CB Financial Services, Inc. - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - CB Financial Services, Inc.	exh_322.htm
EX-32.1 - EXHIBIT 32.1 - CB Financial Services, Inc.	exh_321.htm
EX-31.2 - EXHIBIT 31.2 - CB Financial Services, Inc.	exh_312.htm
EX-31.1 - EXHIBIT 31.1 - CB Financial Services, Inc.	exh_311.htm

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, 2018

☐

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

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

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

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

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

As of November 5, 2018, the number of shares outstanding of the Registrant’s Common Stock was 5,414,299.

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.	38
Item 3. Quantitative and Qualitative Disclosure about Market Risk.	50
Item 4. Controls and Procedures.	50
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.	50
Item 1A. Risk Factors.	51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	51
Item 3. Defaults Upon Senior Securities.	51
Item 4. Mine Safety Disclosures.	51
Item 5. Other Information.	51
Item 6. Exhibits	51
SIGNATURES	52

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

(Dollars in thousands, except share data)		(Unaudited) September 30, 2018			December 31, 2017

ASSETS
Cash and Due From Banks:
Interest Bearing	$	37,173		$	11,685
Non-Interest Bearing		8,784			8,937
Total Cash and Due From Banks		45,957			20,622

Investment Securities:
Available-for-Sale		216,830			123,583
Loans, Net		891,863			735,596
Premises and Equipment, Net		23,933			16,712
Bank-Owned Life Insurance		22,783			19,151
Goodwill		27,071			4,953
Core Deposit Intangible, Net		11,425			3,284
Accrued Interest and Other Assets		13,664			10,585
TOTAL ASSETS	$	1,253,526		$	934,486

LIABILITIES
Deposits:
Demand Deposits	$	261,692		$	188,499
NOW Accounts		198,607			145,183
Money Market Accounts		184,357			136,914
Savings Accounts		206,050			132,359
Time Deposits		208,462			164,301
Brokered Deposits		3,723			6,088
Total Deposits		1,062,891			773,344

Short-Term Borrowings		31,580			39,605
Other Borrowed Funds		23,257			24,500
Accrued Interest and Other Liabilities		2,115			3,781
TOTAL LIABILITIES		1,119,843			841,230

STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; 5,000,000 Shares Authorized		-			-
Common Stock, $0.4167 Par Value; 35,000,000 Shares Authorized, 5,680,993 and 4,363,346 Shares Issued and 5,414,299 and 4,095,957 Shares Outstanding at September 30, 2018 and December 31, 2017, Respectively		2,367			1,818
Capital Surplus		73,632			42,089
Retained Earnings		66,460			55,280
Treasury Stock, at Cost (266,694 and 267,389 Shares at September 30, 2018 and December 31, 2017, Respectively)		(4,680	)		(4,590	)
Accumulated Other Comprehensive Loss		(4,096	)		(1,341	)
TOTAL STOCKHOLDERS' EQUITY		133,683			93,256
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,253,526		$	934,486

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

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except share and per share data)	2018			2017			2018			2017

INTEREST AND DIVIDEND INCOME
Loans, Including Fees	$	10,044		$	7,459		$	27,272		$	21,830
Federal Funds Sold		53			64			113			120
Investment Securities:
Taxable		1,202			386			2,624			1,133
Exempt From Federal Income Tax		318			229			857			665
Other Interest and Dividend Income		147			75			295			205
TOTAL INTEREST AND DIVIDEND INCOME		11,764			8,213			31,161			23,953

INTEREST EXPENSE
Deposits		1,398			720			3,372			2,050
Federal Funds Purchased		-			-			1			-
Short-Term Borrowings		68			20			473			59
Other Borrowed Funds		128			120			364			361
TOTAL INTEREST EXPENSE		1,594			860			4,210			2,470

NET INTEREST INCOME		10,170			7,353			26,951			21,483
Provision For Loan Losses		25			300			2,125			1,020
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		10,145			7,053			24,826			20,463

NONINTEREST INCOME
Service Fees on Deposit Accounts		866			630			2,176			1,839
Insurance Commissions		920			758			2,731			2,686
Other Commissions		127			125			823			336
Net Gains on Sales of Loans		52			137			106			389
Net Gains on Sales of Investments		-			10			-			132
Fair Value of Equity Securities		35			-			54			-
Net Gains on Purchased Tax Credits		11			14			33			43
Net Loss on Disposal of Fixed Assets		(74	)		-			(74	)		-
Income from Bank-Owned Life Insurance		135			116			370			348
Other		16			28			80			87
TOTAL NONINTEREST INCOME		2,088			1,818			6,299			5,860

NONINTEREST EXPENSE
Salaries and Employee Benefits		4,708			3,512			13,268			10,425
Occupancy		855			526			2,213			1,678
Equipment		786			464			1,916			1,376
FDIC Assessment		67			104			361			267
PA Shares Tax		197			186			593			562
Contracted Services		273			119			583			408
Legal and Professional Fees		171			81			456			324
Advertising		245			197			587			504
Bankcard Processing Expense		180			130			448			384
Other Real Estate Owned (Income) Expense		49			(349	)		37			(343	)
Amortization of Core Deposit Intangible		452			134			986			401
Merger-Related		61			-			854			-
Other		1,321			793			3,224			2,432
TOTAL NONINTEREST EXPENSE		9,365			5,897			25,526			18,418

Income Before Income Taxes		2,868			2,974			5,599			7,905
Income Taxes ⁽¹⁾		576			910			977			2,336
NET INCOME	$	2,292		$	2,064		$	4,622		$	5,569

EARNINGS PER SHARE
Basic	$	0.42		$	0.50		$	0.96		$	1.36
Diluted		0.42			0.50			0.95			1.36

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		5,414,299			4,088,025			4,834,948			4,087,783
Diluted		5,476,792			4,108,723			4,889,553			4,104,157

⁽¹⁾ See Note 1 – Income Taxes for further details on the reduction of the effective tax rate.

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2018			2017			2018			2017

Net Income	$	2,292		$	2,064		$	4,622		$	5,569

Other Comprehensive (Loss) Income:
Unrealized (Losses) Gains on Available-for-Sale Securities Net of Income (Benefit) Tax of ($325) and $5 for the Three Months Ended September 30, 2018 and 2017, Respectively, and ($734) and $314 for the Nine Months Ended September 30, 2018 and 2017, Respectively		(1,224	)		9			(2,715	)		612

Reclassification Adjustment for Gains on Securities:
Included in Net Income, Net of Income Tax of $4 and $45 for the Three and Nine Months Ended September 30, 2017, Respectively ⁽¹⁾		-			(6	)		-			(87	)
Other Comprehensive (Loss) Income, Net of Income (Benefit) Tax		(1,224	)		3			(2,715	)		525
Total Comprehensive Income	$	1,068		$	2,067		$	1,907		$	6,094

(1)

The gross amount of gains on securities of $10 and $132 for the Three and Nine Months Ended September 30, 2017, 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 Loss			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 ($0.66 Per Share)	-		-		-		(2,698	)		-			-			(2,698	)
September 30, 2017	4,363,346	$	1,818	$	42,128	$	54,584		$	(4,722	)	$	(654	)	$	93,154

(Dollars in thousands, except share and per share data)	Shares Issued		Common Stock		Capital Surplus		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders' Equity

December 31, 2017	4,363,346	$	1,818	$	42,089	$	55,280		$	(4,590	)	$	(1,341	)	$	93,256
Comprehensive Income:
Net Income	-		-		-		4,622			-			-			4,622
Other Comprehensive Loss	-		-		-		-			-			(2,715	)		(2,715	)
Equity Securities MTM Adjustment ⁽¹⁾	-		-		-		40			-			(40	)		-
Issuance of Common Stock	1,317,647		549		31,692		9,801			-			-			41,527
(net of issuance expenses of $515)	-		-		-		-			-			-			-
Stock-Based Compensation Expense	-		-		361		-			-			-			361
Exercise of Stock Options	-		-		5		-			208			-			213
Treasury stock purchased, at cost (8,624 shares)	-		-		-		-			(298	)		-			(298	)
Dividends Paid ($0.66 Per Share)	-		-		-		(3,283	)		-			-			(3,283	)
September 30, 2018	5,680,993	$	2,367	$	73,632	$	66,460		$	(4,680	)	$	(4,096	)	$	133,683

⁽¹⁾

Reclassification due to the adoption of ASU 2016-01. See Note 1 for additional information.

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

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
(Dollars in thousands)	2018			2017

OPERATING ACTIVITIES
Net Income	$	4,622		$	5,569
Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities:
Net Amortization on Investments		96			265
Depreciation and Amortization		2,263			1,867
Provision for Loan Losses		2,125			1,020
Unrealized Gain on Equity Securities		(54)			-
Gains on Purchased Tax Credits		33			43
Income from Bank-Owned Life Insurance		(370	)		(348	)
Proceeds From Mortgage Loans Sold		6,434			16,941
Originations of Mortgage Loans for Sale		(6,328	)		(16,552	)
Gains on Sales of Loans		(106	)		(389	)
Gains on Sales of Investment Securities		-			(132	)
Gains on Sales of Other Real Estate Owned and Repossessed Assets		(19	)		(357	)
Noncash Expense for Stock-Based Compensation		361			258
(Increase) Decrease in Accrued Interest Receivable		(996	)		(131	)
Loss on Retirement of Premises and Equipment		74			152
Decrease in Taxes Payable		(954	)		(808	)
Increase in Accrued Interest Payable		191			79
Net Payment of Federal/State Income Taxes		(850	)		(2,355	)
Other, Net		502			4,284
NET CASH PROVIDED BY OPERATING ACTIVITIES		7,024			9,406

INVESTING ACTIVITIES
Investment Securities Available for Sale:
Proceeds From Principal Repayments and Maturities		11,624			11,683
Purchases of Securities		(1,069	)		(32,346	)
Proceeds from Sales of Securities		80,314			11,643
Net Increase in Loans		(63,176	)		(23,413	)
Purchase of Premises and Equipment		(4,529	)		(3,444	)
Proceeds From a Claim on Bank-Owned Life Insurance		950			-
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets		214			357
Decrease (Increase) in Restricted Equity Securities		389			(47	)
Net Cash Received from Acquisition		20,632			-
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		45,349			(35,567	)

FINANCING ACTIVITIES
Net (Decrease) Increase in Deposits		7,927			64,156
Net Decrease in Short-Term Borrowings		(28,056	)		(2,365	)
Principal Payments on Other Borrowed Funds		(3,541	)		(3,500	)
Cash Dividends Paid		(3,283	)		(2,698	)
Treasury Stock, Purchases at Cost		(298	)		24
Exercise of Stock Options		213			7
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(27,038	)		55,624

INCREASE IN CASH AND CASH EQUIVALENTS		25,335			29,463
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR		20,622			14,282
CASH AND DUE FROM BANKS AT END OF PERIOD	$	45,957		$	43,745

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $3,372 and $2,050, respectively)	$	4,019		$	2,390
Income taxes		850			2,355

Real estate acquired in settlement of loans		46			169
Non-cash transaction related to FWVB acquisition		41,527			-

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters” or “EU”). CB Financial and the Bank are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill and intangible assets impairment, and the valuation of deferred tax assets.

In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All 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, 2017. Interim results are not necessarily indicative of results for a full year.

On August 1, 2018, the Bank’s insurance subsidiary, Exchange Underwriters, acquired certain assets from Beynon Insurance (Beynon), headquartered in Pittsburgh, Pennsylvania for approximately $1.8 million. Acquired assets consist primarily of a customer list and certain non-compete consulting contracts. The acquired customer list was recorded on the Company’s balance sheet as an intangible asset included within the “accrued interest and other assets” and expected to be amortized over the average life of the customer list in accordance with U.S. GAAP. Our analysis of the estimated average life for this customer list is approximately 9.5 years and non-compete consulting contract over 6 years. The fair value estimates for the Beynon acquisition are preliminary as the final valuations and/or appraisals are completed. The Company expects to finalize the purchase price allocation of Beynon in the fourth quarter of 2018.

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

Acquired Loans

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

For performing loans acquired in a merger, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. For purchased credit impaired (“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.

Income Taxes

The income tax decrease was primarily due to the enactment of the Tax Cuts and Jobs Act reducing the Federal corporate tax rate from 34% to 21% effective January 1, 2018, and tax-exempt bank-owned life insurance proceeds which was a discrete item and reduced the expected 2018 effective tax rate of 18.9% to 17.4% at September 30, 2018, compared to 29.6% at September 30, 2017.

Recognition of a Prior Period Error

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

As a result of this error, the Company’s 2017 results were overstated by $237,000 and the Company’s March 31, 2018 quarterly and nine months ended September 30, 2018 results were understated by the same amount. Management of the Company concluded the effect of the error was immaterial to the Company’s 2017 results as well as estimated annual results for 2018.

Reclassifications

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

Recent Accounting Standards

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

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 amendments simplify the accounting for certain financial instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered and will also recognize the effect of the trigger within equity. ASU 2017-11 is effective for 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 adopted the provisions of ASU 2017-10 as of January 1, 2018, and its adoption did 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 adopted the provisions of ASU 2017-09 as of January 1, 2018, and its adoption did not have a material impact on the Company's consolidated financial condition or results of operations.

In March 2017, the FASB issued ASU 2017-08, Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchases of Callable Debt Securities. ASU 2017-08 amends guidance on the amortization period of premiums on certain purchases of callable debt securities. The amendments shorten the amortization period of premiums on certain purchases of callable debt securities to the earliest call date. ASU 2017-08 is effective for 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 2017-08 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 adopted the provisions of ASU 2016-15 as of January 1, 2018, and the adoption did not have a material impact on the Company's consolidated financial condition or results of operations.

In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 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 February 2016, the FASB issued 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 adopted the provisions of ASU 2016-01 effective in the first quarter of 2018. Its adoption did not have a material impact on the Company's consolidated financial condition or results of operations. As of January 1, 2018, there was a one-time $40,000 cumulative fair value adjustment that was reclassified within the September 30, 2018, Statement of Stockholders’ Equity. The fair value adjustments recognized for equity securities were gains of $35,000 and $54,000 for the three and nine months ended September 30, 2018, respectively. This fair value adjustment will fluctuate between reporting periods and is based on market conditions.

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. The guidance is effective for the Company’s financial statements beginning January 1, 2018.

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing a gain (loss) from the transfer of nonfinancial assets, such as OREO. The Company adopted the ASC 2014-09 using the modified retrospective approach. The majority of the Company’s revenues are derived from interest income and other sources, including loans, leases, securities and derivatives that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within non-interest income and non-interest expense, and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include services fees on deposits accounts, interchange income, insurance commissions, other commissions, and the sale of OREO. Refer to Note 4 – Revenue Recognition from Contracts with Customers for further discussion on the Company’s accounting policies for revenue sources within the scope of ASC 606.

Note 2. Merger

On November 16, 2017, the Company entered into a definitive merger agreement with First West Virginia Bancorp, Inc. (“FWVB”), the holding company for Progressive Bank, N.A. (“PB”), a national association. The FWVB merger was completed effective April 30, 2018, following the receipt of shareholder and regulatory approvals and the satisfaction of other customary closing conditions. In addition, effective April 30, 2018, PB merged into the Bank. The FWVB merger enhanced the Bank’s exposure into the core of the PA-WV-OH Tri-State region. Through the FWVB merger, the Company anticipates future revenue and earnings growth from an expanded menu of financial services expanding the Company’s business footprint into the Ohio Valley. The FWVB merger resulted in the addition of eight branches and expanded the Company’s reach into West Virginia with seven branches and one branch in Eastern Ohio. The FWVB merger value was approximately $51.3 million. In connection with the FWVB merger, the Company issued 1,317,647 shares of common stock based on the Company’s closing stock price on April 30, 2018, of $31.9068, and paid cash consideration of $9.8 million in exchange for all the outstanding shares of FWVB common stock.

Merger-related expenses are recorded in the Consolidated Statement of Income and include costs relating to the Company’s acquisition of FWVB, as described above. These charges represent one-time costs associated with acquisition activities and do not represent ongoing costs of the fully integrated combined organization. Accounting guidance requires that acquisition-related transactional and restructuring costs incurred by the Company be charged to expense as incurred. There were approximately $1.3 million of cumulative merger-related expenses, of which $61,000 and $854,000, were recorded in the Consolidated Statement of Income for the three and nine months ended September 30, 2018, respectively.

As of the date of merger, FWVB had approximately $334.0 million of assets, $96.8 million of loans, and $282.9 million of deposits held across a network of 8 branches located in West Virginia and eastern Ohio. The Company stockholders and FWVB stockholders now own approximately 76% and 24% of the combined company, respectively.

The FWVB merger was accounted for as an acquisition in accordance with the acquisition method of accounting as detailed in Accounting Standards Codification ("ASC") 805, Business Combinations. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed based on their fair values as of the date of acquisition. This process is heavily reliant on measuring and estimating the fair values of all the assets and liabilities of the acquired entity. To the extent we did not have the requisite expertise to determine the fair values of the assets acquired and liabilities assumed, we engaged third-party valuation specialists to assist us in determining such values. The preliminary results of the fair value evaluation generated goodwill and intangible assets. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual obligations or other legal rights.

The assets acquired and liabilities assumed of FWVB were recorded on the Company’s Consolidated Statement of Financial Condition at their estimated fair values as of April 30, 2018. Due to the timing of the acquisition relative to the end of the reporting period, the fair values for certain assets and liabilities acquired from FWVB on April 30, 2018, represented preliminary estimates previously reported as of June 30, 2018. Since then, the Company received additional information and adjusted previously estimated fair values associated with the acquisition. These adjustments were primarily related to property and equipment based on updated appraisals, core deposit intangible and deferred taxes.

The fair value estimates for loans, deferred taxes and other liabilities have continued to fluctuate as the final valuations and/or appraisals are completed. The Company expects to finalize the purchase price accounts of FWVB within one year of the date of acquisition.

None of the goodwill is deductible for income tax purposes, as the acquisition is accounted for as a tax-free exchange for tax purposes.

The fair value of the assets acquired and liabilities assumed in the FWVB merger were as follows (dollars in thousands):

Consideration Paid:
Cash Paid for Redemption of FWVB Common Stock	$	9,801
CB Financial Common Stock Issued in Exchange for FWVB Common Stock		41,527
Total Consideration Paid		51,328

Assets Acquired:
Cash and Cash Equivalents		30,433
Net Loans		95,456
Investment Securities		187,628
Premises and Equipment		3,712
Bank Owned Life Insurance		4,212
Core Deposit Intangible		9,127
Deferred Tax Assets		2,497
Other Assets		3,030
Total Assets Acquired		336,095

Liabilities Assumed:
Deposits		281,620
Borrowings		22,329
Other Liabilities		2,935
Total Liabilities Assumed		306,884
Total Identifiable Net Assets		29,211
Goodwill Recognized	$	22,117

As part of the FWVB merger, the Company identified employees from FWVB who would be retained and estimated a severance cost of $100,000 if those employees were terminated without cause within the first year of the merger.

The operating results of FWVB have been included in the Company’s Consolidated Statement of Income since the April 30, 2018, acquisition date. Total income of the acquired operations of FWVB consisted of net interest income of approximately $4.6 million, noninterest income of approximately $388,000, noninterest expense of approximately $3.8 million and net income of approximately $961,000 from May 1, 2018 through September 30, 2018.

The following unaudited combined pro forma information presents the operating results for the nine months ended September 30, 2018, and year ended December 31, 2017, as if the FWVB acquisition had occurred on January 1, 2017. The pro forma results have been prepared for comparative purposes only and require significant estimates and judgments. As a result, they are not necessarily indicative of the results that would have been obtained had the FWVB merger actually occurred on January 1, 2017 nor are they intended to be indicative of future results of operations (dollars in thousands, except per share data).

		Nine Months Ended September 30, 2018		Year Ended December 31, 2017
Net Interest Income	$	30,631	$	37,944
Noninterest Income		6,609		8,779
Noninterest Expense		30,362		33,733
Net Income		5,365		8,444

Earnings Per Share:
Basic	$	1.11	$	1.75
Diluted		1.10		1.73

Note 3. 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,
	2018			2017			2018			2017
Weighted-Average Common Shares Outstanding		5,680,993			4,363,346			5,101,808			4,363,346
Average Treasury Stock Shares		(266,694	)		(275,321	)		(266,860	)		(275,563	)
Weighted-Average Common Shares and Common Stock
Equivalents Used to Calculate Basic Earnings Per Share		5,414,299			4,088,025			4,834,948			4,087,783
Additional Common Stock Equivalents (Stock Options and Restricted Stock) Used to Calculate Diluted Earnings Per Share		62,493			20,698			54,605			16,374
Weighted-Average Common Shares and Common Stock
Equivalents Used to Calculate Diluted Earnings Per Share		5,476,792			4,108,723			4,889,553			4,104,157

Earnings per share:
Basic	$	0.42		$	0.50		$	0.96		$	1.36
Diluted		0.42			0.50			0.95			1.36

Note 4. Revenue Recognition from Contracts with Customers

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior periods amounts continue to be reported in accordance with legacy GAAP. The adoption of ASC 606 resulted in a change in recognition of revenue for insurance commissions. There were no changes in the accounting for all other in-scope revenue streams.

The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

The following table below presents ASC 606 in-scope revenue streams and the impact of the accounting standard at the date indicted:

	(Dollars in thousands)
	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	As reported		Under Legacy GAAP		Impact of ASC 606		As reported		Under Legacy GAAP		Impact of ASC 606
NONINTEREST INCOME
Service Fees on Deposit Accounts	$	866	$	866	$	-	$	2,176	$	2,176	$	-
Insurance Commissions		920		894		26		2,731		2,629		102
Other Commissions		127		127		-		823		823		-
Other		16		16		-		80		80		-
Total		1,929		1,903		26		5,810		5,708		102

NONINTEREST EXPENSE
Other Real Estate Owned Expense		49		49		-		37		37		-
Total		49		49		-		37		37		-

Net Impact		1,978		1,952		26		5,847		5,745		102

Income Tax Expense	$	415	$	410	$	5	$	1,228	$	1,206	$	21

Net Income	$	2,292	$	2,271	$	21	$	4,622	$	4,541	$	81

Basic earnings per share	$	0.42	$	0.42	$	0.00	$	0.96	$	0.94	$	0.02
Diluted earnings per share	$	0.42	$	0.41	$	0.01	$	0.95	$	0.93	$	0.02

All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income with the exception of Other Real Estate Owned Expense (Income), which is accounted for in Non-Interest Expense. The following table presents the Company’s sources of Non-Interest Income and Expense as of the date indicated:

	(Dollars in thousands)
	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018

NONINTEREST INCOME
Service Fees on Deposit Accounts ^(a)	$	866		$	2,176
Insurance Commissions		920			2,731
Other Commissions ^(c)		127			823
Net Gains on Sales of Loans ^(b)		52			106
Net Gains on Sales of Investments ^(b)		-			-
Fair Value of Equity Securities ^(b)		35			54
Net Gains on Purchased Tax Credits ^(b)		11			33
Net Loss on Disposal of Fixed Assets ^(b)		(74	)		(74	)
Income from Bank-Owned Life Insurance ^(b)		135			370
Other ^(b)		16			80
Total non-interest income		2,088			6,299

NONINTEREST EXPENSE
Other Real Estate Owned Expense		49			37
Total non-interest expense		49			37

Net non-interest income	$	2,039		$	6,262

(a)

Interchange fees and ATM fees are included within this line item.

(b)

Not within the scope of ASC 606.

(c)

The Other Commissions category includes wealth management referral fees, check sales and safety deposit box rentals totaling $127,000 and $336,000 for the three and nine months ended September 30, 2018, which is in the scope of ASC 606; the remaining balance of $487,000 for the nine months ended September 30, 2018, mainly represents income derived from an assumable rate conversion (“ARC”) loan referral fee and a bank-owned life insurance policy claim for the nine months ended September 30, 2018, which are outside the scope of ASC 606. The following narrative describes the Company’s revenue streams accounted for under the guidance of ASC 606 as follows:

Service Fees on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees include services fees for ATM uses, stop payment charges, statement production, ACH and wire fees, which are recognized into income at the occurrence of an executed transaction and the point in time the Company fulfills the customer’s request. Account maintenance fees, which are primarily based on monthly maintenance activities, are earned over the course of the month, and satisfy the Company’s performance obligation. Overdraft fees are recognized as the overdrafts on customer’s accounts are incurred. The services fees on deposit accounts are automatically withdrawn from the customer’s accounts balance per their account agreement with the Company.

Interchange Fees: The Company earns interchange fees from debit/credit cardholder transactions conducted through the MasterCard network for our debit cards and through the Visa network for our credit cards. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The Company currently does not offer a cardholder rewards program.

Insurance Commissions: The Company’s insurance subsidiary, Exchange Underwriters, derives commission and fee income from direct and agency bill insurance policies. Direct bill policies are invoiced directly from the insurance company provider to the customer, once the customer remits payment for the policy, the insurance company provider then remits the commission or fee income to EU on a monthly basis. Agency bill policies are invoiced from EU, the insurance underwriting agency, to the customer. EU records the insurance company policy payable and the commission or fee income earned on the policy. As all insurance policies are contracts with customers, each policy has different terms and conditions.

EU utilizes a report from their core insurance data processing program, The Agency Manager, otherwise known as “TAM”. The report from TAM captures all in force policies that are active in the system and annualizes the commission over the life of each individual contract. The report then provides an overall commission and fee income total for the monthly reporting financial statement period. This income is then compared to the amount of direct and agency bill income recorded in TAM for the reporting month and an adjustment to income is made according to the report and this is the income recognized for the portion of the insurance contract that has been earned by EU and subsequently the Company.

Other Commissions: The Company earns other commissions, such as, wealth management referral fees, check sales and safety deposit box rentals to customers. The wealth management referral fees are earned as a referral of a bank customer initiates a customer relationship with an associated wealth management firm. These fees fulfill the contract/agreement between the Company and the wealth management firm. Check sales are recognized as customers contact the Company for check supplies or the customer initiates the check order through the Company website to our third party check company. These commissions are recognized as the third party check company satisfies the contract of providing check stock to our customers. Safety deposit box rental income is recognized on a monthly basis, per each contract agreement with our customers. The safety deposit box income is automatically withdrawn from the customer’s deposit account on a monthly basis as this revenue is earned by the contract.

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. It is not common policy that the Company will finance an OREO property with the buyer. It is the Company’s belief that once loan collateral has been recognized as an OREO property, it needs to be sold to free the Company of any additional possible loss exposure.

Note 5. 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, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

U.S. Government Agencies	$	82,487	$	4	$	(3,286	)	$	79,205
Obligations of States and Political Subdivisions		46,048		68		(943	)		45,173
Mortgage-Backed Securities - Government-Sponsored Enterprises		90,939		35		(1,066	)		89,908
Equity Securities - Mutual Funds		1,000		-		(41	)		959
Equity Securities - Other		1,470		142		(27	)		1,585
Total	$	221,944	$	249	$	(5,363	)	$	216,830

	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

U.S. Government Agencies	$	67,603	$	-	$	(1,715	)	$	65,888
Obligations of States and Political Subdivisions		38,867		255		(134	)		38,988
Mortgage-Backed Securities - Government-Sponsored Enterprises		17,123		-		(145	)		16,978
Equity Securities - Mutual Funds		500		3		-			503
Equity Securities - Other		1,188		52		(14	)		1,226
Total	$	125,281	$	310	$	(2,008	)	$	123,583

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, 2018
	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		7	$	18,746	$	(375	)		21	$	56,639	$	(2,911	)		28	$	75,385	$	(3,286	)
Obligations of States and Political Subdivisions		57		26,595		(646	)		15		7,543		(297	)		72		34,138		(943	)
Mortgage-Backed Securities - Government Sponsored Enterprises		40		78,046		(777	)		4		7,578		(289	)		44		85,624		(1,066	)
Equity Securities - Mutual Fund		2		959		(41	)		-		-		-			2		959		(41	)
Equity Securities - Other		5		500		(22	)		1		55		(5	)		6		555		(27	)
Total		111	$	124,846	$	(1,861	)		41	$	71,815	$	(3,502	)		152	$	196,661	$	(5,363	)

	December 31, 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		7	$	23,805	$	(223	)		16	$	42,083	$	(1,492	)		23	$	65,888	$	(1,715	)
Obligations of States and Political Subdivisions		20		10,061		(47	)		9		4,397		(87	)		29		14,458		(134	)
Mortgage-Backed Securities - Government Sponsored Enterprises		9		16,978		(145	)		-		-		-			9		16,978		(145	)
Equity Securities - Other		5		458		(7	)		1		53		(7	)		6		511		(14	)
Total		41	$	51,302	$	(422	)		26	$	46,533	$	(1,586	)		67	$	97,835	$	(2,008	)

For debt securities, the Company does not believe that any individual unrealized loss as of September 30, 2018 or December 31, 2017 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, 2018 and December 31, 2017 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.

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

	(Dollars in thousands)
	September 30, 2018
	Available-for-Sale
		Amortized Cost		Fair Value
Due in One Year or Less	$	2,539	$	2,574
Due after One Year through Five Years		56,528		54,578
Due after Five Years through Ten Years		68,447		66,414
Due after Ten Years		94,430		93,264
Total	$	221,944	$	216,830

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.

Note 6. 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, 2018						December 31, 2017
	Amount			Percent			Amount			Percent
Originated Loans
Real Estate:
Residential	$	224,248			32.0	%	$	200,486			32.6	%
Commercial		220,341			31.5			160,235			26.1
Construction		41,006			5.9			36,149			5.9
Commercial and Industrial		87,674			12.5			100,294			16.3
Consumer		115,744			16.5			114,358			18.6
Other		11,536			1.6			3,376			0.5
Total Originated Loans		700,549			100.0	%		614,898			100.0	%
Allowance for Loan Losses		(8,672	)					(8,215	)
Loans, Net	$	691,877					$	606,683

Loans Acquired at Fair Value
Real Estate:
Residential	$	95,116			47.4	%	$	72,952			56.3	%
Commercial		78,001			38.9			48,802			37.7
Construction		3,402			1.7			-			0.0
Commercial and Industrial		16,267			8.1			7,541			5.8
Consumer		2,756			1.4			199			0.2
Other		5,057			2.5			-			0.0
Total Loans Acquired at Fair Value		200,599			100.0	%		129,494			100.0	%
Allowance for Loan Losses		(613	)					(581	)
Loans, Net	$	199,986					$	128,913

Total Loans
Real Estate:
Residential	$	319,364			35.4	%	$	273,438			36.7	%
Commercial		298,342			33.1			209,037			28.1
Construction		44,408			5.1			36,149			4.9
Commercial and Industrial		103,941			11.5			107,835			14.5
Consumer		118,500			13.1			114,557			15.4
Other		16,593			1.8			3,376			0.4
Total Loans		901,148			100.0	%		744,392			100.0	%
Allowance for Loan Losses		(9,285	)					(8,796	)
Loans, Net	$	891,863					$	735,596

Total unamortized net deferred loan fees were $1.0 million and $808,000 at September 30, 2018 and December 31, 2017, respectively.

Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $98.9 million and $95.4 million at September 30, 2018 and December 31, 2017, respectively.

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, 2018 and December 31, 2017, there were no loans in the criticized category of Loss within the internal risk rating system.

	(Dollars in thousands)
	September 30, 2018
		Pass		Special Mention		Substandard		Doubtful		Total
Originated Loans
Real Estate:
Residential	$	222,613	$	1,092	$	543	$	-	$	224,248
Commercial		208,197		10,059		2,085		-		220,341
Construction		37,689		2,902		415		-		41,006
Commercial and Industrial		76,858		8,409		1,565		842		87,674
Consumer		115,694		-		50		-		115,744
Other		11,536		-		-		-		11,536
Total Originated Loans	$	672,587	$	22,462	$	4,658	$	842	$	700,549

Loans Acquired at Fair Value
Real Estate:
Residential	$	93,439	$	858	$	819	$	-	$	95,116
Commercial		72,750		4,766		485		-		78,001
Construction		3,402		-		-		-		3,402
Commercial and Industrial		16,251		-		16		-		16,267
Consumer		2,756		-		-		-		2,756
Other		4,952		105		-		-		5,057
Total Loans Acquired at Fair Value	$	193,550	$	5,729	$	1,320	$	-	$	200,599

Total Loans
Real Estate:
Residential	$	316,052	$	1,950	$	1,362	$	-	$	319,364
Commercial		280,947		14,825		2,570		-		298,342
Construction		41,091		2,902		415		-		44,408
Commercial and Industrial		93,109		8,409		1,581		842		103,941
Consumer		118,450		-		50		-		118,500
Other		16,488		105		-		-		16,593
Total Loans	$	866,137	$	28,191	$	5,978	$	842	$	901,148

	December 31, 2017
		Pass		Special Mention		Substandard		Doubtful		Total
Originated Loans
Real Estate:
Residential	$	198,869	$	1,031	$	586	$	-	$	200,486
Commercial		143,824		13,161		2,716		534		160,235
Construction		35,571		-		535		43		36,149
Commercial and Industrial		84,910		11,460		2,589		1,335		100,294
Consumer		114,287		-		71		-		114,358
Other		3,376		-		-		-		3,376
Total Originated Loans	$	580,837	$	25,652	$	6,497	$	1,912	$	614,898

Loans Acquired at Fair Value
Real Estate:
Residential	$	71,176	$	-	$	1,776	$	-	$	72,952
Commercial		43,297		5,004		501		-		48,802
Commercial and Industrial		7,270		5		189		77		7,541
Consumer		199		-		-		-		199
Total Loans Acquired at Fair Value	$	121,942	$	5,009	$	2,466	$	77	$	129,494

Total Loans
Real Estate:
Residential	$	270,045	$	1,031	$	2,362	$	-	$	273,438
Commercial		187,121		18,165		3,217		534		209,037
Construction		35,571		-		535		43		36,149
Commercial and Industrial		92,180		11,465		2,778		1,412		107,835
Consumer		114,486		-		71		-		114,557
Other		3,376		-		-		-		3,376
Total Loans	$	702,779	$	30,661	$	8,963	$	1,989	$	744,392

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, 2018
		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	$	223,246	$	229	$	-	$	18	$	247	$	755	$	224,248
Commercial		220,290		51		-		-		51		-		220,341
Construction		41,006		-		-		-		-		-		41,006
Commercial and Industrial		85,607		880		94		41		1,015		1,052		87,674
Consumer		115,694		-		-		-		-		50		115,744
Other		11,536		-		-		-		-		-		11,536
Total Originated Loans	$	697,379	$	1,160	$	94	$	59	$	1,313	$	1,857	$	700,549

Loans Acquired at Fair Value
Real Estate:
Residential	$	93,401	$	141	$	338	$	-	$	479	$	1,236	$	95,116
Commercial		75,347		1,655		80		-		1,735		919		78,001
Construction		3,366		20		-		-		20		16		3,402
Commercial and Industrial		16,264		3		-		-		3		-		16,267
Consumer		2,592		-		164		-		164		-		2,756
Other		5,057		-		-		-		-		-		5,057
Total Loans Acquired at Fair Value	$	196,027	$	1,819	$	582	$	-	$	2,401	$	2,171	$	200,599

Total Loans
Real Estate:
Residential	$	316,647	$	370	$	338	$	18	$	726	$	1,991	$	319,364
Commercial		295,637		1,706		80		-		1,786		919		298,342
Construction		44,372		20		-		-		20		16		44,408
Commercial and Industrial		101,871		883		94		41		1,018		1,052		103,941
Consumer		118,286		-		164		-		164		50		118,500
Other		16,593		-		-		-		-		-		16,593
Total Loans	$	893,406	$	2,979	$	676	$	59	$	3,714	$	4,028	$	901,148

	December 31, 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	$	198,564	$	1,088	$	310	$	-	$	1,398	$	524	$	200,486
Commercial		159,947		-		-		-		-		288		160,235
Construction		36,106		-		-		-		-		43		36,149
Commercial and Industrial		96,863		125		1,227		-		1,352		2,079		100,294
Consumer		112,965		1,142		154		26		1,322		71		114,358
Other		3,376		-		-		-		-		-		3,376
Total Originated Loans	$	607,821	$	2,355	$	1,691	$	26	$	4,072	$	3,005	$	614,898

Loans Acquired at Fair Value
Real Estate:
Residential	$	71,333	$	398	$	180	$	142	$	720	$	899	$	72,952
Commercial		48,802		-		-		-		-		-		48,802
Commercial and Industrial		7,448		77		-		-		77		16		7,541
Consumer		199		-		-		-		-		-		199
Total Loans Acquired at Fair Value	$	127,782	$	475	$	180	$	142	$	797	$	915	$	129,494

Total Loans
Real Estate:
Residential	$	269,897	$	1,486	$	490	$	142	$	2,118	$	1,423	$	273,438
Commercial		208,749		-		-		-		-		288		209,037
Construction		36,106		-		-		-		-		43		36,149
Commercial and Industrial		104,311		202		1,227		-		1,429		2,095		107,835
Consumer		113,164		1,142		154		26		1,322		71		114,557
Other		3,376		-		-		-		-		-		3,376
Total Loans	$	735,603	$	2,830	$	1,871	$	168	$	4,869	$	3,920	$	744,392

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, 2018			December 31, 2017
Nonaccrual Loans:
Originated Loans:
Real Estate:
Residential	$	755		$	524
Commercial		-			288
Construction		-			43
Commercial and Industrial		1,052			2,079
Consumer		50			71
Total Originated Nonaccrual Loans		1,857			3,005

Loans Acquired at Fair Value:
Real Estate:
Residential		1,236			899
Commercial		919			-
Construction		16			-
Commercial and Industrial		-			16
Total Loans Acquired at Fair Value Nonaccrual Loans		2,171			915
Total Nonaccrual Loans		4,028			3,920

Accruing Loans Past Due 90 Days or More:
Originated Loans:
Real Estate:
Residential		18			-
Commercial and Industrial		41			-
Consumer		-			26
Total Originated Accruing Loans 90 Days or More Past Due		59			26

Loans Acquired at Fair Value:
Real Estate:
Residential		-			142
Total Loans Acquired at Fair Value Accruing Loans 90 Days or More Past Due		-			142
Total Accruing Loans 90 Days or More Past Due		59			168
Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due		4,087			4,088

Troubled Debt Restructurings, Accruing:
Originated Loans:
Real Estate - Residential		27			30
Real Estate - Commercial		994			1,271
Commercial and Industrial		165			5
Other		-			1
Total Originated Loans		1,186			1,307
Loans Acquired at Fair Value:
Real Estate - Residential		1,224			1,257
Real Estate - Commercial		332			426
Commercial and Industrial		-			173
Total Loans Acquired at Fair Value		1,556			1,856
Total Troubled Debt Restructurings, Accruing		2,742			3,163

Total Nonperforming Loans		6,829			7,251

Real Estate Owned:
Residential		46			152
Commercial		871			174
Total Real Estate Owned		917			326

Total Nonperforming Assets	$	7,746		$	7,577

Nonperforming Loans to Total Loans		0.76	%		0.97	%
Nonperforming Assets to Total Assets		0.62			0.81

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 $805,000 and $1.5 million at September 30, 2018 and December 31, 2017, 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 13 loans totaling $3.7 million and 16 loans totaling $4.5 million at September 30, 2018 and December 31, 2017, respectively. Originated loans classified as TDRs consisted of six loans totaling $2.1 million and eight loans totaling $2.6 million at September 30, 2018 and December 31, 2017, respectively. Loans acquired at fair value classified as TDRs consisted of seven loans totaling $1.6 million and eight loans totaling $1.9 million at September 30, 2018 and December 31, 2017, respectively.

During the three months ended September 30, 2018, one originated commercial real estate TDR loan paid off.

During the nine months ended September 30, 2018, one originated commercial and industrial TDR loan was fully charged-off due to declining updated financial information, one originated consumer loan previously identified as a TDR paid off and one commercial and industrial loan previously identified as an acquired loan at fair value TDR paid off.

During the three months ended September 30, 2018, there were no loans modified in a TDR transaction. For the nine months ended September 30, 2018, one originated commercial and industrial line of credit loan entered into a TDR transaction and was termed-out due to declining updated financial information and one acquired loan at fair value TDR for residential real estate was due to the FWVB merger. During the three and nine months ended September 30, 2017, one residential real estate loan modified terms in a new TDR transaction.

No TDRs subsequently defaulted during the three and nine months ended September 30, 2018 and 2017, respectively.

The following table presents information at the time of modification related to loans modified in a TDR during the nine months ended September 30, 2018, and three and nine months ended September 30, 2017.

	(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	$	-

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

Loans Acquired at Fair Value
Real Estate
Residential	1	$	7	$	7	$	-
Total	1	$	7	$	7	$	-

	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	$	-

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

	(Dollars in thousands)
	September 30, 2018
		Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Originated Loans
Real Estate:
Residential	$	74	$	-	$	77	$	84	$	3
Commercial		1,801		-		1,801		1,969		67
Construction		415		-		415		487		20
Commercial and Industrial		1,582		-		1,594		1,611		52
Total With No Related Allowance Recorded	$	3,872	$	-	$	3,887	$	4,151	$	142

Loans Acquired at Fair Value
Real Estate:
Residential	$	1,228	$	-	$	1,228	$	1,243	$	47
Commercial		3,393		-		3,393		2,133		86
Total With No Related Allowance Recorded	$	4,621	$	-	$	4,621	$	3,376	$	133

Total Loans
Real Estate:
Residential	$	1,302	$	-	$	1,305	$	1,327	$	50
Commercial		5,194		-		5,194		4,102		153
Construction		415		-		415		487		20
Commercial and Industrial		1,582		-		1,594		1,611		52
Other		-		-		-		-		-
Total With No Related Allowance Recorded	$	8,493	$	-	$	8,508	$	7,527	$	275

With A Related Allowance Recorded:
Originated Loans
Real Estate:
Commercial	$	639	$	185	$	639	$	646	$	27
Commercial and Industrial		991		605		1,084		1,100		44
Total With A Related Allowance Recorded	$	1,630	$	790	$	1,723	$	1,746	$	71

Loans Acquired at Fair Value
Real Estate:
Commercial	$	46	$	11	$	46	$	24	$	3
Commercial and Industrial		16		6		17		17		-
Total With A Related Allowance Recorded	$	62	$	17	$	63	$	41	$	3

Total Loans
Real Estate:
Commercial	$	685	$	196	$	685	$	670	$	30
Commercial and Industrial		1,007		611		1,101		1,117		44
Total With A Related Allowance Recorded	$	1,692	$	807	$	1,786	$	1,787	$	74

	September 30, 2018 (cont.)
		Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
Total Impaired Loans:
Originated Loans
Real Estate:
Residential	$	74	$	-	$	77	$	84	$	3
Commercial		2,440		185		2,440		2,615		94
Construction		415		-		415		487		20
Commercial and Industrial		2,573		605		2,678		2,711		96
Other		-		-		-		-		-
Total Impaired Loans	$	5,502	$	790	$	5,610	$	5,897	$	213

Loans Acquired at Fair Value
Real Estate:
Residential	$	1,228	$	-	$	1,228	$	1,243	$	47
Commercial		3,439		11		3,439		2,157		89
Construction		-		-		-		-		-
Commercial and Industrial		16		6		17		17		-
Other		-		-		-		-		-
Total Impaired Loans	$	4,683	$	17	$	4,684	$	3,417	$	136

Total Loans
Real Estate:
Residential	$	1,302	$	-	$	1,305	$	1,327	$	50
Commercial		5,879		196		5,879		4,772		183
Construction		415		-		415		487		20
Commercial and Industrial		2,589		611		2,695		2,728		96
Other		-		-		-		-		-
Total Impaired Loans	$	10,185	$	807	$	10,294	$	9,314	$	349

	December 31, 2017
		Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Originated Loans
Real Estate:
Residential	$	89	$	-	$	91	$	114	$	4
Commercial		2,142		-		2,142		2,297		104
Construction		578		-		578		629		26
Commercial and Industrial		1,002		-		1,002		1,058		28
Other		1		-		1		3		-
Total With No Related Allowance Recorded	$	3,812	$	-	$	3,814	$	4,101	$	162

Loans Acquired at Fair Value
Real Estate:
Residential	$	1,257	$	-	$	1,257	$	1,278	$	65
Commercial		927		-		927		965		51
Commercial and Industrial		189		-		189		320		12
Total With No Related Allowance Recorded	$	2,373	$	-	$	2,373	$	2,563	$	128

Total Loans
Real Estate:
Residential	$	1,346	$	-	$	1,348	$	1,392	$	69
Commercial		3,069		-		3,069		3,262		155
Construction		578		-		578		629		26
Commercial and Industrial		1,191		-		1,191		1,378		40
Other		1		-		1		3		-
Total With No Related Allowance Recorded	$	6,185	$	-	$	6,187	$	6,664	$	290

With A Related Allowance Recorded:
Originated Loans
Real Estate:
Commercial	$	1,480	$	351	$	1,480	$	1,509	$	65
Commercial and Industrial		2,927		1,264		3,019		3,346		159
Total With A Related Allowance Recorded	$	4,407	$	1,615	$	4,499	$	4,855	$	224

Loans Acquired at Fair Value
Real Estate:
Commercial and Industrial	$	77	$	3	$	77	$	98	$	4
Total With A Related Allowance Recorded	$	77	$	3	$	77	$	98	$	4

Total Loans
Real Estate:
Commercial	$	1,480	$	351	$	1,480	$	1,509	$	65
Commercial and Industrial		3,004		1,267		3,096		3,444		163
Total With A Related Allowance Recorded	$	4,484	$	1,618	$	4,576	$	4,953	$	228

	December 31, 2017 (cont.)
		Recorded Investment		Related Allowance		Unpaid Principal Balance		Average Recorded Investment		Interest Income Recognized
Total Impaired Loans
Originated Loans
Real Estate:
Residential	$	89	$	-	$	91	$	114	$	4
Commercial		3,622		351		3,622		3,806		169
Construction		578		-		578		629		26
Commercial and Industrial		3,929		1,264		4,021		4,404		187
Other		1		-		1		3		-
Total Impaired Loans	$	8,219	$	1,615	$	8,313	$	8,956	$	386

Loans Acquired at Fair Value
Real Estate:
Residential	$	1,257	$	-	$	1,257	$	1,278	$	65
Commercial		927		-		927		965		51
Commercial and Industrial		266		3		266		418		16
Total Impaired Loans	$	2,450	$	3	$	2,450	$	2,661	$	132

Total Loans
Real Estate:
Residential	$	1,346	$	-	$	1,348	$	1,392	$	69
Commercial		4,549		351		4,549		4,771		220
Construction		578		-		578		629		26
Commercial and Industrial		4,195		1,267		4,287		4,822		203
Other		1		-		1		3		-
Total Impaired Loans	$	10,669	$	1,618	$	10,763	$	11,617	$	518

The following table presents the activity in the allowance for loan losses summarized by major classifications and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.

	(Dollars in thousands)
	September 30, 2018
		Real Estate Residential			Real Estate Commercial			Real Estate Construction		Commercial and Industrial			Consumer			Other		Unallocated			Total
Originated Loans
June 30, 2018	$	863		$	2,311		$	259	$	2,799		$	2,130		$	-	$	336		$	8,698
Charge-offs		-			-			-		-			(126	)		-		-			(126	)
Recoveries		4			22			-		1			48			-		-			75
Provision		78			(12	)		96		(43	)		(72	)		-		(22	)		25
September 30, 2018	$	945		$	2,321		$	355	$	2,757		$	1,980		$	-	$	314		$	8,672

Loans Acquired at Fair Value
June 30, 2018	$	-		$	493		$	-	$	119		$	-		$	-	$	61		$	673
Charge-offs		(4	)		-			-		(58	)		-			-		-			(62	)
Recoveries		-			1			-		-			1			-		-			2
Provision		4			1			-		39			(1	)		-		(43	)		-
September 30, 2018	$	-		$	495		$	-	$	100		$	-		$	-	$	18		$	613

Total Allowance for Loan Losses
June 30, 2018	$	863		$	2,804		$	259	$	2,918		$	2,130		$	-	$	397		$	9,371
Charge-offs		(4	)		-			-		(58	)		(126	)		-		-			(188	)
Recoveries		4			23			-		1			49			-		-			77
Provision		82			(11	)		96		(4	)		(73	)		-		(65	)		25
September 30, 2018	$	945		$	2,816		$	355	$	2,857		$	1,980		$	-	$	332		$	9,285

Originated Loans
December 31, 2017	$	891		$	1,799		$	276	$	2,461		$	2,358		$	-	$	430		$	8,215
Charge-offs		(27	)		-			-		(1,398	)		(424	)		-		-			(1,849	)
Recoveries		16			40			-		4			120			-		-			180
Provision		65			482			79		1,690			(74	)		-		(116	)		2,126
September 30, 2018	$	945		$	2,321		$	355	$	2,757		$	1,980		$	-	$	314		$	8,672

Loans Acquired at Fair Value
December 31, 2017	$	-		$	490		$	-	$	83		$	-		$	-	$	8		$	581
Charge-offs		(36	)		-			-		(58	)		-			-		-			(94	)
Recoveries		9			115			-		-			3			-		-			127
Provision		27			(110	)		-		75			(3	)		-		10			(1	)
September 30, 2018	$	-		$	495		$	-	$	100		$	-		$	-	$	18		$	613

Total Allowance for Loan Losses
December 31, 2017	$	891		$	2,289		$	276	$	2,544		$	2,358		$	-	$	438		$	8,796
Charge-offs		(63	)		-			-		(1,456	)		(424	)		-		-			(1,943	)
Recoveries		25			155			-		4			123			-		-			307
Provision		92			372			79		1,765			(77	)		-		(106	)		2,125
September 30, 2018	$	945		$	2,816		$	355	$	2,857		$	1,980		$	-	$	332		$	9,285

	September 30, 2018
		Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Unallocated		Total
Originated Loans
Individually Evaluated for Impairment	$	-	$	185	$	-	$	605	$	-	$	-	$	-	$	790
Collectively Evaluated for Potential Impairment	$	945	$	2,136	$	355	$	2,152	$	1,980	$	-	$	314	$	7,882

Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	-	$	11	$	-	$	6	$	-	$	-	$	-	$	17
Collectively Evaluated for Potential Impairment	$	-	$	484	$	-	$	94	$	-	$	-	$	18	$	596

Total Allowance for Loan Losses
Individually Evaluated for Impairment	$	-	$	196	$	-	$	611	$	-	$	-	$	-	$	807
Collectively Evaluated for Potential Impairment	$	945	$	2,620	$	355	$	2,246	$	1,980	$	-	$	332	$	8,478

	December 31, 2017
		Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Unallocated		Total
Originated Loans
Individually Evaluated for Impairment	$	-	$	351	$	-	$	1,264	$	-	$	-	$	-	$	1,615
Collectively Evaluated for Potential Impairment	$	891	$	1,448	$	276	$	1,197	$	2,358	$	-	$	430	$	6,600

Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	-	$	-	$	-	$	3	$	-	$	-	$	-	$	3
Collectively Evaluated for Potential Impairment	$	-	$	490	$	-	$	80	$	-	$	-	$	8	$	578

Total Allowance for Loan Losses
Individually Evaluated for Impairment	$	-	$	351	$	-	$	1,267	$	-	$	-	$	-	$	1,618
Collectively Evaluated for Potential Impairment	$	891	$	1,938	$	276	$	1,277	$	2,358	$	-	$	438	$	7,178

	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

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

		Accretable Discount
Balance at December 31, 2017	$	760
Purchase Accounting Adjustment related to FWVB Merger at April 30, 2018		1,348
Accretable Yield		(240	)
Nonaccretable Discount		5
Balance at September 30, 2018	$	1,873

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, 2018
		Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Total
Originated Loans
Individually Evaluated for Impairment	$	74	$	2,440	$	415	$	2,573	$	-	$	-	$	5,502
Collectively Evaluated for Potential Impairment		224,174		217,901		40,591		85,101		115,744		11,536		695,047
	$	224,248	$	220,341	$	41,006	$	87,674	$	115,744	$	11,536	$	700,549

Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	1,228	$	3,439	$	-	$	16	$	-	$	-	$	4,683
Collectively Evaluated for Potential Impairment		93,888		74,562		3,402		16,251		2,756		5,057		195,916
	$	95,116	$	78,001	$	3,402	$	16,267	$	2,756	$	5,057	$	200,599

Total Loans
Individually Evaluated for Impairment	$	1,302	$	5,879	$	415	$	2,589	$	-	$	-	$	10,185
Collectively Evaluated for Potential Impairment		318,062		292,463		43,993		101,352		118,500		16,593		890,963
	$	319,364	$	298,342	$	44,408	$	103,941	$	118,500	$	16,593	$	901,148

	December 31, 2017
		Real Estate Residential		Real Estate Commercial		Real Estate Construction		Commercial and Industrial		Consumer		Other		Total
Originated Loans
Individually Evaluated for Impairment	$	89	$	3,622	$	578	$	3,929	$	-	$	1	$	8,219
Collectively Evaluated for Potential Impairment		200,397		156,613		35,571		96,365		114,358		3,375		606,679
	$	200,486	$	160,235	$	36,149	$	100,294	$	114,358	$	3,376	$	614,898

Loans Acquired at Fair Value
Individually Evaluated for Impairment	$	1,257	$	927	$	-	$	266	$	-	$	-	$	2,450
Collectively Evaluated for Potential Impairment		71,695		47,875		-		7,275		199		-		127,044
	$	72,952	$	48,802	$	-	$	7,541	$	199	$	-	$	129,494

Total Loans
Individually Evaluated for Impairment	$	1,346	$	4,549	$	578	$	4,195	$	-	$	1	$	10,669
Collectively Evaluated for Potential Impairment		272,092		204,488		35,571		103,640		114,557		3,375		733,723
	$	273,438	$	209,037	$	36,149	$	107,835	$	114,557	$	3,376	$	744,392

Note 7. 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, 2018
One Year or Less	$	104,427
Over One Through Two Years		49,763
Over Two Through Three Years		19,184
Over Three Through Four Years		17,350
Over Four Through Five Years		11,101
Over Five Years		6,637
Total	$	208,462

The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $58.1 million and $52.1 million as of September 30, 2018 and December 31, 2017, respectively.

Note 8. Short-Term Borrowings

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

	(Dollars in thousands)
	September 30, 2018				December 31, 2017
		Amount	Weighted Average Rate			Amount	Weighted Average Rate
Short-term Borrowings
Federal Funds Purchased:
Average Balance Outstanding During the Period	$	50	2.67	%	$	75	-	%
Maximum Amount Outstanding at any Month End		1,500				550

FHLB Borrowings:
Balance at Period End		-	-			13,764	1.57
Average Balance Outstanding During the Period		26,374	1.86			215	0.93
Maximum Amount Outstanding at any Month End		98,960				13,764

Securities Sold Under Agreements to Repurchase:
Balance at Period End		31,580	0.55			25,841	0.26
Average Balance Outstanding During the Period		28,104	0.51			26,350	0.31
Maximum Amount Outstanding at any Month End		35,661				27,951

Securities Collaterizing the Agreements at Period-End:
Carrying Value		96,145				38,953
Market Value		94,092				38,081

Note 9. 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, 2018				December 31, 2017
		Amount	Weighted Average Rate			Amount	Weighted Average Rate
Due in One Year	$	4,791	2.20	%	$	4,500	1.41	%
Due After One Year to Two Years		6,000	1.88			6,000	1.78
Due After Two Years to Three Years		5,000	2.09			6,000	1.97
Due After Three Years to Four Years		3,000	2.23			5,000	2.18
Due After Four Years to Five Years		4,466	3.20			3,000	2.41
Total	$	23,257	2.29		$	24,500	1.92

As of September 30, 2018, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $373.0 million with the FHLB. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on outstanding residential mortgage loans and the Company’s investment in FHLB stock. Under this arrangement the Company had available a variable rate Line of Credit in the amount of $147.0 million and $143.1 million as of September 30, 2018 and December 31, 2017, respectively, of which, there was no outstanding balance as of September 30, 2018 and December 31, 2017.

The Company maintains a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $108.0 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by commercial and consumer indirect auto loans. The Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million and $40.0 million as of September 30, 2018, and December 31, 2017, respectively. There was a total increase of $20.0 million in multiple line of credit agreements due to the FWVB merger. As of September 30, 2018 and December 31, 2017, no draws had been taken on these facilities.

Note 10. 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, 2018		December 31, 2017
Standby Letters of Credit	$	36,221	$	55,105
Performance Letters of Credit		3,256		4,339
Construction Mortgages		55,001		30,619
Personal Lines of Credit		6,378		6,183
Overdraft Protection Lines		6,140		6,167
Home Equity Lines of Credit		21,191		16,337
Commercial Lines of Credit		83,904		62,088
	$	212,091	$	180,838

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 11. Fair Value Disclosure

FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.

The three levels of fair value hierarchy are as follows:

	Level I –	Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

	Level II –	Fair value is based on significant inputs, other than Level I inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level II inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.

	Level III –	Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level III classification include option pricing models, discounted cash flows, and other similar techniques.

This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statement of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level II of the fair value hierarchy. Fair values for Level II securities were primarily determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. There were no transfers from Level I to Level II and no transfers into or out of Level III during the nine months ended September 30, 2018 or year ended December 31, 2017.

			(Dollars in thousands)
		Fair Value Hierarchy		September 30, 2018		December 31, 2017
Available for Sales Securities:
U.S. Government Agencies	Level II		$	79,205	$	65,888
Obligations of States and Political Subdivisions	Level II			45,173		38,988
Mortgage-Backed Securities - Government-Sponsored Enterprises	Level II			89,908		16,978
Equity Securities - Mutual Funds	Level I			959		503
Equity Securities - Other	Level I			1,585		1,226
Total Available for Sale Securities			$	216,830	$	123,583

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,
2018

December 31,
2017

Valuation
Techniques

Significant
Unobservable Inputs

Unobservable
Input Value

Impaired Loans

Level III

885

2,866

Market Comparable Properties

Marketability Discount

10%

30%

(1)

OREO

Level III

321

Market Comparable Properties

Marketability Discount

10%

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, 2018 and December 31, 2017, the fair value of impaired loans consists of the loan balances of $1.7 million and $4.5 million, respectively, less their specific valuation allowances of $807,000 and $1.6 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, 2018, one FFCO acquired at fair value residential real estate loan for $46,000 moved into OREO. 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, 2018, one commercial real estate OREO property at $697,000 fair value was acquired with the FWVB merger, one FFCO acquired at fair value residential real estate loan for $46,000 moved into OREO, and one residential real estate OREO property was sold at a gain of $19,000. During the nine months ended September 30, 2017, two residential real estate loans for $155,000 and $14,000 moved into OREO.

Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

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

		(Dollars in thousands)
		September 30, 2018				December 31, 2017
	Fair Value Hierarchy		Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and Due From Banks:
Interest Bearing	Level I	$	37,173	$	37,173	$	11,685	$	11,685
Non-Interest Bearing	Level I		8,784		8,784		8,937		8,937
Investment Securities:
Available for Sale	See Above		216,830		216,830		123,583		123,583
Loans, Net	Level III		891,863		884,263		735,596		741,020
Restricted Stock	Level II		3,951		3,951		4,340		4,340
Bank-Owned Life Insurance	Level II		22,783		22,783		19,151		19,151
Accrued Interest Receivable	Level II		3,703		3,703		2,706		2,706

Financial Liabilities:
Deposits	Level II		1,062,891		1,061,727		773,344		772,080
Short-term Borrowings	Level II		31,580		31,580		39,605		39,605
Other Borrowed Funds	Level II		23,257		22,928		24,500		24,454
Accrued Interest Payable	Level II		621		621		430		430

Note 12. Income Taxes

Due to the FWVB merger, deferred tax assets (“DTA”) were acquired and deferred tax liabilities (“DTL”) were assumed at April 30, 2018. These DTA’s and DTL’s were evaluated by management and the deferred taxes that were deemed obsolete due to the fair value measurement of assets and liabilities at the time of merger were charged against goodwill. In addition, the fair value adjustments that were provided by third party valuation specialists outside the Company, were tax effected at the federal statutory rate of 21%. The West Virginia (“WV”) state tax effect of 6.5% times the appropriate WV state apportionment according to state revenue laws regarding nexus is currently being evaluated by management and this impact will be addressed in a subsequent period. Presented in the table below are the tax effects of deductible and taxable temporary differences that gave rise to significant portions of the net deferred tax assets and liabilities. The net change in deferred taxes is recorded in the accrued interest and other assets lines on the balance sheet.

	(Dollars in thousands)
		September 30, 2018			December 31, 2017
Deferred Tax Assets:
Allowance for Loan Losses	$	2,004		$	1,847
Amortization of Core Deposit Intangible		3			9
Amortization of Intangibles		69			68
Tax Credit Carryforwards		1,468			-
Unrealized Loss of AFS - Merger Tax Adjustment		894			-
Postretirement Benefits		30			31
Net Unrealized Loss on Securities		1,089			357
Discount Accretion		(2	)		-
Passthrough Entities		2			2
Stock-Based Compensation Expense		68			17
Accrued Payroll		44			-
OREO		121			-
Deferred Compensation		55			-
Other		71			92
Gross Deferred Tax Assets		5,916			2,423

Deferred Tax Liabilities:
Deferred Origination Fees and Costs		277			260
Depreciation		423			375
Mortgage Servicing Rights		193			191
Purchase Accounting Adjustments		2,576			1,340
Goodwill		406			379
Gross Deferred Tax Liabilities		3,875			2,545
Net Deferred Tax Assets (Liabilities)	$	2,041		$	(122	)

Note 13. Other Noninterest Expense

The details of other noninterest expense for the Company’s consolidated statement of income for the three and nine months ended September 30, 2018 and 2017, are as follows:

	(Dollars in thousands)
	Three Months Ended September 30,				Nine Months Ended September 30,
		2018		2017		2018		2017
Other Noninterest Expense
Non-employee compensation	$	176	$	101	$	444	$	301
Printing and supplies		153		107		420		310
Postage		63		36		170		166
Telephone		160		99		410		287
Charitable contributions		36		30		108		111
Dues and subscriptions		46		54		174		172
Loan expenses		140		110		345		271
Meals and entertainment		42		41		142		108
Travel		61		36		171		105
Training		19		-		56		20
Miscellaneous		425		179		784		581
Total Other Noninterest Expense	$	1,321	$	793	$	3,224	$	2,432

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, 2017.

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 income tax rate of 21.0% to value its deferred tax assets and liabilities. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act reduced the US federal corporate tax rate from 35% to 21%. As of December 31, 2017, we completed our accounting for the tax effects of the enactment of the Act. In addition, all deferred tax assets and liabilities including deferred tax assets and liabilities that were retained from the FWVB merger will be tax effected at the WV state income tax rate of 6.5% times the appropriate WV state apportionment according to state revenue laws regarding nexus. As of September 30, 2018, deferred tax amounts are still being evaluated for reasonableness and the WV state deferred tax impact will be finalized in a subsequent period.

We have made a reasonable estimate of the effects on our existing deferred tax balances as of December 31, 2017. We re-measured all of our deferred tax assets (“DTA”) and liabilities (“DTL”) based on the rates at which they are expected to reverse in the future. We recognized an income tax benefit of $89,000 for the year ended December 31, 2017 related to adjusting our net deferred tax liability balance to reflect the new corporate tax rate.

In addition, DTAs/DTLs related to available for sale (“AFS”) securities unrealized losses that were revalued as of December 31, 2017 noted above created a “stranded tax effects” in Accumulated Other Comprehensive Income (“AOCI”) due enactment of the Tax Act. The issue arose due to the nature of GAAP recognition of tax rate change effects on the AFS DTA/DTL revaluation as an adjustment to income tax provision.

In February 2018, FASB issued ASU 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220). As disclosed in Note 1 of the Annual Report, the Company early adopted the provisions of the ASU 2018-02 and recorded a reclassification adjustment of $220,000 from AOCI to retained earnings for stranded tax effects related to AFS securities resulting from the newly enacted corporate tax rate. The amount of the reclassification was the difference between the 35% historical Federal corporate tax rate and the newly enacted 21% Federal corporate tax rate. See Statement of Changes in Stockholders Equity as of December 31, 2017 included in the Annual Report for additional details and reclassification impact due to impact of the ASU 2018-02.

The accounting for the effects of the tax rate change on deferred tax balances is complete and no provisional amounts were recorded for this item.

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 headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned banking subsidiary Community Bank.

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

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

On August 1, 2018, the Bank’s insurance subsidiary, Exchange Underwriters, completed its merger with Beynon Insurance. For additional information regarding the Beynon merger, refer to Note 1 in the Notes to Consolidated Financial Statements.

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, 2018, compared to the financial condition as of December 31, 2017 and the consolidated results of operations for the three and nine months ended September 30, 2018 and 2017.

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.

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 $319.0 million, or 34.1%, to $1.3 billion at September 30, 2018 compared to $934.5 million at December 31, 2017.

Cash and due from banks increased $25.3 million, or 122.9%, to $46.0 million at September 30, 2018 compared to $20.6 million at December 31, 2017. This is primarily the result of deposit growth.

Investment securities classified as available-for-sale increased $93.2 million, or 75.5%, to $216.8 million at September 30, 2018 compared to $123.6 million at December 31, 2017. This increase was primarily the result of securities acquired in the FWVB merger.

Loans, net, increased $156.3 million, or 21.2%, to $891.9 million at September 30, 2018 compared to $735.6 million at December 31, 2017. This was primarily due to the FWVB acquired loan portfolio of $95.5 million and net organic loan originations of $50.8 million in commercial real estate loans, $14.7 million in residential mortgage loans, $8.2 million in other loans and $4.9 million in construction loans, partially offset by a decrease of $15.5 million in commercial and industrial loans.

Premises and equipment, net, increased $7.2 million, or 43.2%, to $23.9 million at September 30, 2018 compared to $16.7 million at December 31, 2017. This is due to the additions related to the eight branch locations from the FWVB merger. In addition, there was $3.5 million related to the new Barron P. “Pat” McCune Corporate Center (“BPMCC”) that was placed into service in the second quarter. Total premises and equipment capitalized for the BPMCC totaled $6.1 million. The BPMCC building was previously taken into premises and equipment from a previously defaulted loan relationship in the first quarter of 2016.

Liabilities. Total liabilities increased $278.6 million, or 33.1%, to $1.1 billion at September 30, 2018 compared to $841.2 million at December 31, 2017.

Total deposits increased $289.5 million, or 37.4%, to $1.1 billion at September 30, 2018 compared to $773.3 million at December 31, 2017. There were increases of $73.7 million in savings accounts, $73.2 million in demand deposits, $53.4 million in NOW accounts, $47.4 million in money market accounts and $44.2 million in time deposits, partially offset by a decrease of $2.4 million in brokered deposits. This increase is due to approximately $281.6 million deposits acquired in the FWVB merger on April 30, 2018 and these acquired deposits increased by $10.8 million as of September 30, 2018. This increase is largely the result of school district and municipal deposits during the current quarter. The legacy Bank deposit portfolio had approximately $2.9 million decrease in deposits. There was a local government depositor that withdrew funds in the first quarter of 2018 of approximately $17.0 million and this was mainly offset by current quarter deposits by school districts and local municipalities as a result of annual property tax remittance. 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.

Short-term borrowings decreased $8.0 million, or 20.3%, to $31.6 million at September 30, 2018 compared to $39.6 million at December 31, 2017. At September 30, 2018, short-term borrowings were comprised of $31.5 million of securities sold under agreements to repurchase compared to $25.8 million of securities sold under agreement to repurchase and $13.8 million of FHLB overnight borrowings at December 31, 2017. Approximately $20.0 million of securities sold under agreements to repurchase were assumed in the FWVB merger. The increase is related to loan originations that exceeded available cash reserves and an increase in 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 $1.2 million due to a $3.5 million maturing FHLB long-term borrowing that was retired in the current period, partially offset by $2.3 million of amortizing fixed-rate FHLB borrowings that were acquired in the FWVB merger. As a result of current period activity, the weighted average interest rate on long-term borrowings increased by 37 basis points to 2.29%.

Stockholders’ Equity. Stockholders’ equity increased $40.4 million, or 43.4%, to $133.7 million at September 30, 2018 compared to $93.3 million at December 31, 2017. During the period, 1,317,647 shares of CBFV stock were issued to shareholders of FWVB in the merger. The approximate value of this stock issuance was $42.0 million, partially offset by $515,000 of stock issuance expenses that were charged against equity. Net income was $4.6 million for the nine months ended September 30, 2018. The Company paid $3.3 million in dividends to stockholders and the unrealized loss on investment securities increased by $2.7 million due to the addition of the FWVB securities portfolio of approximately $102.0 million due to merger and current market conditions.

Results of Operations for the Three Months Ended September 30, 2018 and 2017

Overview. Net income increased $228,000, to $2.3 million for the three months ended September 30, 2018, compared to $2.1 million for the three months ended September 30, 2017. The quarterly results were impacted by increased net interest income and reduced provision for loan losses in the current quarter.

Net Interest Income. Net interest income increased $2.8 million, or 38.3%, to $10.2 million for the three months ended September 30, 2018 compared to $7.4 million for the three months ended September 30, 2017.

Interest and dividend income increased $3.6 million, or 43.2%, to $11.8 million for the three months ended September 30, 2018 compared to $8.2 million for the three months ended September 30, 2017. Interest income on loans increased $2.6 million for the three months ended September 30, 2018, compared to the three months ended September 30, 2017. Average loans increased by $200.2 million for the three months ended September 30, 2018, compared to the three months ended September 30, 2017. This was primarily due to organic net loan growth and loans acquired in the FWVB merger. The FWVB merger not only affected the average loan balance, it also contributed to an increase of 18 basis points in loan yield. The credit mark recorded for the acquired loans in the FWVB merger was approximately $1.3 million. The impact of the accretion from both the FWVB and FedFirst Financial Corporation (“FFCO”) acquired loan portfolios for the three months ended September 30, 2018 was $81,000, or 4 basis points, compared to $127,000, or 8 basis points, for the three months ended September 30, 2017. The remaining credit mark balance for both acquired loan portfolios was $1.9 million as of September 30, 2018. Interest income on taxable securities increased $816,000 mainly due to an increase of $97.5 million in the average balance and 79 basis points in yield in the current period. This is a result of the FWVB merger. Interest income on securities exempt from federal income tax increased by $89,000 in the current period. This was due to the FWVB merger that generated an average balance increase of $9.5 million. In addition, other interest and dividend income increased $72,000 as a result of increased interest earned on correspondent deposit banks and FHLB dividends in the current period.

Interest expense increased $734,000, or 85.3%, to $1.6 million for the three months ended September 30, 2018 compared to $860,000 for the three months ended September 30, 2017. Interest expense on deposits increased $678,000 due to an increase in average interest-bearing deposits of $221.6 million, primarily due to increases in deposits as a result of the FWVB merger. The average cost of interest-bearing deposits increased 20 basis points. This was primarily related to interest rate hikes by the Federal Reserve Board (“FRB”). Interest expense on short-term borrowings increased $48,000 primarily due to securities sold under agreement to repurchase and FHLB overnight borrowings that had increases in average balance of $5.4 million and $3.5 million, respectively during the current quarter due to funding loan growth.

Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2018 and 34% for 2017. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

	(Dollars in thousands) (Unaudited)
	Three Months Ended September 30,
	2018							2017
	Average Balance		Interest and Dividends		Yield/ Cost ⁽¹⁾			Average Balance		Interest and Dividends		Yield/ Cost ⁽¹⁾

Assets:
Interest-Earning Assets:
Loans, Net	$	884,623	$	10,080		4.52	%	$	684,384	$	7,480		4.34	%
Investment Securities
Taxable		178,284		1,202		2.70			80,791		386		1.91
Exempt From Federal Tax		46,901		394		3.36			37,390		340		3.64
Other Interest-Earning Assets		19,285		200		4.11			32,553		139		1.69
Total Interest-Earning Assets		1,129,093		11,876		4.17			835,118		8,345		3.96
Noninterest-Earning Assets		111,122							61,859
Total Assets	$	1,240,215						$	896,977

Liabilities and Stockholders' equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits	$	190,582		171		0.36	%	$	138,742		92		0.26	%
Savings		206,513		143		0.27			131,420		61		0.18
Money Market		179,998		221		0.49			135,214		88		0.26
Time Deposits		210,302		863		1.63			160,456		479		1.18
Total Interest-Bearing Deposits		787,395		1,398		0.70			565,832		720		0.50

Borrowings		58,454		196		1.33			50,741		140		1.09
Total Interest-Bearing Liabilities		845,849		1,594		0.75			616,573		860		0.55

Noninterest-Bearing Demand Deposits		254,727							183,061
Other Liabilities		5,333							4,361
Total Liabilities		1,105,909							803,995

Stockholders' Equity		134,306							92,982
Total Liabilities and Stockholders' Equity	$	1,240,215						$	896,977

Net Interest Income			$	10,282						$	7,485

Net Interest Rate Spread ⁽²⁾						3.42	%						3.41	%
Net Interest-Earning Assets ⁽³⁾	$	283,244						$	218,545
Net Interest Margin ⁽⁴⁾						3.61							3.56
Return on Average Assets						0.73							0.91
Return on Average Equity						6.77							8.81
Average Equity to Average Assets						10.83							10.37
Average Interest-Earning Assets to Average Interest-Bearing Liabilities						133.49							135.45

(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 21% and 34% for the three months ended September 30, 2018, and 2017, respectively.

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2018 and 34% for 2017. 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, 2018 Compared To Three Months Ended September 30, 2017
	Increase (Decrease) Due to
	Volume			Rate			Total

Interest and Dividend Income:
Loans, net	$	2,278		$	322		$	2,600
Investment Securities:
Taxable		607			209			816
Exempt From Federal Tax		82			(28	)		54
Other Interest-Earning Assets		(75	)		136			61
Total Interest-Earning Assets		2,892			639			3,531

Interest Expense:
Deposits		336			342			678
Borrowings		22			34			56
Total Interest-Bearing Liabilities		358			376			734
Change in Net Interest Income	$	2,534		$	263		$	2,797

Provision for Loan Losses. The provision for loan losses was $25,000 for the three months ended September 30, 2018 compared to $300,000 for the three months ended September 30, 2017. Net charge-offs for the three months ended September 30, 2018 were $111,000, which included $63,000 of net charge-offs on automobile loans, compared to $227,000 of net charge-offs for the three months ended September 30, 2017, which included $149,000 of net charge-offs on automobile loans. The decrease in net charge-offs during the current period was mainly attributed to lower automobile loan charge-offs. 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. The decrease in the quarterly provision was primarily due to reduced charge-offs and loan payoffs mainly offsetting loan growth. This was partially offset by improvements in credit matrix factors which had a positive impact on the qualitative factors within the allowance calculation.

Noninterest Income. Noninterest income increased $270,000, or 14.9%, to $2.1 million for the three months ended September 30, 2018 compared to $1.8 million for the three months ended September 30, 2017. Service fees on deposit accounts increased $236,000 due to increased volume in ATM and check card fees as a result of the FWVB merger in the prior quarter. Insurance commissions from Exchange Underwriters increased $162,000 due to increased direct bill commercial and personal lines commission and fee income as a result of the EU – Beynon merger and the revenue recognition standard adopted in the first quarter, partially offset by a decrease in 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. The fair value of equity securities increased $35,000 due to the first quarter adoption of Accounting Standard Update (“ASU”) 2016-01, Financial Instruments – Overall (Subtopic 825-10), which 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. As required, the $35,000 gain was recognized due to current market conditions. There was a decrease in the net gains on the sales of residential mortgage loans of $85,000. 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 and an increase in mortgage rates. The MPF® program enables member financial institutions to offer competitive interest rates for fixed-rate mortgage loans without assuming any of the interest rate risk associated with a long-term asset. Net gains on the disposal of fixed assets decreased $74,000 due to the write-off of the leasehold improvements of the former Washington Business Center that was vacated on September 30, 2018.

Noninterest Expense. Noninterest expense increased $3.5 million, or 58.8%, to $9.4 million for the three months ended September 30, 2018 compared to $5.9 million for the three months ended September 30, 2017. Salaries and employee benefits increased $1.2 million primarily due to the addition of FWVB-retained employee salaries, salary increases related to back office personnel, and health care and retirement benefits expenses mostly related to the FWVB merger. Other noninterest expense increased $528,000 primarily due to other losses that were written off as a result of the FWVB merger and systems conversion, loan expenses, office supplies, telephone, travel, and meals and entertainment expenses. Other real estate owned expense increased $398,000 mainly due to the prior year quarter resolution 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. Occupancy increased $329,000 primarily due to the lease termination of the former FWVB corporate center and increases in depreciation, property contracted services, rent expense and real estate taxes due to the FWVB merger and completion of the BPMCC in Washington, PA. Equipment expense increased $322,000 primarily due to equipment maintenance contracts and data processing expense related to the FWVB merger. Amortization of Core Deposit Intangible (“CDI”) increased $318,000, due to the CDI recorded for the FWVB merger. The Federal Deposit Insurance Corporation (“FDIC”) assessment expense decreased $37,000 due to an assessment factor decrease by the FDIC in the computation of the insurance assessment and average asset growth related to the FWVB merger.

Income Tax Expense. Income taxes decreased $334,000 to $576,000 for the three months ended September 30, 2018 compared to $910,000 for the three months ended September 30, 2017. The effective tax rate for the three months ended September 30, 2018 was 20.1% compared to 30.6% for the three months ended September 30, 2017. The decrease in income taxes was due to a decrease of $106,000 in pre-tax income and the reduction of the federal statutory income tax rate from 34% in the prior year quarter to 21% in the current year quarter, due to the enactment of the new federal tax law titled “Tax Cuts and Jobs Act of 2017” on December 22, 2017.

Results of Operations for the Nine Months Ended September 30, 2018 and 2017

Overview. Net income decreased $947,000, to $4.6 million for the nine months ended September 30, 2018, as compared to $5.6 million for the nine months ended September 30, 2017. Net income was mainly impacted by the FWVB merger-related expenses of $854,000 and other one-time discrete items as a result of the completion of the FWVB merger on April 30, 2018.

Net Interest Income. Net interest income increased $5.5 million, or 25.5%, to $27.0 million for the nine months ended September 30, 2018, compared to $21.5 million for the nine months ended September 30, 2017.

Interest and dividend income increased $7.2 million, or 30.1%, to $31.2 million for the nine months ended September 30, 2018 compared to $24.0 million for the nine months ended September 30, 2017. Interest income on loans increased $5.4 million primarily due to an increase in average loans outstanding of $151.9 million for the nine months ended September 30, 2018. The increase in average loans was mainly due to the FWVB merger and organic loan growth of approximately $62.7 million the current period. This was partially offset by a decrease of $293,000 in accretion on the acquired loan portfolios credit mark for the nine months ended September 30, 2018. Credit mark accretion of $240,000, or 4 basis points, was recognized in the nine months ended September 30, 2018, compared to $533,000, or 16 basis points for the nine months ended September 30, 2017. Interest income on taxable securities increased $1.5 million in the current period. In addition, an increase of 61 basis points in yield resulted from securities acquired in the FWVB merger. The average balance for taxable securities increased $60.0 million for the nine months ended September 30, 2018. Interest income on securities exempt from federal tax increased $192,000 due to securities acquired in the FWVB merger with higher prevailing yields. There was an increase of $7.9 million in the average balance on securities exempt from federal tax and a decrease of 45 basis points in yield as a result of the prior year reduction in the federal statutory income tax rate from 34% to 21%.

Interest expense increased $1.7 million, or 70.4%, to $4.2 million for the nine months ended September 30, 2018 compared to $2.5 million for the nine months ended September 30, 2017. Interest expense on deposits increased $1.3 million due to current year rate increases and an increase in average interest-bearing deposits of $136.1 million which is attributed primarily to the FWVB merger. The average cost of interest-bearing deposits increased 15 basis points. In addition, interest expense on short-term borrowings increased $414,000 in the current period primarily due to increased interest rates on FHLB overnight borrowings that had an average balance increase of $26.4 million and on securities sold under agreements to repurchase.

Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% for 2018 and 34% for 2017. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

	(Dollars in thousands) (Unaudited)
	Nine Months Ended September 30,
	2018						2017
		Average Balance		Interest and Dividends	Yield/ Cost ⁽¹⁾			Average Balance		Interest and Dividends	Yield/ Cost ⁽¹⁾
Assets:
Interest-Earning Assets:
Loans, Net	$	825,781	$	27,374	4.43	%	$	673,922	$	21,896	4.34	%
Investment Securities
Taxable		139,456		2,624	2.51			79,432		1,133	1.90
Exempt From Federal Tax		44,097		1,054	3.19			36,177		987	3.64
Other Interest-Earning Assets		14,731		408	3.70			27,643		325	1.57
Total Interest-Earning Assets		1,024,065		31,460	4.11			817,174		24,341	3.98
Noninterest-Earning Assets		86,417						58,709
Total Assets	$	1,110,482					$	875,883

Liabilities and Stockholders' equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits	$	162,210		412	0.34	%	$	127,736		239	0.25	%
Savings		176,742		329	0.25			128,583		177	0.18
Money Market		159,225		541	0.45			137,906		270	0.26
Time Deposits		191,372		2,090	1.46			159,232		1,364	1.15
Total Interest-Bearing Deposits		689,549		3,372	0.65			553,457		2,050	0.50

Borrowings		77,236		838	1.45			51,505		420	1.09
Total Interest-Bearing Liabilities		766,785		4,210	0.73			604,962		2,470	0.55

Noninterest-Bearing Demand Deposits		224,883						175,401
Other Liabilities		4,764						3,822
Total Liabilities		996,432						784,185

Stockholders' Equity		114,050						91,698
Total Liabilities and Stockholders' Equity	$	1,110,482					$	875,883

Net interest income			$	27,250					$	21,871

Net Interest Rate Spread ⁽²⁾					3.38	%					3.43	%
Net Interest-Earning Assets ⁽³⁾	$	257,280					$	212,212
Net Interest Margin ⁽⁴⁾					3.56						3.58
Return on Average Assets					0.56						0.85
Return on Average Equity					5.42						8.12
Average Equity to Average Assets					10.27						10.47
Average Interest-Earning Assets to Average Interest-Bearing Liabilities					133.55						135.08

(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 21% and 34% for the nine months ended September 30, 2018, and 2017, respectively.

	(Dollars in thousands) (Unaudited)
	Nine Months Ended September 30, 2018 Compared To Nine Months Ended September 30, 2017
	Increase (Decrease) Due to
	Volume			Rate			Total

Interest and Dividend Income:
Loans, net	$	5,015		$	463		$	5,478
Investment Securities:
Taxable		1,046			445			1,491
Exempt From Federal Tax		199			(132	)		67
Other Interest-Earning Assets		(204	)		287			83
Total Interest-Earning Assets		6,056			1,063			7,119

Interest Expense:
Deposits		617			705			1,322
Borrowings		252			166			418
Total Interest-Bearing Liabilities		869			871			1,740
Change in Net Interest Income	$	5,187		$	192		$	5,379

Provision for Loan Losses. The provision for loan losses increased $1.1 million, to $2.1 million, for the nine months ended September 30, 2018, compared to $1.0 million of provision for loan losses for the nine months ended September 30, 2017, of which $250,000 was attributed to the FFCO acquired loan portfolio. Net charge-offs for the nine months ended September 30, 2018 were $1.6 million, which included $263,000 of net charge-offs on automobile loans, compared to net charge-offs of $721,000 for the nine months ended September 30, 2017, which included $435,000 of net charge-offs on automobile loans. The increase in net charge-offs for the current year was due to charge-offs of $1.2 million for three commercial and industrial relationships in the first quarter of 2018. The provision for loan losses was impacted in the current period by the recording of $2.1 million of provision for the originated loan portfolio due to the above-mentioned loan charge-offs and to appropriately reflect risk associated with the originated loan portfolio as of September 30, 2018. Additionally, this was due to growth in the loan portfolio and average loan balances, partially offset by improved credit metrics which had a positive impact on the qualitative factors within the allowance calculation. The acquired loan portfolio from the FWVB merger recorded an approximate credit mark of $1.3 million. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses and credit mark on acquired loan portfolios, with the possible need for additional provisions for loan losses.

Noninterest Income. Noninterest income increased $439,000, or 7.5%, to $6.3 million for the nine months ended September 30, 2018 compared to $5.9 million at September 30, 2017. There was an increase of $487,000 for other commissions due to insurance proceeds recognized by a claim on a bank-owned life insurance policy due to the death of a former officer of the Bank, current year recognition of an ARC loan referral fee and liquidation of a partnership interest in the West Virginia Bankers Title Company, an item that was acquired in the FWVB merger. Service fees on deposit accounts increased $337,000 primarily due to increased ATM fees due to an increased volume of customer transactions and check card fees related to the FWVB merger. There was a $45,000 increase in insurance commissions from Exchange Underwriters mainly due to the EU – Beynon merger in the current period. There was a decrease in the net gains on sales of residential mortgage loans of $283,000. 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 MPF® program and an increase in mortgage rates. Net gains on the sales of investments decreased $132,000 due to the sale of equity securities in the prior period. Net gains on disposal of fixed assets decreased $74,000 due to the write-off of the leasehold improvements of the former Washington Business Center.

Noninterest Expense. Noninterest expense increased $7.1 million, or 38.6%, to $25.5 million for the nine months ended September 30, 2018 compared to $18.4 million for the nine months ended September 30, 2017. Salaries and employee benefits increased $2.8 million, primarily due to additional employees, salary increases, and retirement benefits as a direct result of the FWVB merger, increased incentive compensation accruals due to the loan origination semi-annual bonus matrix, employee group health insurance and employee stock options. Merger-related expenses increased $854,000 due to the FWVB merger. CDI amortization increased $585,000 due to the CDI recorded for the FWVB merger. Other noninterest expense increased $792,000 primarily due to office supplies, telephone, loan expenses, travel and meals and entertainment. Equipment and occupancy increased $540,000 and $535,000, respectively, primarily due to equipment purchases and new maintenance contracts related to the FWVB merger and the BPMCC. Other real estate owned expense increased $380,000 mainly due to the prior year resolution 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. Legal and professional fees increased $132,000 due to increased consultation fees in connection with Exchange Underwriters. FDIC assessment fees increased $94,000 due to an assessment factor increase by the FDIC in the computation of the insurance assessment and average asset growth related to the FWVB merger. Advertising increased $83,000 related to increases in print/media advertising and promotional items to promote the FWVB merger.

Income Tax Expense. Income taxes decreased $1.4 million to $977,000 for the nine months ended September 30, 2018 compared to $2.3 million for the nine months ended September 30, 2017. The effective tax rate for the nine months ended September 30, 2018 was 17.4% compared to 29.6% for the nine months ended September 30, 2017. The decrease in income taxes was primarily due to a decrease of $2.3 million in pre-tax income. The expected effective tax rate for the current year 2018, is 16.9%, which was calculated by excluding the one-time income on a bank-owned life insurance claim of approximately $421,000, which represents a discrete tax item for the first quarter of 2018. The decrease in income taxes was mitigated by the enactment of the Tax Cuts and Jobs Act of 2017, which reduced the statutory federal corporate income tax rate from 34% to 21% effective January 1, 2018.

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 10 in the Notes to Consolidated Financial Statements for a summary of commitments outstanding as of September 30, 2018.

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, 2018 to satisfy its short- and long-term liquidity needs.

The Company’s most liquid assets are cash and due from banks, which totaled $46.0 million at September 30, 2018. 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 $88.4 million at September 30, 2018. In addition, at September 30, 2018, the Company had the ability to borrow up to $373.0 million from the FHLB of Pittsburgh, of which $30.8 million was utilized toward standby letters of credit. The Company also has the ability to borrow up to $108.0 million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million and $40.0 million as of September 30, 2018, and December 31, 2017, respectively. There was a total increase of $20.0 million in multiple line of credit agreements due to the FWVB merger.

At September 30, 2018, time deposits due within one year of that date totaled $104.4 million, or 50.1% 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, 2018, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $2.6 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, 2016 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, 2018 and December 31, 2017, 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.

	(Dollars in thousands)
	September 30, 2018					December 31, 2017
	Amount		Ratio			Amount		Ratio
Common Equity Tier 1 (to risk weighted assets)
Actual	$	95,054		11.34	%	$	84,599		12.22	%
For Capital Adequacy Purposes		37,711		4.50			31,159		4.50
To Be Well Capitalized		54,471		6.50			45,008		6.50

Tier 1 Capital (to risk weighted assets)
Actual		95,054		11.34			84,599		12.22
For Capital Adequacy Purposes		50,281		6.00			41,546		6.00
To Be Well Capitalized		67,041		8.00			55,395		8.00

Total Capital (to risk weighted assets)
Actual		104,339		12.45			93,257		13.47
For Capital Adequacy Purposes		67,041		8.00			55,395		8.00
To Be Well Capitalized		83,802		10.00			69,243		10.00

Tier 1 Leverage (to adjusted total assets)
Actual		95,054		7.93			84,599		9.27
For Capital Adequacy Purposes		47,931		4.00			36,492		4.00
To Be Well Capitalized		59,914		5.00			45,616		5.00

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

The Company believes that as of September 30, 2018, there was no material change in the quantitative and qualitative disclosure about market risk data as of December 31, 2017, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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, 2018, that have materially affected, or are 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.

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, 2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

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

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits

	3.1	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 filed on September 13, 2014 (File No. 333-196749))
	3.2	Bylaws (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-4 filed on September 13, 2014 (File No. 333-196749))
	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, 2018, 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

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 9, 2018	/s/ Patrick G. O’Brien.
		Patrick G. O’Brien
		President and Chief Executive Officer

Date:	November 9, 2018	/s/ Kevin D. Lemley
		Kevin D. Lemley
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)

CB Financial Services, Inc. - FORM 10-Q - November 9, 2018

Attached files

CB Financial Services, Inc. Reports