CBFV 10-Q Quarter ended Sept. 30, 2019

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

1

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

2

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

3

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

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

4

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

5

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

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

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

In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Interim results are not necessarily indicative of results for a full year.

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

Nature of Operations

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

Acquired Loans

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

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

Recognition of Prior Period Errors

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

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

Reclassifications

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

Recent Accounting Standards

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

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

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

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

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

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Note 4. Loans and Related Allowance for Loan Loss

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

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

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

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

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

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

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

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

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

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

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

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

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

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.