Kish Bancorp, Inc.
Annual Report 2020

Plain-text annual report

2 0 2 0 A N N U A L R E P O R T 2 0 2 0 You are why. We are Kish. C O N T E N T S 1 Chairman’s Letter to the Shareholders 8 You Are Why ... We Are Kish. 13 Financial Highlights 14 Independent Auditor’s Report 15 Financial Statements 20 Notes to Consolidated Financial Statements 62 Board of Directors and Officers C H A I R M A N ’ S L E T T E R T O T H E S H A R E H O L D E R S 1 THE STORY OF KISH IN 2020 IS NOT ONE THAT CAN BE SUMMARIZED QUICKLY, ESPECIALLY IF WE ARE TO DO JUSTICE TO THE TEAM’S EXTRAORDINARY PERFORMANCE. THE YEAR WAS A PHENOMENON UNLIKE ANY OTHER, ONE OF WHICH KISH’S INVESTORS, CUSTOMERS, AND COMMUNITIES SHOULD BE FULLY AWARE. Kish began 2020 with a robust agenda of the adjoining lot, would provide for the projects critical to the long-term sustainability construction of a visionary new Kish of the Corporation. The very aggressive plans Innovation Center. The Center, or KIC for the year included important initiatives as we now call it, would support that were critical to our continued drive to our focus on transforming elevate the Kish experience and advance Kish’s customer fulfillment our goal of touching more lives across our through digital technology expanding central Pennsylvania market. The adoption, data management, implementation of these projects had been information security, client support, under strategic development for years. The enhanced team collaboration, and a years of planning across multiple fronts streamlined and digitally-enabled “branch were coming to fruition and the team’s full of the future” concept. attention would now shift to execution. As we entered 2020, we also had very specific The execution of our vision for “Kish 2020” objectives for continuing to aggressively and centered around the conversion of Kish’s profitably grow the franchise. These included core processing system to a nimbler platform leveraging the growing capacity of the team that would expand our ability to deliver to deliver across the full range of our banking advanced technology solutions and more and non-banking services. In addition to efficiently support our growing customer team development, that included recruiting base. The core conversion would touch every talented new team members to support banking relationship and every element of our relationship acquisition and expansion and banking operation. The second pillar of our intensify our focus on serving the Juniata vision was the migration to a cloud-based IT County market, and expansion into Altoona architecture which would bring the flexibility and Blair County. and scalability necessary to support future growth. The migration to an Amazon Web Services hosted virtual environment, Office 365, and a cloud-based phone solution would also prove to be critical throughout the pandemic by providing a “work from anywhere” framework. While a separate undertaking, the accompanying work to reimagine Kish’s Reedsville campus was also a critical part of the vision. The reconfiguration of the Reedsville Financial Center and branch, coupled with the development of With our sights clearly set on execution and backed by multiple years of strong financial performance and an expanding economy, we entered 2020 ready to tackle the tasks and opportunities at hand. Then, with little warning and incredible swiftness, COVID-19 descended upon us all. With rapidly mounting evidence of the disease’s spread and severity, and against a backdrop of dire predictions, the U.S. economy ground to a halt within a matter of weeks. The COVID-19 Recession had arrived with the same speed and alarming William P. Hayes Chairman of the Board and Chief Executive Officer 2 3 “ As all eyes turned first to the nation’s healthcare system, and then to the banking system, the Kish team pivoted. And all other priorities were suddenly set aside. ” impact as the contagion itself. The Fed and the unprecedented and sustained level of to deliver, word spread quickly. To support of the Sausman team and then the conversion Treasury undertook massive fiscal stimulus demand. By year end, with more than 800 the ensuing demand, our credit and lending of their operating core to the Kish Insurance initiatives. Rates fell to near zero. As all eyes mortgages closed, most originators were teams, even retail branch managers, worked core system. It was all hands on deck for both turned first to the nation’s healthcare system, astonished to realize that they had more than around the clock to triage and process insurance teams as well as Kish’s HR team, and then to the banking system, the Kish team doubled their mortgage originations from the requests. In response to the desire for and just one of many projects supported by pivoted. And all other priorities were suddenly record production levels of 2019. Additionally, constant communications, we developed a the impressive Kish IT team. set aside. there was an equal level of requests for two-way communication channel that allowed mortgage loan modifications that Kish offered borrowers to stay abreast of progress with in lieu of refinancing. It was a creative solution their application process. As Treasury and to support existing mortgage customers that the SBA struggled with implementation, we otherwise we would not have been able to actively engaged in industry discussions at support given the extraordinary level of new the state and national levels that would help RESPONSE TO COVID-19 We immediately took steps to safeguard the health of our customers and team members. Branch access was limited to drive-ups and remote delivery. Enabled by previous investments in technology, we quickly moved over 40% of our workforce to remote work mortgage demand. SUPPORT FOR SMALL BUSINESSES status. Other teams could then be physically After Treasury announced the Paycheck distanced from each other, thereby reducing Protection Program (PPP), providing little in the risk of spread that could compromise the way of initial guidance, we seized the those teams and the delivery of mission challenge of this ill-defined program and critical services. When normal outside developed an advanced application professional services were suspended by portal. As awareness of our the governor’s orders, we developed application portal and personal innovative solutions to sustain the delivery attention to applications of banking services. SUPPORT FOR HOMEOWNERS In every area of the company, we became more agile and adaptive. When the regulatory agencies provided us with greater latitude to provide relief to borrowers, the credit administration and lending teams quickly moved forward to implement payment deferral programs to both residential mortgage and commercial customers. When the Fed reduced interest rates to unprecedented levels, we found ways to sustain the closing of residential mortgages that reduced rates and payments and provided housing solutions to first-time homeowners, even as other market participants suspended all mortgage lending activity. Mortgage lenders, working remotely from their origination support teams, were unflagging in their drive to handle became more widespread, and local businesses found access when other banks were unable Todd Erdley CEO and Founder of Videon, a live streaming video encoder business in State College, and Kish PPP loan recipient CORE CONVERSION INTO THE TEETH OF A GALE The conversion to the new CSI core system was a massive undertaking that had been scheduled for May 2020 more than a year in advance so all the resources necessary for a successful conversion could be locked in place. As the pandemic worsened and travel became restricted, and as conversion drew nearer, it became clear that this conversion would need to be conducted virtually, without a single representative of CSI’s conversion team on site and most of the Kish team working remotely as well. It would be the first virtual conversion of its size in the country. Our analogy going into conversion was that it would be like changing the engines on the plane while it was in flight. What we did not know in advance was that the CSI pilots and mechanics would be on the ground, talking the Kish conversion team through it. Following the successful conversion over the weekend of May 15, and after a few challenging weeks that followed, we all could reflect on a high stakes undertaking that represented yet another triumph for the entire Kish team. It was an accomplishment that validated our growing confidence in the “team of teams” approach to executing to shape the PPP submission, approval, and funding processes. When the smoke began to clear, we were surprised to discover that, in a few short months, we had received, processed, approved, and funded more than double the commercial loan requests that we had historically handled in a year—all this in addition to the regular lending activity that has kept us growing and active for the last several years. As the year wore on, the team moved through the second phase of PPP and then right into the PPP forgiveness process for the more than 800 relationships that had received PPP loans. Building on established technology relationships, Kish was a leader in providing PPP technology that put our borrowers at the front of the line for SBA consideration every step of the way. By year end, more than half of Kish’s 2020 PPP loans had been forgiven, even as the team geared up for the next round of PPP lending. INSURANCE AGENCY ACQUISITION Although delayed several times by the across multiple, mission-critical fronts coronavirus, the acquisition of Sausman simultaneously. Insurance Agency by Kish Insurance closed in the second quarter of the year and represented the first major insurance acquisition by Kish since the landmark Thompson-Wilson Agency acquisition in 1997. The closing was followed by the assimilation CLOUD MIGRATION AT THE PERFECT TIME Another critical part of Kish’s transformation for the future was the migration to cloud- based IT structure that will support growth and long-term sustainability. In 2019, the “ In a few short months, we had received, processed, approved, and funded more than double the commercial loan requests that we had historically handled in a year. ” 4 5 “ The KIC will support a new capability to work more effectively, efficiently, and collaboratively. ” Kish IT team had transitioned our network there were some delays in the delivery of key from exceptional support from the IT team development of an Altoona-based team and architecture from a traditional MPLS building components, we were pleased by to prepare for the switch-over of systems. we are excited about the potential for growth connection to a much faster, more redundant, year end to bring this enormously important We also should express our appreciation to in that market. and flexible architecture called SDWAN. and transformative project to fruition with Alexander Construction for their effective Beginning in January of 2020, the team only slight modifications to both budget construction management and coordination started the final phase of our cloud migration and the KIC’s completion date. The finished of the primarily local sub-contractors. Credit for our phone system, the Microsoft Office building’s striking architectural design has also goes to Fernsler Hutchinson Architecture 365 productivity suite, and a virtual desktop already attracted attention far and wide, but for their exceptional work in designing environment hosted in the cloud. Through the true beauty of the technology-enabled a facility reflective of the Kish culture of a partnership with the cloud computing KIC is in its layout and internal systems. The innovation and collaboration. company, Summit Technology Group, Kish interior space will provide a new working rolled out these new systems just in time environment for our “team of teams” to support the pandemic response and approach to solving problems, delivering migration to a virtual work environment. Years solutions, and supporting our customers. Not of strategy and planning came together very only will it house multiple support teams fortuitously to quickly execute the migration working within the facility, but it will be a while permanently establishing a scalable IT point of engagement for multi-disciplinary infrastructure that will benefit our clients, our teams from across the company and across employees, and our shareholders with more Kish’s growing footprint. The KIC will support efficient, flexible, and faster technology. a new capability to work more effectively, REEDSVILLE CAMPUS AND THE KIC Concurrent with the conversion project, a smaller but intensely focused team was also working hard on the Reedsville campus reformulation and the construction of the new KIC. While work on this critical facilities project was suspended under the governor’s order and efficiently, and collaboratively to transform how we advance our strategic priorities and support our customers, communities, and team members. Although we regret not being able to share the KIC through in-person tours until the COVID-19 crisis is behind us, the marketing team is developing a virtual tour of the facility with President and COO Greg Hayes. It was his vision for the Reedsville campus and Kish Innovation Center that drove this through to a final plan and that will make this transformational facility central to Kish’s growth and expansion for decades to come. Recognition also goes to Facilities and Security Officer, Glenn Snyder, who was relentless in his management of all the various pieces of this complex and multi-phased project. The final execution stages of this facility project benefitted The new Kish Innovation Center on the Reedsville campus GROWTH AND EXPANSION Finally, there was the focus on the critical priority of expanding our client base and geographic presence. We began the year with a strong focus on our stated goal of expansion into Juniata County. This was augmented by our agreement to acquire Sausman Insurance Agency, which not only provided us with an established base of business, but also with an existing office located just off the Mifflintown exit of Route 322. Following the closing of the transaction and the acquisition of the real estate, we quickly moved to have the office approved as a Limited Purpose Office (LPO) of Kish Bank (no deposits accepted or loans disbursed). Shortly thereafter, we began the selection of a Juniata regional advisory board and dedicated several commercial and mortgage lenders and a financial advisor to the market. Our attention to market expansion in the Altoona/Blair County market did not lag far behind. In October, we were pleased to announce that Robert Bilger was joining Kish as a senior commercial lender and Market Leader. Bob brings more than 32 years of banking experience to Kish, all of it in the Blair region. Earlier in the year, we were pleased to announce that Ed Henderson had joined Kish as a Wealth and Trust Advisor. Ed is a native of Blair County and had spent the majority of his career as an advisor in that market. Together, Bob and Ed form a great nucleus for the Additionally, we were pleasantly surprised when a northeastern Ohio commercial real estate lending team, with whom we had a longstanding working partnership, called to say they were interested in joining the Kish Bank team. Ken Goetz and Gary Wimer, seasoned bankers and commercial real estate development lenders, came to us following an unpleasant post-merger experience with their former employer. Because of the number of loans we had participated in over the prior five years, we were very familiar with the quality of their work and their borrowers and welcomed the opportunity to bring them on board. In a related development, shortly after year-end, Peter Collins stepped down as Kish’s Chief Credit Officer to assume a Senior Portfolio Manager and Commercial Lender role working out of the Hudson, Ohio, office with Ken and Gary. Pete’s home and family are in Cleveland, as were many of Pete’s prior years of commercial lending experience, so this move made sense for both Kish and Pete. We are now very well-positioned to have this satellite office, for which we recently received regulatory LPO approval, become a meaningful part of our growth strategy going forward. I am sure all of you are familiar with the circus act of plate spinning where the performer spins multiple plates simultaneously balanced on thin poles. It will not surprise you that this analogy has come to mind frequently as I have been writing this letter. The miraculous performance of the versatile and multi-talented Kish team was very akin to plate spinning on a massive scale. Amazingly, not a single plate was dropped. It will be a performance that goes down in the annals of Kish lore and in the stories told by our clients for many years to come. 6 “ Our long- term strategic focus of developing residential mortgage lending as a linchpin relationship acquisition tool has been an overwhelming success. ” 7 I will close with the final chapter in the sufficient to fund rising loan demand, thereby Benefits consulting achieved positive are as proud as I am of the positive impact amazing story of 2020, one in which our preserving the bank’s net interest margin with results given that many relationships under the Kish team had on the region we serve. As shareholders will have added interest. In only a modest decline of 9 basis points versus development chose not to move due to our reach expands and Kish’s business model addition to producing life-sustaining solutions a 35 basis point decline for the bank’s peers. the uncertainties of the environment. attracts new clients and new partners, we will for our customers, communities, and fellow Deposits finished the year up by $167.6 Nevertheless, earnings for benefits consulting continue to trust in the capacity of this team team members, the extraordinary work of million to $877.8 million, an increase of rose modestly higher to $599 thousand to deliver for our customers, communities, this team also generated exceptional results 23.59% from $710.2 million a year ago, with a from $585 thousand in 2019. Travel quite and, ultimately, for you, our shareholders. for Kish shareholders. I will simply preface continued notable expansion in core deposits. expectedly experienced steep declines as Thank you for your loyalty and support. Please by saying that 2020 was a remarkable year for performance in almost every respect, and clearly differentiated Kish from its peers. FINANCIAL RESULTS Unprecedented activity in almost every area of the company produced unprecedented revenue expansion in almost every area of the company. The bottom line was that net income for the year reached $8.04 million, an increase of $1.03 million, or 14.72%, compared to $7.01 million for the year ended 2019. Fully diluted earnings per share increased to $3.12 per share from $2.70 per share in 2019, up 15.60%. The increases reflect expansion in The expansion in noninterest income was equally impressive. Most notable was the more than 100% growth in fee income from the sale of residential mortgage loans to the secondary market, which increased to $2.4 revenues dropped to $88 thousand from stay safe and well. $371 thousand the year prior. We expect pent-up demand for both employee benefits consulting and travel to rebound as COVID subsides later this year. Sincerely, million from $1.2 million in 2019. It was Noninterest expense was generally in line truly a blowout year for the Kish residential with the expansion of business activity, mortgage lenders and underwriters, as well but also reflected the investment Kish is as our mortgage unit leader, Deb Weikel. making in the future. While most conversion Our long-term strategic focus of developing costs were covered in prior periods, there residential mortgage lending as a linchpin were some non-recurring consultancy costs relationship acquisition tool has been an incurred during the year, as well as some overwhelming success as preparation met significant overtime cost related to the with opportunity over the past several years. conversion. Of significant comparison was William P. Hayes Chairman of the Board and Chief Executive Officer both net interest income, up 12.52% over Other centers of noninterest income the prior year, and noninterest income, which generation are evident from the income increased 19.07% overall. The strong growth in net interest income to $31.1 million in 2020, an increase of $3.6 million, or 12.52%, compared to $27.5 million in 2019, was delivered because of several key contributors. Interest income benefitted from rising loan activity, net of PPP activity, with statement. The insurance agency, which achieved 10% internal revenue growth, was augmented by the addition of Sausman Insurance Agency. Consequently, insurance a year ago. The bank’s interest in significant agency acquisition opportunities remains high. total loans closing the year up $78.7 million, Despite the incredible volatility in financial or 11.46%, at $765.7 million. Net interest markets, the performance of the wealth the rise in FDIC insurance costs, reflecting the 2019 credit from prior period events related to the funding of large non-banks choosing the bank charter and the benefits of FDIC insurance. Otherwise, most areas of expense were well-controlled in 2020. The extraordinary team at Kish responded to every challenge that came their way during the most challenging year in our history. Never once did I hear “no way” or agency income grew to $2.2 million from $1.3 CONCLUSION BUT NOT AN END income, including fees from PPP lending, was management unit delivered impressive results “we can’t,” only, “we can find a way” and “we more than sufficient to offset contributions of an 8.4% increase in revenues from 2019. will get it done.” As shareholders, I hope you to the loan loss reserve from earnings of $2.3 Both the licensed advisory unit and the trust million in 2020, compared to $390 thousand unit were successful in generating positive in 2019. Despite the dramatic fall in interest rates results for the year, with revenue increasing to $1.78 million from $1.64 million. created by the COVID-19 Recession, balance Several units hit hardest by the COVID sheet management strategies coupled with a shutdown were the employee benefits dramatic rise in core deposits were more than consulting group and the travel group. Sausman Insurance Agency, a division of Kish 8 Y O U A R E W H Y . . . W E A R E K I S H . 9 At Kish, it’s not about what we do, it’s about why we do it. JOHN R. WALD COMPANY – HUNTINGDON Nearly 100 years ago, John R. Wald—a visionary, engineer, and businessperson— had the idea to design equipment that would automate the production of license plates. The company he established would employ community members to manufacture production lines for correctional industries, Our “why” is the driving force behind everything: we believe in our hearts that we can make the lives of those around us—our employees, our clients, and our communities—better. Our team members act on this belief every day. We know we’re making a difference because we hear the stories from our customers and our communities, and we celebrate their successes alongside them. Here are stories of people like you who started out with a vision and chose Kish to be their partner. We’re honored to be part of their journey. DUMOR, INC. – MIFFLINTOWN DuMor, Inc., in Mifflintown, started 37 years ago with two friends who discovered a need for high quality, custom outdoor commercial and public site furnishings. Dick Rudy and Don Saner, the company’s while, at the same time, helping with prisoner rehabilitation by providing meaningful jobs for inmates. Today, the John R. Wald Company not only builds license plate digital printing and production lines, but they also make and sell license plates to jurisdictions that would rather buy them from private companies. The company has engaged Kish Bank on key projects to modernize production facilities and to introduce products to better serve their customers, such as a powerful new digital color license plate printing system. founders and only two employees, began operations in a newly constructed 4,800 square foot manufacturing facility with just a few designs for wood benches, trash receptacles, park grills, and a picnic table. Their steadfast commitment to quality and exceptional customer service propelled them to become one of the leading names in the site furnishings industry internationally, with 70 employees operating in an 85,000 square foot facility. They now offer over 78 bench designs, 35 receptacle designs, 23 table designs, and many more custom furnishings made out of a variety of materials. DuMor products are placed domestically and internationally in many types of venues. In Pennsylvania, the company’s creations can be seen in places like Hersheypark, Penn State University, and the City of Pittsburgh, and in other states like in the City of Boston and Walt Disney World. Their unwavering focus on their core values remains strong today with the family’s second and third generation management. “My family has always worked with Kish Bank. They’re a small, hometown bank with the capabilities and resources of a much larger bank, so it’s really the best of both worlds. They have great customer service, and you are dealing with people that you know and trust. We will be staying with Kish Bank.” Anita Rudy President, DuMor, Inc. “Kish has done a wonderful job of maintaining a focus on our business needs and working to deliver creative solutions so that we can continue to make this business successful. Like Wald itself, Kish is rooted in the community and cares about people. They’re just as interested as we are in making the company successful, because they know when a company is successful, the people are successful ... and they will bring good things to the community.” Eric Pizzuti CEO, John R. Wald Company 10 11 FOXPRO, INC. – LEWISTOWN GIV LOCAL – STATE COLLEGE FOXPRO, Inc. began in the basement of Mike Dillon’s parents’ home with his father’s A passion for giving back, a background in banking, and entrepreneurial creativity determination to create a portable electronic predator calling device for his sons to inspired three State College area friends to design a unique business model that take into the woods. 25 years later, FOXPRO, Inc. now is the number one predator allows local non-profits to benefit from credit card swipes. Kish customers calling manufacturer and distributor in the world, with 70 employees working Shizuka Buckley, along with her husband Sam and friend Christian Baum, from a 50,000 square foot facility. “We’re a very successful Mifflin County based business with what is today an expanding global reach. Being able to work with a local bank like Kish that is growing like us and reinvesting in our community is a great fit. They make it easy for us as we continue to focus on growth, knowing we can rely on the Kish team for the best advice available for our banking and financial needs.” Mike Dillon General Manager, FOXPRO, Inc. recognized that while many small business owners want to give back, they don’t have the means to donate from their bottom line. The three founded Giv Local in 2018 to connect businesses and non-profits and put money back into the community. When a business selects Giv Local for their credit card processing services, Giv Local seamlessly donates 20% of the standard processing fees to a verified non-profit of that business’s choice. With typical merchant services providers, those fees would go to a large processing company or bank. Fitting with Kish Bank’s commitment to community alignment, Kish switched its merchant services for business customers from a large national provider to Giv Local. “I give kudos to Kish because they saw outside the box and rallied behind us. Kish saw what we had created and bought into our vision to enable businesses and their merchant services customers to make an impact in their communities. It’s very heartwarming to know that we’re part of that, and there’s no better feeling. Actually, there is one better feeling—being able to issue the checks to the non-profits. Kish Bank and Giv Local share in underwriting the cost of the charitable contributions.” Shizuka Buckley Charity Sorceress, Giv Local 12 F I N A N C I A L H I G H L I G H T S 13 STRAWBERRY FIELDS, INC. – STATE COLLEGE Strawberry Fields was founded out of love for children with intellectual disabilities on a farm in Yarnell, PA, in 1972. The founders had a dream of a time when people with disabilities would be accepted and recognized for their unique contributions to our community. Today, they FOR THE YEAR Net Income Net Income Before Taxes Total Dividends Declared 2020 2019 2018 2017 2016 $ 8,039,287 $ 7,006,914 $ 6,029,683 $ 4,139,770 $ 4,616,894 9,278,885 2,804,385 7,903,452 2,585,445 6,670,247 2,396,453 5,141,399 2,301,564 5,254,277 2,130,197 have grown from that farm to an organization that offers a continuum of services, enhancing AT YEAR END (in $000s) the lives of individuals and families with developmental delays, intellectual disabilities, and mental illness. With Kish’s help, they have opened two stores where they employ individuals with disabilities and mental illness, providing them with a greater sense of purpose and accomplishment. “Kish Bank and Strawberry Fields share a common mission—to improve the lives of the people we serve. There is no better example of Kish’s focus on us than when the pandemic first struck. We really had no idea how we were going to continue to operate our stores and keep our group residences safe and open. Kish Bank, on the other hand, was a step ahead of us. They put together a team very quickly that helped us get one of the first PPP loans. The PPP loan enabled us to keep our staff working and stores open prior to the mandated shutdown. We never had any doubt that moving to Kish Bank was the right decision, but during the pandemic, it was absolutely a blessing that they were there for us. There are no doubts that our relationship was meant to be.” Cindy Pasquinelli CEO, Strawberry Fields, Inc. Total Assets Total Loans (Net) Total Deposits Stockholders’ Equity Loan Loss Reserve Net Loan Losses (Recoveries) RATIO ANALYSIS Return on Average Assets* Return on Average Equity* Dividend Declared/Net Income Loans/Deposits Primary Capital/Total Assets Total Capital/Risk Weighted Assets Loan Loss Reserve/Loans Net Loan Losses to Total Loans (Net) PER SHARE DATA** Basic Earnings Fully Diluted Earnings Dividends Paid Equity (Book Value) Equity Plus Loan Loss Reserve $ 1,106,609 $ 918,309 $ 850,508 $ 811,192 $ 725,071 755,960 877,796 69,962 9,771 (4) 0.79% 12.90% 34.88% 86.12% 7.21% 12.32% 1.28% 0.00% 679,519 710,226 64,352 7,499 (467) 0.79% 11.56% 36.90% 95.68% 7.82% 11.86% 1.09% -0.07% 630,440 682,350 59,728 6,642 10 0.72% 10.71% 39.74% 92.39% 7.80% 11.95% 1.04% 0.00% 569,010 653,687 56,339 5,698 913 0.54% 7.45% 55.60% 87.05% 7.65% 11.65% 0.99% 0.17% 488,588 561,928 53,593 6,011 271 0.65% 8.54% 46.14% 86.95% 8.22% 13.10% 1.22% 0.06% $ 3.20 3.12 1.08 26.93 30.69 $ 2.80 2.70 1.00 24.90 27.80 $ 2.44 2.35 0.94 23.41 26.01 $ 1.69 1.67 0.92 22.50 24.77 $ 1.90 1.89 0.86 21.63 24.06 Average Shares Outstanding (#) 2,597,978 2,499,536 2,499,673 2,459,168 2,430,134 NET INCOME (in millions) EARNINGS & DIVIDENDS (per share)** STOCK VALUATION (per share)** Watch videos of more customer stories on Kish Bank’s YouTube channel: https://bit.ly/38zxake *Due to fluctuations in the mark to market valuation for investment securities, these are not included in the totals for average assets and average equity. **For comparability, per share data for 2016 and 2017 have been adjusted to reflect the two-for-one stock split in 2018. 14 I N D E P E N D E N T A U D I T O R ’ S R E P O R T C O N S O L I D AT E D B A L A N C E S H E E T 15 Board of Directors and Stockholders Kish Bancorp, Inc. REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying consolidated financial statements of Kish Bancorp, Inc. and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2020 and 2019; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements. MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kish Bancorp, Inc. and subsidiaries as of December 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America. Cranberry Township, Pennsylvania March 12, 2021 KISH BANCORP, INC. CONSOLIDATED BALANCE SHEET ASSETS Cash and due from banks Interest-bearing deposits with other institutions Cash and cash equivalents Certificates of deposit in other financial institutions Investment Securities available for sale, at fair value Investment Securities held to maturity, fair value of $11,158,435 and $7,378,098 Equity Securities Loans held for sale Loans Less allowance for loan losses Net loans Premises and equipment, net Goodwill Regulatory stock Bank-owned life insurance Accrued interest and other assets TOTAL ASSETS LIABILITIES Deposits: Noninterest-bearing Interest-bearing demand Savings Money market Time Total deposits Short-term borrowings Other borrowings Accrued interest and other liabilities TOTAL LIABILITIES STOCKHOLDERS' EQUITY December 31, 2020 2019 $ 12,442,465 $ 117,223,023 129,665,488 6,878,336 29,331,755 36,210,091 490,000 128,037,046 1,474,000 131,180,513 11,023,499 2,132,287 5,666,999 765,730,956 9,770,563 755,960,393 24,268,706 3,560,942 6,875,100 16,236,506 22,692,322 $ 1,106,609,288 $ $ 135,621,817 $ 70,550,356 91,167,858 328,846,611 251,609,787 877,796,429 69,360,211 64,656,810 24,833,601 1,036,647,051 7,250,000 1,695,342 3,464,876 687,018,196 7,499,402 679,518,794 15,635,486 1,843,699 6,915,000 15,830,426 17,290,797 918,309,024 99,838,645 13,496,720 69,073,873 248,203,646 279,612,736 710,225,620 46,740,021 80,029,248 16,961,740 853,956,629 Preferred stock, $.50 par value; 500,000 shares authorized, no shares issued and outstanding Common stock, $.50 par value; 8,000,000 shares authorized, 2,697,500 shares issued; 2,603,040 and 2,583,294 shares outstanding at December 31, 2020 and 2019, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (94,460 and 114,206 shares at December 31, 2020 and 2019, respectively) TOTAL STOCKHOLDERS' EQUITY - - 1,348,750 2,703,924 69,539,219 (1,009,136 ) (2,620,520 ) 69,962,237 1,348,750 2,494,671 64,304,317 (1,014,506 ) (2,780,837 ) 64,352,395 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,106,609,288 $ 918,309,024 See accompanying notes to consolidated financial statements. S.R. Snodgrass, P.C. • 2009 Mackenzie Way, Suite 340 • Cranberry Township, Pennsylvania 16066 • Phone: 724-934-0344 • Fax: 724-934-0345 2 16 C O N S O L I D AT E D S TAT E M E N T O F I N C O M E C O N S O L I D AT E D S TAT E M E N T O F C O M P R E H E N S I V E I N C O M E 17 KISH BANCORP, INC. CONSOLIDATED STATEMENT OF INCOME KISH BANCORP, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Net income Other comprehensive income Securities available for sale: Year Ended December 31, 2019 2020 7,006,914 8,039,287 $ $ Change in unrealized holding gains on available for sale securities Tax effect Change in comprehensive income related to cash flow hedges Tax effect Reclassification adjustment for net investment securities gains realized in net income Tax effect Total other comprehensive income 3,133,307 (657,993 ) (3,045,609 ) 639,578 (80,903 ) 16,990 5,370 2,150,086 (451,520 ) (1,624,812 ) 341,211 (161,638 ) 33,944 287,271 Total comprehensive income $ 8,044,657 $ 7,294,185 See accompanying notes to consolidated financial statements. INTEREST AND DIVIDEND INCOME Interest and fees on loans: Taxable Exempt from federal income tax Interest and dividends on investment securities: Taxable Exempt from federal income tax Interest-bearing deposits with other institutions Other dividend income Total interest and dividend income INTEREST EXPENSE Deposits Short-term borrowings Other borrowings Total interest expense NET INTEREST INCOME Provision for loan losses Year Ended December 31, 2019 2020 $ 33,850,246 $ 1,309,814 2,880,753 436,694 206,080 769,576 39,453,163 5,321,683 84,843 2,938,290 8,344,816 31,108,347 2,267,500 32,146,548 1,230,229 2,605,465 824,667 645,350 644,456 38,096,715 7,480,980 68,749 3,009,361 10,559,090 27,537,625 390,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 28,840,847 27,147,625 NONINTEREST INCOME Service fees on deposit accounts Investment securities gains, net Equity securities gains (losses), net Gain on sale of loans Earnings on bank-owned life insurance Insurance commissions Travel agency commissions Wealth management Benefit management Other Total noninterest income NONINTEREST EXPENSE Salaries and employee benefits Occupancy and equipment Data processing Professional fees Advertising Federal deposit insurance Pennsylvania shares tax Other Total noninterest expense Income before income taxes Income tax expense NET INCOME EARNINGS PER SHARE Basic Diluted See accompanying notes to consolidated financial statements. 1,580,854 80,903 (313,055 ) 2,424,082 485,614 2,173,549 87,837 1,780,460 598,997 1,223,451 10,122,692 17,983,683 3,055,611 2,167,218 572,625 398,380 500,000 664,625 4,342,512 29,684,654 9,278,885 1,239,598 1,678,651 161,638 232,874 1,171,428 473,054 1,253,906 371,349 1,642,592 584,926 931,434 8,501,852 16,533,267 3,112,385 2,519,299 523,490 263,780 207,871 627,977 3,957,956 27,746,025 7,903,452 896,538 $ 8,039,287 $ 7,006,914 $ $ 3.20 $ 3.12 $ 2.80 2.70 3 4 18 C O N S O L I D AT E D S TAT E M E N T O F C H A N G E S I N S T O C K H O L D E R S ’ E Q U I T Y C O N S O L I D AT E D S TAT E M E N T O F C A S H F L O W S 19 . 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k d c e o s t a S b - k c o t S e m o c n i e m e v o i s c n n e i h e e v r i p s m n e o h c e r r p e m h t o O c r e h t O e m o c n i e m t e N o c n i t e N 5 9 3 , 2 5 5 3 9 , 4 3 6 , 2 5 3 , 4 6 ) 7 3 8 , 0 8 ) 7 7 3 , 2 8 ( , 0 8 7 , ) 2 6 ( 0 5 , 4 1 ) 6 0 0 , 1 5 ( , 4 1 0 , 1 ( 7 1 3 , 4 0 7 3 1 , 4 3 6 , 4 0 3 , 4 1 6 7 6 , 4 9 1 4 7 , 2 6 , 4 9 4 , 2 0 5 7 , 8 4 0 3 5 , 1 7 , 8 4 3 , 1 9 1 0 2 , 1 9 3 1 0 r e 2 b , m 1 3 e c r e e D b m , e e c c n e a D l a , B e c n a l a B - - 0 7 3 , 5 0 7 3 , 5 8 2 5 , 8 8 8 2 5 , 8 8 ) 2 4 0 , 4 8 ) 2 1 4 ( 0 , 4 8 1 ( 7 8 2 , 9 3 7 0 8 , 8 2 , 9 3 0 , 8 5 3 5 , 4 7 5 3 3 5 , 4 7 3 2 4 8 , 8 1 2 5 4 8 , 8 1 5 ) 5 8 3 , 4 0 ) 5 8 8 , 2 3 ( , 4 0 8 , 2 ( - - ) 9 7 2 , 6 ( ) 9 7 2 , 6 ( ) 8 8 3 , 3 5 ) 8 7 8 ( 3 , 3 5 7 ( ) 8 8 3 , 3 5 ) 8 7 8 ( 3 , 3 5 7 ( 0 3 6 , 9 9 0 6 3 6 , 9 9 6 9 4 4 , 5 4 9 5 4 4 , 5 4 5 0 7 3 , 5 0 7 3 , 5 7 8 2 , 9 3 7 0 8 , 8 2 , 9 3 0 , 8 ) 5 8 3 , 4 0 ) 5 8 8 , 2 3 ( , 4 0 8 , 2 ( 1 8 1 , 4 5 1 1 8 1 , 4 5 1 8 2 5 , 8 8 8 2 5 , 8 8 ) 5 3 5 , 4 7 ) 5 3 3 ( 5 , 4 7 3 ( ) 2 4 0 , 4 8 ) 2 1 4 ( 0 , 4 8 1 ( 9 7 2 , 6 9 7 2 , 6 2 4 8 , 8 1 2 5 4 8 , 8 1 5 ) s e r a h s ) s 8 e 5 r 4 a , h 8 s 1 8 ( 5 n 4 a , l 8 p 1 k ( c n o a t l s p d k e c t c o i t r s t s d e e r t y c i b r t s s e e r r a y h b s s f o e r e a s h a s h f c o r u e P s a h c r u P ) s e r a h s ) s 5 e 1 r 2 a ( h s n a 5 l 1 p 2 k ( c n o a t l s p d k e c t c o i t r s t s d e e r t y c i b r t s s e e r r a y h b s s f o e r e a r h u s t i f e o f r e o r F u t i e f r o F ) s e r a h s ) s 6 e 2 r 0 a , h 9 s 1 ( 6 2 s n 0 o , 9 i 1 t p ( o s n k o c i o t t p s o f o k c e o s t i s c r f e o x e E s i c r e x E s e r a h s s n e a r l a p h k s c n o a t l s p d k e c t c o i t r s t s d e e r t c f o i r t n s o e i r t a f o z i t n r o o i m t a A z i t r o m A ) s e r a h s ) s 6 e 5 r 6 a , h 7 s 2 6 ( 5 k 6 c , o 7 t 2 s ( y k r u c s o a t s e r y t r f u o s a e e s r a t h f c o r u e P s a h c r u P ) s e r a h s ) 9 s e 5 r 1 a , h 9 s 2 9 ( 5 k 1 c , o 9 t 2 s ( y k r u c s o a t s e r y t r f u o s a e e l a r t S f o e l a S ) e r a h s r ) e e p r a 8 h 0 s . r 1 e $ p ( 8 s d 0 n . 1 e $ d ( i v s i d d n e h d s a i v C i d h s a C e s n e p x e e s n n o e i p t x a s e n n e o p i m t a o s c n e n p o m i t o p c o n k o c i o t t p S o k c o t S e m o c n i e m e v o i s c n n e i h e e v r i p s m n e o h c e r r p e m h t o O c r e h t O e m o c n i e m t e N o c n i t e N 7 3 2 , 2 6 7 9 3 , 9 2 6 , 2 6 9 $ , 9 6 ) 0 2 5 $ , 0 2 ) 0 6 2 , 2 5 ( , 0 $ 2 6 , ) 2 6 ( 3 1 $ , 9 0 ) 6 0 3 , 1 1 ( , 9 0 0 , 1 $ ( 9 1 2 $ , 9 3 9 5 1 , 9 2 6 , 9 3 $ 5 , 9 4 6 2 9 $ , 3 0 4 7 2 , 2 9 , 3 $ 0 7 , 2 0 5 7 $ , 8 4 0 3 5 , 1 7 , 8 $ 4 3 , 1 $ 0 2 0 2 , 1 0 3 2 0 r e 2 b , m 1 3 e c r e e D b m , e e c c n e a D l a , B e c n a l a B . s t n e m . e s t t a n t e s m l a e i t c a n t a s n l a i f i c d n e a t a n d i f i l d o e s t n a o d c i l o o t s n s o e t c o o n t g s n e i t y o n n a g p n m i y o n c a c p a m e e o S c c a e e S KISH BANCORP, INC. CONSOLIDATED STATEMENT OF CASH FLOW Year Ended December 31, 2020 2019 OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 8,039,287 $ 7,006,914 Provision for loan losses Investment securities gains, net Equity security (gains) losses Proceeds from sale of loans held for sale Origination of loans held for sale Gain on sales of loans Depreciation, amortization, and accretion Deferred income taxes Decrease (increase) in accrued interest receivable (Decrease) increase in accrued interest payable Earnings on bank-owned life insurance Gain on sale of other assets Non-cash compensation - equity awards Other, net Net cash provided by operating activities INVESTING ACTIVITIES Maturities of certificates of deposit Investment securities available for sale: Proceeds from sale of investments Proceeds from repayments and maturities Purchases Investment held to maturity: Purchases Equity securities: Proceeds from sale of securities Purchases Increase in loans, net Purchase of regulatory stock Redemption of regulatory stock Purchase of premises and equipment Proceeds from sale of other real estate owned Net cash used for investing activities FINANCING ACTIVITIES Increase in deposits, net Increase in short-term borrowings, net Proceeds from other borrowings Repayments of other borrowings Purchases of treasury stock Proceeds from sale of treasury stock Exercise of stock options Cash dividends 5 5 Net cash provided by financing activities Increase in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest on deposits and borrowings Income taxes SUPPLEMENTAL DISCLOSURE OF NON-CASH CASH FLOW INFORMATION Real estate acquired in settlement of loans Right of use assets and lease liability See accompanying notes to consolidated financial statements. $ $ $ 6 2,267,500 (80,903 ) 313,055 51,499,353 (51,277,394 ) (2,424,082 ) 1,264,142 (666,073 ) (198,448 ) (512,129 ) (485,614 ) - 607,370 (837,756 ) 7,508,308 390,000 (161,638 ) (232,874 ) 44,070,616 (46,207,499 ) (1,171,428 ) 1,210,994 (314,366 ) 51,779 247,948 (473,054 ) (6,335 ) 393,071 1,411,654 6,215,782 984,000 1,646,000 - 62,650,078 (60,320,838 ) 9,694,054 30,612,964 (44,731,980 ) - (250,000 ) - (750,000 ) (78,709,100 ) (1,025,400 ) 1,065,300 (9,723,327 ) - (85,829,287 ) 167,570,809 22,620,190 1,824,236 (17,196,674 ) (753,388 ) 699,630 (184,042 ) (2,804,385 ) 171,776,376 93,455,397 36,210,091 129,665,488 $ 1,987,549 - (49,504,658 ) (1,404,700 ) 600,400 (2,532,174 ) 35,918 (53,846,627 ) 27,875,579 24,255,852 6,589,000 (4,584,707 ) (853,543 ) 709,265 (333,843 ) (2,585,445 ) 51,072,158 3,441,313 32,768,778 36,210,091 9,003,543 $ 1,950,000 10,311,142 - - $ 149,739 36,000 4,989,184 20 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 21 KISH BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Nature of Operations and Basis of Presentation Investment Securities (Continued) Kish Bancorp, Inc. (the “Company”) is a diversified financial services organization whose principal activity is the ownership and management of its subsidiaries, Kish Bank (the “Bank”), Kish Travel Services, Inc., and the Bank’s subsidiaries, Tri-Valley Properties, LLC, Kish Agency, Inc., and Kish Equities, LLC. The Company generates commercial and industrial, agricultural, commercial mortgage, residential real estate, and consumer loans and deposit services to its customers located primarily in central Pennsylvania and the surrounding areas. The Bank operates under a Pennsylvania Department of Banking and Securities bank charter and provides full banking services. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law. Kish Agency, Inc. provides insurance products and services. Kish Travel Services, Inc. is a Pennsylvania business established to provide travel services to its customers. Kish Equities, LLC is a subsidiary established to hold investments in equity securities. The consolidated financial statements include the accounts of Kish Bancorp, Inc. and its subsidiaries, Kish Bank and Kish Travel Services, Inc., after elimination of all significant intercompany transactions. The accounting principles followed by the Company and the methods of applying these principles conform to U.S. generally accepted accounting principles (“GAAP”) and to general practice within the banking industry. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the Consolidated Balance Sheet date and revenues and expenses for that period. Actual results could differ from those estimates. Risks and Uncertainties The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of the Company’s customers. The pandemic and its associated impacts on trade, travel, employee productivity, unemployment, and consumer spending has resulted in less economic activity and volatility and disruption in the financial markets. The ultimate extent of the impact of the COVID-19 pandemic on the Company’s business, financial condition, and results of operations is currently uncertain and will depend on various developments and other factors, including, among others: the duration and scope of the pandemic; governmental, regulatory, and private sector responses to the pandemic; and the associated impacts on the economy, financial markets, and our customers, employees, and vendors. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees, and communities during this difficult time. Investment Securities Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity, available for sale, or trading. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest income. Debt securities which are held principally as a source of liquidity are classified as available for sale. Unrealized holding gains and losses for available for sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method. Debt securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in current earnings. Realized securities gains and losses are computed using the specific identification method. The Company does not have trading securities as of December 31, 2020 and 2019. Interest and dividends on investment securities is recognized as income when earned. Securities are evaluated at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. For debt securities, management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in fair value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the investor does not intend to sell the security, and it is more likely than not that it will not be required to sell the security before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. Equity Securities Equity securities are held at fair value. Holding gains and losses are recorded in noninterest income. Dividends are recognized as income when earned. Regulatory Stock Common stock of the Federal Home Loan Bank (“FHLB”) of Pittsburgh represents ownership in an institution that is wholly owned by other financial institutions. These equity securities are accounted for at cost and are shown separately on the Consolidated Balance Sheet as regulatory stock. The Bank is a member of the FHLB and, as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and, as such, is classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared with the capital stock amount and the length of time this situation has persisted; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their principal amount, net of the allowance for loan losses and deferred origination fees or costs. Interest on loans is recognized as income when earned on the accrual method. Generally, the policy has been to stop accruing interest on loans when it is determined that a reasonable doubt exists as to the collectability of additional interest. Interest previously accrued but deemed uncollectible is deducted from current interest income. Payments received on nonaccrual loans are recorded as income or applied against principal according to management’s judgment as to the collectability of such principal. Nonaccrual loans will generally be put back on accrual status after demonstrating six consecutive months of no delinquency. 7 8 22 23 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans (Continued) Allowance for Loan Losses (Continued) The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized is accounted for as an adjustment of the related loan’s yield. Management is amortizing these amounts over the contractual life of the related loans. In general, fixed rate, permanent residential mortgage loans originated by the Bank are held for sale and are carried in the aggregate at the lower of cost or fair value. The Bank sells these loans to various other financial institutions. Currently, the Bank retains the servicing of those loans sold to the FHLB and releases the servicing of loans sold to all other institutions. Allowance for Loan Losses The allowance for loan losses represents the amount that management estimates is adequate to provide for probable losses inherent in its loan portfolio as of the Consolidated Balance Sheet date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to change in the near term. Impaired loans are those for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company evaluates commercial and industrial, agricultural, state and political subdivisions, commercial real estate, and all troubled debt restructuring loans for possible impairment. Consumer and residential real estate loans are also evaluated if part of a commercial lending relationship. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan using the original interest rate and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed. In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded lending commitments, such as letters of credit, financial guarantees, and unfunded loan commitments. Unfunded lending commitments are subject to individual reviews and are analyzed and segregated by risk according to the Company’s internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. Provision for credit losses related to the loan portfolio and unfunded lending commitments are reported in the Consolidated Statement of Income. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 7 years for furniture, fixtures, and equipment, and 31 to 39½ years for building premises. Leasehold improvements are depreciated over shorter of the term of the lease or useful life. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. Goodwill The Company accounts for goodwill using a two-step process for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. Bank-Owned Life Insurance (“BOLI”) The Company purchased life insurance policies on certain key employees. BOLI is recorded at its cash surrender value, or the amount that can be realized. Real Estate Owned Real estate acquired by foreclosure is included with other assets on the Consolidated Balance Sheet at the lower of the recorded investment in the property or its fair value less estimated costs of sale. Prior to foreclosure, the value of the underlying collateral is written down by a charge to the allowance for loan losses if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income and losses on their disposition, are included in other noninterest expense. Treasury Stock Treasury stock is carried at cost. Sales are determined by the first-in, first-out method. Advertising Costs Advertising costs are expensed as the costs are incurred. 9 10 24 25 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes Transfer of Assets The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Earnings Per Share The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options and restricted stock awards are adjusted in the denominator. Treasury shares are not deemed outstanding for earnings per share calculations. Stock Options For purposes of computing stock compensation expense, the Company estimated the fair values of stock options using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can materially affect fair value estimates. The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. The fair value of each stock option granted was estimated using the following weighted-average assumptions: Grant Year 2020 2019 Expected Dividend Yield 3.94 % 3.04 % Risk-Free Interest Rate 0.47 % 2.50 % Expected Volatility 25.91 % 9.47 % Expected Life (in Years) 6.0 10.0 The weighted-average fair value of each stock option granted for 2020 and 2019 was $3.63 and $2.24, respectively. Mortgage Servicing Rights (“MSRs”) The Company has agreements for the express purpose of selling loans in the secondary market. The Company retains servicing rights for certain loans. Originated MSRs are recorded by allocating total costs incurred between the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated servicing income over the estimated life of the servicing portfolio. The Company performs an impairment review of the MSRs and recognizes impairment through a valuation account. MSRs are a component of accrued interest and other assets on the Consolidated Balance Sheet. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds and the carrying value of the loans. All sales are made with limited recourse. For the years ended December 31, 2020 and 2019, the Company recorded gross servicing rights of $426,527 and $485,562, respectively, with a reserve for impairment of $226,221 and $187,634, respectively. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Cash Flow Information The Company has defined cash and cash equivalents as those amounts included in the balance sheet captions “Cash and due from banks” and “Interest-bearing deposits with other institutions” that have original maturities of less than 90 days. Reclassification of Comparative Amounts Certain items previously reported have been reclassified to conform to the current year’s format. Such reclassifications did not affect net income or stockholders’ equity. Derivatives and Hedging Activities The Company engages in a number of business activities that are vulnerable to interest rate risk. The associated variability in cash flows related to interest rate risk may impact the results of operations of the Company. The Company’s hedging objective is to reduce, to the extent possible, unpredictable cash flows associated with interest rate risk, via approved hedging strategies, related to business strategies and business objectives. All derivatives are recorded on the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value of derivatives depends on whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings, together and in the same income statement line item with changes in the fair value of the related hedged item. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss) and are reclassified into the line item in the income statement in which the hedged item is recorded and in the same period in which the hedged item affects earnings. Hedge ineffectiveness and gains and losses on the excluded component of a derivative in assessing hedge effectiveness are recorded in earnings. 11 12 26 27 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3. INVESTMENT SECURITIES Revenue Recognition The amortized cost, gross unrealized gains and losses, and fair value of investment securities are as follows: The Company’s revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of ASC 606, and noninterest income. Certain components of noninterest income such as interest rate swap income, income from rabbi trust investments, trading securities gains, gains on sales of mortgage loans, and gains on sales of securities available for sale are accounted for under other U.S. GAAP standards, and are therefore out of scope of the ASC 606 revenue standard. Insurance commissions, service charges on deposit accounts, debit card processing fees, and trust and investment advisory fees are within the scope of the ASC 606 revenue standard. As such, the Company reviewed contracts related to these revenue streams and there were not any material changes to revenue recognition upon adoption. 2. EARNINGS PER SHARE There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income will be 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. 2020 2019 Weighted-average common shares issued 2,697,500 2,697,500 Weighted-average treasury stock shares (99,522 ) (112,861 ) Weighted-average unvested restricted stock awards (82,595 ) (85,103 ) Basic weighted-average shares outstanding 2,515,383 2,499,536 Dilutive effect of outstanding restricted stock awards 37,365 44,138 Dilutive effect of outstanding stock options 23,407 49,605 Diluted weighted-average shares outstanding 2,576,155 2,593,279 For the year ended December 31, 2020, the Company has excluded from the computation of diluted weighted-average shares the impact of 114,021 options to purchase shares of the Company’s common stock and 850 shares of restricted stock, as the effect would have been anti-dilutive. For the year ended December 31, 2019, the Company has excluded from the computation of diluted weighted-average shares the impact of 41,058 options to purchase shares of the Company’s common stock, as the effect would have been anti-dilutive. Available for Sale: Cost Gains Losses Amortized Unrealized Unrealized Fair Value Gross 2020 Gross U.S. treasury securities U.S. government agency securities Obligations of states and political subdivisions Corporate securities Mortgage-backed securities in government-sponsored entities Total Available for Sale $ 2,006,566 $ 37,974 $ - $ 2,044,540 26,216,418 652,364 (9,135 ) 26,859,647 44,701,805 1,187,094 13,209,467 282,784 (84,068 ) 45,804,831 (505 ) 13,491,746 38,545,580 (49,251 ) 39,836,282 $ 124,679,836 $ 3,500,169 $ (142,959 ) $ 128,037,046 1,339,953 Held to Maturity: Corporate Securities $ 11,023,499 $ 145,127 $ (10,191 ) $ 11,158,435 Gross 2019 Gross Available for Sale: Cost Gains Losses Amortized Unrealized Unrealized Fair Value $ 2,011,276 $ - $ (3,936 ) $ 2,007,340 45,750,235 173,682 (64,705 ) 45,859,212 U.S. treasury securities U.S. government agency securities Obligations of states and political subdivisions Corporate securities Mortgage-backed securities in government-sponsored entities Total Available for Sale 31,878,494 196,940 15,381,522 212,511 (92,845 ) 31,982,589 (39,887 ) 15,554,146 35,854,180 172,080 (249,034 ) 35,777,226 $ 130,875,707 $ 755,213 $ (450,407 ) $ 131,180,513 Held to Maturity: Corporate Securities $ 7,250,000 $ 128,098 $ - $ 7,378,098 13 14 28 29 3. INVESTMENT SECURITIES (Continued) 3. INVESTMENT SECURITIES (Continued) 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 December 31, 2020 and 2019. Less than Twelve Months 2020 Twelve Months or Greater Total Fair Value Gross Unrealized Fair Value Losses Gross Unrealized Losses Fair Value Gross Unrealized Losses Available for Sale: U.S. government agency securities Obligations of states and political subdivisions Corporate securities Mortgage-backed securities in government-sponsored entities Total Available for Sale Held to Maturity: $ 6,152,860 $ (9,135 ) $ 6,211,972 499,495 (84,068 ) (505 ) 1,970,833 (49,251 ) $ 14,835,160 $ (142,959 ) $ Corporate Securities $ 3,763,308 $ (10,191 ) $ - $ - - - - $ - $ - $ 6,152,860 $ (9,135 ) - 6,211,972 - 499,495 (84,068 ) (505 ) - 1,970,833 (49,251 ) - $ 14,835,160 $ (142,959 ) - $ 3,763,308 $ (10,191 ) Less than Twelve Months 2019 Twelve Months or Greater Total Fair Value Gross Unrealized Fair Value Losses Gross Unrealized Losses Fair Value Gross Unrealized Losses $ 2,007,340 $ (3,936 ) $ - $ - $ 2,007,340 $ (3,936 ) 12,300,685 (55,361 ) 4,491,030 (9,344 ) 16,791,715 (64,705 ) 5,198,142 525,295 (91,999 ) 459,319 (14,384 ) 1,463,330 (846 ) 5,657,461 (13,818 ) 1,988,625 (92,845 ) (28,202 ) 16,984,833 (245,244 ) 836,110 $ 37,016,295 $ (410,924 ) $ 7,249,789 $ (3,790 ) 17,820,943 (249,034 ) (27,798 ) $ 44,266,084 $ (438,722 ) $ - $ - $ 738,315 $ (11,685 ) $ 738,315 $ (11,685 ) Available for Sale: U.S. treasury securities U.S. government agency securities Obligations of states and political subdivisions Corporate securities Mortgage-backed securities in government-sponsored entities Total Available for Sale Held to Maturity: Corporate Securities The Company had 20 investment securities, consisting of 4 U.S. government obligations and direct obligations of U.S. government agencies, 9 obligations of states and political subdivisions, 6 different corporate securities, and 1 mortgage-backed security that were in unrealized loss positions at December 31, 2020. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis or par value, which may be maturity, the Company does not consider those investments to be other-than- temporarily impaired at December 31, 2020. The amortized cost and fair value of debt securities at December 31, 2020, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for Sale Held to Maturity Amortized Cost Fair Value Amortized Cost Fair Value Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years $ 7,831,140 $ 7,900,475 $ - $ 39,776,640 26,298,890 50,773,066 40,933,975 27,103,524 52,099,072 1,750,000 9,273,499 - - 1,749,982 9,408,453 - Total $ 124,679,736 $ 128,037,046 $ 11,023,499 $ 11,158,435 Investment securities with a carrying value of $112,227,920 and $110,586,946 at December 31, 2020 and 2019, respectively, were pledged to secure deposits and other purposes as required by law. The following is a summary of proceeds received, gross gains, and gross losses realized on the sale and calls of investment securities available for sale for the years ended December 31: 2020 2019 Proceeds from sales Proceeds from calls Gross gains Gross losses $ 17,384,109 80,903 - - $ 9,694,054 6,607,143 162,275 (637 ) Equity Securities The Company recognized changes in fair value of equity securities in net equity securities gains (losses). The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the years ended December 31, 2020 and December 31, 2019: Net gains (losses) recognized in equity securities during the year Less: Net gains realized on sale of equity securities during the year Unrealized gains (losses) recognized in equity securities 2019 2020 $ (313,055 ) $ 232,874 230,053 2,821 $ (313,055 ) $ - 15 16 30 31 4. LOANS 4. LOANS (Continued) Major classifications of loans are summarized as follows at December 31: COVID-19 Loan Forbearance Programs (Continued) Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Less allowance for loan losses Net loans 2020 2019 $ 291,727,044 $ 249,990,170 100,376,943 126,181,773 30,829,832 27,608,446 36,726,830 41,967,923 6,909,273 5,628,425 262,185,148 272,617,345 687,018,196 765,730,956 9,770,563 7,499,402 $ 755,960,393 $ 679,518,794 Mortgage loans serviced by the Company for others amounted to $43,354,290 and $49,164,176 at December 31, 2020 and 2019, respectively. The Company grants residential, commercial, and consumer loans to customers throughout its trade area, which is concentrated in central Pennsylvania. Such loans are subject to, at origination, credit risk assessment by management following the Company’s lending policy. Although the Company has a diversified loan portfolio at December 31, 2020 and 2019, a substantial portion of its debtors’ ability to honor their loan agreements is dependent upon the economic stability of its immediate trade area. Paycheck Protection Program During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of December 31, 2020, the Company had outstanding PPP loan principal balances of $43,367,158. The loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial and Industrial category. In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $3.2 million in fees associated with the processing of these loans. Upon funding of the loans, these fees were deferred and amortized as earned as adjustments to yield in accordance with FASB ASC 310-20-25-2. Deferred PPP fees of $827,099 are included in loans receivable at December 31, 2020. COVID-19 Loan Forbearance Programs Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease (COVID– 19) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) December 31, 2020. On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID- 19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. According to the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. During 2020, our customers requested loan payment deferrals or payments of interest only on 271 loans with balances totaling approximately $121.0 million. As of December 31, 2020, 37 loans remain in deferral status, with outstanding balances totaling approximately $28.2 million. In accordance with Section 4013 of the CARES Act and the interagency guidance issued on April 7, 2020, these short-term deferrals are not considered troubled debt restructurings. In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends. Loans to Officers and Directors In the normal course of business, loans are extended to directors, executive officers, and their associates. A summary of loan activity for those directors, executive officers, and their associates with loan balances in excess of $60,000 for the years ended December 31, 20120 and 2019, is as follows: Balance Amounts Balance Amounts Balance 2018 Additions Collected 2019 Additions Collected 2020 $ 17,036,261 $ 7,790,420 $ (6,129,819 ) $ 18,696,862 $ 3,392,844 $ (13,568,549 ) $ 8,521,157 Loan amounts collected during 2020 includes $10,649,715 for six loans to an individual who is no longer a director as of December 31, 2020. 17 18 32 33 5. ALLOWANCE FOR LOAN LOSSES 5. ALLOWANCE FOR LOAN LOSSES (Continued) Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: commercial real estate loans, commercial and industrial loans, agricultural loans, state and political subdivision loans, consumer loans, and residential real estate loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over a five-year period for all portfolio segments. Certain qualitative factors are then added to the historical loss percentages to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed to determine allocations for non-classified loans for each portfolio segment:  Changes in lending policies and procedures  Changes in economic and business conditions  Changes in nature and volume of the loan portfolio  Changes in lending staff experience and ability  Changes in past-due loans, nonaccrual loans, and classified loans  Changes in credit risk management  Changes in underlying value of collateral-dependent loans  Levels of credit concentrations  Effects of external factors, such as legal and regulatory requirements These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the Bank’s operating environment. During 2020, the emergence of the novel coronavirus (“COVID-19”) pandemic caused significant disruption to local and national economies, with adverse effects evident across a wide range of industries, including banking and financial services. Management considered the broad potential effects and financial uncertainties posed by the COVID-19 environment when assessing the qualitative factors used in evaluating risk exposures within our loan pools. In response, during the second quarter of 2020 management increased the qualitative factor related to “changes in economic and business conditions” across all loan pools other than our loan pool representing loans to state and political subdivisions. The largest factor increases were applied to the commercial real estate loan pool, reflecting the downturn already evident in hotel and restaurant business. Factor increases were applied to the commercial real estate loan pool as well as the commercial and industrial loan pool as local unemployment rates began to show substantial increases, and in consideration of the loans collateralized by assets of borrowers in the hospitality and real estate businesses, among others. Additionally, due to the wide- ranging economic uncertainties resulting from the current COVID-19 environment, management determined a general increase in loss reserves across the entire loan portfolio was appropriate. The additional reserves will continue to be evaluated and allocated with respect to the specific loan pools as the economic impacts by loan types becomes more apparent. We consider commercial real estate loans, commercial and industrial loans, agricultural loans, and consumer loans to be riskier than one-to-four family residential mortgage loans. Commercial real estate loans entail significant additional credit risks compared to one-to-four family residential mortgage loans, as they involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and/or business operation of the borrower who is also the primary occupant, and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Commercial and industrial loans, along with agricultural loans, involve a higher risk of default than residential mortgage loans of like duration since their repayment is generally dependent on the successful operation of the borrower’s business and the sufficiency of collateral, if any. Repayment of agricultural loans can also be impacted by fluctuations in commodity prices. Although a customer’s ability to repay for both one-to-four family residential mortgage loans and consumer loans is highly dependent on the local economy, especially employment levels, consumer loans as a group generally present a higher degree of risk because of the nature of collateral, if any. State and political subdivision loans carry the lowest risk, as most state and political subdivision loans are either backed by the full taxing authority of a municipality or the revenue of a municipal authority. The following tables present, by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans as of and for the years ended December 31: 2020 Commercial and State and Political Commercial Real Estate Industrial Agricultural Subdivisions Consumer Real Estate Unallocated Total Residential Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision $ 2,753,352 $ 1,434,140 $ (5,236 ) - 11,000 2,640 (276,343 ) 1,544,922 517,523 $ - - (196,729 ) 167,108 $ 71,358 $ 1,684,940 $ - 5,333 181,015 - (20,531 ) - 10,455 (4,128 ) 23,846 870,981 $ 7,499,402 (25,767 ) 29,428 994,917 2,267,500 - - Ending balance $ 4,300,914 $ 1,163,561 $ 320,794 $ 190,954 $ 57,154 $ 1,871,288 $ 1,865,898 $ 9,770,563 Ending balance individually evaluated for impairment Ending balance collectively evaluated for impairment Loans: Individually evaluated for impairment Collectively evaluated for impairment Ending balance $ 25,378 $ 38,546 $ 50,056 $ - $ 2,742 $ 36,803 $ - $ 153,525 4,275,536 1,125,015 270,738 190,954 54,412 1,834,485 1,865,898 9,617,038 $ 4,300,914 $ 1,163,561 $ 320,794 $ 190,954 $ 57,154 $ 1,871,288 $ 1,865,898 $ 9,770,563 $ 307,637 $ 193,672 $ 313,444 $ - $ 2,742 $ 658,170 $ 1,475,665 291,419,407 125,988,101 27,295,002 41,967,923 5,625,683 271,959,175 $ 291,727,044 $ 126,181,773 $ 27,608,446 $ 41,967,923 $ 5,628,425 $ 272,617,345 764,255,291 $ 765,730,956 19 20 34 35 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) $ 31,593 $ 14,823 $ 59,233 $ - $ - $ 29,221 $ - $ 134,870 2020 Commercial and 2019 State and Political Commercial Real Estate Industrial Agricultural Subdivisions Consumer Real Estate Unallocated Total Residential Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision $ 2,659,259 $ 1,428,801 $ - - 7,175 526,930 (1,836 ) (432,837 ) 500,230 $ - - 17,293 188,661 $ 96,537 $ 1,606,577 $ (5,333 ) 1,685 82,011 - (71,764 ) 8,299 - (21,553 ) 38,286 162,345 $ 6,642,410 (77,097 ) 544,089 390,000 - - 708,636 Ending balance $ 2,753,352 $ 1,434,140 $ 517,523 $ 167,108 $ 71,358 $ 1,684,940 $ 870,981 $ 7,499,402 Ending balance individually evaluated for impairment Ending balance collectively evaluated for impairment Loans: Individually evaluated for impairment Collectively evaluated for impairment Ending balance 2,721,759 1,419,317 458,290 167,108 71,358 1,655,719 870,981 7,364,532 $ 2,753,352 $ 1,434,140 $ 517,523 $ 167,108 $ 71,358 $ 1,684,940 $ 870,981 $ 7,499,402 $ 332,244 $ 20,414 $ 298,703 $ - $ - $ 470,146 $ 1,121,507 249,657,926 100,356,529 30,531,129 36,726,830 6,909,273 261,715,002 $ 249,990,170 $ 100,376,943 $ 30,829,832 $ 36,726,830 $ 6,909,273 $ 262,185,148 685,896,689 $ 687,018,196 From 2019 to 2020, our reserve requirement by loan pool for Commercial Real Estate and Residential Real Estate increased by approximately $1.5 million and $0.2 million, respectively, due to increases in outstanding loan balances combined with managements’ decision to increases certain qualitative factors in response to economic conditions evolving from the COVID-19 environment. Reserves for Agricultural loans decreased by approximately $0.2 million, a net effect of decreased outstanding loan balances and an increase applied to qualitative factors. Reserves for Commercial and Industrial loans decreased overall during 2020 by approximately $0.3 million, a net effect of decreased balances of loans within the pool other than PPP loans, and an increase applied to qualitative factors. The loan pool for Commercial and Industrial includes outstanding PPP loans of approximately $43.4 million at December 31, 2020, for which the qualitative risk factors used for calculating reserves are substantially lower due to the unique loan principal forgiveness and SBA loan guarantee features of the PPP loan program. Credit Quality Information The following tables represent the commercial credit exposures by internally-assigned grades for the years ended December 31, 2020 and 2019, respectively. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans. Credit Quality Information (Continued) The Company’s internally-assigned grades are as follows: Pass loans are loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Special Mention loans are loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Substandard loans are loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have all the weaknesses inherent in a substandard asset and these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. Finally, loans classified as Loss are considered uncollectible, or of such value that continuance as an asset is not warranted. Commercial and State and Political Commercial Real Estate Industrial Agricultural Subdivisions Total $ 285,972,827 $ 122,513,801 $ 27,133,299 $ 41,967,923 $ 477,587,850 - 2,976,440 1,553,853 1,422,587 - 6,642,190 4,182,555 2,082,635 278,706 - 162,750 $ 291,727,044 $ 126,181,773 $ 27,608,446 $ 41,967,923 $ 487,485,186 - 377,000 98,147 17,809 2019 Commercial and State and Political Commercial Real Estate Industrial Agricultural Subdivisions Total $ 244,520,026 $ 88,229,710 $ 26,121,832 $ 36,726,830 $ 395,598,398 - 14,582,988 5,470,144 9,112,844 - 7,655,212 87,177 - $ 249,990,170 $ 100,376,943 $ 30,829,832 $ 36,726,830 $ 417,923,775 - - 3,019,566 4,635,646 72,354 - 14,823 Pass Special Mention Substandard Doubtful Total Pass Special Mention Substandard Doubtful Total 21 22 36 37 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) Credit Quality Information (Continued) Age Analysis of Past Due Loans by Class (Continued) For consumer and residential real estate loans, the Company evaluates credit quality based on whether the loan is considered performing or nonperforming. Nonperforming loans are those loans past due 90 days or more and loans on nonaccrual. The following tables present the balances of consumer and residential real estate loans by classes of loan portfolio based on payment performance as of December 31: Consumer 2020 Residential Real Estate Total Performing Nonperforming Total $ $ 5,628,425 $ 272,147,356 $ 277,775,781 469,989 5,628,425 $ 272,617,345 $ 278,245,770 469,989 - Consumer 2019 Residential Real Estate Total Performing Nonperforming Total $ $ 6,903,682 $ 261,962,106 $ 268,865,788 228,633 6,909,273 $ 262,185,148 $ 269,094,421 223,042 5,591 Age Analysis of Past Due Loans by Class The following are tables which show the aging analysis of past due loans as of December 31: 2020 30-59 Days Past Due Past Due Past Due Past Due Current 90 Days or Greater 60-89 Days Total Total Loans 90 Days and Accruing $ - $ 107,880 $ 17,809 $ 125,689 $ 291,601,355 $ 291,727,044 $ - 375,747 61,561 165,288 602,596 125,579,177 126,181,773 - - 98,147 98,147 27,510,299 27,608,446 2,538 - - 7,326 - - 71,751 225,109 786,727 1,083,587 271,533,758 272,617,345 469,989 $ 454,824 $ 394,550 $ 1,070,713 $ 1,920,087 $ 763,810,869 $ 765,730,956 $ 472,527 - 41,967,923 41,967,923 10,068 5,618,357 5,628,425 - 2,742 - - Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total 30-59 Days Past Due Past Due Past Due Past Due Current 90 Days or Greater 60-89 Days Total Total Loans 90 Days and Accruing 2019 Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ - $ 6,058 $ - $ 6,058 $ 249,984,112 $ 249,990,170 $ 836 369,245 349,276 - 14,823 72,354 421,630 30,408,202 30,829,832 100,376,943 99,992,039 384,904 - 11,434 - 36,726,830 36,726,830 17,025 6,892,248 6,909,273 701,037 11,907 223,042 935,986 261,249,162 262,185,148 $ 1,062,583 $ 387,210 $ 315,810 $ 1,765,603 $ 685,252,593 $ 687,018,196 $ - 5,591 - - - - - - - - - Consumer mortgage loans held by the Company in the process of foreclosure amounted to $287,307 as of December 31, 2020. Impaired Loans Management considers commercial real estate loans, commercial and industrial loans, agricultural loans, and state and political subdivision loans which are 90 days or more past due to be impaired. After becoming 90 days or more past due, these categories of loans are measured for impairment. Any consumer and residential real estate loans related to these delinquent loans are also considered to be impaired. Troubled debt restructurings are measured for impairment at the time of restructuring. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the fair value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through a provision or through a charge to the allowance for loan losses. 23 24 38 39 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) Impaired Loans (Continued) Impaired Loans (Continued) The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount as of December 31: 2020 Unpaid Recorded Principal Related Investment Balance Average Recorded Interest Income Allowance Investment Recognized With no related allowance recorded: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate With an allowance recorded: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate $ 17,809 $ 17,809 $ - $ 15,745 $ 152,641 152,641 72,662 72,662 - - 126,983 6,055 - - - - - 406,999 - - 406,999 - - - - - 348,900 - - 9,712 650,111 650,111 - 497,683 9,712 289,828 289,828 25,378 309,394 19,032 41,031 240,782 41,031 240,782 38,546 50,056 46,721 280,410 1,521 11,236 - 2,742 251,171 - 2,742 251,171 - 2,742 36,803 - 4,600 198,358 - - 10,162 825,554 825,554 153,525 839,483 41,951 307,637 307,637 25,378 325,139 19,032 193,672 313,444 193,672 313,444 38,546 50,056 173,704 286,465 1,521 11,236 - 2,742 658,170 - 2,742 658,170 - 2,742 36,803 - 4,600 547,258 - - 19,874 Unpaid Recorded Principal Related Investment Balance Average Recorded Interest Income Allowance Investment Recognized 2019 $ - $ - $ - $ 432,900 $ - 5,591 35,432 5,591 35,432 - - 32,230 44,622 - - 296,741 - - 296,741 - - - - 466 259,129 - 2,475 - - 4,164 337,764 337,764 - 769,347 6,639 332,244 332,244 31,593 243,942 21,159 14,823 263,271 14,823 263,271 14,823 59,233 6,984 258,393 - 14,620 - - 173,405 - - 173,405 - - 29,221 - 793 188,320 - - 10,024 783,743 783,743 134,870 698,432 45,803 332,244 332,244 31,593 676,842 21,159 20,414 298,703 20,414 298,703 14,823 59,233 39,214 303,015 - 17,095 - - 470,146 - - 470,146 - - 29,221 - 1,259 447,449 - - 14,188 With no related allowance recorded: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate With an allowance recorded: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ 1,121,507 $ 1,121,507 $ 134,870 $ 1,467,779 $ 52,442 Total $ 1,475,665 $ 1,475,665 $ 153,525 $ 1,337,166 $ 51,663 25 26 40 41 5. ALLOWANCE FOR LOAN LOSSES (Continued) 6. PREMISES AND EQUIPMENT Nonaccrual Loans Major classifications of premises and equipment are summarized as follows: Loans are considered nonaccrual upon reaching 90 days of delinquency even though the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. Interest income that would have been recorded on nonaccrual loans in accordance with their original terms totaled approximately $40,600 in 2020 and $23,000 in 2019. The following table includes the loan balances on nonaccrual status as of December 31: Commercial real estate Commercial and industrial Agricultural Consumer Residential real estate Total Troubled Debt Restructuring (TDR’s) 2019 2020 $ 17,809 $ 162,750 98,147 2,742 - 14,823 72,354 5,591 316,738 223,042 $ 598,186 $ 315,810 The Company’s loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized either through a charge-off to the allowance or a specific reserve. As of December 31, 2020 and 2019, specific reserve allocations of $107,860 and $83,124, respectively, had been established against the troubled debt restructurings and no charge-offs for the troubled debt restructurings were required. There were no loans modified in a troubled debt restructuring from January 1, 2018 through December 31, 2019, that subsequently defaulted (i.e., 90 days or more past due following a modification) during the years ended December 31, 2020 and 2019, respectively. Loan modifications considered troubled debt restructurings completed during the year ended December 31, 2020 consist of one commercial loan and one residential real estate loan. The Company’s outstanding recorded investment in the loans at the time of the restructuring was $30,922 and $108,688, for the commercial loan and the real estate loan, respectively. The Company’s outstanding recorded investment amount in these loans was not changed by the TDR modifications. There were no loan modifications that were considered troubled debt restructurings during the year ended 2019. 27 Land and land improvements Buildings and leasehold improvements Buildings - construction in progress Furniture, fixtures, and equipment Less accumulated depreciation Total 2020 2019 $ 2,394,918 $ 2,394,918 19,334,135 18,548,238 9,882,297 1,745,185 8,541,569 7,741,252 40,152,919 30,429,593 15,884,213 14,794,107 $ 24,268,706 $ 15,635,486 Depreciation charged to operations was $1,090,106 in 2020 and $1,085,331 in 2019. 7. GOODWILL As of December 31, 2020 and 2019, goodwill had a gross carrying amount of $4,174,955 and $2,457,712, respectively, and accumulated amortization of $614,013 for a net carrying value of $3,560,942 and $1,843,699, respectively. The carrying amount of goodwill was reduced by $300,000 during 2019 to offset and eliminate a related liability balance of $262,498, which was included in Accrued Interest and Other Liabilities at December 31, 2018, and increased 2019 non-cash compensation expense by $37,502. The reclasses reflect an amendment drafted during 2019 to clarify the terms of a restricted stock award issued in conjunction with the acquisition of Benefit Management Group in December 2017, and include the award with all other outstanding restricted stock awards representing incentive compensation awards issued by the Company for future employee services during the period the awards are subject to restriction. The carrying amount of goodwill was tested for impairment in the fourth quarter, after the annual forecasting process. There was no impairment for the years ended December 31, 2020 and 2019. Insurance Agency Acquisition During 2020 the Company completed the acquisition of a property and casualty insurance agency located in Juniata County. The acquisition included the current book of business, assets and liabilities of the agency, and the real estate where the agency office is located. Goodwill increased by $1,717,243 during 2020, representing the residual of the acquisition price of the agency after allocation of the purchase price to identified assets and assumed liabilities. 8. DEPOSITS The scheduled maturities of time deposits approximate the following: Year Ending December 31, 2021 2022 2023 2024 2025 Thereafter Amount 159,089,556 69,275,996 14,028,113 4,883,432 2,954,444 1,378,246 251,609,787 $ $ 28 42 43 8. DEPOSITS (Continued) 10. OTHER BORROWINGS (Continued) The aggregate of all time deposit accounts of $250,000 or more amounted to $52,704,946 and $71,658,616 at December 31, 2020 and 2019, respectively. There were no brokered deposits as of December 31, 2020. As of December 31, 2020, there were no individual depositors representing over 5% of total deposits. 9. SHORT-TERM BORROWINGS Short-term borrowings include overnight repurchase agreements through the FHLB, federal funds purchased, and repurchase agreements with customers. The outstanding balances and related information for short-term borrowings are summarized as follows: Balance at year-end Average balance outstanding Maximum month-end balance Weighted-average rate at year-end Weighted-average rate during the year 2020 2019 $ 69,360,211 $ 46,740,021 62,163,630 41,837,265 69,390,211 47,937,322 0.45 % 0.17 % 1.95 % 0.25 % The collateral pledged on the repurchase agreements by the remaining contractual maturity of the repurchase agreements in the Consolidated Balance Sheet as of years ended December 31, 2020 and 2019, is presented in the following table. Remaining Contractual Maturity Overnight and Continuous December 31, December 31, 2020 2019 Securities of U.S. Government Agencies, U.S. Treasuries, and obligations of state and political subdivisions pledged, fair value $ Repurchase agreements 4,116,853 $ 1,151,378 5,310,216 1,060,022 10. OTHER BORROWINGS The following table sets forth information concerning other borrowings: Description Fixed rate Fixed rate amortizing Mid-term repos Subordinated capital notes Note payable Maturity Range To From Weighted- Average Interest Rate Stated Interest Rate Range To From At December 31, 2020 2019 01/13/21 08/04/26 02/03/21 07/15/24 05/10/21 05/10/21 2.19 % 1.68 2.75 1.40 % 1.33 2.75 2.68 % $ 37,534,000 $ 53,075,499 7,612,749 1.96 3,135,000 2.75 5,356,810 3,135,000 08/25/24 03/03/26 03/17/35 11/23/35 4.97 1.97 4.75 1.71 5.25 2.23 12,445,000 6,186,000 10,020,000 6,186,000 $ 64,656,810 $ 80,029,248 Maturities of other borrowings at December 31, 2020, are summarized as follows: Year Ending December 31, 2021 2022 2023 2024 2025 2026 and after $ $ Amount 11,033,424 12,916,000 11,420,601 13,068,785 3,359,000 12,859,000 64,656,810 Weighted- Average Rate 2.07 % 1.69 2.10 3.60 2.50 3.39 2.59 Borrowing capacity consists of credit arrangements with the FHLB. FHLB borrowings are subject to annual renewal, incur no service charges, and are secured by a blanket security agreement on certain investment and mortgage-backed securities, outstanding residential mortgages, and the Bank’s investment in FHLB stock. As of December 31, 2020, the Bank’s maximum borrowing capacity with the FHLB was approximately $363.3 million. The Bank may request a Federal Reserve Advance secured by acceptable collateral. The Bank’s maximum borrowing capacity with the Federal Reserve Bank as of December 31, 2020 is approximately $90.5 million. The Bank also maintains a $10.0 million, $10.0 million, and $5.0 million federal funds line of credit with three other financial institutions. The Bank did not have outstanding borrowings related to these lines of credit at December 31, 2020. In 2014, the Company formed a special purpose entity (“Entity”) to issue $3,093,000 of fixed/floating rate subordinated debt securities with a stated maturity of March 17, 2035. The rate on these securities is determined quarterly and floats based on three-month LIBOR plus 2.00 percent. The Entity may redeem them, in whole or in part, at face value on or after March 17, 2010. The Company borrowed the proceeds from the Entity in the form of a $3,093,000 note payable, which is included in the liabilities section of the Company’s Consolidated Balance Sheet. In 2015, the Company formed an additional special purpose entity to issue $3,093,000 of fixed/floating rate subordinated debt securities with a stated maturity of November 23, 2035. These securities had a fixed rate of 6.11 percent until November 23, 2015, at which time the rate converted to floating, is determined quarterly, and floats based on three-month LIBOR plus 1.50 percent. The Entity may redeem them, in whole or in part, at face value on or after November 23, 2010. The Company borrowed the proceeds from the Entity in the form of a $3,093,000 note payable, which is included in the liabilities section of the Company’s Consolidated Balance Sheet. In 2014, the Company issued $3,620,000 of fixed rate subordinated capital notes with stated maturities of March 24, 2024 through December 26, 2024. These securities bear a fixed annual rate of 4.75 percent. The Company may redeem them, in whole or in part, at face value on or after March 24, 2019. These borrowings, with a current balance of $1,770,000, are included in the liabilities section of the Company’s Consolidated Balance Sheet. 29 30 44 45 10. OTHER BORROWINGS (Continued) 11. DERIVATIVE FINANCIAL INSTRUMENTS (Continued) In 2015, the Company issued $6,500,000 of fixed rate subordinated capital notes with stated maturities of September 22, 2025 through March 3, 2026. The fixed securities bear an annual rate of 5.25 percent. The Company may redeem them, in whole or in part, at face value on or after September 22, 2020. These borrowings, with a current balance of $5,550,000, are included in the liabilities section of the Company’s Consolidated Balance Sheet. In 2020, the Company issued $5,125,000 of fixed rate subordinated capital notes with stated maturities of June 23, 2030 through December 30, 2030. These securities bear a fixed annual rate of 4.75 percent. The Company may redeem them, in whole or in part, at face value on or after June 23, 2025. These borrowings are included in the liabilities section of the Company’s Consolidated Balance Sheet. The Company’s minority interests in these entities were recorded at the initial investment amount and are included in the accrued interest and other assets on the Consolidated Balance Sheet. These entities are not consolidated as part of the Company’s consolidated financial statements. 11. DERIVATIVE FINANCIAL INSTRUMENTS Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. The Company has contracted with a third party to engage pay-fixed interest rate swap contracts and the outstanding as of December 31, 2020, is being utilized to hedge $65.0 million in floating rate debt. At December 31, 2020 and 2019, the information pertaining to outstanding interest rate swap agreements is as follows: Notional amount Weighted-average pay rate Receive rate Weighted-average maturity in years Unrealized loss relating to interest rate swaps 2020 2019 $ 120,518,422 $ 69,316,000 2.99 % 3.26 % 1 or 3-Month Libor 6.5 1 or 3-Month Libor 6.3 (4,634,000 ) (1,588,991 ) Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed interest payments. As of December 31, 2020, the Company had six interest rate swaps with a notional of $65.0 million associated with the Company’s cash outflows associated with various floating-rate amounts. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the period ended December 31, 2020. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months, the Company estimates that $0 will be reclassified as an increase in interest expense. Credit-Risk-Related Contingent Features The Company has agreements with certain of its derivative counterparties that contain the following provisions:    if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations; if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions, and the Company would be required to settle its obligations under the agreements; if the Company fails to maintain a specified minimum leverage ratio, then the Company could be declared in default on its derivative obligations. At December 31, 2020, the fair value of derivatives in a net liability position, which includes accrued interest and any credit valuation adjustments related to these agreements, was $4,634,600. At December 31, 2020, the Company had required cash collateral with certain of its derivative counterparties in the amount of $9,960,772 and was not holding cash collateral of certain derivative counterparties. If the Company had breached any of the above provisions at December 31, 2020, it would have been required to settle its obligations under the agreements at termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty. 31 32 46 47 11. DERIVATIVE FINANCIAL INSTRUMENTS (Continued) 11. DERIVATIVE FINANCIAL INSTRUMENTS (Continued) Fair Values of Derivative Instruments on the Balance Sheet Derivative Instruments (Continued) The following table presents the fair values of derivative instruments in the balance sheet: Assets Liabilities Balance Sheet Location Fair Value Balance Sheet Location Fair Value Other assets $ 5,074,982 Other liabilities $ (9,709,582 ) Other assets $ 1,805,370 Other liabilities $ (3,394,361 ) December 31, 2020 Interest rate derivatives December 31, 2019 Interest rate derivatives Derivative Instruments The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a swap agreement with a third party in order to economically hedge its exposure through the customer agreement. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, at December 31, 2020, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined they are not significant. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. Notional Amount December 31, 2020 2019 Cash flow interest rate swap Maturing in 2024 Maturing in 2025 Maturing in 2026 Maturing in 2027 Maturing in 2030 $ 6,000,000 $ 6,000,000 22,000,000 14,000,000 22,000,000 14,000,000 10,000,000 10,000,000 - 5,000,000 Interest Rate Paid Fixed Fixed Fixed Fixed Fixed Interest Rate Received Fair Value December 31, 2020 2019 3 Mo. Libor 3 Mo. Libor 3 Mo. Libor 3 Mo. Libor 3 Mo. Libor $ (354,829 ) $ (79,454 ) (1,330,524 ) (508,940 ) (1,728,609 ) (694,322 ) (1,039,595 ) (306,275 ) - (181,043 ) $ 65,000,000 $ 44,000,000 $ (4,634,600 ) $ (1,588,991 ) Customer interest rate swap Maturing in 2025 Maturing in 2026 Maturing in 2027 Maturing in 2029 Maturing in 2030 Maturing in 2031 Maturing in 2035 1 Mo. Libor + Margin 972,564 $ 9,100,000 $ 9,100,000 9,266,000 9,266,000 - 10,379,025 4,950,000 19,629,449 2,000,000 - 2,500,000 - 3,671,384 Fixed Fixed Fixed Fixed Fixed Fixed Fixed 7,303 $ 1,051,004 $ 618,947 1,364,263 858,291 - 1,010,039 298,610 29,522 1,616,774 - 44,509 - (18,910 ) $ 55,518,422 $ 25,316,000 $ 5,074,982 $ 1,805,370 Third party interest rate swap Maturing in 2025 Maturing in 2026 Maturing in 2027 Maturing in 2029 Maturing in 2030 Maturing in 2031 Maturing in 2035 972,564 $ 9,100,000 $ 9,100,000 9,266,000 9,266,000 - 10,379,025 4,950,000 19,629,449 2,000,000 - 2,500,000 - 3,671,384 Fixed Fixed Fixed Fixed Fixed Fixed Fixed 1 Mo. Libor + Margin $ (1,051,004 ) $ (618,947 ) 1 Mo. Libor + Margin (1,364,263 ) (858,291 ) 1 Mo. Libor + Margin - 1 Mo. Libor + Margin (1,010,039 ) (298,610 ) (29,522 ) 1 Mo. Libor + Margin (1,616,774 ) - (44,509 ) 1 Mo. Libor + Margin - 18,910 1 Mo. Libor + Margin (7,303 ) $ 55,518,422 $ 25,316,000 $ (5,074,982 ) $ (1,805,370 ) 12. INCOME TAXES The provision for federal income taxes consists of: Current Deferred $ 2020 1,905,671 $ (666,073 ) 2019 1,210,904 (314,366 ) Total provision $ 1,239,598 $ 896,538 33 34 48 49 12. INCOME TAXES (Continued) 12. INCOME TAXES (Continued) The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are as follows: Deferred tax assets: $ Allowance for loan losses Deferred compensation Core deposit intangible assets Asset valuation allowances Employee compensation accruals Nonaccrual interest receivable Unrealized loss on swaps - balance sheet hedge Fair value adjustment - equity securities Lease liability Other Deferred tax assets Deferred tax liabilities: Premises and equipment Goodwill Deferred loan fees Partnerships Unrealized gain on available-for-sale securities Fair value adjustment - equity securities Deferred gain - intercompany transaction Right of use asset Other Deferred tax liabilities 2020 2019 2,051,818 $ 370,849 17,159 88,091 363,688 10,233 973,266 22,765 979,312 1,174 4,878,355 605,522 369,342 80,213 48,058 705,015 - 99,465 967,121 3,346 2,878,082 1,574,874 300,076 17,159 79,988 317,360 4,842 333,688 - 998,852 1,175 3,628,014 528,015 345,281 80,448 135,423 64,010 42,977 99,465 993,421 3,346 2,292,386 Net deferred tax assets $ 2,000,273 $ 1,335,628 No valuation allowance was established at December 31, 2020 and 2019, in view of the Company’s ability to carryback taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential. The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statement of Income. The Company’s federal and state income tax returns for taxable years through 2016 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue. 13. EMPLOYEE BENEFITS Savings Plan The Bank maintains a qualified 401(k) salary reduction and profit sharing plan that covers substantially all employees. Under the plan, employees make voluntary, pretax contributions to their accounts, and the Bank contributions to the plan are at the discretion of the Board of Directors. Contributions by the Bank charged to operations were $445,991 and $409,077 for the years ended December 31, 2020 and 2019, respectively. The fair value of plan assets includes $2,374,480 and $2,373,014 pertaining to the value of the Company’s common stock that is held by the plan as of December 31, 2020 and 2019, respectively. Deferred Compensation Plan The Company has a nonqualified deferred compensation plan that allows directors and senior executives to defer fees and salaries. Outstanding balances under this arrangement as of December 31, 2020 and 2019 were $1,765,947 and $1,428,933, respectively, and are reported as “Other liabilities” on the Consolidated Balance Sheet. Expenses related to this plan were $200,445 and $244,630 for the years ended December 31, 2020 and 2019, respectively. The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is as follows: Restricted Stock Plan Provision at statutory rate Tax-exempt interest Life insurance income Other Income tax expense and effective rate 2020 % of Pretax 2019 % of Pretax Amount $ 1,948,566 (366,767 ) (64,568 ) (277,633 ) Income 21.0 % (4.0 ) (0.7 ) (3.0 ) Amount $ 1,659,725 (431,528 ) (72,566 ) (259,093 ) Income 21.0 % (5.5 ) (0.9 ) (3.3 ) $ 1,239,598 13.3 % $ 896,538 9.6 % The Company maintains a Restricted Stock Plan (the “Plan”). Employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance-related requirements. Awards granted under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements including continuous employment or service with the Company. Since inception of the Plan in 1988, the Company has authorized share pools totaling 480,000 shares of the Company’s common stock to the plan. The Plan has a remaining available share pool of 226,565 shares and 4,808 shares as of December 31, 2020 and 2019, respectively. The Plan assists the Company in attracting, retaining and motivating employees and non-employee directors to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation. 35 36 50 51 13. EMPLOYEE BENEFITS (Continued) Restricted Stock Plan (Continued) Compensation expense recognized related to restricted stock awards was $518,842 and $361,590 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, unrecognized compensation cost related to restricted stock awards was $1,121,624, which is expected to be recognized over a weighted average life of 2.93 years. The following is a summary of the status of the Company’s outstanding restricted stock awards as of December 31, 2020 and 2019, and changes therein during the years then ended: Shares of Restricted Stock Outstanding Weighted- Average Grant Date Fair Value Outstanding at December 31, 2018 Granted Released from Restrictions Forfeited Outstanding at December 31, 2019 Granted Released from Restrictions Forfeited Outstanding at December 31, 2020 84,258 $ 15,805 (16,829 ) (1,314 ) 81,920 18,458 (19,059 ) (215 ) 81,104 $ 24.03 31.57 20.79 24.95 26.13 25.94 21.80 29.20 27.10 Stock Option Plan The Company has a stock option plan available for granting stock-based compensation awards to employees and board members. The Company authorized a share pool of 760,000 shares of the Company’s common stock for granting incentive stock options and non-qualified stock option awards. The stock option plan has a remaining available share pool of 185,509 and 224,913 shares as of December 31, 2020 and 2019, respectively. The exercise price for the purchase of shares subject to a stock option may not be less than 100 percent of the fair market value of the shares covered by the option on the date of the grant. The term of stock options will not exceed ten years from the date of grant. Options granted are primarily vested evenly over a three-year period from the grant date. Compensation expense recognized related to stock option awards was $88,528 and $68,983 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, unrecognized compensation cost related to stock option awards was $360,882, which is expected to be recognized over a weighted-average life of 2.0 years. 13. EMPLOYEE BENEFITS (Continued) Stock Option Plan (Continued) The following table presents share data related to the outstanding option awards: Incentive Stock Options Weighted- Average Exercise Price Options Outstanding 116,344 $ 36,250 (19,651 ) (4,174 ) 128,769 32,893 (15,438 ) (666 ) 22.63 31.62 17.19 28.93 25.79 26.03 19.80 29.23 Outstanding, January 1, 2019 Granted Exercised Forfeited/Expired Outstanding, December 31, 2019 Granted Exercised Forfeited/Expired Non-Qualified Stock Options Weighted- Average Exercise Price 20.38 31.60 17.86 26.27 21.73 25.96 19.32 28.15 Options Outstanding 92,930 $ 5,580 (19,896 ) (1,389 ) 77,225 8,312 (14,988 ) (1,135 ) Outstanding, December 31, 2020 145,558 $ 26.46 69,414 $ 22.65 Exercisable at December 31, 2020 78,746 $ 24.68 57,598 $ 21.60 37 38 52 53 13. EMPLOYEE BENEFITS (Continued) Stock Option Plan (Continued) Option awards outstanding and exercisable as of December 31, 2020: Incentive Stock Options Expiration Date Exercise Price Share Awards Outstanding Share Awards Exercisable Remaining Contractual Life (years) $ 04/28/21 04/02/22 04/01/23 04/01/24 09/22/24 04/01/25 03/30/26 10/31/26 12/12/26 04/03/27 04/02/28 03/01/29 04/01/29 04/03/30 12/01/30 14.88 15.00 16.63 18.25 19.75 19.48 22.00 22.40 22.38 27.00 29.63 32.00 31.60 25.65 30.00 1,800 4,000 6,980 3,582 500 7,468 9,700 1,000 1,000 10,185 31,200 1,500 33,750 29,993 2,900 145,558 1,800 4,000 6,980 3,582 500 7,468 9,700 1,000 1,000 10,185 20,791 500 11,240 - - 78,746 0.32 1.25 2.25 3.25 3.73 4.25 5.24 5.83 5.95 6.25 7.25 8.16 8.25 9.25 9.92 Non-Qualified Stock Options Expiration Date Exercise Price Share Awards Outstanding Share Awards Exercisable Remaining Contractual Life (years) $ 04/28/21 08/22/21 09/30/21 04/02/22 04/01/23 04/01/24 09/22/24 04/01/25 03/30/26 10/31/26 12/12/26 04/03/27 04/02/28 04/01/29 04/03/30 10/28/30 14.88 31.60 27.00 15.00 16.63 18.25 19.75 19.48 22.00 22.40 22.38 27.00 29.63 31.60 25.65 28.25 1,800 443 350 5,000 5,980 4,182 500 8,704 12,906 1,000 1,000 12,477 1,596 1,660 - - 57,598 0.32 0.64 0.75 1.25 2.25 3.25 3.73 4.25 5.24 5.83 5.95 6.25 7.25 8.25 9.25 9.82 1,800 443 350 5,000 5,980 4,182 500 8,704 12,906 1,000 1,000 12,477 2,400 4,980 6,692 1,000 69,414 39 14. COMMITMENTS In the normal course of business, there are outstanding commitments and contingent liabilities such as commitments to extend credit, financial guarantees, and letters of credit that are not reflected in the accompanying consolidated financial statements. The Company does not anticipate any losses as a result of these transactions. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in the particular classes of financial instruments that consisted of the following: Commitments to extend credit Standby letters of credit Total 2020 2019 $ 202,620,543 $ 172,809,626 5,408,070 5,365,456 $ 207,985,999 $ 178,217,696 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby 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 commitment period. For secured letters of credit, the collateral is typically Bank deposit instruments or real estate. Lease Commitments The Company leases office space and real estate for its bank branches with terms ranging from two years to eighteen years. The Company’s leases are classified as operating leases, and, therefore, were not recognized on the Company’s consolidated balance sheet prior to the adoption of the revised lease standard, ASC 842. With the adoption of ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use (ROU) asset and a corresponding lease liability. A combined ROU asset balance of $4,605,388 and $4,730,575 related to these operating leases is included in Accrued Interest and Other Assets on the consolidated balance sheet as of December 31, 2020 and 2019, respectively. A combined lease liability of $4,663,391 and $4,756,436 related to these operating leases is included in Accrued Interest and Other Liabilities on the consolidated balance sheet as of December 31, 2020 and 2019, respectively. 40 54 55 14. COMMITMENTS (Continued) Lease Commitments (Continued) Maturities of our lease liabilities for all operating leases for each of the next five years and thereafter are as follows: $ 2021 2022 2023 2024 2025 Thereafter Total lease payments Less: imputed interest Present value of lease liabilities $ Operating Lease Payments 399,275 392,220 401,294 410,370 387,309 4,055,701 6,046,169 1,382,778 4,663,391 The calculated amount of the lease liability in the preceding table is impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreement includes one or more options to renew at the Company’s discretion. If at lease inception the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments. Our combined operating leases have a weighted-average discount rate of 3.31% and 3.63%, and a weighted-average remaining lease term of 15.4 years and 16.2 years as of December 31, 2020 and 2019, respectively. Contingent Liabilities The Company from time to time may be a party in various legal actions from the normal course of business activities. Management believes the liability, if any, arising from such actions will not have a material adverse effect on the Company’s financial position. 15. REGULATORY RESTRICTIONS Restriction on Cash and Due from Banks The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The required reserve at December 31, 2020 and 2019 was $0 and $2,832,000, respectively. Loans Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific obligations. Further, such secured loans are limited in amount to 10 percent of the Bank’s common stock and capital surplus. There were no such borrowings by the Company during 2020 and 2019. 15. REGULATORY RESTRICTIONS (Continued) Dividends The Pennsylvania Banking Code restricts the availability of capital surplus for dividend purposes. At December 31, 2020, the Bank had a capital surplus of $5,723,535 which was not available for distribution to the Company as dividends. 16. REGULATORY CAPITAL Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total Tier I and Common Equity Tier 1 capital to risk-weighted assets and of Tier I capital to average total assets. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions. As of December 31, 2020 and 2019, the FDIC categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total risk-based, Common Equity Tier I, Tier I risk-based, and Tier I leverage capital ratios must be at least 10 percent, 6.50 percent, 8 percent, and 5 percent, respectively. The Company’s actual capital ratios are presented in the following table that shows the Company met all regulatory capital requirements: Total capital (to risk-weighted assets) Actual For capital adequacy purposes To be well capitalized Common Equity Tier I (to risk-weighted assets) Actual For capital adequacy purposes To be well capitalized Tier I capital (to risk-weighted assets) Actual For capital adequacy purposes To be well capitalized Tier I capital (to average assets) Actual For capital adequacy purposes To be well capitalized 2020 2019 Amount Ratio Amount Ratio $ 95,279,053 12.32 % 61,874,268 8.00 77,342,835 10.00 $ 86,899,041 11.86 % 58,626,829 8.00 73,283,536 10.00 $ 68,158,230 34,804,276 50,272,842 8.81 % 4.50 6.50 $ 63,910,378 32,977,591 47,634,299 8.72 % 4.50 6.50 $ 74,158,230 46,405,701 61,874,268 9.59 % 6.00 8.00 $ 69,910,378 43,970,122 58,626,829 9.54 % 6.00 8.00 $ 74,158,230 42,342,062 52,927,578 7.01 % 4.00 5.00 $ 69,910,378 36,607,111 45,758,888 7.64 % 4.00 5.00 41 42 56 57 16. REGULATORY CAPITAL (Continued) 17. FAIR VALUE MEASUREMENTS (Continued) The Bank’s actual capital ratios are presented in the following table which shows the Bank met all regulatory capital requirements: Total capital (to risk-weighted assets) Actual For capital adequacy purposes To be well capitalized Common Equity Tier I (to risk-weighted assets) Actual For capital adequacy purposes To be well capitalized Tier I capital (to risk-weighted assets) Actual For capital adequacy purposes To be well capitalized Tier I capital (to average assets) Actual For capital adequacy purposes To be well capitalized 2020 2019 Amount Ratio Amount Ratio $ 94,267,202 12.17 % 61,988,287 8.00 77,485,359 10.00 $ 86,800,059 11.80 % 58,853,023 8.00 73,566,278 10.00 $ 84,303,378 10.88 % 4.50 34,868,411 6.50 50,365,483 $ 79,107,396 10.75 % 4.50 33,104,825 6.50 47,818,081 $ 84,303,378 10.88 % 6.00 46,491,215 8.00 61,988,287 $ 79,107,396 10.75 % 6.00 44,139,767 8.00 58,853,023 $ 84,303,378 42,296,429 52,870,536 7.97 % 4.00 5.00 $ 79,107,396 36,526,539 45,658,174 8.66 % 4.00 5.00 17. FAIR VALUE MEASUREMENTS The following disclosures show the hierarchical disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows: Level I: Level II: Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed. Level III: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. The following tables present the assets and liabilities reported on the Consolidated Balance Sheet at their fair value on a recurring basis as of December 31, 2020 and 2019, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Level I Level II Level III Total December 31, 2020 Investment and equity securities at fair value: $ U.S. treasury securities U.S. government agency securities Obligations of states and political subdivisions Corporate securities Mortgage-backed securities in government-sponsored entities Equity securities - $ 2,044,540 $ - 26,859,647 - $ 2,044,540 - 26,859,647 - 45,804,831 - 13,491,746 - 45,804,831 - 13,491,746 - 39,836,282 2,132,287 - - 39,836,282 - 2,132,287 Total $ 2,132,287 $ 128,037,046 $ - $ 130,169,333 Derivatives at fair value: (1) Assets Liabilities $ $ - $ 5,074,982 $ - $ (9,775,453 ) $ - $ 5,074,982 - $ (9,775,453 ) Level I Level II Level III Total December 31, 2019 Investment and equity securities at fair value: $ U.S. treasury securities U.S. government agency securities Obligations of states and political subdivisions Corporate securities Mortgage-backed securities in government-sponsored entities Equity securities - $ 2,007,340 $ - 45,859,212 - $ 2,007,340 - 45,859,212 31,982,589 - - 15,554,146 31,982,589 - - 15,554,146 - 35,777,226 1,695,342 - - 35,777,226 - 1,695,342 Total $ 1,695,342 $ 131,180,513 $ - $ 132,875,855 Derivatives at fair value: (1) Assets Liabilities $ $ - $ 1,805,370 $ - $ (3,391,549 ) $ - $ 1,805,370 - $ (3,391,549 ) (1) Derivative assets and liabilities at fair value are included in our Consolidated Balance Sheet in Accrued interest and other assets and Accrued interest and other liabilities, respectively. Investment Securities The fair market value of investment securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Fair value for certain held to maturity securities were determined utilizing discounted cash flow models, due to the absence of a current market to provide reliable market quotes for the instruments. 43 44 58 59 17. FAIR VALUE MEASUREMENTS (Continued) 17. FAIR VALUE MEASUREMENTS (Continued) Impaired Loans The Company has measured impairment on loans generally based on the fair value of the loan’s collateral on a non-recurring basis. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses, or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. Derivatives Derivative instruments are recorded at fair value based upon commercially reasonable industry and market practices for valuing similar financial instruments. Certain inputs to the credit valuation models may be based on assumptions and best estimates that are not readily observable in the marketplace. Valuations do not reflect trading costs or counterparty charges that could apply if positions are terminated. Mortgage Servicing Rights Mortgage servicing rights are accounted for under the amortization method and are adjusted to the lower of aggregate cost or estimated fair value on a semi-annual basis or more frequently as deemed appropriate. Fair value is estimated by projecting and discounting future cash flows. Various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs, and other factors are used in the valuation of mortgage servicing rights. The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value as of December 31, 2020 and 2019, by level within the fair value hierarchy. 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 and 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 input. Other real estate owned is measured at fair value, less cost to sell at the date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount, or fair value less cost to sell. The fair value for mortgage servicing rights is estimated by discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar characteristics. Assets: Impaired loans Mortgage servicing rights Assets: Impaired loans Mortgage servicing rights Level I Level II Level III Total December 31, 2020 $ - $ - - $ 1,322,141 $ 1,322,141 200,306 - 200,306 Level I Level II Level III Total December 31, 2019 $ - $ - - $ - 986,637 $ 297,928 986,637 297,928 The following tables provide a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing Level III techniques as of December 31, 2020 and 2019. December 31, 2020 Valuation Impaired loans Fair Value Techniques Unobservable Inputs $ 660,932 Discount Rate Discounted Cash Flows Impaired loans $ 661,209 Property appraisals Management discount for property type and recent market volatility Mortgage servicing rights $ 200,306 Discounted cash flows Discount rate Prepayment speeds December 31, 2019 Valuation Impaired loans Fair Value Techniques Unobservable Inputs $ 722,572 Discount Rate Discounted Cash Flows Impaired loans $ 264,065 Property appraisals Management discount for property type and recent market volatility Mortgage servicing rights $ 297,928 Discounted cash flows Discount rate Prepayment speeds Range 4.00% - 8.50% discount Weighted Average (5.18%) 15.00% - 100.00% discount Weighted Average (28.93%) 2.68 - 3.28% discount Weighted Average (2.98%) 1.47 - 2.99 prepayment factor Weighted Average (1.83%) Range 4.00% - 8.50% discount Weighted Average (5.18%) 15.00% - 100.00% discount Weighted Average (28.93%) 2.68 - 3.28% discount Weighted Average (2.98%) 1.47 - 2.99 prepayment factor Weighted Average (1.83%) 45 46 60 61 18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS 19. ACCUMULATED OTHER COMPREHENSIVE INCOME The estimated fair values of the Company’s financial instruments not required to be measured or reported at fair value at December 31, 2020 and 2019 are as follows: The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the year ended December 31, 2020 and 2019: Carrying Value Fair Value 2020 Level I Level II Level III Financial assets: Investment securities held to maturity Net loans Financial liabilities: Deposits Other borrowings $ 11,023,499 $ 11,158,436 $ 755,960,393 756,802,249 - $ 11,158,436 $ - - 756,802,249 - $ 877,796,429 $ 879,819,942 $ 626,186,642 $ 64,656,810 66,159,726 - - $ 253,633,300 131,159,726 - For cash and cash equivalents, certificates of deposits, loans held for sale, regulatory stock, bank-owned life insurance, accrued interest receivable, short-term borrowings, and accrued interest payable, the carrying value is a reasonable estimate of fair value. Carrying Value Fair Value 2019 Level I Level II Level III 7,250,000 $ $ 679,518,794 7,378,098 $ 682,935,106 - $ - 7,378,098 $ - 682,935,106 - Financial assets: Investment securities held to maturity Net loans Financial liabilities: Deposits Other borrowings Net Unrealized Gains on Investment Securities Cash Flow Hedges Total Accumulated other comprehensive income (loss) , January 1, 2019 Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive loss Amounts from change to AOCI related to cash flow hedges Accumulated other comprehensive income (loss), December 31, 2019 Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive loss Amounts from change to AOCI related to cash flow hedges Accumulated other comprehensive income (loss), December 31, 2020 $ (1,317,858 ) $ 16,081 $ (1,301,777 ) 1,698,566 - 1,698,566 (127,694 ) - (127,694 ) - (1,283,601 ) (1,283,601 ) $ 253,014 $ (1,267,520 ) $ (1,014,506 ) 2,475,314 - 2,475,314 (63,913 ) - (63,913 ) - (2,406,031 ) (2,406,031 ) $ 2,664,415 $ (3,673,551 ) $ (1,009,136 ) $ 710,225,620 $ 711,098,065 $ 430,612,859 $ 80,029,248 80,242,399 - - $ 280,485,206 80,242,399 - The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the year ended December 31, 2020 and 2019: For cash and cash equivalents, certificates of deposits, loans held for sale, regulatory stock, bank-owned life insurance, accrued interest receivable, short-term borrowings, and accrued interest payable, the carrying value is a reasonable estimate of fair value. Unrealized gains on investment securities, December 31, 2020 Amount Reclassified from Accumulated Other Comprehensive Income Affected Line Item in the Consolidated Statement of Income where Net Income is Presented $ $ $ 80,903 (16,990 ) Investment securities gains, net Income tax expense 63,913 161,638 (33,944 ) Investment securities gains, net Income tax expense Unrealized gains on investment securities, December 31, 2019 $ 127,694 20. SUBSEQUENT EVENTS Management has reviewed events occurring through March 12, 2021, the date the financial statements were issued, and no additional subsequent events occurred requiring accrual or disclosure. 47 48 62 B O A R D O F D I R E C T O R S A N D O F F I C E R S 63 BOARD OF DIRECTORS OF KISH BANCORP, INC. William P. Hayes, Chairman James J. Lakso, Vice Chairman Eric J. Barron, Member William L. Dancy, Member Spyros A. Degleris, Member Gregory T. Hayes, Member Paul G. Howes, Member William S. Lake, Member Kathleen L. Rhine, Member Paul H. Silvis, Member James A. Troha, Member* Frances V. Vaughn, Member George V. Woskob, Member BOARD OF DIRECTORS OF KISH BANK William P. Hayes, Chairman James J. Lakso, Vice Chairman William L. Dancy, Member Spyros A. Degleris, Member Gregory T. Hayes, Member Paul G. Howes, Member William S. Lake, Member Kathleen L. Rhine, Member Paul H. Silvis, Member James A. Troha, Member* Frances V. Vaughn, Member George V. Woskob, Member CENTRE COUNTY REGIONAL BOARD A. Christian Baum, Member Spyros A. Degleris, Member Adam R. Fernsler, Member H. Amos Goodall, Jr., Member Alan G. Hawbaker, Member Paul G. Howes, Member Oscar W. Johnston, Member Michael J. Krentzman, Member Maureen L. Mulvihill, Member Kathleen L. Rhine, Member Paul H. Silvis, Member George V. Woskob, Member Brandon M. Zlupko, Member HUNTINGDON COUNTY REGIONAL BOARD Arthur J. DeCamp, Member Wayne A. Hearn, Member Stephen C. Huston, Member James J. Lakso, Member Pamela F. Prosser, Member Burgess A. Smith, Member Delmont R. Sunderland, Member Angela D. Thompson, Member James A. Troha, Member Frances V. Vaughn, Member JUNIATA COUNTY REGIONAL BOARD Philip Bomberger, Member Jeff Brown, Member Ronald N. Colledge, Member Maxwell Manbeck, Member Robert Rowles, Member Anita Rudy, Member MIFFLIN COUNTY REGIONAL BOARD Christina Calkins-Mazur, Member Susan L. Cannon, Member William L. Dancy, Member James W. Felmlee, Member Michael K. Halloran, Member Melinda K. Kenepp, Member William S. Lake, Member Harvard K. McCardle, Member Alan J. Metzler, Member Phyllis L. Palm, Member John Pannizzo, Member James L. Shilling, Jr., Member KISH BANK EXECUTIVE OFFICERS William P. Hayes, Chairman and Chief Executive Officer Gregory T. Hayes, President and Chief Operating Officer Mark J. Cvrkel, Executive Vice President, Chief Financial Officer Robert S. McMinn, Executive Vice President, General Counsel Richard A. Sarfert, Executive Vice President, Chief Lending Officer KISH BANK SENIOR OFFICERS Douglas C. Baxter, Senior Vice President, Accounting and Controls Manager Robert L. Bilger, Senior Vice President, Market Leader Kimberly A. Bubb, Senior Vice President, Director of Digital Technology Innovation Peter D. Collins, Senior Vice President, Senior Portfolio Manager and Commercial Lender Wade E. Curry, LUTCF, Senior Vice President, Investment Services Terra L. Decker, Senior Vice President, Risk Officer Kenneth M. Goetz, Senior Vice President, Managing Director - Ohio Thomas Minichiello, III, Senior Vice President, Director of Retail Banking Amy M. Muchler, Senior Vice President, Educational Outreach and Service Quality Manager Debra K. Weikel, Senior Vice President, Retail Credit Officer Suzanne M. White, Senior Vice President, Human Resources and Organizational Development Director Jeffrey D. Wilson, Senior Vice President, CEO of Kish Agency Gary L. Wimer, Senior Vice President, Managing Director - Ohio Allan F. Bills, Vice President, Finance Reporting and Analytics Manager Tina M. Collins, Vice President, Controller Alta Corman-Wolf, Vice President, Residential Lender Beth N. Metz Gilmore, Vice President, Human Resources Manager Roxanne R. Greising, Vice President, Credit Risk Director Jeffrey A. Gum, Vice President, Managing Director of Kish Benefits Consulting Allana L. Hartung, Vice President, Commercial Relationship Manager Jeffrey T. Hayes, Vice President, Financial Advisor Edward M. Henderson, Vice President, Wealth Advisor and Trust Officer Ashley L. Henry, Vice President, Lending Services Manager Terry P. Horner, Vice President, Business Development Officer Garen M. Jenco, Vice President, Client Experience Holly A. Johnson, Vice President, Mortgage Banking Manager Marsha K. Kuhns, Vice President, Residential Lender John Q. Massie, Vice President, Commercial Relationship Manager Virginia A. McAdoo, Vice President, Retail Banking Manager Kristie R. McKnight, Vice President, Commercial Relationship Manager Seth J. Napikoski, Vice President, Commercial Relationship Manager Peter K. Ort, Vice President, Branch Manager Denise F. Quinn, Vice President, Commercial Relationship Manager Kevin D. Rimmey, Vice President, Credit Administration Manager Melissa K. Royer, Vice President, Technical Advisor Cheryl E. Shope, Vice President, Residential Lender Glenn E. Snyder, Jr., Vice President, Facilities and Security Officer Wendy S. Strohecker, Vice President, Bank Operations Manager N. Robert Sunday, III, Vice President, Compliance Officer Penny L. Zesiger, Vice President, Residential Lender *Appointed at the January 2021 Board meeting. The Board of Directors of Kish Bancorp, Inc. Front row: Kathleen Rhine, Bill Hayes, Greg Hayes, and Fran Vaughn. Back row: Eric Barron, Bill Lake, George Woskob, Paul Howes, Bill Dancy, Jim Lakso, Paul Silvis, and Spyros Degleris. Not pictured: Jim Troha*. In Memoriam EDWARD A. FRIEDMAN 1948–2020 Member of the Board of Directors of Kish Bancorp, Inc. and Kish Bank, and of the Centre County Regional Board 4255 East Main Street, Belleville, PA 17004 | 1-800-981-5474 | www.KishBank.com 

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