CBFV 10-Q Quarter ended March 31, 2019

		(Unaudited)
(Dollars in thousands, except share data)		March 31, 2019				December 31, 2018
ASSETS
Cash and Due From Banks:
Interest Bearing		$	54,245			$	36,736
Non-Interest Bearing			22,094				16,617
Total Cash and Due From Banks			76,339				53,353
Investment Securities:
Available-for-Sale			224,673				225,409
Loans, Net			899,384				903,314
Premises and Equipment, Net			23,092				23,448
Bank-Owned Life Insurance			23,054				22,922
Goodwill			28,425				28,425
Core Deposit Intangible, Net			10,449				10,934
Accrued Interest and Other Assets			17,177				13,496
TOTAL ASSETS		$	1,302,593			$	1,281,301
LIABILITIES
Deposits:
Demand Deposits		$	274,072			$	253,201
NOW Accounts			213,132				218,687
Money Market Accounts			178,708				187,627
Savings Accounts			218,310				209,985
Time Deposits			218,180				214,891
Brokered Deposits			3,063				2,267
Total Deposits			1,105,465				1,086,658
Short-Term Borrowings			30,689				30,979
Other Borrowed Funds			17,000				20,000
Accrued Interest and Other Liabilities			7,710				6,039
TOTAL LIABILITIES			1,160,864				1,143,676
STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; 5,000,000 Shares Authorized			-				-
Common Stock, $0.4167 Par Value; 35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,433,289 and 5,432,289 Shares Outstanding at March 31, 2019 and December 31, 2018, Respectively			2,367				2,367
Capital Surplus			83,307				83,225
Retained Earnings			59,464				57,843
Treasury Stock, at Cost (247,704 and 248,704 Shares at March 31, 2019 and December 31, 2018, Respectively)			(4,353	)			(4,370	)
Accumulated Other Comprehensive Income (Loss)			944				(1,440	)
TOTAL STOCKHOLDERS' EQUITY			141,729				137,625
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	1,302,593			$	1,281,301

1

		Three Months Ended March 31,
(Dollars in thousands, except share and per share data)		2019				2018
INTEREST AND DIVIDEND INCOME
Loans, Including Fees		$	10,433			$	7,971
Federal Funds Sold			114				6
Investment Securities:
Taxable			1,264				434
Exempt From Federal Income Tax			281				236
Other Interest and Dividend Income			204				60
TOTAL INTEREST AND DIVIDEND INCOME			12,296				8,707
INTEREST EXPENSE
Deposits			1,719				788
Federal Funds Purchased			-				1
Short-Term Borrowings			46				197
Other Borrowed Funds			97				113
TOTAL INTEREST EXPENSE			1,862				1,099
NET INTEREST INCOME			10,434				7,608
Provision For Loan Losses			25				1,500
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			10,409				6,108
NONINTEREST INCOME
Service Fees on Deposit Accounts			753				591
Insurance Commissions			1,151				931
Other Commissions			158				433
Net Gains on Sales of Loans			92				8
Net Loss on Sales of Investments			(60	)			-
Fair Value of Equity Securities			20				(25	)
Net Gains on Purchased Tax Credits			9				11
Net Loss on Disposal of Fixed Assets			(6	)			-
Income from Bank-Owned Life Insurance			132				108
Other			66				29
TOTAL NONINTEREST INCOME			2,315				2,086
NONINTEREST EXPENSE
Salaries and Employee Benefits			4,935				3,695
Occupancy			759				570
Equipment			704				498
FDIC Assessment			188				136
PA Shares Tax			268				199
Contracted Services			272				139
Legal and Professional Fees			181				140
Advertising			148				131
Bankcard Processing Expense			197				129
Other Real Estate Owned (Income) Expense			(63	)			7
Amortization of Core Deposit Intangible			485				134
Merger-Related			-				24
Other			1,007				865
TOTAL NONINTEREST EXPENSE			9,081				6,667
Income Before Income Taxes			3,643				1,527
Income Taxes			718				167
NET INCOME		$	2,925			$	1,360
EARNINGS PER SHARE
Basic		$	0.54			$	0.33
Diluted			0.54				0.33
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic			5,432,856				4,096,292
Diluted			5,451,478				4,134,223

2

		Three Months Ended March 31,
(Dollars in thousands)		2019				2018
Net Income		$	2,925			$	1,360
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available-for-Sale Securities Net of Income Tax Expense (Benefit) of $622 and ($387) for the Three Months Ended March 31, 2019 and 2018, Respectively			2,337				(1,421	)
Reclassification Adjustment for Losses on Securities: Included in Net Income, Net of Income Tax Benefit of ($13) for the Three Months Ended March 31, 2019 (1)			47				-
Other Comprehensive Income (Loss), Net of Income Tax (Benefit)			2,384				(1,421	)
Total Comprehensive Income (Loss)		$	5,309			$	(61	)

(Dollars in thousands, except share and per share data)		Shares Issued				Common Stock				Capital Surplus				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
December 31, 2017			4,363,346			$	1,818			$	42,089			$	55,280			$	(4,590	)		$	(1,341	)		$	93,256
Comprehensive Income:
Net Income			-				-				-				1,360				-				-				1,360
Other Comprehensive Loss			-				-				-				-				-				(1,421	)			(1,421	)
Impact of change in method of accounting for marketable equity securities (1)			-				-				-				40				-				(40	)			-
Stock-Based Compensation Expense			-				-				119				-				-				-				119
Exercise of Stock Options			-				-				3				-				29				-				32
Treasury Stock Purchased, at cost (895 shares)			-				-				-				-				(27	)			-				(27	)
Dividends Paid ($0.22 Per Share)			-				-				-				(901	)			-				-				(901	)
March 31, 2018			4,363,346			$	1,818			$	42,211			$	55,779			$	(4,588	)		$	(2,802	)		$	92,418

(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, 2018			5,680,993			$	2,367			$	83,225			$	57,843			$	(4,370	)		$	(1,440	)		$	137,625
Comprehensive Income:
Net Income			-				-				-				2,925				-				-				2,925
Other Comprehensive Income			-				-				-				-				-				2,384				2,384
Stock-Based Compensation Expense			-				-				77				-				-				-				77
Exercise of Stock Options			-				-				5				-				17				-				22
Dividends Paid ($0.24 Per Share)			-				-				-				(1,304	)			-				-				(1,304	)
March 31, 2019			5,680,993			$	2,367			$	83,307			$	59,464			$	(4,353	)		$	944			$	141,729

3

		Three Months Ended March 31,
(Dollars in thousands)			2019				2018
OPERATING ACTIVITIES
Net Income		$	2,925			$	1,360
Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities:
Net (Accretion) Amortization on Investments			(1	)			104
Depreciation and Amortization			913				464
Provision for Loan Losses			25				1,500
Unrealized (Gain) Loss on Equity Securities			(20	)			25
Gains on Purchased Tax Credits			9				11
Income from Bank-Owned Life Insurance			(132	)			(108	)
Proceeds From Mortgage Loans Sold			3,995				534
Originations of Mortgage Loans for Sale			(3,903	)			(526	)
Gains on Sales of Loans			(92	)			(8	)
Losses on Sales of Investment Securities			60				-
Gains on Sales of Other Real Estate Owned and Repossessed Assets			(71	)			(12	)
Noncash Expense for Stock-Based Compensation			77				119
Increase in Accrued Interest Receivable			(237	)			(145	)
Net Loss on Disposal of Fixed Assets			6				-
Increase (Decrease) in Taxes Payable			455				(15	)
Increase in Accrued Interest Payable			176				19
Net Payment of Federal/State Income Taxes			(15	)			(30	)
Other, Net			(2,949	)			(2,144	)
NET CASH PROVIDED BY OPERATING ACTIVITIES			1,221				1,148
INVESTING ACTIVITIES
Investment Securities Available for Sale:
Proceeds From Principal Repayments and Maturities			3,901				1,212
Purchases of Securities			(10,947	)			(1,044	)
Proceeds from Sales of Securities			10,762				-
Net Decrease (Increase) in Loans			3,845				(38,165	)
Purchase of Premises and Equipment			-				(1,888	)
Asset Acquisition of a Customer List			(900	)			-
Proceeds From a Claim on Bank-Owned Life Insurance			-				950
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets			814				164
Decrease (Increase) in Restricted Equity Securities			55				(2,168	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			7,530				(40,939	)
FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits			18,807				(18,613	)
Net (Decrease) Increase in Short-Term Borrowings			(290	)			55,660
Principal Payments on Other Borrowed Funds			(3,000	)			(3,500	)
Cash Dividends Paid			(1,304	)			(901	)
Treasury Stock, Purchases at Cost			-				(27	)
Exercise of Stock Options			22				32
NET CASH PROVIDED BY FINANCING ACTIVITIES			14,235				32,651
INCREASE IN CASH AND CASH EQUIVALENTS			22,986				(7,140	)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR			53,353				20,622
CASH AND DUE FROM BANKS AT END OF PERIOD		$	76,339			$	13,482
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $1,719 and $788, respectively)		$	1,686			$	1,080
Income taxes			15				30
SUPPLEMENTAL NONCASH DISCLOSURE:
Right of use asset recognized			1,888				-
Lease liability recognized			1,854				-

4

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, 2018. Interim results are not necessarily indicative of results for a full year.

The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by ASC Topic 855, Subsequent Events , to be recognizable events.

Nature of Operations

The Company derives substantially all its income from banking and bank-related services which include interest earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from sixteen offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, seven offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, the Bank’s wholly-owned subsidiary that is a full-service, independent insurance agency.

Acquired Loans

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

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

Recognition of Prior Period Errors

In April 2018, the Company discovered an error with the collateral position on a commercial and industrial classified loan relationship that had occurred in April 2017. This error resulted in the loss of the Company’s first lien position, leaving the loan with insufficient collateral. The Company recognized the error by recording a specific reserve and recognizing an additional $300,000 (pre-tax) of provision for loan losses for the quarter-ended March 31, 2018. There was no financial statement impact for the three months ended March 31, 2019. The impact of the correction of the error resulted in a decrease of $300,000 in income before income taxes and a decrease of $63,000 in income taxes, resulting in a decrease of $237,000 (after-tax) in net income ($0.06 per share) for the three months ended March 31, 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 results were understated by the same amount. Management of the Company concluded the effect of the error was immaterial to the Company’s 2017 and 2018 results.

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

Reclassifications

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

Recent Accounting Standards

In January 2018, the Financial Accounting Standards Board (“FASB”) issued 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 adopted the provisions of ASU 2016-02 effective January 1, 2019, which increased assets and liabilities approximately $1.9 million as a result of reporting additional leases on the Company's consolidated statement of financial condition.

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

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

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

In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 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 adopted the provisions of ASU 2016-02, effective January 1, 2019, which increased assets and liabilities approximately $1.9 million as a result of reporting additional leases on the Company's consolidated statement of financial condition.

Note 2. Merger

Effective April 30, 2018, the Company merged with First West Virginia Bancorp, Inc. (“FWVB”), the holding company for Progressive Bank, N.A. (“PB”), a national association. In addition, effective April 30, 2018, PB merged in the Bank. The FWVB merger enhanced the Bank’s exposure into the core of the PA-WV-OH Tri-State region. Through the FWVB merger, the Company anticipates future revenue and earnings growth from an expanded menu of financial services offered through the Company’s branch network in 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 $24,000, were recorded in the Consolidated Statement of Income for the three months ended March 31, 2018.

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

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

The assets acquired and liabilities assumed of FWVB were recorded on the Company’s Consolidated Statement of Financial Condition at their estimated fair values as of April 30, 2018. Based on a purchase price allocation, the Company recorded $23.5 million in goodwill and $9.1 million in core deposit intangibles related to the FWVB acquisition.

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

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

As part of the FWVB merger, the Company identified FWVB employees who would be retained and estimated a severance costs of $100,000 if those employees were terminated without cause within the first year of the merger. For the three months ended March 31, 2019, the Company paid out $52,000 in severance cost according to the FWVB merger agreement.

8

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.

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 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 ASC 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

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

(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 safe deposit box rentals totaling $69,000 and $42,000 for the three months ended March 31, 2019 and 2018, respectively, which are in the scope of ASC 606; the remaining balances of $89,000 and $391,000 for the three months ended March 31, 2019 and 2018, respectively, represent income derived from other various commissions and a bank-owned life insurance policy claim for the three months ended March 31, 2018, which are all outside the scope of ASC 606. The following narrative describes the Company’s revenue streams accounted for under the guidance of ASC 606 as follows:

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

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

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

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

Other Commissions : The Company earns other commissions, such as, wealth management referral fees, check sales and safe 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. Safe deposit box rental income is recognized on a monthly basis, per each contract agreement with our customers. The safe deposit box income is automatically withdrawn from the customer’s deposit account on a monthly basis as this revenue is earned by the contract.

Gains/Losses on Sales of OREO : The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. It is not common policy that the Company will finance an OREO property with the buyer. It is the Company’s belief that once loan collateral has been recognized as an OREO property, it needs to be sold to free the Company of any additional possible loss exposure. In addition, the Company occasionally will receive ownership in mineral rights with an OREO property. It has been the Company’s practice to retain ownership in the mineral rights and proceed to recognize the value of these rights to offset any potential 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:

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:

For debt securities, the Company does not believe that any individual unrealized loss as of March 31, 2019 or December 31, 2018, represents an other-than-temporary impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary impairment. The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer. The securities that are temporarily impaired at March 31, 2019 and December 31, 2018 relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell or it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security.

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

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.

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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.

Total unamortized net deferred loan fees were $850,000 and $926,000 at March 31, 2019 and December 31, 2018, respectively.

Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $102.4 million and $99.0 million at March 31, 2019 and December 31, 2018, respectively.

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

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.

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.

The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $1.1 million and $1.4 million at March 31, 2019 and December 31, 2018, respectively.

TDRs typically are the result of our loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of 12 loans totaling $2.8 million and $3.6 million at March 31, 2019 and December 31, 2018, respectively. Originated loans classified as TDRs consisted of seven loans totaling $2.1 million and six loans totaling $2.1 million at March 31, 2019 and December 31, 2018, respectively. Loans acquired at fair value classified as TDRs consisted of five loans totaling $679,000 and six loans totaling $1.5 million at March 31, 2019 and December 31, 2018, respectively.

During the three months ended March 31, 2019, one residential real estate loan previously identified as an acquired loan at fair value TDR paid off.

During the three months ended March 31, 2019, one originated residential real estate loan modified in a TDR transaction by extending the term of the loan. During the three months ended March 31, 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 paid off.

No TDRs subsequently defaulted during the three months ended March 31, 2019.

The following table presents information at the time of modification related to loans modified in a TDR during the three months ended March 31, 2019.

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

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

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

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.