10-Q 1 f10q_080918p.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from __________ to __________

  

Commission file number: 001-36706

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

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

Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐  (Do not check if a smaller reporting company) Smaller reporting company ☐
Emerging growth company ☒  

 

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

 

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

 

As of August 6, 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 (Loss) 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. 36
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 47
Item 4. Controls and Procedures. 47
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings. 47
Item 1A. Risk Factors. 47
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds. 47
Item 3.  Defaults Upon Senior Securities. 47
Item 4. Mine Safety Disclosures. 47
Item 5. Other Information. 47
Item 6. Exhibits 48
SIGNATURES 49

 

 

 

 

 

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

 

   (Unaudited)   
(Dollars in thousands, except share data)  June 30,
2018
  December 31,
2017
       
ASSETS   
Cash and Due From Banks:          
Interest Bearing  $6,386   $11,685 
Non-Interest Bearing   17,792    8,937 
Total Cash and Due From Banks   24,178    20,622 
           
Investment Securities:          
Available-for-Sale   225,125    123,583 
Loans, Net   882,319    735,596 
Premises and Equipment, Net   32,894    16,712 
Bank-Owned Life Insurance   22,647    19,151 
Goodwill   15,484    4,953 
Core Deposit Intangible, Net   15,539    3,284 
Accrued Interest and Other Assets   13,474    10,585 
TOTAL ASSETS  $1,231,660   $934,486 
           
LIABILITIES          
Deposits:          
Demand Deposits  $247,854   $188,499 
NOW Accounts   178,089    145,183 
Money Market Accounts   180,253    136,914 
Savings Accounts   206,126    132,359 
Time Deposits   209,151    164,301 
Brokered Deposits   3,087    6,088 
Total Deposits   1,024,560    773,344 
           
Short-Term Borrowings   47,179    39,605 
Other Borrowed Funds   23,282    24,500 
Accrued Interest and Other Liabilities   2,955    3,781 
TOTAL LIABILITIES   1,097,976    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 June 30, 2018 and December 31, 2017, Respectively   2,367    1,818 
Capital Surplus   83,311    42,089 
Retained Earnings   55,558    55,280 
Treasury Stock, at Cost (266,694 and 267,389 Shares at June 30, 2018 and December 31, 2017, Respectively)   (4,680)   (4,590)
Accumulated Other Comprehensive Loss   (2,872)   (1,341)
TOTAL STOCKHOLDERS' EQUITY   133,684    93,256 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $1,231,660   $934,486 

 

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

 

1

 

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands, except share and per share data)  2018  2017  2018  2017
             
INTEREST AND DIVIDEND INCOME                    
Loans, Including Fees  $9,257   $7,229   $17,228   $14,371 
Federal Funds Sold   54    41    60    56 
Investment Securities:                    
Taxable   988    386    1,422    747 
Exempt From Federal Income Tax   303    219    539    436 
Other Interest and Dividend Income   88    74    148    130 
TOTAL INTEREST AND DIVIDEND INCOME   10,690    7,949    19,397    15,740 
                     
INTEREST EXPENSE                    
Deposits   1,186    675    1,974    1,330 
Federal Funds Purchased   -    -    1    - 
Short-Term Borrowings   208    20    405    39 
Other Borrowed Funds   123    119    236    241 
TOTAL INTEREST EXPENSE   1,517    814    2,616    1,610 
                     
NET INTEREST INCOME   9,173    7,135    16,781    14,130 
Provision For Loan Losses   600    300    2,100    720 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   8,573    6,835    14,681    13,410 
                     
NONINTEREST INCOME                    
Service Fees on Deposit Accounts   719    625    1,310    1,209 
Insurance Commissions   880    842    1,811    1,928 
Other Commissions   263    107    696    211 
Net Gains on Sales of Loans   46    162    54    252 
Net Gains on Sales of Investments   -    70    -    122 
Fair Value of Equity Securities   44    -    19    - 
Net Gains on Purchased Tax Credits   11    15    22    29 
Income from Bank-Owned Life Insurance   127    116    235    232 
Other   35    29    64    59 
TOTAL NONINTEREST INCOME   2,125    1,966    4,211    4,042 
                     
NONINTEREST EXPENSE                    
Salaries and Employee Benefits   4,865    3,424    8,560    6,913 
Occupancy   788    604    1,358    1,152 
Equipment   632    473    1,130    912 
FDIC Assessment   158    82    294    163 
PA Shares Tax   197    186    396    376 
Contracted Services   171    157    310    289 
Legal and Professional Fees   145    102    285    243 
Advertising   211    182    342    307 
Bankcard Processing Expense   139    131    268    254 
Other Real Estate Owned (Income) Expense   (19)   1    (12)   6 
Amortization of Core Deposit Intangible   400    133    534    267 
Merger-Related   769    -    793    - 
Other   1,038    829    1,903    1,639 
TOTAL NONINTEREST EXPENSE   9,494    6,304    16,161    12,521 
                     
Income Before Income Taxes   1,204    2,497    2,731    4,931 
Income Taxes (1)   234    696    401    1,426 
NET INCOME  $970   $1,801   $2,330   $3,505 
                     
EARNINGS PER SHARE                    
Basic  $0.19   $0.44   $0.51   $0.86 
Diluted   0.19    0.44    0.51    0.85 
                     
WEIGHTED AVERAGE SHARES OUTSTANDING                    
Basic   5,000,209    4,088,025    4,550,580    4,087,659 
Diluted   5,061,788    4,105,338    4,601,134    4,101,861 

 

(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 statements

 

2

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2018  2017  2018  2017
             
Net Income  $970   $1,801   $2,330   $3,505 
                     
Other Comprehensive (Loss) Income:                    
Unrealized (Losses) Gains on Available-for-Sale Securities Net of Income (Benefit) Tax of ($31) and $198 for the Three Months Ended June 30, 2018 and 2017, Respectively, and ($409) and $309 for the Six Months Ended June 30, 2018 and 2017, Respectively   (70)   385    (1,491)   603 
                     
Reclassification Adjustment for Gains on Securities:                    
Included in Net Income, Net of Income Tax of $23 and $41 for the Three and Six Months Ended June 30, 2017, Respectively (1)   -    (47)   -    (81)
Other Comprehensive (Loss) Income, Net of Income (Benefit) Tax   (70)   338    (1,491)   522 
Total Comprehensive Income  $900   $2,139   $839   $4,027 

 

(1)The gross amount of gains on securities of $70 and $122 for the Three and Six Months Ended June 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   -    -    -    3,505    -    -    3,505 
Other Comprehensive Income   -    -    -    -    -    522    522 
Stock-Based Compensation Expense   -    -    171    -    -    -    171 
Exercise of Stock Options   -    -    7    -    24    -    31 
Dividends Paid ($0.44 Per Share)   -    -    -    (1,798)   -    -    (1,798)
June 30, 2017   4,363,346   $1,818   $42,041   $53,420   $(4,722)  $(657)  $91,900 

 

(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   -    -    -    2,330    -    -    2,330 
Other Comprehensive Loss   -    -    -    -    -    (1,491)   (1,491)
Equity Securities MTM Adjustment (1)   -    -    -    40    -    (40)   - 
Issuance of Common Stock   1,317,647    549    41,493    -    -    -    42,042 
FWVB Equity Offering Related Expenses   -    -    (515)   -    -    -    (515)
Stock-Based Compensation Expense   -    -    239    -    -    -    239 
Exercise of Stock Options   -    -    5    -    208    -    213 
Treasury stock purchased, at cost (8,624 shares)   -    -    -    -    (298)   -    (298)
Dividends Paid ($0.44 Per Share)   -    -    -    (2,092)   -    -    (2,092)
June 30, 2018   5,680,993   $2,367   $83,311   $55,558   $(4,680)  $(2,872)  $133,684 

 

(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 statements

 

3

 

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

   Six Months Ended
June 30,
(Dollars in thousands)  2018  2017
       
OPERATING ACTIVITIES          
Net Income  $2,330   $3,505 
Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities:          
Net Amortization on Investments   115    171 
Depreciation and Amortization   1,347    1,305 
Provision for Loan Losses   2,100    720 
Unrealized Loss on Equity Securities   19    - 
Gains on Purchased Tax Credits   22    29 
Income from Bank-Owned Life Insurance   (235)   (232)
Proceeds From Mortgage Loans Sold   2,539    10,620 
Originations of Mortgage Loans for Sale   (2,485)   (10,368)
Gains on Sales of Loans   (54)   (252)
Gains on Sales of Investment Securities   -    (122)
Gains on Sales of Other Real Estate Owned and Repossessed Assets   (19)   - 
Noncash Expense for Stock-Based Compensation   239    171 
(Increase) Decrease in Accrued Interest Receivable   (832)   91 
Retirements of Premises and Equipment   -    152 
Decrease in Taxes Payable   (1,914)   (1,743)
Increase in Accrued Interest Payable   106    4 
Net Payment of Federal/State Income Taxes   (820)   (1,495)
Other, Net   1,345    4,049 
NET CASH PROVIDED BY OPERATING ACTIVITIES   3,803    6,605 
           
INVESTING ACTIVITIES          
Investment Securities Available for Sale:          
Proceeds From Principal Repayments and Maturities   4,823    4,588 
Purchases of Securities   (1,069)   (17,787)
Proceeds from Sales of Securities   80,314    3,603 
Net Increase in Loans   (53,526)   (1,502)
Purchase of Premises and Equipment   (3,742)   (3,150)
Proceeds From a Claim on Bank-Owned Life Insurance   951    - 
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets   214    - 
(Increase) Decrease in Restricted Equity Securities   (306)   37 
Net Cash Received from Acquisition   20,632    - 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES   48,291    (14,211)
           
FINANCING ACTIVITIES          
Net (Decrease) Increase in Deposits   (30,404)   28,841 
Net Decrease in Short-Term Borrowings   (12,457)   (1,577)
Principal Payments on Other Borrowed Funds   (3,500)   (3,500)
Cash Dividends Paid   (2,092)   (1,798)
Treasury Stock, Purchases at Cost   (298)   - 
Exercise of Stock Options   213    31 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES   (48,538)   21,997 
           
INCREASE IN CASH AND CASH EQUIVALENTS   3,556    14,391 
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR   20,622    14,282 
CASH AND DUE FROM BANKS AT END OF PERIOD  $24,178   $28,673 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for:          
Interest on deposits and borrowings (including interest credited to deposit accounts of $1,974 and $1,330, respectively)  $2,511   $1,606 
Income taxes   820    1,495 
           
Real estate acquired in settlement of loans   -    155 
Non-cash transaction related to FWVB acquisition   41,527    - 

 

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

 

4

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation and Basis of Presentation

 

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

 

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill 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 merged with Beynon Insurance, headquartered in Pittsburgh, Pennsylvania. Exchange Underwriters is the surviving insurance company and the acquisition price was approximately $1.8 million, which is expected to be allocated to the Beynon Insurance customer list. The acquired customer list will be recorded on the Company’s balance sheet as an intangible asset and amortized over the average life of the customer list in accordance with U.S. GAAP. Our preliminary estimated average life for this customer list is approximately 9 years and will be finalized in a subsequent period. Except as disclosed herein, 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, Inc., 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.

 

5

 

Income Taxes

 

The income tax decrease was due to the enactment of the Tax Cuts and Jobs Act reducing the 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 18.1% to 15.0% at June 30, 2018, compared to 30.0% at June 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 June 30, 2018. The impact of the correction of an 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 six months ended June 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 six months ended June 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 September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments. ASU 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU No. 2016-02, Leases (Topic 842). The SEC staff stated the SEC would not object to a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting ASC Topic 606 for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The SEC staff stated the SEC would not object to a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC adopting ASC Topic 842 for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is evaluating the provisions of ASU 2017-13 but believes that its adoption will not have a material impact on the Company's consolidated financial condition or results of operations.

 

6

 

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.

 

7

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the provisions of ASU 2016-13, but does not believe that its adoption will have a material impact on the Company's consolidated financial condition or results of operations.

 

In 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 June 30, 2018, Statement of Stockholders’ Equity. The fair value adjustments recognized for equity securities were gains of $44,000 and $19,000 for the three and six months ended June 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.

 

8

 

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 (“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 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 $1.2 million of cumulative merger-related expenses, of which $769,000 and $793,000, were recorded in the Consolidated Statement of Income for the three and six months ended June 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 is 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, represent preliminary estimates. Based on a preliminary purchase price allocation, the Company recorded $10.5 million in goodwill and $12.8 million in core deposit intangibles, representing the principal change in goodwill and intangibles from December 31, 2017. None of the goodwill is deductible for income tax purposes, as the acquisition is accounted for as a tax-free exchange for tax purposes.

 

9

 

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   13,047 
Bank Owned Life Insurance   4,212 
Core Deposit Intangible   12,789 
Deferred Tax Assets   1,086 
Other Assets   3,030 
Total Assets Acquired   347,681 
      
Liabilities Assumed:     
Deposits   281,620 
Borrowings   22,329 
Other Liabilities   2,935 
Total Liabilities Assumed   306,884 
Total Identifiable Net Assets   40,797 
Goodwill Recognized  $10,531 

 

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 First West Virginia Bancorp consisted of net interest income of approximately $1.8 million, noninterest income of approximately $155,000, noninterest expense of approximately $1.5 million and net income of approximately $385,000 from May 1, 2018 through June 30, 2018.

 

The following unaudited combined pro forma information presents the operating results for the six months ended June 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).

 

   Six Months Ended
June 30,
2018
  Year Ended
December 31,
2017
Net Interest Income  $20,761   $37,944 
Noninterest Income   4,521    8,779 
Noninterest Expense   20,843    33,733 
Net Income   3,462    8,444 
           
Earnings Per Share:          
Basic  $0.76   $1.86 
Diluted   0.75    1.84 

 

10

 

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
June 30,
  Six Months Ended
June 30,
   2018  2017  2018  2017
Weighted-Average Common Shares Outstanding   5,266,714    4,363,346    4,817,525    4,363,346 
Average Treasury Stock Shares   (266,505)   (275,321)   (266,945)   (275,687)
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Basic Earnings Per Share   5,000,209    4,088,025    4,550,580    4,087,659 
Additional Common Stock Equivalents (Stock Options and Restricted Stock) Used to Calculate Diluted Earnings Per Share   61,579    17,313    50,554    14,202 
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Diluted Earnings Per Share   5,061,788    4,105,338    4,601,134    4,101,861 
                     
Earnings per share:                    
Basic  $0.19   $0.44   $0.51   $0.86 
Diluted   0.19    0.44    0.51    0.85 

 

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
June 30, 2018
  Six Months Ended
June 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  $719   $719   $-   $1,310   $1,310   $- 
Insurance Commissions   880    799    81    1,811    1,735    76 
Other Commissions   263    263    -    696    696    - 
Other   35    35    -    64    64    - 
Total   1,897    1,816    81    3,881    3,805    76 
                               
NONINTEREST EXPENSE                              
Other Real Estate Owned Expense   (19)   (19)   -    (12)   (12)   - 
Total   (19)   (19)   -    (12)   (12)   - 
                               
Net Impact   1,878    1,797    81    3,869    3,793    76 
                               
Income Tax Expense  $394   $377   $17   $812   $797   $16 
                               
Net Income  $970   $906   $64   $2,330   $2,270   $60 
                               
Basic earnings per share  $0.19   $0.18   $0.01   $0.51   $0.50   $0.01 
Diluted earnings per share  $0.19   $0.18   $0.01   $0.51   $0.49   $0.02 

 

11

 

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 (Income) Expense, 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
June 30, 2018
  Six Months Ended
June 30, 2018
       
NONINTEREST INCOME          
Service Fees on Deposit Accounts (a)  $719   $1,310 
Insurance Commissions   880    1,811 
Other Commissions (c)   263    696 
Net Gains on Sales of Loans (b)   46    54 
Net Gains on Sales of Investments (b)   -    - 
Fair Value of Equity Securities (b)   44    19 
Net Gains on Purchased Tax Credits (b)   11    22 
Income from Bank-Owned Life Insurance (b)   127    235 
Other (b)   35    64 
Total non-interest income   2,125    4,211 
           
NONINTEREST EXPENSE          
Other Real Estate Owned (Income) Expense   (19)   (12)
Total non-interest expense   (19)   (12)
           
Net non-interest income  $2,144   $4,223 

 

(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 $111,000 and $209,000 for the three and six months ended June 30, 2018, which is in the scope of ASC 606; the remaining balance of $152,000 and $487,000 for three and six months ended June 30, 2018, respectively, mainly represents income derived from an assumable rate conversion (“ARC”) loan referral fee for the three and six months ended June 30, 2018, and a bank-owned life insurance policy claim, for the six months ended June 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.

 

12

 

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 and 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)
   June 30, 2018
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
             
U.S. Government Agencies  $82,470   $28   $(3,005)  $79,493 
Obligations of States and Political Subdivisions   48,561    190    (603)   48,148 
Mortgage-Backed Securities - Government-Sponsored Enterprises   95,225    224    (473)   94,976 
Equity Securities - Mutual Funds   1,000    -    (34)   966 
Equity Securities - Other   1,470    108    (36)   1,542 
Total  $228,726   $550   $(4,151)  $225,125 

 

   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 

 

13

 

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)
   June 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   8   $26,122   $(744)   16   $41,289   $(2,261)   24   $67,411   $(3,005)
Obligations of States and                                             
Political Subdivisions   39    20,736    (425)   11    5,282    (178)   50    26,018    (603)
Mortgage-Backed Securities -                                             
Government Sponsored Enterprises   17    32,963    (473)   -    -    -    17    32,963    (473)
Equity Securities - Mutual Fund   2    966    (34)   -    -    -    2    966    (34)
Equity Securities - Other   5    441    (31)   1    56    (5)   6    497    (36)
Total   71   $81,228   $(1,707)   28   $46,627   $(2,444)   99   $127,855   $(4,151)

 

   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 June 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 June 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)
   June 30, 2018
   Available-for-Sale
   Amortized
Cost
  Fair
Value
Due in One Year or Less  $1,889   $1,894 
Due after One Year through Five Years   46,595    45,381 
Due after Five Years through Ten Years   79,730    77,601 
Due after Ten Years   100,512    100,249 
Total  $228,726   $225,125 

 

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.

 

14

 

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)
   June 30, 2018  December 31, 2017
   Amount  Percent  Amount  Percent
Originated Loans                    
Real Estate:                    
Residential  $216,561    31.7%  $200,486    32.6%
Commercial   214,865    31.4    160,235    26.1 
Construction   32,891    4.8    36,149    5.9 
Commercial and Industrial   89,505    13.1    100,294    16.3 
Consumer   117,952    17.3    114,358    18.6 
Other   11,694    1.7    3,376    0.5 
Total Originated Loans   683,468    100.0%   614,898    100.0%
Allowance for Loan Losses   (8,698)        (8,215)     
Loans, Net  $674,770        $606,683      
                     
Loans Acquired at Fair Value                    
Real Estate:                    
Residential  $99,138    47.6%  $72,952    56.3%
Commercial   82,652    39.6    48,802    37.7 
Construction   84    0.0    -    0.0 
Commercial and Industrial   17,959    8.7    7,541    5.8 
Consumer   3,223    1.6    199    0.2 
Other   5,166    2.5    -    0.0 
Total Loans Acquired at Fair Value   208,222    100.0%   129,494    100.0%
Allowance for Loan Losses   (673)        (581)     
Loans, Net  $207,549        $128,913      
                     
Total Loans                    
Real Estate:                    
Residential  $315,699    35.4%  $273,438    36.7%
Commercial   297,517    33.4    209,037    28.1 
Construction   32,975    3.6    36,149    4.9 
Commercial and Industrial   107,464    12.1    107,835    14.5 
Consumer   121,175    13.6    114,557    15.4 
Other   16,860    1.9    3,376    0.4 
Total Loans   891,690    100.0%   744,392    100.0%
Allowance for Loan Losses   (9,371)        (8,796)     
Loans, Net  $882,319        $735,596      

 

Total unamortized net deferred loan fees were $1.0 million and $808,000 at June 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 $97.7 million and $95.4 million at June 30, 2018 and December 31, 2017, respectively.

 

15

 

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 June 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)
   June 30, 2018
   Pass  Special
Mention
  Substandard  Doubtful  Total
Originated Loans                         
Real Estate:                         
Residential  $214,231   $1,202   $1,128   $-   $216,561 
Commercial   202,268    10,197    2,159    241    214,865 
Construction   29,441    2,902    505    43    32,891 
Commercial and Industrial   73,445    14,095    1,098    867    89,505 
Consumer   117,919    -    33    -    117,952 
Other   11,694    -    -    -    11,694 
Total Originated Loans  $648,998   $28,396   $4,923   $1,151   $683,468 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $97,445   $-   $1,693   $-   $99,138 
Commercial   77,321    4,841    490    -    82,652 
Construction   84    -    -    -    84 
Commercial and Industrial   17,885    -    16    58    17,959 
Consumer   3,223    -    -    -    3,223 
Other   5,060    106    -    -    5,166 
Total Loans Acquired at Fair Value  $201,018   $4,947   $2,199   $58   $208,222 
                          
Total Loans                         
Real Estate:                         
Residential  $311,676   $1,202   $2,821   $-   $315,699 
Commercial   279,589    15,038    2,649    241    297,517 
Construction   29,525    2,902    505    43    32,975 
Commercial and Industrial   91,330    14,095    1,114    925    107,464 
Consumer   121,142    -    33    -    121,175 
Other   16,754    106    -    -    16,860 
Total Loans  $850,016   $33,343   $7,122   $1,209   $891,690 

 

 

 

 

16

 

   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 

 

 

 

 

 

17

 

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)
   June 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  $215,471   $377   $39   $13   $429   $661   $216,561 
Commercial   214,807    58    -    -    58    -    214,865 
Construction   32,848    -    -    -    -    43    32,891 
Commercial and Industrial   88,429    -    -    -    -    1,076    89,505 
Consumer   116,916    961    42    -    1,003    33    117,952 
Other   11,694    -    -    -    -    -    11,694 
Total Originated Loans  $680,165   $1,396   $81   $13   $1,490   $1,813   $683,468 
                                    
Loans Acquired at Fair Value                                   
Real Estate:                                   
Residential  $97,612   $132   $-   $93   $225   $1,301   $99,138 
Commercial   81,643    48    -    -    48    961    82,652 
Construction   84    -    -    -    -    -    84 
Commercial and Industrial   17,885    -    58    -    58    16    17,959 
Consumer   3,207    6    5    -    11    5    3,223 
Other   5,166    -    -    -    -    -    5,166 
Total Loans Acquired at Fair Value  $205,597   $186   $63   $93   $342   $2,283   $208,222 
                                    
Total Loans                                   
Real Estate:                                   
Residential  $313,083   $509   $39   $106   $654   $1,962   $315,699 
Commercial   296,450    106    -    -    106    961    297,517 
Construction   32,932    -    -    -    -    43    32,975 
Commercial and Industrial   106,314    -    58    -    58    1,092    107,464 
Consumer   120,123    967    47    -    1,014    38    121,175 
Other   16,860    -    -    -    -    -    16,860 
Total Loans  $885,762   $1,582   $144   $106   $1,832   $4,096   $891,690 

 

 

 

 

18

 

   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 

 

 

 

 

 

19

 

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)
   June 30,
2018
  December 31,
2017
Nonaccrual Loans:          
Originated Loans:          
Real Estate:          
Residential  $661   $524 
Commercial   -    288 
Construction   43    43 
Commercial and Industrial   1,076    2,079 
Consumer   33    71 
Total Originated Nonaccrual Loans   1,813    3,005 
           
Loans Acquired at Fair Value:          
Real Estate:          
Residential   1,301    899 
Commercial   961    - 
Commercial and Industrial   16    16 
Consumer   5    - 
Total Loans Acquired at Fair Value Nonaccrual Loans   2,283    915 
Total Nonaccrual Loans   4,096    3,920 
           
Accruing Loans Past Due 90 Days or More:          
Originated Loans:          
Real Estate:          
Residential   13    - 
Consumer   -    26 
Total Originated Accruing Loans 90 Days or More Past Due   13    26 
           
Loans Acquired at Fair Value:          
Real Estate:          
Residential   93    142 
Total Loans Acquired at Fair Value Accruing Loans 90 Days or More Past Due   93    142 
Total Accruing Loans 90 Days or More Past Due   106    168 
Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due   4,202    4,088 
           
Troubled Debt Restructurings, Accruing:          
Originated Loans:          
Real Estate - Residential   28    30 
Real Estate - Commercial   1,246    1,271 
Commercial and Industrial   165    5 
Other   -    1 
Total Originated Loans   1,439    1,307 
Loans Acquired at Fair Value:          
Real Estate - Residential   1,235    1,257 
Real Estate - Commercial   343    426 
Commercial and Industrial   -    173 
Total Loans Acquired at Fair Value   1,578    1,856 
Total Troubled Debt Restructurings, Accruing   3,017    3,163 
           
Total Nonperforming Loans   7,219    7,251 
           
Real Estate Owned:          
Residential   -    152 
Commercial   871    174 
Total Real Estate Owned   871    326 
           
Other non-performing assets   -    - 
Total Nonperforming Assets  $8,090   $7,577 
           
Nonperforming Loans to Total Loans   0.81%   0.97%
Nonperforming Assets to Total Assets   0.66    0.81 

 

20

 

The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $1.1 million and $1.5 million at June 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 14 loans totaling $4.0 million and 16 loans totaling $4.5 million at June 30, 2018 and December 31, 2017, respectively. Originated loans classified as TDRs consisted of seven loans totaling $2.4 million and eight loans totaling $2.6 million at June 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 June 30, 2018 and December 31, 2017, respectively.

 

During the three months ended June 30, 2018, one originated commercial and industrial line of credit loan entered into a TDR 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. In addition, there was one acquired loan at fair value TDR from the FFCO merger for commercial real estate that paid off during the three months ended June 30, 2018. There were no loans modified into a TDR transaction during the quarter- ended March 31, 2018.

 

   (Dollars in thousands)
   Three Months Ended June 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   $- 

 

During the six months ended June 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.

 

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

 

There were no loans modified into a TDR transaction during the three and six months ended June 30, 2017.

 

21

 

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

 

   (Dollars in thousands)
   June 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  $78   $-   $80   $87   $2 
Commercial   1,879    -    1,879    2,036    46 
Construction   548    -    548    562    14 
Commercial and Industrial   1,114    -    1,127    1,075    17 
Total With No Related Allowance Recorded  $3,619   $-   $3,634   $3,760   $79 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,242   $-   $1,242   $1,252   $31 
Commercial   1,843    -    1,843    1,858    24 
Commercial and Industrial   58    -    58    69    2 
Total With No Related Allowance Recorded  $3,143   $-   $3,143   $3,179   $57 
                          
Total Loans                         
Real Estate:                         
Residential  $1,320   $-   $1,322   $1,339   $33 
Commercial   3,722    -    3,722    3,894    70 
Construction   548    -    548    562    14 
Commercial and Industrial   1,172    -    1,185    1,144    19 
Total With No Related Allowance Recorded  $6,762   $-   $6,777   $6,939   $136 
                          
With A Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Commercial  $883   $191   $883   $892   $25 
Commercial and Industrial   1,016    606    1,097    1,104    29 
Total With A Related Allowance Recorded  $1,899   $797   $1,980   $1,996   $54 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Commercial  $65   $19   $65   $65   $2 
Commercial and Industrial   3    3    3    3    - 
Total With A Related Allowance Recorded  $68   $22   $68   $68   $2 
                          
Total Loans                         
Real Estate:                         
Commercial  $948   $210   $948   $957   $27 
Commercial and Industrial   1,019    609    1,100    1,107    29 
Total With A Related Allowance Recorded  $1,967   $819   $2,048   $2,064   $56 

 

22

 

   June 30, 2018 (cont.)
   Recorded
Investment
  Related
Allowance
  Unpaid
Principal
Balance
  Average
Recorded
Investment
  Interest
Income
Recognized
Total Impaired Loans:                         
Originated Loans                         
Real Estate:                         
Residential  $78   $-   $80   $87   $2 
Commercial   2,762    191    2,762    2,928    71 
Construction   548    -    548    562    14 
Commercial and Industrial   2,130    606    2,224    2,179    46 
Total Impaired Loans  $5,518   $797   $5,614   $5,756   $133 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,242   $-   $1,242   $1,252   $31 
Commercial   1,908    19    1,908    1,923    26 
Construction   -    -    -    -    - 
Commercial and Industrial   61    3    61    72    2 
Total Impaired Loans  $3,211   $22   $3,211   $3,247   $59 
                          
Total Loans                         
Real Estate:                         
Residential  $1,320   $-   $1,322   $1,339   $33 
Commercial   4,670    210    4,670    4,851    97 
Construction   548    -    548    562    14 
Commercial and Industrial   2,191    609    2,285    2,251    48 
Total Impaired Loans  $8,729   $819   $8,825   $9,003   $192 

 

 

 

 

 

 

23

 

   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 

 

24

 

   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 

 

 

 

 

 

 

25

 

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

 

   (Dollars in thousands)
   June 30, 2018
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Originated Loans                                        
March 31, 2018  $875   $2,206   $156   $2,771   $2,156   $-   $36   $8,200 
Charge-offs   -    -    -    -    (157)   -    -    (157)
Recoveries   8    19    -    1    27    -    -    55 
Provision   (20)   86    103    27    104    -    300    600 
June 30, 2018  $863   $2,311   $259   $2,799   $2,130   $-   $336   $8,698 
                                         
Loans Acquired at Fair Value                                        
March 31, 2018  $-   $487   $-   $167   $-   $-   $42   $696 
Charge-offs   (32)   -    -    -    -    -    -    (32)
Recoveries   7    1    -    -    1    -    -    9 
Provision   25    5    -    (48)   (1)   -    19    - 
June 30, 2018  $-   $493   $-   $119   $-   $-   $61   $673 
                                         
Total Allowance for Loan Losses                                        
March 31, 2018  $875   $2,693   $156   $2,938   $2,156   $-   $78   $8,896 
Charge-offs   (32)   -    -    -    (157)   -    -    (189)
Recoveries   15    20    -    1    28    -    -    64 
Provision   5    91    103    (21)   103    -    319    600 
June 30, 2018  $863   $2,804   $259   $2,918   $2,130   $-   $397   $9,371 
                                         
Originated Loans                                        
December 31, 2017  $891   $1,799   $276   $2,461   $2,358   $-   $430   $8,215 
Charge-offs   (27)   -    -    (1,398)   (298)   -    -    (1,723)
Recoveries   12    19    -    3    72    -    -    106 
Provision   (13)   493    (17)   1,733    (2)   -    (94)   2,100 
June 30, 2018  $863   $2,311   $259   $2,799   $2,130   $-   $336   $8,698 
                                         
Loans Acquired at Fair Value                                        
December 31, 2017  $-   $490   $-   $83   $-   $-   $8   $581 
Charge-offs   (32)   -    -    -    -    -    -    (32)
Recoveries   8    115    -    -    1    -    -    124 
Provision   24    (112)   -    36    (1)   -    53    - 
June 30, 2018  $-   $493   $-   $119   $-   $-   $61   $673 
                                         
Total Allowance for Loan Losses                                        
December 31, 2017  $891   $2,289   $276   $2,544   $2,358   $-   $438   $8,796 
Charge-offs   (59)   -    -    (1,398)   (298)   -    -    (1,755)
Recoveries   20    134    -    3    73    -    -    230 
Provision   11    381    (17)   1,769    (3)   -    (41)   2,100 
June 30, 2018  $863   $2,804   $259   $2,918   $2,130   $-   $397   $9,371 

 

26

 

   June 30, 2018
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Originated Loans                                        
Individually Evaluated for Impairment  $-   $191   $-   $606   $-   $-   $-   $797 
Collectively Evaluated for Potential Impairment  $863   $2,120   $259   $2,193   $2,130   $-   $336   $7,901 
                                         
Loans Acquired at Fair Value                                        
Individually Evaluated for Impairment  $-   $19   $-   $3   $-   $-   $-   $22 
Collectively Evaluated for Potential Impairment  $-   $474   $-   $116   $-   $-   $61   $651 
                                         
Total Allowance for Loan Losses                                        
Individually Evaluated for Impairment  $-   $210   $-   $609   $-   $-   $-   $819 
Collectively Evaluated for Potential Impairment  $863   $2,594   $259   $2,309   $2,130   $-   $397   $8,552 

 

 

   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 

 

 

 

 

27

 

   June 30, 2017
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Originated Loans                                        
March 31, 2017  $1,089   $1,898   $83   $1,598   $2,256   $-   $282   $7,206 
Charge-offs   -    -    -    -    (118)   -    -    (118)
Recoveries   1    -    -    25    53    -    -    79 
Provision   (150)   119    59    137    32    -    103    300 
June 30, 2017  $940   $2,017   $142   $1,760   $2,223   $-   $385   $7,467 
                                         
Loans Acquired at Fair Value                                        
March 31, 2017  $-   $471   $-   $114   $-   $-   $(6)  $579 
Charge-offs   -    (3)   -    -    -    -    -    (3)
Recoveries   38    1    -    -    1    -    -    40 
Provision   (38)   144    -    (5)   (1)   -    (100)   - 
June 30, 2017  $-   $613   $-   $109   $-   $-   $(106)  $616 
                                         
Total Allowance for Loan Losses                                        
March 31, 2017  $1,089   $2,369   $83   $1,712   $2,256   $-   $276   $7,785 
Charge-offs   -    (3)   -    -    (118)   -    -    (121)
Recoveries   39    1    -    25    54    -    -    119 
Provision   (188)   263    59    132    31    -    3    300 
June 30, 2017  $940   $2,630   $142   $1,869   $2,223   $-   $279   $8,083 
                                         
Originated Loans                                        
December 31, 2016  $1,106   $1,942   $65   $1,579   $2,463   $-   $128   $7,283 
Charge-offs   -    -    -    -    (445)   -    -    (445)
Recoveries   5    -    -    36    118    -    -    159 
Provision   (171)   75    77    145    87    -    257    470 
June 30, 2017  $940   $2,017   $142   $1,760   $2,223   $-   $385   $7,467 
                                         
Loans Acquired at Fair Value                                        
December 31, 2016  $-   $365   $-   $120   $-   $-   $35   $520 
Charge-offs   (64)   (132)   -    -    -    -    -    (196)
Recoveries   38    1    -    -    3    -    -    42 
Provision   26    379    -    (11)   (3)   -    (141)   250 
June 30, 2017  $-   $613   $-   $109   $-   $-   $(106)  $616 
                                         
Total Allowance for Loan Losses                                        
December 31, 2016  $1,106   $2,307   $65   $1,699   $2,463   $-   $163   $7,803 
Charge-offs   (64)   (132)   -    -    (445)   -    -    (641)
Recoveries   43    1    -    36    121    -    -    201 
Provision   (145)   454    77    134    84    -    116    720 
June 30, 2017  $940   $2,630   $142   $1,869   $2,223   $-   $279   $8,083 

 

   June 30, 2017
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Originated Loans                                        
Individually Evaluated for Impairment  $-   $425   $-   $815   $-   $-   $-   $1,240 
Collectively Evaluated for Potential Impairment  $940   $1,592   $142   $945   $2,223   $-   $385   $6,227 
                                         
Loans Acquired at Fair Value                                        
Individually Evaluated for Impairment  $-   $-   $-   $16   $-   $-   $-   $16 
Collectively Evaluated for Potential Impairment  $-   $613   $-   $93   $-   $-   $(106)  $600 
                                         
Total Allowance for Loan Losses                                        
Individually Evaluated for Impairment  $-   $425   $-   $831   $-   $-   $-   $1,256 
Collectively Evaluated for Potential Impairment  $940   $2,205   $142   $1,038   $2,223   $-   $279   $6,827 

 

28

 

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

 

  

Accretable

Discount

Balance at December 31, 2017  $760 
Purchase Accounting Adjustment related to FWVB Merger at April 30, 2018   1,348 
Accretable Yield   (154)
Nonaccretable Discount   5 
Balance at June 30, 2018  $1,959 

 

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)
   June 30, 2018
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Total
Originated Loans                                   
Individually Evaluated for Impairment  $78   $2,762   $548   $2,130   $-   $-   $5,518 
Collectively Evaluated for Potential Impairment   216,483    212,103    32,343    87,375    117,952    11,694    677,950 
   $216,561   $214,865   $32,891   $89,505   $117,952   $11,694   $683,468 
                                    
Loans Acquired at Fair Value                                   
Individually Evaluated for Impairment  $1,242   $1,908   $-   $61   $-   $-   $3,211 
Collectively Evaluated for Potential Impairment   97,896    80,744    84    17,898    3,223    5,166    205,011 
   $99,138   $82,652   $84   $17,959   $3,223   $5,166   $208,222 
                                    
Total Loans                                   
Individually Evaluated for Impairment  $1,320   $4,670   $548   $2,191   $-   $-   $8,729 
Collectively Evaluated for Potential Impairment   314,379    292,847    32,427    105,273    121,175    16,860    882,961 
   $315,699   $297,517   $32,975   $107,464   $121,175   $16,860   $891,690 

 

   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 

 

29

 

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:  June 30,
2018
One Year or Less  $95,829 
Over One Through Two Years   55,927 
Over Two Through Three Years   20,774 
Over Three Through Four Years   17,110 
Over Four Through Five Years   12,620 
Over Five Years   6,891 
Total  $209,151 

 

The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $57.9 million and $52.1 million as of June 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)
   June 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  $75    2.69%  $75    -%
Maximum Amount Outstanding at any Month End   1,500         550      
                     
FHLB Borrowings:                    
Balance at Period End   17,978    2.10    13,764    1.57 
Average Balance Outstanding During the Period   37,994    1.83    215    0.93 
Maximum Amount Outstanding at any Month End   98,960         13,764      
                     
Securities Sold Under Agreements to Repurchase:                    
Balance at Period End   29,201    0.52    25,841    0.26 
Average Balance Outstanding During the Period   26,290    0.46    26,350    0.31 
Maximum Amount Outstanding at any Month End   35,661         27,951      
                     
Securities Collaterizing the Agreements at Period-End:                    
Carrying Value   98,346         38,953      
Market Value   96,906         38,081      

 

30

 

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)
   June 30, 2018  December 31, 2017
   Amount  Weighted
Average
Rate
  Amount  Weighted
Average
Rate
Due in One Year  $4,802    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   4,480    3.20    3,000    2.41 
Total  $23,282    2.29   $24,500    1.92 

 

As of June 30, 2018, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $315.9 million with the FHLB. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on outstanding residential mortgage loans and the Company’s investment in FHLB stock. Under this arrangement the Company had available a variable rate Line of Credit in the amount of $147.0 million as of June 30, 2018 and December 31, 2017, respectively, of which, $18.0 million was outstanding as of June 30, 2018.

 

The Company maintains a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $111.4 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 June 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 June 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.

 

31

 

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)
   June 30,
2018
  December 31,
2017
Standby Letters of Credit  $30,081   $55,105 
Performance Letters of Credit   3,256    4,339 
Construction Mortgages   49,265    30,619 
Personal Lines of Credit   6,333    6,183 
Overdraft Protection Lines   6,140    6,167 
Home Equity Lines of Credit   21,134    16,337 
Commercial Lines of Credit   76,069    62,088 
   $192,278   $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 six months ended June 30, 2018 or year ended December 31, 2017.

 

32

 

      (Dollars in thousands)
   Fair Value
Hierarchy
  June 30,
2018
  December 31,
2017
Available for Sales Securities:             
U.S. Government Agencies  Level II  $79,493   $65,888 
Obligations of States and Political Subdivisions  Level II   48,148    38,988 
Mortgage-Backed Securities - Government-Sponsored Enterprises  Level II   94,976    16,978 
Equity Securities - Mutual Funds  Level I   966    503 
Equity Securities - Other  Level I   1,542    1,226 
Total Available for Sale Securities     $225,125   $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
   Fair Value  June 30,  December 31,  Valuation  Significant  Unobservable
Financial Asset  Hierarchy  2018  2017  Techniques  Unobservable Inputs  Input Value
Impaired Loans  Level III  $1,148   $2,866   Market Comparable Properties  Marketability Discount   10% to 30%(1) 
OREO  Level III   697    321   Market Comparable Properties  Marketability Discount   10% to 50%(1) 

 

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

 

Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Fair value is measured based on the value of the collateral securing these loans and is classified as Level III in the fair value hierarchy. At June 30, 2018 and December 31, 2017, the fair value of impaired loans consists of the loan balances of $2.0 million and $4.5 million, respectively, less their specific valuation allowances of $819,000 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 June 30, 2018, one commercial real estate OREO property at $697,000 fair value was acquired with the FWVB merger and one residential real estate OREO property was sold at a gain of $19,000. During the six months ended June 30, 2017, one residential real estate loan for $155,000 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.

 

33

 

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)
      June 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  $6,386   $6,386   $11,685   $11,685 
Non-Interest Bearing  Level I   17,792    17,792    8,937    8,937 
Investment Securities:                       
Available for Sale  See Above   225,125    225,125    123,583    123,583 
Loans, Net  Level III   882,319    874,899    735,596    741,020 
Restricted Stock  Level II   4,647    4,647    4,340    4,340 
Bank-Owned Life Insurance  Level II   22,647    22,647    19,151    19,151 
Accrued Interest Receivable  Level II   3,538    3,538    2,706    2,706 
                        
Financial Liabilities:                       
Deposits  Level II   1,024,560    1,022,900    773,344    772,080 
Short-term Borrowings  Level II   47,179    47,179    39,605    39,605 
Other Borrowed Funds  Level II   23,282    22,030    24,500    24,454 
Accrued Interest Payable  Level II   536    536    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 line on the balance sheet.

 

34

 

   (Dollars in thousands)
   Six Months Ended
June 30, 2018
  Year Ended
December 31, 2017
Deferred Tax Assets:          
Allowance for Loan Losses  $1,968   $1,847 
Amortization of Core Deposit Intangible   5    9 
Amortization of Intangibles   63    68 
Tax Credit Carryforwards   2,743    - 
Unrealized Loss of AFS - Merger Tax Adjustment   1,022    - 
Postretirement Benefits   29    31 
Net Unrealized Loss on Securities   763    357 
Discount Accretion   2    - 
Passthrough Entities   2    2 
Stock-Based Compensation Expense   50    17 
Accrued Payroll   111    - 
OREO   135    - 
Deferred Compensation   54    - 
Other   63    92 
Gross Deferred Tax Assets   7,010    2,423 
           
Deferred Tax Liabilities:          
Deferred Origination Fees and Costs   263    260 
Depreciation   448    375 
Mortgage Servicing Rights   189    191 
Purchase Accounting Adjustments   6,191    1,340 
Goodwill   390    379 
Gross Deferred Tax Liabilities   7,481    2,545 
Net Deferred Tax Liabilities  $(471)  $(122)

 

Note 13. Other Noninterest Expense

 

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

 

   (Dollars in thousands)
   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2018  2017  2018  2017
Other Noninterest Expense                    
Non-employee compensation  $146   $100   $268   $200 
Printing and supplies   159    100    267    203 
Postage   50    64    108    130 
Telephone   138    99    250    188 
Charitable contributions   10    9    21    23 
Dues and subscriptions   61    55    127    118 
Loan expenses   113    86    206    160 
Meals and entertainment   66    43    101    67 
Travel   73    43    110    69 
Training   24    9    37    20 
Miscellaneous   198    221    408    461 
Total Other Noninterest Expense  $1,038   $829   $1,903   $1,639 

 

 

35

 

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 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 June 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 corporate tax rate and the newly enacted 21 % 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.

 

36

 

General

 

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

 

The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from 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.

 

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 June 30, 2018 compared to the financial condition as of December 31, 2017 and the consolidated results of operations for the three and six months ended June 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 $297.2 million, or 31.8%, to $1.2 billion at June 30, 2018 compared to $934.5 million at December 31, 2017.

 

Cash and due from banks increased $3.6 million, or 17.2%, to $24.2 million at June 30, 2018 compared to $20.6 million at December 31, 2017. This is primarily the result of cash acquired due to the FWVB merger.

 

Investment securities classified as available-for-sale increased $101.5 million, or 82.2%, to $225.1 million at June 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 $146.7 million, or 19.9%, to $882.3 million at June 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 $47.7 million in commercial real estate loans and $9.3 million in residential mortgage loans, partially offset by decreases of $4.0 million in commercial and industrial loans and $3.3 million in construction loans.

 

Premises and equipment, net, increased $16.2 million, or 96.8%, to $32.9 million at June 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 with a fair market value of approximately $13.0 million, including a purchase accounting adjustment of approximately $8.0 million. In addition, there was $3.5 million related to the new Barron P. ”Pat” McCune Jr. Corporate Center (“BPMCC”) that was placed into service in the second quarter. Total premises and equipment capitalized for the new Corporate Center totaled $5.9 million. The Corporate Center building was previously taken into premises and equipment from a previously defaulted loan relationship in the first quarter of 2016.

 

37

 

Liabilities. Total liabilities increased $256.7 million, or 30.5%, to $1.1 billion at June 30, 2018 compared to $841.2 million at December 31, 2017.

 

Total deposits increased $251.2 million, or 32.5%, to $1.0 billion at June 30, 2018 compared to $773.3 million at December 31, 2017. There were increases of $73.8 million in savings accounts, $59.4 million in demand deposits, $45.0 million in time deposits, $43.0 million in money market accounts and $32.9 million in NOW accounts, partially offset by a decrease of $3.0 million in brokered deposits. This increase is due to approximately $281.6 million deposits acquired in the FWVB merger offset by a decrease of $2.5 million in those deposits as of June 30, 2018. The legacy Community Bank deposit portfolio had approximately $30.0 million decrease in deposits, largely the result of school district and municipal deposits decreasing by $20.5 million mainly due to a local government depositor withdrawing funds in the first quarter of approximately $17.0 million. 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 increased $7.6 million, or 19.1%, to $47.2 million at June 30, 2018 compared to $39.6 million at December 31, 2017. At June 30, 2018, short-term borrowings were comprised of $29.2 million of securities sold under agreements to repurchase and $18.0 million of FHLB overnight borrowings compared to $25.8 million of securities sold under agreement to repurchase and $13.8 million of FHLB overnight borrowing 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 June 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 $2.3 million for the six months ended June 30, 2018. The Company paid $2.1 million in dividends to stockholders and the unrealized loss on investment securities increased by $1.5 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 June 30, 2018 and 2017

 

Overview. Net income decreased $831,000, to $970,000, for the three months ended June 30, 2018, compared to $1.8 million for the three months ended June 30, 2017. The quarterly results were impacted by merger-related expenses of $769,000 and $300,000 in provision for loan losses due to the growth in commercial real estate loans.

 

Net Interest Income. Net interest income increased $2.0 million, or 28.6%, to $9.2 million for the three months ended June 30, 2018 compared to $7.1 million for the three months ended June 30, 2017.

 

Interest and dividend income increased $2.7 million, or 34.5%, to $10.7 million for the three months ended June 30, 2018 compared to $7.9 million for the three months ended June 30, 2017. Interest income on loans increased $2.0 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. Average loans increased by $170.3 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017. This was primarily due to organic loan growth and the FWVB merger. The FWVB merger not only affected the average loan balance, it also contributed to an increase of 9 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 June 30, 2018 was $93,000, or 5 basis points, compared to $173,000, or 11 basis points, for the three months ended June 30, 2017. The remaining credit mark balance for both acquired loan portfolios was $2.0 million as of June 30, 2018. Interest income on taxable securities increased $602,000 mainly due to an increase of $71.5 million in the average balance and 69 basis points in yield in the current period. This is a result of the FWVB merger and new purchases with higher prevailing yields replacing security calls and maturities with lower yields within the portfolio. Interest income on securities exempt from federal income tax increased by $84,000 in the current period. This was due to the FWVB merger that generated an average balance increase of $10.6 million. In addition, other interest and dividend income increased $14,000 as a result of increased interest earned on correspondent deposit banks and FHLB dividends in the current period.

 

38

 

Interest expense increased $703,000, or 86.4%, to $1.5 million for the three months ended June 30, 2018 compared to $814,000 for the three months ended June 30, 2017. Interest expense on deposits increased $511,000 due to an increase in average interest-bearing deposits of $158.9 million, primarily due to increases in deposits as a result of the FWVB merger. The average cost of interest-bearing deposits increased 18 basis points. This was primarily related to an interest rate hike in the current quarter by the Federal Reserve Board (“FRB”). Interest expense on short-term borrowings increased $188,000 primarily due to FHLB overnight borrowings that had an increase in average balance of $33.6 million during the current quarter due to funding loan growth pre-merger.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% 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. 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 June 30,
   2018  2017
      Interest        Interest   
   Average  and  Yield/  Average  and  Yield/
   Balance  Dividends  Cost (1)  Balance  Dividends  Cost (1)
Assets:               
Interest-Earning Assets:                              
Loans, Net  $840,537   $9,288    4.43%  $670,231   $7,251    4.34%
Investment Securities                              
Taxable   152,867    988    2.59    81,409    386    1.90 
Exempt From Federal Tax   46,101    371    3.22    35,529    325    3.66 
Other Interest-Earning Assets   17,102    142    3.33    30,666    115    1.50 
Total Interest-Earning Assets   1,056,607    10,789    4.10    817,835    8,077    3.96 
Noninterest-Earning Assets   89,250              57,904           
Total Assets  $1,145,857             $875,739           
                               
Liabilities and                              
Stockholders' equity:                              
Interest-Bearing Liabilities:                              
Interest-Bearing Demand Deposits  $163,801    139    0.34%  $125,695    78    0.25%
Savings   188,628    124    0.26    129,719    60    0.19 
Money Market   159,898    201    0.50    136,026    88    0.26 
Time Deposits   197,281    722    1.47    159,309    449    1.13 
Total Interest-Bearing Deposits   709,608    1,186    0.67    550,749    675    0.49 
                               
Borrowings   84,834    331    1.56    51,070    139    1.09 
Total Interest-Bearing Liabilities   794,442    1,517    0.77    601,819    814    0.54 
                               
Noninterest-Bearing Demand Deposits   231,491              178,478           
Other Liabilities   5,527              3,617           
Total Liabilities   1,031,460              783,914           
                               
Stockholders' Equity   114,397              91,825           
Total Liabilities and                              
Stockholders' Equity  $1,145,857             $875,739           
                               
Net Interest Income       $9,272             $7,263      
                               
Net Interest Rate Spread (2)             3.33%             3.42%
Net Interest-Earning Assets (3)  $262,165             $216,016           
Net Interest Margin (4)             3.52              3.56 
Return on Average Assets             0.34              0.82 
Return on Average Equity             3.40              7.87 
Average Equity to Average Assets             9.98              10.49 
Average Interest-Earning Assets to                              
Average Interest-Bearing Liabilities             133.00              135.89 

__________

(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 June 30, 2018, and 2017, respectively.

 

40

 

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21% 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 June 30, 2018
   Compared To
   Three Months Ended June 30, 2017
   Increase (Decrease) Due to
   Volume  Rate  Total
          
Interest and Dividend Income:               
Loans, net  $1,884   $153   $2,037 
Investment Securities:               
Taxable   426    176    602 
Exempt From Federal Tax   88    (42)   46 
Other Interest-Earning Assets   (68)   95    27 
Total Interest-Earning Assets   2,330    382    2,712 
                
Interest Expense:               
Deposits   224    287    511 
Borrowings   116    76    192 
Total Interest-Bearing Liabilities   340    363    703 
Change in Net Interest Income  $1,990   $19   $2,009 

 

Provision for Loan Losses. The provision for loan losses was $600,000 for the three months ended June 30, 2018 compared to $300,000 for the three months ended June 30, 2017. Net charge-offs for the three months ended June 30, 2018 were $125,000, which included $113,000 of net charge-offs on automobile loans, compared to $2,000 of net charge-offs for the three months ended June 30, 2017, which included $49,000 of net charge-offs on automobile loans. The increase in net charge-offs during the current period was due to reduced recoveries in the current period and higher 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 increase in the quarterly provision was primarily due to loan growth. This was partially offset by improvements in the local economy and industry conditions which had a positive impact on the qualitative factors within the allowance calculation.

 

Noninterest Income. Noninterest income increased $159,000, or 8.1%, to $2.1 million for the three months ended June 30, 2018 compared to $2.0 million for the three months ended June 30, 2017. Other commissions increased $156,000 due to the current quarter recognition of an assumable rate conversion (“ARC”) loan referral fee and liquidation of a partnership interest in the West Virginia Bankers Title Company, an item that was resolved from the FWVB merger. Service fees on deposit accounts increased $94,000 due to increased ATM and check card fees in the current quarter. The fair value of equity securities increased $44,000 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 are that consolidated) to be measured at fair value with changes in fair value recognized in net income. As required, the $44,000 gain was recognized due to current market conditions. Insurance commissions from Exchange Underwriters increased $38,000 due to increased direct bill commercial and personal lines commission and fee income as a result of 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. There was a decrease in the net gains on the sales of residential mortgage loans of $116,000. 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 sales of investments decreased $70,000 due to the sale of equity securities in the prior year.

 

41

 

Noninterest Expense. Noninterest expense increased $3.2 million, or 50.6%, to $9.5 million for the three months ended June 30, 2018 compared to $6.3 million for the three months ended June 30, 2017. Salaries and employee benefits increased $1.4 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. In addition, the incentive compensation accrual increased related to the loan origination semi-annual bonus matrix due to loan growth. Merger-related expenses increased $769,000 due to the FWVB merger. Amortization of Core Deposit Intangible (“CDI”) increased $267,000 due to the CDI recorded for the FWVB merger. Other noninterest expense increased $209,000 primarily due to loan expenses, office supplies, telephone, travel, and meals and entertainment expenses. Occupancy increased $184,000 primarily due to increases in 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 $159,000 primarily due to equipment maintenance contracts and data processing expense related to the FWVB merger. The Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $76,000 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. Legal and professional fees increased $43,000 primarily due to prior year quarter refund of legal fees from delinquent loans.

 

Income Tax Expense. Income taxes decreased $462,000 to $234,000 for the three months ended June 30, 2018 compared to $696,000 for the three months ended June 30, 2017. The effective tax rate for the three months ended June 30, 2018 was 19.4% compared to 27.9% for the three months ended June 30, 2017. The decrease in income taxes was due to a decrease of $1.3 million 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 Six Months Ended June 30, 2018 and 2017

 

Overview. Net income decreased $1.2 million to $2.3 million as of the six months ended June 30, 2018, as compared to $3.5 million for the six months ended June 30, 2017. Net income was mainly impacted by the FWVB merger-related expenses of $793,000 and other one-time discrete items as a result of the completion of the merger on April 30, 2018.

 

Net Interest Income. Net interest income increased $2.7 million, or 18.8%, to $16.8 million for the six months ended June 30, 2018, compared to $14.1 million for the six months ended June 30, 2017.

 

Interest and dividend income increased $3.7 million, or 23.2%, to $19.4 million for the six months ended June 30, 2018 compared to $15.7 million for the six months ended June 30, 2017. Interest income on loans increased $2.9 million primarily due to an increase in average loans outstanding of $127.3 million for the six months ended June 30, 2018. The increase in average loans was mainly due to the FWVB merger and organic loan growth of approximately $53.2 million the current period. This was partially offset by a decrease of $247,000 in accretion on the acquired loan portfolios credit mark for the six months ended June 30, 2018. Credit mark accretion of $159,000, or 9 basis points, was recognized in the six months ended June 30, 2018, compared to $406,000, or 25 basis points for the six months ended June 30, 2017. Interest income on taxable securities increased $675,000 in the current period. In addition, an increase of 48 basis points in yield resulted from securities acquired in the FWVB merger. The average balance for taxable securities increased $41.0 million for the six months ended June 30, 2018. Interest income on securities exempt from federal tax increased $103,000 due to securities acquired in the FWVB merger with higher prevailing yields. There was an increase of $7.1 million in the average balance on securities exempt from federal tax and a decrease of 55 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 $1.0 million, or 62.5%, to $2.6 million for the six months ended June 30, 2018 compared to $1.6 million for the six months ended June 30, 2017. Interest expense on deposits increased $644,000 due to current year rate increases and an increase in average interest-bearing deposits of $92.7 million which is attributed primarily to the FWVB merger. The average cost of interest-bearing deposits increased 13 basis points. In addition, short-term borrowings increased $366,000 in the current period due to increased interest rates on FHLB overnight borrowings that had an average balance increase of $38.0 million and on securities sold under agreements to repurchase.

 

42

 

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. 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)
   Six Months Ended June 30,
   2018  2017
      Interest        Interest   
   Average  and  Yield/  Average  and  Yield/
   Balance  Dividends  Cost (1)  Balance  Dividends  Cost (1)
Assets:               
Interest-Earning Assets:                              
Loans, Net  $795,872   $17,295    4.38%  $668,606   $14,415    4.35%
Investment Securities                              
Taxable   119,720    1,422    2.38    78,741    747    1.90 
Exempt From Federal Tax   42,672    660    3.09    35,561    648    3.64 
Other Interest-Earning Assets   12,417    208    3.38    25,147    186    1.49 
Total Interest-Earning Assets   970,681    19,585    4.07    808,055    15,996    3.99 
Noninterest-Earning Assets   73,859              57,107           
Total Assets  $1,044,540             $865,162           
                               
Liabilities and                              
Stockholders' equity:                              
Interest-Bearing Liabilities:                              
Interest-Bearing Demand Deposits  $147,790    241    0.33%  $122,141    147    0.24%
Savings   161,610    186    0.23    127,141    116    0.18 
Money Market   148,667    320    0.43    139,273    181    0.26 
Time Deposits   181,751    1,227    1.36    158,610    886    1.13 
Total Interest-Bearing Deposits   639,818    1,974    0.62    547,165    1,330    0.49 
                               
Borrowings   86,782    642    1.49    51,894    280    1.09 
Total Interest-Bearing Liabilities   726,600    2,616    0.73    599,059    1,610    0.54 
                               
Noninterest-Bearing Demand Deposits   209,713              171,507           
Other Liabilities   4,472              3,550           
Total Liabilities   940,785              774,116           
                               
Stockholders' Equity   103,755              91,046           
Total Liabilities and                              
Stockholders' Equity  $1,044,540             $865,162           
                               
Net interest income       $16,969             $14,386      
                               
Net Interest Rate Spread (2)             3.34%             3.45%
Net Interest-Earning Assets (3)  $244,081             $208,996           
Net Interest Margin (4)             3.53              3.59 
Return on Average Assets             0.45              0.82 
Return on Average Equity             4.53              7.76 
Average Equity to Average Assets             9.93              10.52 
Average Interest-Earning Assets to                              
Average Interest-Bearing Liabilities             133.59              134.89 

_________

(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 six months ended June 30, 2018, and 2017, respectively.

 

43

 

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)
   Six Months Ended June 30, 2018
   Compared To
   Six Months Ended June 30, 2017
   Increase (Decrease) Due to
   Volume  Rate  Total
          
Interest and Dividend Income:               
Loans, net  $2,780   $100   $2,880 
Investment Securities:               
Taxable   454    221    675 
Exempt From Federal Tax   119    (107)   12 
Other Interest-Earning Assets   (129)   151    22 
Total Interest-Earning Assets   3,224    365    3,589 
                
Interest Expense:               
Deposits   254    390    644 
Borrowings   235    127    362 
Total Interest-Bearing Liabilities   489    517    1,006 
Change in Net Interest Income  $2,735   $(152)  $2,583 

 

Provision for Loan Losses. The provision for loan losses increased $1.4 million, to $2.1 million, for the six months ended June 30, 2018, compared to $720,000 of provision for loan losses for the six months ended June 30, 2017, of which $250,000 was attributed to the FFCO acquired loan portfolio. Net charge-offs for the six months ended June 30, 2018 were $1.5 million, which included $200,000 of net charge-offs on automobile loans, compared to net charge-offs of $440,000 for the six months ended June 30, 2017, which included $287,000 of net charge-offs on automobile loans. The increase in net charge-offs for the current year was due to charge-offs of $496,000, $443,000 and $238,000 for three commercial and industrial relationships. 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 June 30, 2018. Additionally, this was due to growth in the loan portfolio and average loan balances, partially offset by the local economy 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 $169,000, or 4.2%, to $4.2 million for the six months ended June 30, 2018 compared to $4.0 million at June 30, 2017. There was an increase of $485,000 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 quarter recognition of an ARC loan referral fee and liquidation of a partnership interest in the West Virginia Bankers Title Company, an item that was resolved from the FWVB merger. Service fees on deposit accounts increased $101,000 primarily due to increased ATM fees due to an increased volume of customer transactions and check card fees. There was a decrease in the net gains on sales of residential mortgage loans of $198,000. 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 sales of investments decreased $122,000 due to the sale of equity securities in the prior period. There was an $117,000 decrease in insurance commissions from Exchange Underwriters mainly due to a decrease in contingency fees received in the current period.

 

44

 

Noninterest Expense. Noninterest expense increased $3.6 million, or 29.1%, to $16.2 million for the six months ended June 30, 2018 compared to $12.5 million for the six months ended June 30, 2017. Salaries and employee benefits increased $1.6 million, primarily due to additional employees, salary increases, and retirement benefits as a direct result of the FWVB merger, incentive compensation accrual increased due to the loan origination semi-annual bonus matrix, employee group health insurance and employee stock options. Merger-related expenses increased $793,000 due to the FWVB merger. CDI amortization increased $267,000 due to the CDI recorded for the FWVB merger. Other noninterest expense increased $264,000 primarily due to office supplies, telephone, loan expenses, travel and meals and entertainment. Equipment and occupancy increased $218,000 and $206,000, respectively, primarily due to equipment purchases and new maintenance contracts related to the FWVB merger and the BPMCC. FDIC assessment fees increased $131,000 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. Legal and professional fees increased $42,000 due to increased consultation fees in connection with Exchange Underwriters. Advertising increased $35,000 related to increases in print/media advertising and promotional items to promote the FWVB merger.

 

Income Tax Expense. Income taxes decreased $1.0 million to $401,000 for the six months ended June 30, 2018 compared to $1.4 million for the six months ended June 30, 2017. The effective tax rate for the six months ended June 30, 2018 was 14.7% compared to 28.9% for the six months ended June 30, 2017. The decrease in income taxes was primarily due to a decrease of $2.2 million in pre-tax income. The expected effective tax rate for the current year is 17.4%, 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 due to the enactment of the Tax Cuts and Jobs Act of 2017, which reduced the corporate statutory federal 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 June 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 June 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 $24.2 million at June 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 $131.6 million at June 30, 2018. In addition, at June 30, 2018, the Company had the ability to borrow up to $315.9 million from the FHLB of Pittsburgh, of which $18.0 million was outstanding and $31.1 million was utilized toward standby letters of credit. The Company also has the ability to borrow up to $111.4 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 June 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 June 30, 2018, time deposits due within one year of that date totaled $95.8 million, or 45.8% 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.

 

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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 June 30, 2018, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $2.9 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 June 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)
   June 30, 2018  December 31, 2017
   Amount  Ratio  Amount  Ratio
Common Equity Tier 1 (to risk weighted assets)                    
Actual  $102,021    12.03%  $84,599    12.22%
For Capital Adequacy Purposes   38,177    4.50    31,159    4.50 
To Be Well Capitalized   55,144    6.50    45,008    6.50 
                     
Tier 1 Capital (to risk weighted assets)                    
Actual   102,021    12.03    84,599    12.22 
For Capital Adequacy Purposes   50,902    6.00    41,546    6.00 
To Be Well Capitalized   67,870    8.00    55,395    8.00 
                     
Total Capital (to risk weighted assets)                    
Actual   111,392    13.13    93,257    13.47 
For Capital Adequacy Purposes   67,870    8.00    55,395    8.00 
To Be Well Capitalized   84,837    10.00    69,243    10.00 
                     
Tier 1 Leverage (to adjusted total assets)                    
Actual   102,021    9.23    84,599    9.27 
For Capital Adequacy Purposes   44,227    4.00    36,492    4.00 
To Be Well Capitalized   55,284    5.00    45,616    5.00 

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk.

 

The Company believes that as of June 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 June 30, 2018, that has materially affected, or is reasonably likely to materially affect, CB Financial’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

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.

 

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Item 6. Exhibits

 

 3.1Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 filed on June 13, 2014 (File No. 333-196749))
 3.2Bylaws (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-4 filed on June 13, 2014 (File No. 333-196749))
31.1Rule 13a-14(a) / 15d-14(a) Certification (Chief Executive Officer)
31.2Rule 13a-14(a) / 15d-14(a) Certification (Chief Financial Officer)
32.1Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Chief Financial Officer Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0The following materials for the quarter ended June 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

 

 

 

 

 

 

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SIGNATURES

 

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

 

 

      CB FINANCIAL SERVICES, INC.
      (Registrant)
       
Date:   August 14, 2018   /s/ Patrick G. O’Brien.
      Patrick G. O’Brien
      President and Chief Executive Officer
       
Date:   August 14, 2018   /s/ Kevin D. Lemley
      Kevin D. Lemley
      Executive Vice President and Chief Financial Officer
      (Principal Financial Officer and Chief Accounting Officer)

 

 

 

 

 

 

 

 

 

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