Miscellaneous		179		236		581		698
Total Other Noninterest Expense	$	793	$	870	$	2,432	$	2,542

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, 2016.

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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;

· 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; and

· Changes in federal and state legislation and regulation applicable to our business.

The Company uses the current statutory tax rate of 34.0% to value its deferred tax assets and liabilities. On April 26, 2017, the Trump Administration announced a comprehensive tax reform proposal that includes a reduction in the U.S. corporate income tax rate to 15.0%. The latest tax reform discussion from the Trump Administration has the proposed reduction in the U.S. corporate income tax rate to 20.0%. If corporate tax rates were reduced, management expects the Company would be required to record an initial charge against earnings to lower the carrying amount of its net deferred tax asset, and then, going forward, would record lower tax provisions on an ongoing basis. The proposal is at the beginning stages of negotiations and will need to be addressed by both houses of Congress. It is too early in the process to determine if any of the proposals are actionable. Accordingly, management cannot assess the effect a change in the corporate tax rate would have on Company’s operating results or financial position at the present time.

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. CB Financial’s business activity is conducted through its wholly owned banking subsidiary Community Bank.

The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from 16 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s wholly-owned subsidiary that is a full-service, independent insurance agency.

On October 31, 2014, the Company completed its merger with FedFirst Financial Corporation (“FedFirst” or the “merger”), the holding company for First Federal Savings Bank, a community bank based in Monessen, Pennsylvania. The merger resulted in the addition of five branches and expanded the Company’s reach into Fayette and Westmoreland counties in southwestern Pennsylvania.

The Bank’s website address is www.communitybank.tv. Information on the website is not and should not be considered a part of this Form 10-Q.

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, 2017 compared to the financial condition as of December 31, 2016 and the consolidated results of operations for the three and nine months ended September 30, 2017 and 2016.

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, other real estate owned, advertising and promotion, stationery and supplies, deposit and general insurance and other expenses.

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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 the southwestern Pennsylvania market area.

Statement of Financial Condition Analysis

Assets. Total assets increased $62.3 million, or 7.4%, to $908.3 million at September 30, 2017 compared to $846.1 million at December 31, 2016.

Cash and due from banks increased $29.5 million, or 206.3%, to $43.7 million at September 30, 2017 compared to $14.3 million at December 31, 2016. This is primarily the result of deposit growth.

Investment securities classified as available-for-sale increased $9.7 million, or 9.1%, to $115.9 million at September 30, 2017 compared to $106.2 million at December 31, 2016. This increase was primarily the result of new security purchases funded by deposit growth.

Loans, net, increased $21.6 million, or 3.2%, to $695.7 million at September 30, 2017 compared to $674.1 million at December 31, 2016. This was primarily due to net loan originations of $18.3 million on construction loans, $4.9 million on commercial and industrial loans and $2.3 million on commercial real estate loans, partially offset by net loan payoffs of $3.2 million on residential mortgage loans and $380,000 in consumer loans (mainly indirect auto loans).

Premises and equipment, net, increased $2.4 million, or 17.2%, to $16.6 million at September 30, 2017 compared to $14.1 million at December 31, 2016. This is due to the additions related to the new Operations Center that was placed into service in the second quarter. Total premises and equipment capitalized for the new Operations Center totaled $5.3 million.

Liabilities. Total liabilities increased $58.6 million, or 7.7%, to $815.2 million at September 30, 2017 compared to $756.6 million at December 31, 2016.

Total deposits increased $64.2 million, or 9.2%, to $762.4 million at September 30, 2017 compared to $698.2 million at December 31, 2016. There were increases of $33.2 million in NOW accounts, $22.6 million in demand deposits, $9.7 in savings accounts and $5.4 million in time deposits, partially offset by decreases of $4.4 million in brokered deposits and $2.4 million in money market accounts. Due to the rising interest rate environment, the Bank has been selective on offering promotional interest rates and has concentrated its efforts on increasing noninterest-bearing accounts by building strong customer relationships. In addition, school district and municipal deposits increased $27.1 million due to building stronger customer relationships with these depositors and new accounts.

Short-term borrowings decreased $2.4 million, or 8.8%, to $24.7 million at September 30, 2017 compared to $27.0 million at December 31, 2016. At September 30, 2017, short-term borrowings were comprised of $24.7 million of securities sold under agreements to repurchase compared to $27.0 million at December 31, 2016. 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 by $3.5 million due to a maturing FHLB long-term borrowing that was retired in the current period. As a result of current period activity, the weighted average interest rate on long-term borrowings increased by 12 basis points to 1.92%.

Stockholders’ Equity. Stockholders’ equity increased $3.7 million, or 4.1%, to $93.2 million at September 30, 2017 compared to $89.5 million at December 31, 2016. During the period, net income was $5.6 million and the Company paid $2.7 million in dividends to stockholders.

Results of Operations for the Three Months Ended September 30, 2017 and 2016

Overview. Net income increased $489,000, to $2.1 million, for the three months ended September 30, 2017 compared to $1.6 million for the three months ended September 30, 2016. The quarterly results benefited from an increase in interest income related to loan growth in the current quarter. In addition, improving credit quality reduced the provision for loan losses and the settlements of prior loan collection efforts yielded a decrease in noninterest expense during the current quarter. Quarterly pre-tax income increased by $792,000 due in part to the successful resolution of prior loan collection efforts and an increase in net interest income.

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Net Interest Income. Net interest income increased $377,000, or 5.4%, to $7.4 million for the three months ended September 30, 2017 compared to $7.0 million for the three months ended September 30, 2016.

Interest and dividend income increased $529,000, or 6.9%, to $8.2 million for the three months ended September 30, 2017 compared to $7.7 million for the three months ended September 30, 2016. Interest income on loans increased $366,000 for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Average loans increased by $13.0 million during the current quarter. The loan portfolio had an increase of 12 basis points in yield. Contributing to the yield increase this quarter was the accretion on the acquired loan portfolio credit mark. The positive impact of the accretion for the three months ended September 30, 2017 was $127,000, or 8 basis points, compared to $87,000, or 5 basis points, for the three months ended September 30, 2016. The remaining credit mark balance for acquired loans was $994,000 as of September 30, 2017. Interest income on taxable securities increased $99,000 mainly due to an increase of $29.3 million in the average balance for taxable securities in the current period. The increase in the average balance offset a decrease of 32 basis points in yield on taxable securities. This is a result of new purchases with lower prevailing yields replacing security calls and maturities with higher yields within the portfolio. Interest income on Federal funds sold increased to $64,000 for the three months ended September 30, 2017 compared to $3,000 for the three months ended September 30, 2016. This is the result of the increase in interest rates in the last year and the increases in the average interest-earning balances of $23.0 million as a result of deposit growth for the three months ended September 30, 2017. In addition, other interest and dividend income increased $35,000 as a result of increased interest earned with correspondent deposit banks and FHLB dividends in the current period. Interest income on securities exempt from federal tax decreased $32,000 due to deploying proceeds from security calls and maturities into lower yielding taxable security purchases in the current period. There was a decrease of $2.0 million in the average balance on securities exempt from federal tax and a decrease of 30 basis points in yield as a result of security calls and maturities that had higher yields.

Interest expense increased $152,000, or 21.5%, to $860,000 for the three months ended September 30, 2017 compared to $708,000 for the three months ended September 30, 2016. Interest expense on deposits increased $163,000 due to an increase in average interest-bearing deposits of $57.4 million, primarily due to increases in interest-bearing demand deposits, time deposits and savings accounts. The average cost of interest-bearing deposits increased 6 basis points. This was related to the multiple interest rate hikes over the last year by the Federal Reserve Board (“FRB”). Interest expense on other borrowed funds decreased $9,000 primarily due to a FHLB long-term borrowing for $3.5 million that matured in the first quarter. Interest expense on short-term borrowings decreased $1,000 mainly due to an average balance decrease of $1.1 million on securities sold under agreements to repurchase.

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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal tax rate of 34%. 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, but include non-accrual loans. The yields and costs for the periods indicated are derived by dividing 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,
	2017							2016
			Interest							Interest
	Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Cost (1)			Balance		Dividends		Cost (1)
Assets:
Interest-Earning Assets:
Loans, Net	$	684,384	$	7,480		4.34	%	$	671,346	$	7,120		4.22	%
Investment Securities
Taxable		80,791		386		1.91			51,460		287		2.23
Exempt From Federal Tax		37,390		340		3.64			39,428		388		3.94
Other Interest-Earning Assets		32,553		139		1.69			9,296		43		1.84
Total Interest-Earning Assets		835,118		8,345		3.96			771,530		7,838		4.04
Noninterest-Earning Assets		61,859							54,484
Total Assets	$	896,977						$	826,014
Liabilities and
Stockholders' equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits	$	138,742		92		0.26	%	$	112,679		49		0.17	%
Savings		131,420		61		0.18			121,439		56		0.18
Money Market		135,214		88		0.26			138,033		87		0.25
Time Deposits		160,456		479		1.18			136,258		365		1.07
Total Interest-Bearing Deposits		565,832		720		0.50			508,409		557		0.44
Borrowings		50,741		140		1.09			57,791		151		1.04
Total Interest-Bearing Liabilities		616,573		860		0.55			566,200		708		0.50
Noninterest-Bearing Demand Deposits		183,061							165,422
Other Liabilities		4,361							4,199
Total Liabilities		803,995							735,821
Stockholders' Equity		92,982							90,193
Total Liabilities and
Stockholders' Equity	$	896,977						$	826,014
Net Interest Income			$	7,485						$	7,130
Net Interest Rate Spread (2)						3.41	%						3.54	%
Net Interest-Earning Assets (3)	$	218,545						$	205,330
Net Interest Margin (4)						3.56							3.68
Return on Average Assets						0.91							0.76
Return on Average Equity						8.81							6.95
Average Equity to Average Assets						10.37							10.92
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities						135.45							136.26

(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 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 34%.

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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 tax rate of 34%. 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, 2017
	Compared To
	Three Months Ended September 30, 2016
	Increase (Decrease) Due to
	Volume			Rate			Total
Interest and Dividend Income:
Loans, net	$	155		$	205		$	360
Investment Securities:
Taxable		145			(46	)		99
Exempt From Federal Tax		(19	)		(29	)		(48	)
Other Interest-Earning Assets		100			(4	)		96
Total Interest-Earning Assets		381			126			507
Interest Expense:
Deposits		81			82			163
Borrowings		(18	)		7			(11	)
Total Interest-Bearing Liabilities		63			89			152
Change in Net Interest Income	$	318		$	37		$	355

Provision for Loan Losses. The provision for loan losses was $300,000 for the three months ended September 30, 2017 compared to $450,000 for the three months ended September 30, 2016. Net charge-offs for the three months ended September 30, 2017 were $227,000, which included $149,000 of net charge-offs on automobile loans, compared to $175,000 of net charge-offs for the three months ended September 30, 2016, which included $145,000 of net charge-offs on automobile loans. The increase in net charge-offs during the current period was due to charge-offs of $67,000 for residential mortgages and $52,000 for consumer 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. This was due to improvements in the loan department along with loan personnel experience, and improvements in the local economy which had a positive impact on the qualitative factors within the allowance calculation.

Noninterest Income. Noninterest income decreased $3,000, or 0.2%, and remained constant at $1.8 million for the three months ended September 30, 2017 and 2016. There was a decrease in the net gains on the sales of residential mortgage loans of $113,000. The decrease in gains was primarily due to a decrease in the number of loans originated and subsequently sold to the FHLB as part of the Mortgage Partnership Finance® (“MPF®”) program. 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. Net gains on the sales of investments decreased $12,000 due to the sale of equity securities in 2016. These sales were transacted to recognize capital gains that will be offset by a capital loss carry forward deferred tax asset that was acquired in the merger with FedFirst Financial Corporation in October 2014 (“merger”). The capital loss carry forward deferred tax asset was fully recognized in the prior quarter. In addition, there was a decrease of $6,000 in income from bank-owned life insurance due to lower crediting rates. Mainly offsetting the decreases were insurance commissions from Exchange Underwriters that increased $82,000 due to increased commercial lines commission and fee income and contingency fees received in the current period. Contingency fees are commissions that are contingent upon several factors including, but not limited to, eligible written premiums, earned premiums, incurred losses and stop loss charges. Net gains on purchased tax credits increased $14,000 due to the purchased Pennsylvania shares tax credits being recognized in the current period. Other commissions increased $13,000 due to miscellaneous income recognized from forfeited funds from an employee flexible spending account (“FSA”) from prior years. Service fees on deposit accounts increased $11,000 due to increased non-sufficient funds (“NSF”) fees due to customer overdrafts of deposit accounts and check card fees in the current quarter.

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Noninterest Expense. Noninterest expense decreased $268,000, or 4.3%, to $5.9 million for the three months ended September 30, 2017 compared to $6.2 million for the three months ended September 30, 2016. Other real estate owned expense decreased $353,000 due to the final resolutions of loan collection efforts through the sale of a mineral rights interest for $186,000, bankruptcy court settlement for $86,000 and mortgage insurance proceeds for $85,000. The aforementioned items were proceeds from previously sold OREO properties. The additional proceeds represent contingent gains recorded by the Company when the proceeds were received. These items are considered non-recurring. Other noninterest expense decreased $77,000 primarily due to reduced overdraft and debit card fraud losses, postage, employee training, telephone and travel. Legal and professional fees decreased $59,000 due to the above mentioned mortgage insurance proceeds, in which part of the insurance proceeds were utilized to offset legal fees attributed to the problem loan relationship. Contracted services decreased $36,000 as a result of combining services at the new Ralph J. Sommers Jr. Operations Center (“Operations Center”). Occupancy decreased $18,000 primarily due to decreases in rent expense and accelerated depreciation taken on leasehold improvements in the Bank’s former operations center that did not transfer over to the new Operations Center in the current quarter. The new Operations Center was completed and placed into bank operations during the second quarter. The Federal Deposit Insurance Corporation (“FDIC”) assessment expense decreased $8,000 due to an assessment factor reduction by the FDIC in the computation of the insurance assessment. Partially offsetting these favorable variances were salaries and employee benefits that increased $221,000 primarily due to normal salary increases, employee group health insurance, retirement benefits expense and employee stock options. Pennsylvania shares tax, which is calculated based on the Bank’s stockholders’ equity, increased $48,000 due to the increase in equity that was calculated on the current year shares tax return. Advertising expense increased $8,000 due to the Bank’s current marketing initiatives.

Income Tax Expense. Income taxes increased $303,000 to $910,000 for the three months ended September 30, 2017 compared to $607,000 for the three months ended September 30, 2016. The effective tax rate for the three months ended September 30, 2017 was 30.6% compared to 27.8% for the three months ended September 30, 2016. The increase in income taxes was due to an increase of $792,000 in pre-tax income. The increase in the effective tax rate was related to a change in the securities portfolio composition of new purchases of taxable securities replacing tax-exempt security calls and maturities within the portfolio. In addition, the capital loss carry forward deferred tax asset has been fully recognized and the expiration of the low income housing tax credit program in the prior quarter, which attributed to the increase in both income taxes and the effective tax rate.

Results of Operations for the Nine Months Ended September 30, 2017 and 2016

Overview. Net income increased $11,000 and remained constant at $5.6 million, for the nine months ended September 30, 2017 and 2016, respectively.

Net Interest Income. Net interest income decreased $161,000 , or 0.7%, to $21.5 million for the nine months ended September 30, 2017 compared to $21.6 million for the nine months ended September 30, 2016.

Interest and dividend income increased $196,000, or 0.8%, to $24.0 million for the nine months ended September 30, 2017 compared to $23.8 million for the nine months ended September 30, 2016. Interest income on taxable securities increased $215,000 despite a decrease of 38 basis points in yield from new purchases with lower prevailing yields. The average balance for taxable securities increased $25.9 million for the nine months ended September 30, 2017. Federal Funds sold increased $104,000 for the nine months ended September 30, 2017. This is the direct result of the end of the historically low interest rates in the last year and the increases in the average interest-earning balances to $16.1 million as a result of deposit growth for the nine months ended September 30, 2017. Other interest and dividend income increased $82,000 primarily due to increased interest earned with correspondent deposit banks and FHLB dividends in the current period. Interest income on securities exempt from federal tax decreased $122,000 due to deploying proceeds from security calls and maturities into purchasing taxable securities in the current year. There was a decrease of $2.7 million in the average balance on securities exempt from federal tax and a decrease of 38 basis points in yield as a result of security calls and maturities that had higher yields. Interest income on loans decreased $83,000 primarily due to accretion on the acquired loan portfolio credit mark for the nine months ended September 30, 2017 of $533,000, or 16 basis points compared to $860,000, or 26 basis points for the nine months ended September 30, 2016. There was an increase in average loans outstanding of $471,000. The increase in average loans was due to the loan originations within the entire loan portfolio in the later part of the current period.

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Interest expense increased $357,000, or 16.9%, to $2.5 million for the nine months ended September 30, 2017 compared to $2.1 million for the nine months ended September 30, 2016. Interest expense on deposits increased $372,000 due to recent rate increases and an increase in average interest-bearing deposits of $33.7 million which we attribute primarily to time deposits, interest-bearing demand deposits and savings accounts. The average cost of interest-bearing deposits increased 7 basis points. In addition, short-term borrowings increased $9,000 in the current period due to increased interest rates on securities sold under agreements to repurchase. Interest expense on other borrowed funds decreased $22,000 due to a decrease in long-term borrowings as a result of a FHLB long-term borrowing for $3.5 million that matured in the current period.

39

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal tax rate of 34%. Average balances for loans are net of the allowance for loan losses, but include non-accrual loans. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented and are expressed in annualized rates.

	(Dollars in thousands) (Unaudited)
	Nine Months Ended September 30,
	2017							2016
			Interest							Interest
	Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Cost (1)			Balance		Dividends		Cost (1)
Assets:
Interest-Earning Assets:
Loans, Net	$	673,922	$	21,896		4.34	%	$	673,451	$	21,998		4.36	%
Investment Securities
Taxable		79,432		1,133		1.90			53,580		918		2.28
Exempt From Federal Tax		36,177		987		3.64			38,902		1,172		4.02
Other Interest-Earning Assets		27,643		325		1.57			11,533		139		1.61
Total Interest-Earning Assets		817,174		24,341		3.98			777,466		24,227		4.16
Noninterest-Earning Assets		58,709							53,806
Total Assets	$	875,883						$	831,272
Liabilities and
Stockholders' equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits	$	127,736		239		0.25	%	$	114,959		147		0.17	%
Savings		128,583		177		0.18			123,079		169		0.18
Money Market		137,906		270		0.26			142,820		268		0.25
Time Deposits		159,232		1,364		1.15			138,917		1,094		1.05
Total Interest-Bearing Deposits		553,457		2,050		0.50			519,775		1,678		0.43
Borrowings		51,505		420		1.09			54,533		435		1.07
Total Interest-Bearing Liabilities		604,962		2,470		0.55			574,308		2,113		0.49
Noninterest-Bearing Demand Deposits		175,401							163,815
Other Liabilities		3,822							4,086
Total Liabilities		784,185							742,209
Stockholders' Equity		91,698							89,063
Total Liabilities and
Stockholders' Equity	$	875,883						$	831,272
Net interest income			$	21,871						$	22,114
Net Interest Rate Spread (2)						3.43	%						3.67	%
Net Interest-Earning Assets (3)	$	212,212						$	203,158
Net Interest Margin (4)						3.58							3.80
Return on Average Assets						0.85							0.89
Return on Average Equity						8.12							8.34
Average Equity to Average Assets						10.47							10.71
Average Interest-Earning Assets to
Average Interest-Bearing Liabilities						135.08							135.37

(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 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 34%.

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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. 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, 2017
	Compared To
	Nine Months Ended September 30, 2016
	Increase (Decrease) Due to
	Volume			Rate			Total
Interest and Dividend Income:
Loans, net	$	(1	)	$	(101	)	$	(102	)
Investment Securities:
Taxable		387			(172	)		215
Exempt From Federal Tax		(79	)		(106	)		(185	)
Other Interest-Earning Assets		189			(3	)		186
Total Interest-Earning Assets		496			(382	)		114
Interest Expense:
Deposits		87			285			372
Borrowings		(23	)		8			(15	)
Total Interest-Bearing Liabilities		64			293			357
Change in Net Interest Income	$	432		$	(675	)	$	(243	)

Provision for Loan Losses. The provision for loan losses decreased $580,000 to $1.0 million, for the nine months ended September 30, 2017, of which $250,000 was attributed to the acquired loan portfolio, compared to $1.6 million of provision for loan losses for the nine months ended September 30, 2016. Net charge-offs for the nine months ended September 30, 2017 were $667,000, which included $435,000 of net charge-offs on automobile loans, compared to net charge-offs of $625,000 for the nine months ended September 30, 2016, which included $375,000 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 an increase or reduction in provision for loan losses for the nine months ended September 30, 2017. The decrease in provision is mainly attributed to loan payoffs and improving credit quality of impaired loans resulting in an average balance decrease of approximately $4.0 million in impaired loans for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. There was sizable loan growth and increased performance in substandard loans which resulted in upgrades to credit quality risk ratings as compared to the prior year. As the acquired loan portfolio has loan payoffs, paydowns and accretion of the credit mark, the need for additional provision may be required based on our loan loss analysis.

Noninterest Income. Noninterest income increased $324,000, or 5.9%, to $5.9 million for the nine months ended September 30, 2017 compared to $5.5 million at September 30, 2016. There was a $395,000 increase in insurance commissions from Exchange Underwriters due to additional contingency fees received and an increase in commercial commission and fee income received in the current period. Net gains on the sales of investments increased $52,000 due to the sale of equity securities. These sales were transacted to recognize capital gains that will be offset by a capital loss carry forward deferred tax asset that was acquired in the merger. The capital loss carry forward deferred tax asset has been fully recognized in the current period. Net gains on purchased tax credits increased $43,000 due to purchased Pennsylvania shares tax credits being recognized in the current period. Service fees on deposit accounts increased $28,000 primarily due to increased NSF fees due to customer overdrafts of deposit accounts and check card fees. There was a decrease in the net gains on sales of residential mortgage loans of $170,000. The decrease in gains was primarily due to a decrease in the number of loans originated and subsequently sold to the FHLB as part of the Mortgage Partnership Finance® (“MPF®”) program. 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. Income from bank-owned life insurance decreased $13,000 due to lower crediting rates in the current period. Other miscellaneous income decreased $6,000 due to student loan servicing fees and an increase in amortization on mortgage servicing rights related to loans sold to the FHLB. This was partially offset by an increase in the servicing income received from mortgage loans sold to the FHLB as part of the MPF® program. Other commissions decreased $5,000 primarily due to decreases in merchant services and check sales fees in the current period, partially offset by an increase in miscellaneous income recognized from forfeited funds from an employee FSA from prior years.

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Noninterest Expense. Noninterest expense increased $651,000, or 3.7%, to $18.4 million for the nine months ended September 30, 2017 compared to $17.8 million for the nine months ended September 30, 2016. Salaries and employee benefits increased $480,000, primarily due to additional employees, normal salary increases, retirement benefits, employee stock options and employee group health insurance. This was partially offset by a decrease in restricted stock awards expense. Occupancy and equipment increased $222,000 and $59,000, respectively, primarily due to accelerated depreciation taken on leasehold improvements in the Bank’s former operations center that did not transfer over to the new Operations Center that was placed into service in the prior quarter. In addition, the new Operations Center increased depreciation during the current period. Other increases for occupancy were related to real estate taxes, moving expenses, utilities and property insurance. Equipment expense increases were mainly due to equipment purchases and new maintenance contracts for the Operations Center. Bankcard processing expense increased $25,000 due to the increased number of automatic teller transactions (“ATM”) in the current period. Pennsylvania shares tax, which is calculated based on the Bank’s stockholders’ equity, increased $19,000 due to the increase in equity that was calculated on the current year shares tax return. Other real estate owned expense was $343,000 of income in the current period compared to $531,000 of income in the prior period resulting in an increase of $188,000 in expense. This change is primarily due to the $566,000 pre-tax gain recognized due to the foreclosure procedures on two commercial real estate loans that moved into other real estate owned properties in the first quarter of 2016. This was partially offset due to the final resolutions of loan collection efforts through the sale of a mineral rights interest, bankruptcy court settlement and mortgage insurance proceeds. These items are considered non-recurring. Other noninterest expense decreased $110,000 primarily due to decreases in various miscellaneous expenses, such as other insurance, other losses, non-employee restricted stock awards and a Pennsylvania state sales tax refund as a result of a Bank initiated reverse audit. The FDIC assessment decreased $86,000 due to an assessment factor reduction by the FDIC in the computation of the insurance assessment. Legal and professional fees decreased $71,000 due to the previously mentioned mortgage insurance proceeds, in which part of the insurance proceeds were utilized to offset legal fees attributed to the problem loan relationship. Advertising decreased $39,000 related to decreases in print/media advertising and promotional items as a cost savings initiative.

Income Tax Expense. Income taxes increased $81,000 to $2.3 million for the nine months ended September 30, 2017 compared to $2.3 million for the nine months ended September 30, 2016. The effective tax rate for the nine months ended September 30, 2017 was 29.6% compared to 28.9% for the nine months ended September 30, 2016. The increase in income taxes was primarily due to an increase of $92,000 in pre-tax income and the expiration of the low income housing tax credit program. The increase in the effective tax rate was related to the decrease in tax exempt income, the expiration of the low income housing tax credit program and the capital loss carry forward deferred tax asset that has been fully recognized, partially offset by the favorable tax preference charitable donation of a former First Federal Savings Bank building to the City of Monessen, Pennsylvania in the current period.

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 8 in the Notes to Consolidated Financial Statements for a summary of commitments outstanding as of September 30, 2017.

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, 2017 to satisfy its short- and long-term liquidity needs at that date.

42

 

The Company’s most liquid assets are cash and due from banks, which totaled $43.7 million at September 30, 2017. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. Unpledged securities, which provide an additional source of liquidity, totaled $20.0 million at September 30, 2017. In addition, at September 30, 2017, the Company had the ability to borrow up to $286.3 million from the FHLB of Pittsburgh, of which $24.5 million was outstanding and $48.9 million was utilized toward standby letters of credit. The Company also has the ability to borrow up to $88.3 million from the FRB through its Borrower-In-Custody line of credit agreement and $40.0 million from multiple line of credit arrangements with various banks, none of which were outstanding.

At September 30, 2017, time deposits due within one year of that date totaled $43.9 million, or 27.3% 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, 2017, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $1.8 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 Company and the Bank are 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 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, 2017 at the 0.625% level and will be phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019).

At September 30, 2017 and December 31, 2016, the Company 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.

43

 

	(Dollars in thousands)
	September 30, 2017					December 31, 2016
	Amount		Ratio			Amount		Ratio
Common Equity Tier 1 (to risk weighted assets)
Actual	$	84,325		13.18	%	$	81,845		13.38	%
For Capital Adequacy Purposes		28,797		4.50			27,533		4.50
To Be Well Capitalized		41,596		6.50			39,770		6.50
Tier 1 Capital (to risk weighted assets)
Actual		84,325		13.18			81,845		13.38
For Capital Adequacy Purposes		38,397		6.00			36,711		6.00
To Be Well Capitalized		51,195		8.00			48,947		8.00
Total Capital (to risk weighted assets)
Actual		92,331		14.43			89,497		14.63
For Capital Adequacy Purposes		51,195		8.00			48,947		8.00
To Be Well Capitalized		63,994		10.00			61,184		10.00
Tier 1 Leverage (to adjusted total assets)
Actual		84,325		9.48			81,845		9.80
For Capital Adequacy Purposes		35,567		4.00			33,390		4.00
To Be Well Capitalized		44,458		5.00			41,738		5.00

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

The Company believes that as of September 30, 2017, there was no material change in the quantitative and qualitative disclosure about market risk data as of December 31, 2016, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4. Controls and Procedures.

CB Financial’s management, including CB Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of CB Financial’s “disclosure controls and procedures” as such term is defined in Rule 13a-15(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, CB Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that CB Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to CB Financial’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

There have been no changes in CB Financial’s internal control over financial reporting during the quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, CB Financial’s internal control over financial reporting.

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 financial condition, results of operations or cash flows.

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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, 2016, 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

31.1 Rule 13a-14(a) / 15d-14(a) Certification (Chief Executive Officer)

31.2 Rule 13a-14(a) / 15d-14(a) Certification (Chief Financial Officer)

32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Chief Financial Officer Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.0 The following materials for the quarter ended September 30, 2017, 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 8, 2017	/s/ Barron P. McCune, Jr.
		Barron P. McCune, Jr.
		Chief Executive Officer
Date:	November 8, 2017	/s/ Kevin D. Lemley
		Kevin D. Lemley
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)

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