Kish Bancorp, Inc.
Annual Report 2023

Plain-text annual report

2023 ANNUAL REPORT CONTENTS Letter to the Shareholders .................................................... 3 Financial Highlights .............................................................. 10 Investor Information .............................................................. 11 Independent Auditor’s Report ........................................... 12 Financial Statements ............................................................ 14 Notes to Consolidated Financial Statements .................. 19 Board of Directors and Officers ........................................ 62 Kish Bank's Pleasant Valley Boulevard branch in Altoona. Front Cover (Top Row): Cory and Gene Stocker; Thomas Yoder; Emily and David Miller Front Cover (Bottom Row): Clark Adelman; Matt Patterson and Megan Lantz From Watershed to Bellwether: Banking That Transforms In the world of banking and financial services, language is usually precise and analytical. For Kish Bancorp over the past decade, the use of banking terminology has largely failed to capture the full magnitude of our progress. While we were, and remain, proud of the extraordinary expansion in total assets, earnings per share, return on shareholders’ equity, market share gains, and return on assets we achieved, it remained a struggle with each annual report to capture the true essence of our accomplishments for the year just passed. Was it just an exceptional moment in time reflecting a disciplined focus on performance? Or was it a watershed moment, with Kish’s results representing the culmination of years of investment in our team and infrastructure? Ultimately, both were true. As we reflect on the and new metrics for service quality. Metrics that significant gains and incredible progress of recent include response times, products developed, team years, and the watershed period they represent knowledge, customer satisfaction, digital adoption, for Kish, it becomes clear that this was indeed a and financial performance that supports and drives transformative period in Kish’s history. It is one innovation. that marks a critical turning point in the company’s evolution that will have a profound impact on the years that follow. Instead of speaking of Kish’s performance as another outstanding year in a succession of compelling annual results, we can now speak of 2023 as the year in which Kish emerged with a new, robust, and powerful model for the future of community banking. One in which strong and industry-leading financial performance remains a top priority, but also where Kish’s strategic vision for the future has been transformed. 2023 will stand as a bellwether year for Kish Bancorp, reflecting a dramatic and permanent elevation in the capacity of the company to operate as a community banking powerhouse going forward. As we enter 2024, we have reached the point where we can say that Kish is truly banking transformed. What are the indicators that 2023 will stand as a truly bellwether year? The Kish Bank branch of the future is fully emerging in 2024 in State College, Altoona, Huntingdon, and Mifflintown. Kish Bank’s new ATM + Live Banker experience will soon be rolled out through Advanced ITMs (Interactive Teller Machines) throughout Kish’s five-county PA market. This advanced technology will be especially critical to maintaining service levels to smaller rural communities as well as busy population centers. Our new 38,000 square foot Kish Innovation Center in The highlights of our accomplishments and financial Reedsville now results for 2023 affirm that the transformation of the represents the Kish franchise has been validated not only by the nerve center for permanent high levels of traditional performance this innovative metrics, but also by Kish’s capacity to break new approach to ground in terms of digital delivery, speed to market, banking in a digital sustained growth in market share, team capacity, world infused with industry leadership, and expanding revenues. We a commitment to are doing this through the implementation of new a deeply personal digital solutions infused with personal attention experience. William P. Hayes Executive Chairman Gregory T. Hayes President and Chief Executive Officer 2 Table of Contents Letter to the Shareholders 3 “ We have always worked to forge relationships with like-minded businesses that align with our mission to enhance our community. Community involvement is one of our greatest passions. Our relationship with Kish has provided opportunities to give back, like their Giv Local Community Gifting Program, which will allow local businesses like ours to help our communities well into the future.” Cory Stocker VP & Partner, Stocker Chevrolet Pictured with father Gene Stocker, President & Owner Stocker Chevrolet is in its 63rd year of business and third generation of management under the Stocker family. In addition to maintaining a family business environment, taking great care of their employees, and always focusing on the customer experience, Cory Stocker ranks their support of and from the community as one of the keys to their long-term success. None of this would be possible without an overriding dedication to the banking fundamentals of credit the acquisition of exceptional new teams in both markets. Additionally, our commercial quality, relationship profitability, product development, lending team in Ohio sustained its robust customer satisfaction, team development, and sustained commercial lending production—in particular, performance for shareholders. That combines with growing contributions from our non-bank units and our loans to fund multi-family housing projects throughout the upper Midwest and eastern optimism for their futures as well. seaboard. So, as we review the extraordinary milestones and outcomes achieved in 2023, and as you review the financial results contained in these pages, please understand that cumulatively they represent a validation of a vision for the future of Kish that is not only sustainable but truly industry-leading. It is a picture of Kish Bancorp that validates 2023 as a bellwether year. Here are the highlights: CEO SUCCESSION TO GREG HAYES During 2023, we celebrated a successful transition in leadership, with Greg Hayes assuming the role of President and CEO. In his 17 years with Kish, his strategic vision and focus on execution have contributed significantly to the bank’s growth and success. After 40 years as Kish’s CEO, I assumed the role of Executive Chairman on July 1, 2023. In that capacity, my objective has been to remain a resource to Greg and to our dynamic leadership team while maintaining a strong focus on performance for shareholders. ASSET GROWTH SURPASSES $1.5 BILLION Kish Bancorp achieved a new milestone in the recent dramatic expansion of total assets, crossing the $1.5 billion mark in total assets, nearly doubling in just over five years. This high-water mark reflects the bank’s priority of successfully pursuing profitable customer acquisition and market share expansion coupled with advanced capital, balance sheet, and financial management strategies. MARKET EXPANSION Kish successfully expanded its market footprint into Blair and Juniata Counties in central Pennsylvania. Together, this expansion opens markets that represent the opportunity to access over $4 billion in new deposits. We have positioned ourselves for success with NEW STOCK ISSUANCE The bank issued $8 million in new stock to local investors to fund sustained growth. This infusion of capital, which will continue into 2024, demonstrates both confidence and optimism regarding Kish Bancorp’s future. Combined with $11 million in retained earnings and an improving AOCI valuation, Kish Bancorp’s capital position expanded by $20.8 million in 2023, capable of supporting over $240 million in additional earning assets, much of which is already in the central Pennsylvania and northeastern Ohio pipeline. Notably, 2023 represented the eighth consecutive year of increased dividends for Kish shareholders. Kish Bancorp shares are traded on the OTCQX exchange under the ticker symbol KISB. SUSTAINED COMMUNITY INVESTMENT Augmented by thousands of hours of volunteerism by Kish team members, Kish’s financial support of local charities and nonprofit organizations continued to expand at a double-digit rate. We have been especially pleased with the success of our flagship fundraising effort. For the second year running, the organization-wide Kish for the Cure campaign raised $75,000 to provide financial support for local cancer victims and their families who are struggling financially as they fight this horrific disease. Additionally, we have identified several key new charitable opportunities in Blair and Juniata Counties. Kish’s innovative Giv Local merchant services program has allowed local businesses to direct a portion of their credit card charges to local charities of their choosing. American Eagle Paper Mills serves as the lifeblood of the town of Tyrone. The mill operated for nearly 120 years until it unexpectedly closed in 2001, devastating local families. AEPM reopened in 2003 with a vision of producing paper sustainably with recycled fiber. In 2016, they turned to Kish to finance a highly efficient natural gas boiler that was critical to their mission. The new energy source has helped position AEPM for future sustainable growth, and the mill now employs 190 people, up over 10% from the startup in 2003. “ Kish provided the funding for us to build our new warehouse and install our gas-fired boiler. This helped our company grow and helped keep jobs in Tyrone. Kish has been a wonderful partner in our success.” Clark Adelman VP of Finance & Administration, American Eagle Paper Mills 4 Letter to the Shareholders Letter to the Shareholders 5 SUPPORT FOR EDUCATION A pillar of Kish’s core values is support for the education and health of our region’s young people. Emblematic of that passion has been the broad participation by our team in the American Bankers Association’s Teach Children to Save program, which in 2023 reached over 2,500 elementary students across our five-county area. Kish also supports Juniata College’s Science in Motion program that travels to high schools across central PA. Additionally, we dramatically elevated Kish’s college scholarships to deserving high school students who need financial support to pursue their continuing education. FOSTERING ECONOMIC DEVELOPMENT Through community development loans, multi-family housing development loans, municipality loans, services to small businesses, and active leadership of Kish bankers in economic development organizations across the region, Kish’s focus is to stimulate economic growth, support job creation, and improve infrastructure. CONCLUSION There is much more I could add in documenting Kish’s bellwether year in 2023, and I urge you to digest the financial information in the ensuing pages. However, I want to return to the theme of Banking That Transforms, which President and CEO Greg Hayes will address in a discussion of Kish Bank’s recent nominations for several awards in innovation excellence, including Celent's Model Bank Award and Banking Tech USA’s Best Community Bank Modernization Award. I will close by thanking you for your investment in Kish Bancorp. As shareholders, you support a bank that has developed as a regional banking power—one that is transforming how banking and financial services are delivered. As always, we welcome any questions you may have regarding your investment. Sincerely, William P. Hayes Executive Chairman Founded in 2008, Penn State Construction is a family owned and operated business in Mifflin County. The growing company takes pride in the client experience and has built a powerful reputation in the industry. The majority of their work comes from repeat customers and word of mouth among satisfied clients. Integrity and focus on excellence are the foundation from which success has been built. “ As a growing business, we needed a bank that could grow with us. We were introduced to Kish and found a professional, eager team that was interested in collaborating with us on our future. The working relationships we’ve developed with Kish, and the financial support they’ve provided, have accelerated our growth.” David Miller President, Penn State Construction Pictured with wife Emily Miller, Secretary The "Your Kish, Your Way" Promise A LETTER FROM GREG HAYES As a son, a Kish team member, and now as the new CEO and President of Kish Bank, I have watched We call it “Your Kish, Your Way.” It is Kish Bank’s human-enabled digital experience, and it comes with and engaged with my father, Bill Hayes, as Kish a promise to our customers that technology will Bank grew from a two-branch community bank in never replace personal relationships—it will enhance the Kishacoquillas Valley with $10 million in total them. Within every Kish digital tool or service, our assets to a highly sophisticated regional community customers can easily reach a Kish representative any bank, serving five counties and beyond, with time they want or need, allowing us to accommodate total assets of $1.5 billion. That growth has come customers who prefer a fully digital relationship, a from an unwavering commitment to providing more traditional experience, and all those in between. personalized attention with local, knowledgeable, caring, and responsive financial professionals who deliver customized financial solutions to people and businesses that want to build a strong financial future. Over the past 45 years, Kish has consistently differentiated itself through relationships and innovation. In 2015, we set out to transform Kish Bank’s community banking approach through the utilization of innovative technology, and with a commitment to maintaining, at our core, the most critical element of our success: our unwavering focus on fulfilling our clients’ financial needs. Over the past decade, the banking industry has seen the most rapid period of technological change ever experienced. Banking technologies have been amplified by FinTech companies providing banking services and cloud- based technology solutions, and challenged by increased cyber threats and fraud, the evolution of The result is a community bank that takes great pride in all aspects of its customer service experience and its ability to remain connected with clients, while at the same time understanding that one of the greatest challenges to remaining relevant is our ability to innovate human interaction with convenience, speed, experience, and technology solutions. While this strategic focus has enabled Kish to grow tremendously over the past five years, more importantly, it has created the capacity for us to succeed long-term. Our vision is to meet every customer where they are, regardless of their preferred banking channel or product and where/how they use it. Our progress has been marked by significant achievements that include: • A new, more integrated and feature-rich Digital Banking solution that has the same omnichannel look and feel across all devices. Its features cryptocurrencies, and the pandemic’s impact on how include instant person-to-person transfer of people work. And, as we face the massive shift that funds; the ability to manage debit card alerts will come with Artificial Intelligence, we know that the and limits and to turn cards on and off; the pace of innovation is only going to increase. aggregation of external bank account and credit That is why it is more critical than ever that Kish Bank doubles down on its focus not just on human relationships and interactions, but those that are supported by technology innovation. Unlike other institutions that look to replace human interactions with technology, Kish is enhancing client access to our bankers and services with technology and innovation. card transactions into one holistic view with included budgeting tools; credit monitoring and coaching; and the ability to easily live chat with our dedicated Client Solutions Center team. • Expanded hours of support from our Client Solutions Center (7 a.m. to 7 p.m.) via our enhanced call center phone system, in addition to live chat for our website and Digital Banking. 6 Letter to the Shareholders Letter to the Shareholders 7 • Increased access to our banking team with the opening of three new branches (and current construction of a fourth) as we continue to expand into Juniata and Blair Counties. Clients can also go online to easily schedule appointments with our branch teams through our completely redesigned website. • New online account opening and loan application solutions that allow us to provide more convenience to our clients while maintaining the connection to our bankers. • Contactless purchase and mobile wallet capabilities for the Kish Debit Card, which can now be instantly printed and issued to clients at any of our financial centers. • ATM + Live Banker, the key element of our Branch of the Future model currently in its live pilot phase. This video-based ATM capability provides full-service teller transactions—from check cashing to loan payments—across expanded hours for more convenience, all while maintaining live, local, and caring human engagement. Equally important to “Your Kish, Your Way” are the improvements we have made to the employee experience that enable our team to better support customers. In the last few years alone, we have: • Opened our 38,000-square foot Kish Innovation Center on our Reedsville campus, which provides an elevated focus on team member education and collaboration through dedicated innovative space, housing our Client Solutions Center as well as our new Employee Solutions Center dedicated to supporting front-line employees. • Migrated to a highly secure, cloud- hosted, virtual desktop environment and implemented Microsoft 365 office productivity tools in support of our team’s work-life integration, giving our team the capacity to work more efficiently and provide solutions from anywhere, at any time. • Positioned ourselves for the future by integrating a new core banking processor, state-of-the-art technology stack, and network infrastructure that have been built to provide the highest levels of information security and data management, supporting technological advancements that will enable Kish to grow with scale and efficiency. These critical elements of our strategy represent the ongoing transformation occurring at Kish. The “Your Kish, Your Way” promise never stops. It’s an embedded philosophy and a promise to which we are committed. Finally, we recognize that the most important proof of success will always come directly from those we serve—those who share the stories of our team’s focus on making their lives better. Clients, like those highlighted in this annual report, who consistently affirm the importance of our people and our support to their financial well-being. Sincerely, Gregory T. Hayes President and Chief Executive Officer Thomas Yoder, longtime Kish customer and community leader, is entering his third year as Mayor of Huntingdon. Tom retired from a lifelong career as an educator to focus on the revitalization and economic development of the Huntingdon Borough. Tom served on the Borough Council for 12 years and understands the kind of leadership and commitment a community needs to thrive. “ As the mayor of the Borough of Huntingdon, community is very important to me. I want people to be proud of their town and enjoy living and working here. I want to be affiliated with organizations that make a difference in their communities and our citizens’ lives. From all my experiences with Kish, I know they are here to serve.” Thomas Yoder Mayor, Borough of Huntingdon Matt Patterson is a franchisee of 21 Jersey Mike’s stores in Central PA. He and his wife, Kristie (not pictured), opened their first store in 2012 and have grown their business exponentially in the last 12 years. Matt attributes part of their rapid growth to Kish’s ability to respond to funding needs, and the relationships he has built with his banking, insurance, and benefits teams at Kish. “ My Kish team understands my business and has my back. I call on them and they take action and personal care, as if they have a stake in my business. The relationships I’ve developed with Kish have helped to propel our business at a speed that other banks could not keep up with. We have grown from 30 to over 500 employees with Kish by our side.” Matt Patterson Franchisee, Jersey Mike's Subs Pictured with Megan Lantz, Director of Operations 8 Letter to the Shareholders Letter to the Shareholders 9 FOR THE YEAR Net Income Net Income Before Taxes Total Dividends Declared 2023 $ 13,499,712 2022 $ 12,860,301 2021 $ 9,881,340 2020 $ 8,039,287 2019 $ 7,006,914 16,154,155 3,883,501 15,283,348 11,232,900 9,278,885 7,903,452 3,448,214 2,988,353 2,804,384 2,585,444 Grow with Us Add to Your Investment in Kish Bancorp, Inc. (KISB) $ 1,542,776 $ 1,295,448 $ 1,232,779 $ 1,106,609 $ 918,309 1,225,317 1,179,069 92,765 7,545 44 0.94% 13.02% 28.77% 103.92% 6.50% 10.70% 0.61% 0.00% 1,013,170 1,037,120 71,972 10,335 225 868,153 1,002,645 77,100 10,560 (9) 1.02% 14.95% 26.81% 97.69% 6.35% 11.57% 1.01% 0.02% 0.85% 14.08% 30.24% 86.59% 7.11% 12.78% 1.20% 0.00% 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%) AT YEAR END (IN $000s) Total Assets Total Loans (Net) Total Deposits Stockholders’ Equity Allowance for Loan Credit Losses 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 Allowance for Credit Losses/Loans Net Loan Losses to Total Loans (Net) PER SHARE DATA Basic Earnings Fully Diluted Earnings Dividends Paid Equity (Book Value) Equity Plus Allowance for Credit Losses $ 5.22 $ 5.02 $ 3.88 $ 3.20 $ 2.80 INVESTOR RELATIONS 5.13 1.46 35.28 38.15 4.90 1.31 27.41 31.35 3.76 1.14 29.39 33.42 3.12 1.08 26.93 30.69 2.70 1.00 24.90 27.80 Average Shares Outstanding (#) 2,629,167 2,625,612 2,626,931 2,597,978 2,499,536 Net Income (in millions) Earnings & Dividends (per share) Stock Valuation (per share) The 2023 Annual Report includes information that chronicles the growth of your corporation. That growth is the result of the Kish team’s execution of carefully developed strategies to grow your business. Shareholders may purchase additional shares through the open market. KISB is also listed on the OTCQX exchange and trades with regular frequency through any brokerage account. Shareholders who hold their shares with our transfer agent, Computershare, may participate in the Kish Bancorp Dividend Reinvestment Plan. Please contact us if we may be of assistance. INQUIRIES MARKET MAKERS Questions or requests for investment information Janney Montgomery Scott, LLC Contact: Eugene Bodo 215-665-6566 1717 Market Street Philadelphia, PA 19103 Raymond James and Associates, Inc. Contact: Anthony Lanfranca 312-655-2961 222 South Riverside Plaza, 7th Floor Chicago, IL 60606 may be directed to: KISBinfo@kishbank.com 814-325-7252 Contact: Amanda Dutrow Additional information about Kish Bancorp, including quarterly and annual financial reports, stock and dividend information, and news, is available at: ir.kishbancorp.com and otcmarkets.com/stock/KISB STOCK LISTING Kish Bancorp, Inc. stock is traded on the OTCQX market under the stock ticker symbol "KISB." COMPANY INFORMATION Corporate Headquarters: 4255 East Main Street P.O. Box 917 Belleville, PA 17004 Principal Executive Offices: 2610 Green Tech Drive State College, PA 16803 * 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. 10 Financial Highlights Investor Information 11 Board of Directors and Stockholders Kish Bancorp, Inc. OPINION and appropriate to provide a basis for our audit material misstatement when it exists. The risk of not OTHER INFORMATION INCLUDED IN THE We have audited the accompanying consolidated financial statements of Kish Bancorp, Inc. and its subsidiaries (the “Company”), which comprise the consolidated balance sheet as of December 31, 2023 and 2022; the related consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the “financial statements”). opinion. CHANGE IN ACCOUNTING PRINCIPLE As discussed in Note 1 to the financial statements, the Company changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Codification (ASC) Topic 326, Financial Instruments – Credit Losses. Our opinion is not modified with respect to this matter. RESPONSIBILITIES OF MANAGEMENT FOR In our opinion, the accompanying financial statements THE FINANCIAL STATEMENTS present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America. We have also audited, in accordance with auditing standards generally accepted in the United States of America (GAAS), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2024, expressed an unmodified opinion on the effectiveness of the Company’s internal control over financial reporting. Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of within one year after the date the financial statements are issued or available to be issued. BASIS FOR OPINION AUDITOR’S RESPONSIBILITIES FOR THE AUDIT We conducted our audits in accordance with GAAS. OF THE FINANCIAL STATEMENTS Our responsibilities under those standards are further described in the “Auditor’s Responsibilities for the Audit of the Financial Statements” section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and, therefore, is not a guarantee that an audit conducted in accordance with GAAS will always detect a detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: • Exercise professional judgment and maintain professional skepticism throughout the audit. ANNUAL REPORT Management is responsible for the other information included in the annual report. The other information comprises the Chairman’s Letter to the Stockholders and Financial Highlights but does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information, and we do not express an opinion or any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and consider whether a material • Identify and assess the risks of material inconsistency exists between the other information misstatement of the financial statements, whether and the financial statements, or whether the other due to fraud or error, and design and perform information otherwise appears to be materially audit procedures responsive to those risks. Such misstated. If, based on the work performed, we procedures include examining, on a test basis, conclude that an uncorrected material misstatement evidence regarding the amounts and disclosures in of the other information exists, we are required to the financial statements. describe it in our report. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. • Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. • Conclude whether, in our judgment, there are Cranberry Township, Pennsylvania March 14, 2024 S.R. Snodgrass, P.C. 2009 Mackenzie Way, Suite 340 Cranberry Township, PA 16066 conditions or events, considered in the aggregate, 724-934-0344 that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. 12 Independent Auditor's Report Independent Auditor's Report 13 KISH BANCORP, INC. CONSOLIDATED BALANCE SHEET KISH BANCORP, INC. CONSOLIDATED STATEMENT OF INCOME 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, net of allowance for credit losses of $112,624 and $0, fair value of $9,972,415 and $10,070,997 Equity securities Loans held for sale Loans Less allowance for credit losses - loans 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 Preferred stock, $.50 par value; 500,000 shares authorized, no shares issued and outstanding Common stock, $.50 par value; 8,000,000 shares authorized, 2,960,591 and 2,697,500 shares issued; 2,881,086 and 2,639,544 shares outstanding at December 31, 2023 and 2022, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock, at cost (79,505 and 57,956 shares at December 31, 2023 and 2022, respectively) TOTAL STOCKHOLDERS' EQUITY December 31, 2023 2022 $ 13,288,999 $ 16,448,736 29,737,735 11,082,445 9,024,003 20,106,448 $ $ 245,000 178,977,804 245,000 155,308,551 10,891,602 2,712,968 663,017 10,763,833 2,858,117 631,414 1,232,861,975 7,544,973 1,225,317,002 1,023,505,114 10,335,231 1,013,169,883 27,397,616 3,560,942 9,772,000 24,302,468 29,197,801 1,542,775,955 $ 26,795,671 3,560,942 7,256,300 23,628,587 31,123,166 1,295,447,912 182,035,638 $ 111,134,914 104,757,107 378,495,532 402,646,217 1,179,069,408 189,976,622 115,230,051 131,688,405 331,948,502 268,276,138 1,037,119,718 194,541,362 41,418,608 34,981,433 1,450,010,811 100,326,547 52,413,653 33,616,318 1,223,476,236 - - 1,480,296 10,890,781 96,878,445 (14,000,592 ) 1,348,750 2,897,790 85,844,293 (16,140,949 ) (2,483,786 ) 92,765,144 (1,978,208 ) 71,971,676 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,542,775,955 $ 1,295,447,912 See accompanying notes to the 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 credit losses - loans Provision for credit losses - investment securities held to maturity Provision for credit losses - off balance sheet credit exposures Total provision for credit losses Year Ended December 31, 2022 2023 $ 65,808,264 $ 810,709 41,423,419 965,252 5,181,614 203,777 456,243 936,379 73,396,986 21,124,267 887,863 7,757,440 29,769,570 3,654,621 229,151 369,155 552,108 47,193,706 5,072,657 239,630 3,636,717 8,949,004 43,627,416 38,244,702 328,965 2,460 379,620 711,045 - - - - NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 42,916,371 38,244,702 NONINTEREST INCOME Service fees on deposit accounts Investment securities gains (losses), 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 2,339,661 (158 ) (145,149 ) 340,336 646,640 3,060,586 261,836 2,545,185 623,299 1,698,737 11,370,973 22,198,014 3,896,516 4,184,820 783,991 622,786 1,134,670 692,127 4,620,265 38,133,189 16,154,155 2,654,443 2,152,592 440 164,537 1,095,550 1,042,850 2,848,821 219,286 2,485,063 604,037 1,494,717 12,107,893 21,140,174 4,623,738 2,673,625 796,698 460,155 756,961 741,375 3,876,521 35,069,247 15,283,348 2,423,047 $ 13,499,712 $ 12,860,301 $ $ 5.22 $ 5.13 $ 5.02 4.90 3 4 See accompanying notes to the consolidated financial statements. 14 Financial Statements Financial Statements 15 KISH BANCORP, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) Net income Other comprehensive income (loss) Securities available for sale: Change in unrealized holding gains (losses) on available for sale securities Tax effect Change in unrealized gains (losses) related to cash flow hedges Tax effect Reclassification adjustment for net investment securities losses (gains) realized in net income Tax effect Total other comprehensive income (loss) Year Ended December 31, 2022 2023 12,860,301 13,499,712 $ $ 3,940,791 (827,565 ) (1,231,637 ) 258,644 158 (33 ) 2,140,357 (24,578,671 ) 5,161,521 6,138,078 (1,288,996 ) (440 ) 92 (14,568,416 ) Total comprehensive income (loss) $ 15,640,069 $ (1,708,115 ) See accompanying notes to the consolidated financial statements. S e e a c c o m p a n y i n g n o t e s t o t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s . 6 B a l a n c e , D e c e m b e r 3 1 , 2 0 2 3 $ 1 , 4 8 0 , 2 9 6 $ 1 0 , 8 9 0 , 7 8 1 $ 9 6 , 8 7 8 , 4 4 5 $ ( 1 4 , , 0 0 0 5 9 2 ) $ ( 2 , , 4 8 3 7 8 6 ) $ 9 2 , 7 6 5 , 1 4 4 N e t i n c o m e O t h e r c o m p r e h e n s i v e i n c o m e S t o c k o p t i o n c o m p e n s a t i o n e x p e n s e n e t o f d e f e r r e d t a x e f f e c t o f $ 3 7 6 , 9 2 1 C a s h d i v i d e n d s ( $ 1 . 4 6 p e r s h a r e ) A m o r t i z a t i o n o f r e s t r i c t e d s t o c k p l a n s h a r e s S a l e o f n e w i s s u e c o m m o n s t o c k ( 1 7 4 , 6 5 3 s h a r e s ) E x e r c i s e o f s t o c k o p t i o n s ( 3 2 , 4 8 4 s h a r e s ) F o r f e i t u r e o f s h a r e s b y r e s t r i c t e d s t o c k p l a n ( 5 , 7 3 7 s h a r e s ) P u r c h a s e o f s h a r e s b y r e s t r i c t e d s t o c k p l a n ( 2 2 , 4 2 8 s h a r e s ) C u m u l a t i v e e f f e c t o f c h a n g e i n a c c o u n t i n g p r i n c i p l e ( N o t e 1 ) S a l e o f t r e a s u r y s t o c k ( 2 4 , 4 8 2 s h a r e s ) P u r c h a s e o f t r e a s u r y s t o c k ( 6 2 , 7 2 2 s h a r e s ) S u b o r d i n a t e d d e b t r e d e e m e d f o r n e w i s s u e c o m m o n s t o c k ( 8 8 , 4 3 9 s h a r e s ) 4 4 , 2 1 9 8 7 , 3 2 7 2 , 7 8 5 , 7 8 1 5 , 5 0 1 , 5 8 5 ( 3 7 , 6 8 2 ) ( 3 , 8 8 3 , 5 0 1 ) 4 3 9 , 1 9 4 1 6 2 , 4 4 1 ( 2 8 6 , 9 2 9 ) ( 8 0 4 , 5 5 8 ) 2 3 3 , 1 5 9 1 3 , 4 9 9 , 7 1 2 1 , 4 1 7 , 9 4 1 2 , 1 4 0 , 3 5 7 ( 1 , , 9 7 2 7 2 6 ) 6 2 1 5 2 9 , ( 1 6 2 , 4 4 1 ) 2 0 3 5 0 2 , 8 0 4 5 5 8 , ( 1 , 9 7 2 , 7 2 6 ) 2 , 8 3 0 , 0 0 0 5 , 5 8 8 , 9 1 2 ( 3 , 8 8 3 , 5 0 1 ) 4 3 9 , 1 9 4 5 8 3 , 8 4 7 ( 8 3 , 4 2 7 ) - 1 3 , 4 9 9 , 7 1 2 1 , 4 1 7 , 9 4 1 2 , 1 4 0 , 3 5 7 2 3 3 , 1 5 9 - B a l a n c e , D e c e m b e r 3 1 , 2 0 2 2 1 , 3 4 8 , 7 5 0 2 , 8 9 7 , 7 9 0 8 5 , 8 4 4 , 2 9 3 ( 1 6 , , 1 4 0 9 4 9 ) ( 1 , , 9 7 8 2 0 8 ) 7 1 , 9 7 1 , 6 7 6 N e t i n c o m e O t h e r c o m p r e h e n s i v e l o s s S t o c k o p t i o n c o m p e n s a t i o n e x p e n s e C a s h d i v i d e n d s ( $ 1 . 3 1 p e r s h a r e ) S a l e o f t r e a s u r y s t o c k ( 2 8 , 7 7 6 s h a r e s ) P u r c h a s e o f t r e a s u r y s t o c k ( 3 6 , 0 6 1 s h a r e s ) A m o r t i z a t i o n o f r e s t r i c t e d s t o c k p l a n s h a r e s E x e r c i s e o f s t o c k o p t i o n s ( 3 0 , 6 0 8 s h a r e s ) F o r f e i t u r e o f s h a r e s b y r e s t r i c t e d s t o c k p l a n ( 1 , 2 0 8 s h a r e s ) P u r c h a s e o f s h a r e s b y r e s t r i c t e d s t o c k p l a n ( 1 7 , 3 5 5 s h a r e s ) 1 0 3 , 1 6 2 5 5 7 , 8 3 3 3 6 , 4 3 6 ( 3 5 7 , 4 7 2 ) ( 5 1 6 , 0 3 1 ) 1 8 8 , 5 1 9 ( 3 , 4 4 8 , 2 1 4 ) 1 2 , 8 6 0 , 3 0 1 ( 1 4 , , 5 6 8 4 1 6 ) ( 1 , , 2 6 2 2 7 3 ) 5 3 3 0 2 3 , 2 6 5 5 7 3 , 5 1 6 0 3 1 , ( 3 6 , 4 3 6 ) ( 1 , 2 6 2 , 2 7 3 ) ( 3 , 4 4 8 , 2 1 4 ) 6 3 6 , 1 8 5 5 5 7 , 8 3 3 ( 9 1 , 8 9 9 ) - - ( 1 4 , 5 6 8 , 4 1 6 ) 1 2 , 8 6 0 , 3 0 1 1 8 8 , 5 1 9 B a l a n c e , D e c e m b e r 3 1 , 2 0 2 1 $ 1 , 3 4 8 , 7 5 0 $ 2 , 8 8 5 , 3 4 3 $ 7 6 , 4 3 2 , 2 0 6 $ ( 1 , , 5 7 2 5 3 3 ) $ ( 1 , , 9 9 4 1 2 6 ) $ 7 7 , 0 9 9 , 6 4 0 C O N S O L I D A T E D S T A T 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 K I S H B A N C O R P , I N C . S t o c k C o m m o n C a p i t a l P a i d - i n A d d i t i o n a l E a r n i n g s R e t a i n e d L o s s C o m p r e h e n s i v e O t h e r A c c u m u l a t e d S t o c k T r e a s u r y E q u i t y S t o c k h o l d e r s ' T o t a l 16 Financial Statements Financial Statements 17 5 KISH BANCORP, INC. CONSOLIDATED STATEMENT OF CASH FLOW KISH BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Year Ended December 31, 2023 2022 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES $ 13,499,712 $ 12,860,301 Nature of Operations and Basis of Presentation Provision for credit losses Investment securities (gains) losses, 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 Increase in accrued interest receivable 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 Bank owned life insurance: Benefit proceeds Investment securities available for sale: Proceeds from repayments and maturities Purchases Investment securities held to maturity: Proceeds from repayments and maturities Purchases Increase in loans, net Purchase of regulatory stock Redemption of regulatory stock Purchase of premises and equipment Proceeds from sale of other assets 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 Collateral received (repaid) on interest rate derivatives, net Proceeds from sale of common stock Purchases of treasury stock Proceeds from sale of treasury stock Exercise of stock options Cash dividends Net cash provided by financing activities Increase (Decrease) 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 Right of use assets and lease liabilities $ $ $ See accompanying notes to the consolidated financial statements. 7 711,045 158 145,149 18,022,375 (17,713,642 ) (340,336 ) 1,185,446 (29,206 ) (1,801,696 ) 3,829,552 (646,640 ) (573,052 ) 672,353 (413,607 ) 16,547,611 - (440 ) (164,537 ) 61,468,762 (57,749,556 ) (1,095,550 ) 1,661,670 179,626 (1,450,648 ) 1,025,784 (1,042,850 ) (482,001 ) 746,352 236,415 16,193,328 - 1,048,651 19,429,376 (39,242,073 ) 24,949,600 (26,954,481 ) - (244,963 ) (208,910,301 ) (9,918,200 ) 7,402,500 (3,124,810 ) 1,929,582 (232,678,889 ) 141,949,690 94,214,815 59,282 (8,224,327 ) (2,470,000 ) 5,588,912 (1,972,726 ) 787,349 (286,929 ) (3,883,501 ) 225,762,565 9,631,287 20,106,448 29,737,735 $ 1,000,000 (1,500,000 ) (144,785,142 ) (3,691,600 ) 2,404,000 (2,977,122 ) 727,704 (149,778,390 ) 34,474,371 32,892,590 14,051,077 (28,822,044 ) 11,500,000 - (1,262,273 ) 901,758 (357,472 ) (3,448,214 ) 59,929,793 (73,655,269 ) 93,761,717 20,106,448 25,966,419 $ 2,650,000 7,964,220 2,185,000 409,650 $ 156,379 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. Allowance for Credit Losses - Available-for-Sale Securities The Bank measures expected credit losses on available-for-sale debt securities when the Bank does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Bank evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Bank considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. The allowance for credit losses on available-for-sale debt securities is included within Investment securities available-for-sale on the consolidated balance sheet. Changes in the allowance for credit losses are recorded within Provision for credit losses on the consolidated statement of income. Losses are charged against the allowance when the Bank believes the collectability of an available-for-sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities totaled $1,003,499 at December 31, 2023 and is included within Accrued interest and other assets on the Consolidated Balance Sheet. This amount is excluded from the estimate of expected credit losses. 8 18 Financial Statements Notes to Consolidated Financial Statements 19 Available-for-sale debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available-for-sale debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed. Allowance for Credit Losses - Held-to-Maturity Securities The Bank measures expected credit losses on its portfolio of held-to-maturity debt securities, which is comprised of corporate securities. Accrued interest receivable on held-to-maturity debt securities totaled $106,231 at December 31, 2023 and is included within Accrued interest and other assets on the Consolidated Balance Sheet. This amount is excluded from the estimate of expected credit losses. Held- to-maturity debt securities are typically classified as nonaccrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held-to-maturity debt securities are placed on nonaccrual status, unpaid interest credited to income is reversed. Investment Securities Prior to Adopting ASU 2016-13 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. The Company does not have trading securities as of December 31, 2023 and 2022. 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 (loss), 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 non-interest 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 credit 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. 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 using the level yield method. In general, fixed rate, permanent residential mortgage loans originated by the Bank are classified as 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 - Prior to Adopting ASU 2016-13 Prior to adoption of ASU 326-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", the Bank calculated Allowance for Loan Losses using the incurred loan loss methodology. The following policy relates to reporting for years ended December 31, 2022 and prior. For years ended December 31, 2022 and prior, the allowance for loan losses was established through provisions for loan losses charged against income. Loans deemed to be uncollectible were charged against the allowance for loan losses and subsequent recoveries, if any, were credited to the allowance. 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 9 10 20 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 21 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. Allowance for Credit Losses (ACL) - Following Adoption of ASU 2016-13 Disclosures of the allowance for credit losses (ACL) for the year ended December 31, 2023 are presented in accordance with ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments". Refer to Summary of Significant Accounting Policies, "Adoption of New Accounting Standards". The ACL is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. The methodology for determining the ACL has two main components: evaluation of expected credit losses for certain groups of homogeneous loans (pooled segments) that share similar risk characteristics and evaluation of loans that do not share risk characteristics with other loans. The ACL is measured on a pooled segment basis when similar risk characteristics exist. The Company has identified the following portfolio segments based on Federal Call Code groupings and measures the ACL using the following methods: Loan Portfolio - Pooled Segments Construction, land development and other land loans Loans secured by farmland Revolving loans secured by 1-4 family residential properties Mortgages secured by first liens Mortgages secured by second liens Loans secured by multi-family residential properties Loans secured by nonfarm, nonresidential properties Agricultural loans Commercial and industrial loans Automobile loans Other consumer loans Loans to state and municipal subdivisions Loss Rate Methodology Discounted cash flows Discounted cash flows Discounted cash flows Discounted cash flows Discounted cash flows Discounted cash flows Discounted cash flows Discounted cash flows Discounted cash flows Remaining life method Discounted cash flows Discounted cash flows Historical credit loss experience is the basis for the estimation of expected credit losses. The Company applies historical loss rates to pools of loans with similar risk characteristics. After consideration of the historic loss calculation, management applies qualitative adjustments to reflect the current conditions and reasonable and supportable forecasts not already reflected in the historical loss information at the balance sheet date. Our reasonable and supportable forecast adjustment is based on forecasted national unemployment rates and application of management judgments. For periods beyond our reasonable and supportable forecast, we revert to historical loss rates utilizing a straight-line method over a one year reversion period. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, experience and ability of lending staff, quality of the bank’s loan review system, value of underlying collateral, the existence of and changes in concentrations and other external factors. These modified historical loss rates are multiplied by the outstanding principal balance of each loan to calculate a required reserve. The Bank has elected to exclude accrued interest receivable from the measurement of its ACL. When a loan is placed on non-accrual status, any outstanding accrued interest is reversed against interest income. The ACL for individually evaluated loans begins with the use of normal credit review procedures to identify whether a loan no longer shares similar risk characteristics with other pooled loans and therefore, should be individually assessed. We evaluate all loans that meet the following criteria: 1) when it is determined that foreclosure is probable, 2) substandard, doubtful and nonperforming loans when repayment is expected to be provided substantially through the operation or sale of the collateral, 3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Specific reserves are established based on the following three acceptable methods for measuring the ACL: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral when the loan is collateral dependent. Our individual loan evaluations consist primarily of the fair value of collateral method because most of our loans are collateral dependent. Collateral values are discounted to consider disposition costs when appropriate. A specific reserve is established or a charge-off is taken if the fair value of the loan is less than the loan balance. 11 12 22 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 23 Premises and Equipment Earnings Per Share 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. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet credit exposures is adjusted through credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. 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. Income Taxes 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. 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 2023 2022 Expected Dividend Yield 3.96 % 3.31 % Risk-Free Interest Rate 3.50 % 2.56 % Expected Volatility 27.59 % 27.32 % Expected Life (in Years) 6.0 6.0 The weighted-average fair value of each stock option granted for 2023 and 2022 was $6.78 and $7.25, 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, 2023 and 2022, the Company recorded gross servicing rights of $248,594 and $279,743, respectively, with a reserve for impairment of $86,182 and $104,060, respectively. Transfer of Assets 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. 13 14 24 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 25 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. Revenue Recognition The Company’s revenue is comprised of net interest income on financial assets and liabilities, and noninterest income. Under FASB Accounting Standards Codification (“ASC”) Topic 606, "Revenue from Contracts with Customers", management determined that net interest income on financial assets and liabilities and certain components of noninterest income resulting from investment securities gains, loan servicing, gains on sales of loans, earnings on bank owned life insurance, 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 not within the scope of ASC Topic 606. Descriptions of revenue-generating activities reported in our Consolidated Statement of Income that are within the scope of Topic 606 include: Insurance and travel agency commissions • Service fee income on deposit accounts • • Trust and investment advisory fees • Benefit management consulting income • ATM and debit card transaction fees • Loan servicing fees • Wire transfer fees • Safe deposit box rentals 15 Non-transaction-based fees such as account maintenance fees, monthly statement fees, loan servicing fees and safe deposit box rentals are considered to be provided to the customer under short-term contracts with ongoing renewals. Revenue for these non-transaction-based fees is earned on a monthly basis, representing the period over which the Company satisfies the performance obligations. Transaction-based fees such as non-sufficient fund charges, stop payment charges and wire fees are recognized at the time the transaction is executed as the contract duration does not extend beyond the service performed. The Company earns fees from ATM transactions fees and debit card transaction fees from cardholder transactions conducted through third party payment network providers which consist of interchange fees earned from the payment networks as a debit card issuer. These fees are recognized when the transaction occurs and are settled on a daily or monthly basis. Revenues from trust and investment advisory services are generally recognized on a monthly basis and are typically based on a percentage of the customer’s assets under management or based on investment solutions that are implemented for the customer. Commission and fee income from insurance, benefit consulting and travel services are recognized as the performance obligations are satisfied, either over the contract policy period or as sales commissions are received when the performance obligation period does not extend beyond the sales transaction event. Adoption of New Accounting Standards On January 1, 2023, the Company adopted ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses. The Bank adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to January 1, 2023 using the prospective transition approach, though no such charges had been recorded on the securities held by the Bank as of the adoption date. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $3.1 million, which is presented as an increase to net loans outstanding, an increase in the allowance for credit losses on unfunded loan commitments of $1.2 million, which is recorded within Other Liabilities, and an allowance for credit losses for held to maturity securities of $110.2 thousand, which is presented as a reduction to held to maturity securities outstanding. The Company recorded a net increase to retained earnings of $1.4 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax liabilities recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the previously applicable accounting standards (incurred loss reporting). 16 26 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 27 immediately upon issuance and must be applied on a prospective basis. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements. 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. Weighted-average common shares issued Weighted-average treasury stock shares 2023 2022 2,694,597 2,697,500 (59,639 ) (67,350 ) Weighted-average unvested restricted stock awards (48,956 ) (70,807 ) Basic weighted-average shares outstanding 2,586,002 2,559,343 Dilutive effect of outstanding restricted stock awards Dilutive effect of outstanding stock options 18,716 24,449 31,181 35,088 Diluted weighted-average shares outstanding 2,629,167 2,625,612 For the year ended December 31, 2023, the Company excluded from the computation of diluted weighted- average shares the impact of 79,924 options to purchase shares of the Company’s common stock, and 11,580 shares of restricted stock, as the effect would have been anti-dilutive. For the year ended December 31, 2022, the Company excluded from the computation of diluted weighted- average shares the impact of 42,059 options to purchase shares of the Company’s common stock, as the effect would have been anti-dilutive. The following table illustrates the impact of adopting ASC 326: ASC 326 Adopted Effective January 1, 2023 Prior to ASC 326 Adoption Impact of ASC 326 Adoption As Reported under ASC 326 $ $ Assets: Allowance for credit losses on debt securities held to maturity Allowance for credit losses on loans Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total allowance for credit losses on loans Liabilities: Allowance for credit losses on off-balance-sheet credit exposures $ $ - $ 110,164 $ 110,164 6,108,863 $ 1,578,840 286,469 106,944 41,680 2,212,435 (2,132,318 ) $ (252,955 ) (56,603 ) (56,672 ) 18,710 (594,903 ) 3,976,545 1,325,885 229,866 50,272 60,390 1,617,532 10,335,231 $ (3,074,741 ) $ 7,260,490 193,261 $ 1,169,715 $ 1,362,976 Total pretax effect of ASC 326 adoption Deferred tax impact Total effect of ASC 326 adoption, net of deferred tax impact $ (1,794,862 ) 376,921 $ (1,417,941 ) Effective January 1, 2023, the Company adopted ASU 2022-02 "Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings (TDR) and Vintage Disclosures", which removed the existing measurement and disclosure requirements for TDR loans and added additional disclosure requirements related to modifications provided to borrowers experiencing financial difficulty. Prior to adoption a change in contractual terms of a loan where a borrower was experiencing financial difficulty and received a concession not available through other sources the loans was required to be disclosed as a TDR, whereas now a borrower that is experiencing financial difficulty and receives a modification in the form of principal forgiveness, interest rate reduction, an other-than-insignificant payment delay or a term extension in the current period needs to be disclosed. The Company may modify loans to borrowers experiencing financial difficulty as a way of managing risk and mitigating credit loss from the borrower and may make various types of modifications and may in certain circumstances use a combination of modification types in order to mitigate future loss. The amount of defined modifications given to borrowers experiencing financial difficulty is disclosed in Note 5 to the Consolidated Financial Statements. In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting", to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met and can make a one- time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance. In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848", which extends the sunset (or expiration) date of SC Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform. ASC 2022-06 is effective for all reporting entities 17 18 28 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 29 3. INVESTMENT SECURITIES The amortized cost, gross unrealized gains and losses, and fair value of investment securities are as follows: 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, 2023 and 2022. 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 Collateralized mortgage obligations Gross 2023 Gross Amortized Cost Unrealized Unrealized Gains Losses Fair Value Allowance for Credit Losses $ 27,863,700 $ - $ (1,355,955 ) $ 26,507,745 $ 63,816,922 340 (5,444,033 ) 58,373,229 40,926,071 1,506,202 288 - (6,143,267 ) (68,488 ) 34,783,092 1,437,714 34,032,633 10,486 (3,974,921 ) 30,068,198 - - - - - - - Total Available for Sale $ 200,113,328 $ 31,967,800 9,194 20,308 $ (4,169,168 ) 27,807,826 (21,155,832 ) $ 178,977,804 $ Held to Maturity: Corporate Securities $ 11,004,226 $ - $ (1,031,811 ) $ 9,972,415 $ (112,624 ) 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 Collateralized mortgage obligations Total Available for Sale Held to Maturity: Corporate Securities Amortized Cost 2022 Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 20,886,392 $ 49,881,118 - $ - (1,753,897 ) $ 19,132,495 (6,873,567 ) 43,007,551 41,934,666 6,564,965 3,345 490 (7,661,301 ) (113,026 ) 34,276,710 6,452,429 30,857,100 1,976 (4,387,180 ) 26,471,896 30,260,783 180,385,024 $ - 5,811 $ (4,293,313 ) (25,082,284 ) $ 25,967,470 155,308,551 10,763,833 $ - $ (692,836 ) $ 10,070,997 $ $ Less than Twelve Months Gross Fair Value Unrealized Losses Twelve Months or Greater Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses 2023 $ 6,943,810 $ (18,808 ) $ 19,563,935 $ (1,337,147 ) $ 26,507,745 $ (1,355,955 ) 15,936,186 (110,762 ) 41,436,702 (5,333,271 ) 57,372,888 (5,444,033 ) - - - - 33,941,003 1,437,714 (6,143,267 ) (68,488 ) 33,941,003 1,437,714 (6,143,267 ) (68,488 ) Total Available for Sale $ 6,898,550 (185,293 ) 21,900,186 (3,789,628 ) 28,798,736 (3,974,921 ) 9,072,572 38,851,118 $ (181,985 ) (496,848 ) $ 16,168,122 134,447,662 $ (3,987,183 ) (20,658,984 ) $ 25,240,694 173,298,780 $ (4,169,168 ) (21,155,832 ) Less than Twelve Months Gross Fair Value Unrealized Losses Twelve Months or Greater Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses 2022 $ 19,132,495 $ (1,753,897 ) $ - $ - $ 19,132,495 $ (1,753,897 ) 10,219,323 (554,800 ) 32,788,228 (6,318,767 ) 43,007,551 (6,873,567 ) 18,746,763 4,529,899 (3,690,444 ) (35,071 ) 13,765,525 422,045 (3,970,857 ) (77,955 ) 32,512,288 4,951,944 (7,661,301 ) (113,026 ) 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 Collateralized mortgage obligations 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 Collateralized mortgage obligations Total Available for Sale $ 5,561,090 (605,497 ) 19,490,124 (3,781,683 ) 25,051,214 (4,387,180 ) 14,034,828 72,224,398 $ (837,805 ) (7,477,514 ) $ 11,932,642 78,398,564 $ (3,455,508 ) (17,604,770 ) $ 25,967,470 150,622,962 $ (4,293,313 ) (25,082,284 ) Held to Maturity: Corporate Securities $ 8,502,470 $ (511,364 ) $ 1,568,528 $ (181,473 ) $ 10,070,998 $ (692,836 ) The Company had 191 investment securities, consisting of 46 U.S. government agency securities, 66 obligations of states and political subdivisions, 19 different corporate securities, 33 mortgage-backed securities, and 27 collateralized mortgage obligations that were in unrealized loss positions at December 31, 2023. 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 have an allowance for credit losses recorded against them. As of December 31, 2023, there were no investment securities past due. 19 20 30 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 31 Credit Quality Indicators 4. LOANS The held-to-maturity securities portfolio consists of sixteen subordinated corporate notes and one senior corporate note. All securities are issued by banking financial companies in the United States or United States territories. The notes consisting primarily of community bank issued debt, are generally unrated. The Company regularly monitors the corporate banking sector of the market and reviews collectability including such factors as the financial condition of the issuers as well as general market credit trends in effect as of the reporting period. The amortized cost and fair value of debt securities at December 31, 2023, 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 Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Amortized Cost $ 11,714,445 $ 61,344,421 59,265,264 67,789,198 Fair Value 11,614,645 $ 58,255,669 50,454,023 58,653,467 Amortized Cost - $ 3,000,000 8,004,226 - Allowance for credit losses Total 200,113,328 - 178,977,804 - $ 200,113,328 $ 178,977,804 $ 11,004,226 (112,624 ) 10,891,602 $ Fair Value - 2,815,640 7,156,775 - 9,972,415 - 9,972,415 Investment securities with a carrying value of $123,767,259 and $70,917,500 at December 31, 2023 and 2022, 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: Proceeds from sales Proceeds from calls Gross gains Gross losses 2023 $ - $ 718,679 188 346 2022 - 999,560 440 - Equity Securities The Company recognized changes in fair value of equity securities in equity securities gains (losses), net. 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, 2023 and 2022: Net gains (losses) recognized in equity securities during the year Less: Net gains (losses) realized on sale of equity securities during the year Unrealized gains (losses) recognized in equity securities 2022 2023 $ (145,149 ) $ 164,537 - $ (145,149 ) $ 164,537 - Major classifications of loans are summarized as follows at December 31: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Less: Allowance for credit losses Net loans 2023 2022 $ 590,694,766 $ 144,234,974 28,493,121 31,283,590 5,243,094 432,912,430 1,232,861,975 7,544,973 $ 1,225,317,002 $ 489,329,128 132,681,835 28,535,279 24,226,289 5,030,762 343,701,821 1,023,505,114 10,335,231 1,013,169,883 Mortgage loans serviced by the Company for others amounted to $25,907,491 and $29,009,755 at December 31, 2023 and 2022, respectively. The Company grants residential, commercial, and consumer loans to customers throughout its trade area, which is predominantly in greater central Pennsylvania. The Company also has a limited purpose office located in Hudson, Ohio, focusing primarily on multi-family commercial real estate loans. The office serves established commercial developers in the Cleveland to Columbus markets, providing loans for development projects that extend to the Mid-Atlantic and Southeast regions. All loan originations are subject to credit risk assessment by management following the Company’s lending policies. Although the Company has a diversified loan portfolio at December 31, 2023 and 2022, a substantial portion of its debtors’ ability to honor their loan agreements is dependent upon the economic stability of their immediate geographic areas. The Company had a lending concentration in lessors of residential buildings and dwellings of 34% and 18% as of December 31, 2023 and 2022, respectively. 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, 2023, and 2022, is as follows: Balance 2021 Additions Amounts Collected Balance 2022 Additions Amounts Collected Balance 2023 $ 7,376,354 $ 2,026,246 $ (2,223,781 ) $ 7,178,819 $ 1,704,510 $ (5,895,527 ) $ 2,987,802 5. ALLOWANCE FOR CREDIT LOSSES - LOANS Management has an established methodology to determine the adequacy of the allowance for credit losses (ACL) that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the ACL, the Company has segmented certain loans in the portfolio by Federal Call Code designations, then 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. Following adoption of ACS 326 effective January 1, 2023, the Company calculates the ACL for pooled loan segments using the Discounted Cash Flow (DCF) method for all pools other than automobile loans, which is calculated using the Remaining Life method. 21 22 32 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 33 The ACL is a valuation reserve established and maintained by charges against income and is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL when they are deemed uncollectible. The ACL is an estimate of expected credit losses, measured over the contractual life of a loan, that considers our historical loss experience, current conditions, and forecasts of future economic conditions. Determination of an appropriate ACL is inherently subjective and may have significant changes from period to period. Management uses a DCF model to calculate the present value of the expected cash flows for pools of loans that share similar risk characteristics and compares the results of this calculation to the amortized cost basis to determine its allowance for credit loss balance. The contractual term used in projecting the cash flows of a loan is based on the maturity date of a loan, and is adjusted for prepayment or curtailment assumptions which may shorten that contractual time period. Options to extend are considered by management in determining the contractual term. The key inputs to the DCF model are (1) probability of default, (2) loss given default, (3) prepayment and curtailment rates, (4) reasonable and supportable economic forecasts, (5) forecast reversion period, (6) expected recovery delays on charged off loans, and (7) discount rate. Probability of Default ("PD") In order to incorporate economic factors into forecasting within the DCF model, management elected to use the Loss Driver method to generate the PD rate inputs. The Loss Driver method analyzes how one or more economic factors change the default rate using statistical regression analysis. Management selected to use forecasted National Unemployment Rates as the economic factor having a strong correlation to historical default rates. Loss Given Default ("LGD") Management elected to use the Frye Jacobs parameter for determining the LGD input, which is an estimation technique that derives an LGD input from segment-specific risk curves that correlates LGD with PD. Prepayment and Curtailment Rates Prepayment Rates: Loan-level transaction data is used to calculate semi-annual prepayment rates. These semi-annual rates are annualized, and the average of the annualized rates is used in the DCF calculation for fixed payment or term loans. Rates are calculated for each pool. Curtailment Rates: Loan-level transaction data is used to calculate annual curtailment rates using available historical loan-level data. The average of the historical rates is used in the DCF model for interest-only payment or line-of-credit type loans. Rates are calculated for each pool. Reasonable and Supportable Forecasts The forecast data used in the DCF model is obtained via a subscription to a widely recognized and relied- upon company that publishes various forecast scenarios. Management evaluates the various scenarios to determine a reasonable and supportable scenario. Forecast Reversion Period Management uses forecasts to predict how economic factors will perform and has determined to use a four- quarter forecast period and a four-quarter straight-line reversion period to historical averages (the mean reversion period). Expected Recovery Delays on Charged-off Loans Management performs an analysis to estimate the delay recovery periods for recoveries of charged off loan balances. Discount Rate The effective interest rate of the underlying loans of the Company serves as the discount rate applied to the expected periodic cash flows. Management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. Remaining Life Loss Rate Method The Company utilizes the Remaining Life loss rate method for calculating the allowance for credit losses for the pooled loan segment of automobile loans. The allowance is determined by calculating the estimated remaining life of the outstanding loan balances and applying a projected charge-off rate derived from both internal and peer group historical loss experience for similar loans. Individual Evaluation Management evaluates individual instruments for expected credit losses when those instruments do not share similar risk characteristics with instruments evaluated using a collective (pooled) basis. These instruments will not be included in the collective analyses. The individual analysis will establish a specific reserve for instruments in scope. Prior to adopting ASC 326, historical loss percentages for each pooled loan segment category were calculated and used as the basis for calculating allowance allocations. The historical loss percentages are calculated over a five-year period for all portfolio segments. Certain qualitative factor adjustments are then added to the historical loss percentages to calculate the adjusted factor applied to non-classified loans. Qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the Bank’s operating environment. 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. Qualitative Factors For credit loss allowances calculated under both the current ACL model framework and under the previous Incurred Loss model, the following qualitative factors are used in developing the overall loss rate estimates applied to the pooled loan segments: • 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 23 24 34 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 35 The following tables present, by portfolio segment, the changes in the allowance for loan credit losses and the recorded investment in loans as of and for the years ended December 31: Commercial Real Estate Commercial and Industrial Agricultural State and Political Subdivisions Consumer Residential Real Estate Unallocated Total 2023 Allowance for loan credit losses: Beginning balance, prior to adoption of ASC 326 Impact of adopting ASC 326 Charge-offs Recoveries Provision Ending balance Ending balance individually evaluated for credit loss Ending balance collectively evaluated for credit loss Loans: Individually evaluated for credit loss Collectively evaluated for credit loss $ 6,108,863 $ (2,132,318 ) - - 446,856 1,578,840 $ (252,955 ) (39,572 ) - (136,823 ) 286,469 $ (56,603 ) - - (23,947 ) 106,944 $ (56,672 ) - - 18,709 41,680 $ 18,710 (7,609 ) 2,699 4,999 2,212,435 $ (594,903 ) - - 19,171 - $ - - - - 10,335,231 (3,074,741 ) (47,181 ) 2,699 328,965 $ 4,423,402 $ 1,149,490 $ 205,919 $ 68,981 $ 60,479 $ 1,636,703 $ - $ 7,544,973 $ 1,255 $ 19,183 $ 21,679 $ - $ - $ 101,393 $ - $ 143,510 4,422,147 1,130,307 184,240 68,981 60,479 1,535,310 - 7,401,463 $ 4,423,402 $ 1,149,490 $ 205,919 $ 68,981 $ 60,479 $ 1,636,703 $ - $ 7,544,973 $ 13,064 $ 390,373 $ 21,679 $ - $ - $ 1,331,192 $ 1,756,308 590,681,702 143,844,601 28,471,442 31,283,590 5,243,094 431,581,238 1,231,105,667 Ending balance $ 590,694,766 $ 144,234,974 $ 28,493,121 $ 31,283,590 $ 5,243,094 $ 432,912,430 $ 1,232,861,975 Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision Ending balance Ending balance individually evaluated for impairment Ending balance collectively evaluated for impairment Loans: Individually evaluated for impairment Collectively evaluated for impairment Commercial Real Estate Commercial and Industrial Agricultural State and Political Subdivisions Consumer Residential Real Estate Unallocated Total 2022 $ 5,270,205 $ - - 838,658 1,516,700 $ (335,107 ) 125,000 272,247 325,746 $ 176,685 $ - - (39,277 ) - - (69,741 ) 46,552 $ (16,990 ) 3,629 8,488 1,961,277 $ (1,153 ) - 252,311 1,262,687 $ - - (1,262,687 ) 10,559,852 (353,250 ) 128,629 (0 ) $ $ $ 6,108,863 $ 1,578,840 $ 286,469 $ 106,944 $ 41,680 $ 2,212,435 $ - $ 10,335,231 6,479 $ 19,801 $ 40,344 $ - $ 283 $ 148,327 $ 6,102,384 6,108,863 $ 1,559,038 1,578,840 $ 246,125 286,469 $ 106,944 106,944 $ 41,397 41,680 $ 2,064,108 2,212,435 $ - $ - - $ 215,234 10,119,997 10,335,231 $ 205,972 $ 273,127 $ 208,702 $ - $ 9,317 $ 1,564,707 $ 2,261,825 489,123,156 132,408,708 28,326,577 24,226,289 5,021,445 342,137,114 1,021,243,289 Ending balance $ 489,329,128 $ 132,681,835 $ 28,535,279 $ 24,226,289 $ 5,030,762 $ 343,701,821 $ 1,023,505,114 Credit Quality Information The Company’s internal credit risk grading system is based on experience and estimates the capability of the borrower to repay the contractual obligations under the loan agreements. Pass grade 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. The following tables represent the outstanding loan balances by credit quality indicators and vintage year by class of financing receivable and current period charge-offs by year of origination under ASC 326 as of December 31, 2023: As of December 31, 2023 Term Loans Amortized Cost Basis by Origination Year 2023 2022 2021 Prior Revolver Total at Amortized Cost Basis Total Commercial real estate Risk Rating Pass Special Mention Substandard Doubtful Total Commercial real estate Current period gross write offs Commercial and industrial Risk Rating Pass Special Mention Substandard Doubtful Total Commercial & Industrial Current period gross write offs Agriculture Risk Rating Pass Special Mention Substandard Doubtful Total Agriculture Current period gross write offs State and political subdivisions Risk Rating Pass Special Mention Substandard Doubtful Total State and political subdivisions Current period gross write offs $ 109,029,405 $ 111,862,871 $ 157,513,271 $ 196,936,447 $ - - - 3,012,892 - - - - - 429,483 3,869,390 - $ 109,029,405 $ 114,875,763 $ 157,513,271 $ 201,235,320 $ - $ - $ $ - $ - $ - - 13,064 8,027,943 $ 583,369,937 3,442,375 3,869,390 13,064 8,041,007 $ 590,694,766 - - $ $ $ $ 21,835,352 $ 30,798 - - 21,866,150 $ - $ 33,525,894 $ 172,140 - - 33,698,034 $ - $ 18,496,738 $ 235,289 666,758 - 19,398,785 $ 9,982 $ 11,789,033 $ 266,576 263,898 95,306 12,414,813 $ 29,590 $ 24,319 241,697 - 56,591,176 $ 142,238,193 729,122 1,172,353 95,306 56,857,192 $ 144,234,974 39,572 - $ $ 2,784,201 $ 2,178,394 $ 6,287,102 $ - - - - - - - - - $ $ 2,784,201 $ - $ 2,178,394 $ - $ 6,287,102 $ - $ 14,264,598 $ - - 21,679 14,286,277 $ - $ 2,957,147 $ - - - 2,957,147 $ - $ 28,471,442 - - 21,679 28,493,121 - $ 1,279,565 $ 8,613,108 $ 956,571 $ 20,217,301 $ 217,045 $ - - - - - - - - - - - - - - - $ $ 1,279,565 $ 8,613,108 $ 956,571 $ 20,217,301 $ 217,045 $ - $ - $ - $ - $ - $ 31,283,590 - - - 31,283,590 - Total by Risk Rating Pass Special Mention Substandard Doubtful Total Total current period gross write offs $ $ 134,928,523 $ 156,180,267 $ 183,253,682 $ 243,207,379 $ 30,798 - - 3,185,032 - - 235,289 666,758 - 696,059 4,133,288 116,985 $ 134,959,321 $ 159,365,299 $ 184,155,729 $ 248,153,711 $ 29,590 $ - $ 9,982 $ - $ 24,319 241,697 13,064 67,793,311 $ 785,363,162 4,171,497 5,041,743 130,049 68,072,391 $ 794,706,451 39,572 - $ 25 26 36 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 37 As of December 31, 2023 Term Loans Amortized Cost Basis by Origination Year 2023 2022 2021 Prior Revolver Total at Amortized Cost Basis Total 533,637 $ 207,561 $ 143,149 $ 376,618 $ 3,982,129 $ - 533,637 $ - $ - 207,561 $ - $ - 143,149 $ - $ - - 376,618 $ 7,609 $ 3,982,129 $ - $ 5,243,094 - 5,243,094 7,609 78,756,431 $ 100,654,054 $ 65,294,982 $ 148,531,171 $ - - 56,211 512,174 78,756,431 $ 100,654,054 $ - $ - $ 65,351,193 $ 149,043,345 $ - $ - $ 79,290,068 $ 100,861,615 $ 65,438,131 $ 148,907,789 $ - - 56,211 512,174 79,290,068 $ 100,861,615 $ - $ - $ 65,494,342 $ 149,419,963 $ 7,609 $ - $ - 39,107,407 $ 432,344,044 568,386 39,107,407 $ 432,912,430 - - $ - 43,089,536 $ 437,587,138 568,386 43,089,536 $ 438,155,524 7,609 - $ Consumer Payment Performance Performing Nonperforming Total Consumer Current period gross write offs Residential real estate Payment Performance Performing Nonperforming Total Residential real estate Current period gross write offs $ $ $ $ $ $ Total by Payment Performance Performing Nonperforming Total $ Total current period gross write offs $ $ The following table presents commercial credit exposures by internally assigned grades for the year ended December 31, 2022: Commercial Real Estate Commercial and Industrial 2022 Agricultural State and Political Subdivisions Pass Special Mention Substandard Doubtful Total $ 485,441,953 $ 131,670,430 $ 3,872,824 - 14,351 728,203 161,676 121,526 $ 489,329,128 $ 132,681,835 $ 28,513,600 $ - - 21,679 28,535,279 $ 24,226,289 $ - - - 24,226,289 $ Total 669,852,272 4,601,027 161,676 157,556 674,772,531 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, 2022: Consumer Residential Real Estate Total Performing Nonperforming Total $ $ 5,030,762 $ - 5,030,762 $ 343,246,250 $ 455,571 343,701,821 $ 348,277,012 455,571 348,732,583 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: 30-59 Days 60-89 Days Past Due Past Due 90 Days or Greater Past Due 2023 Total Past Due Current Total Loans 90 Days and Accruing $ Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ - $ 76,277 95,130 153,786 $ 43,205 193,825 - $ - - 153,786 $ 119,482 288,955 590,540,980 $ 144,115,492 28,204,166 590,694,766 $ 144,234,974 28,493,121 - - - - 7,423 784,805 963,635 $ - - 285,131 675,947 $ - - 138,780 138,780 $ - - - 7,423 1,208,716 138,780 1,778,362 $ 1,231,083,613 $ 1,232,861,975 $ 138,780 31,283,590 5,243,094 432,912,430 31,283,590 5,235,671 431,703,714 30-59 Days 60-89 Days Past Due Past Due 90 Days or Greater Past Due 2022 Total Past Due Current Total Loans 90 Days and Accruing $ Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ 211,804 $ 50,000 - - 9,289 164,520 435,613 $ - $ - $ 208,365 - 29,990 21,679 211,804 $ 288,355 21,679 489,117,324 $ 132,393,480 28,513,600 489,329,128 $ 132,681,835 28,535,279 - - - - - 218,137 426,502 $ - - 455,571 507,240 $ - 9,289 838,228 - - 157,767 1,369,355 $ 1,022,135,759 $ 1,023,505,114 $ 157,767 24,226,289 5,030,762 343,701,821 24,226,289 5,021,473 342,863,593 Consumer mortgage loans held by the Company in the process of foreclosure amounted to $0 and $250,404 as of December 31, 2023 and 2022, respectively. Impaired Loans - Prior to Adoption of ASC 326, for Year Ended December 31, 2022 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. 27 28 38 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 39 The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount as of December 31, 2022: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income 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 $ 115,207 $ 121,526 - 115,207 $ 121,526 - - $ - - 71,014 $ 129,904 - 7,484 - - - - - - - 104,913 - - 104,913 341,646 341,646 90,765 151,601 208,702 90,765 151,601 208,702 - 9,317 1,459,794 - 9,317 1,459,794 - - 101,716 - - - - 302,634 7,484 6,479 19,801 40,344 - 283 148,327 157,609 562,859 226,249 - 5,173 1,393,733 5,829 13,304 9,649 - 718 57,052 1,920,179 1,920,179 215,234 2,345,623 86,552 205,972 273,127 208,702 205,972 273,127 208,702 - 9,317 1,564,707 - 9,317 1,564,707 6,479 19,801 40,344 - 283 148,327 228,623 692,763 226,249 - 5,173 1,495,449 13,313 13,304 9,649 - 718 57,052 Total $ 2,261,825 $ 2,261,825 $ 215,234 $ 2,648,257 $ 94,036 Nonaccrual Loans 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 $63,692 and $61,839 as of December 31, 2023 and 2022, respectively. 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 2023 2022 $ 13,064 $ 14,351 95,306 121,526 21,679 21,679 - - 429,606 397,867 $ 559,655 $ 555,423 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of December 31, 2023: Nonaccrual Loans With No Allowance for Credit Loss Nonaccrual Loans With a Related Allowance for Credit Loss Loans Past Due Over 89 Days Still Accruing $ Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ - $ 95,306 - - - 92,704 188,010 $ 13,064 $ - 21,679 - - 336,902 371,645 $ - - - - - 138,780 138,780 Troubled Debt Restructurings - Prior to Adoption of ASC 326 The following discussion provides disclosures previously required by ASC Subtopic 310-40, "Receivables - Troubled Debt Restructurings by Creditors", related to loans with troubled debt restructuring modifications during the year ended December 31, 2022. As of December 31, 2022, the Company’s loan portfolio 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, 2022, a specific reserve allocation of $175,363 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, 2020 through December 31, 2021, that subsequently defaulted (i.e., 90 days or more past due following a modification) during the year ended December 31, 2022. Loan modifications considered troubled debt restructurings completed during the year ended December 31, 2022 consist of one residential real estate loan and one unsecured consumer line of credit. The Company’s outstanding recorded investment in the loans at the time of the restructuring was $314,487 and $9,823, for the real estate loan and line of credit, respectively. Modifications to the real estate loan include a lengthened maturity date and reduced monthly payment. The maturity date of the credit line was extended. The Company’s outstanding recorded investment amount in these loans was not changed by the TDR modifications. 29 30 40 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 41 Modifications to Borrowers Experiencing Financial Difficulty 7. GOODWILL Effective January 1, 2023, the Company implemented ASU 2022-02, which eliminated the recognition and measure of troubled debt restructurings and enhanced the disclosures for loan modifications to borrowers experiencing financial difficulty. Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extensions, or interest rate reductions. When principal forgiveness is provided, the amount of forgiveness is charged off against the allowance for credit losses. In some cases the Company provides multiple types of concessions for a single loan. The following table presents the amortized cost basis of gross loans held for investment made to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2023: Rate Reduction and Term Extension Weighted Average Weighted Average Term Rate Term Extension Extension Reduction (Years) $ Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ - $ - 21,679 - - 42,106 63,785 $ - 180,000 - - - 5,195 185,195 2.500 % 1.675 % 0.4 8.0 9.2 As of December 31, 2023 a single loan with modifications to a borrow experiencing financial difficulty with amortized costs basis of $21,679 was classified as nonaccrual. The Bank did not incur any payment default during the period from loans that were modified in the 12 months before default to borrowers experiencing financial difficulty. 6. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows: Land and land improvements Buildings and leasehold improvements Buildings - construction in progress Furniture, fixtures, and equipment Less accumulated depreciation Total 2023 2022 148,950 $ 2,066,803 $ 2,959,350 33,281,636 32,069,851 9,396 11,373,676 9,750,458 46,871,065 44,789,055 19,473,449 17,993,384 $ 27,397,616 $ 26,795,671 Depreciation charged to operations was $1,587,682 in 2023 and $1,464,812 in 2022. As of December 31, 2023 and 2022, goodwill had a gross carrying amount of $4,174,955, and accumulated amortization of $614,013 for a net carrying value of $3,560,942. 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, 2023 and 2022. 8. DEPOSITS The scheduled maturities of time deposits approximate the following: Year Ending December 31, 2024 2025 2026 2027 2028 Thereafter Amount 340,954,721 46,891,108 6,024,612 6,177,621 1,500,178 1,097,977 402,646,217 $ $ The aggregate of all time deposit accounts of $250,000 or more amounted to $128,137,681 and $76,886,890 as of December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, there were no individual depositors with balances in excess of 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 $ 2023 194,541,362 153,450,385 194,541,362 2022 $ 100,326,547 83,774,238 105,337,229 5.66 % 1.79 % 4.71 % 2.51 % The collateral pledged on the repurchase agreements by the remaining contractual maturity of the repurchase agreements in the Consolidated Balance Sheet as of December 31, 2023 and 2022, is presented in the following table. Securities of U.S. Government Agencies, U.S. Treasuries, and obligations of state and political subdivisions pledged, fair value Repurchase agreements Remaining Contractual Maturity Overnight and Continuous December 31, December 31, 2023 2022 $ 4,860,607 $ 512,349 2,161,670 786,231 31 32 42 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 43 10. OTHER BORROWINGS The following table sets forth information concerning other borrowings: Description Maturity Range To From Weighted- Average Interest Rate Stated Interest Rate Range From To At December 31, 2023 2022 Fixed rate Fixed rate amortizing Subordinated debt Junior subordinated debt 01/08/24 07/15/24 08/25/24 03/17/35 08/04/26 07/15/24 03/03/26 11/23/35 2.41 % 1.33 4.18 7.41 2.01 % 2.53 % $ 1.33 4.00 7.14 1.33 4.75 7.67 9,966,000 $ 16,821,000 1,475,655 27,930,998 6,186,000 114,532 25,152,076 6,186,000 Maturities of other borrowings at December 31, 2023, are summarized as follows: $ 41,418,608 $ 52,413,653 Year Ending December 31, 2024 2025 2026 2027 2028 2029 and after Amount 5,598,532 3,359,000 1,123,000 - - 31,338,076 41,418,608 Weighted- Average Rate 2.41 % 2.50 2.01 - - 4.81 4.22 $ $ 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, 2023, the Bank’s maximum borrowing capacity with the FHLB was approximately $585.1 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, 2023 is approximately $109.7 million. The Bank maintains a $10.0 million, $10.0 million, and $5.0 million federal funds line of credit with three other financial institutions. The Bank maintains a $750,000 Letter of Credit Facility with a financial institution. The Bank did not have outstanding borrowings related to these lines of credit at December 31, 2023 or 2022. 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 CME Term SOFR plus the spread adjustment of 0.26161 percent, plus margin of 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 other borrowings 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, which is determined quarterly, and floats based on three-month CME Term SOFR plus the spread adjustment of 0.26161 percent, plus margin of 1.50 percent. The Entity may redeem them, in whole or in part, at face 33 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 other borrowings section of the Company’s Consolidated Balance Sheet. In 2020, the Company issued $8,097,000 of fixed rate subordinated capital notes with stated maturities of June 23, 2030 through April 1, 2031. During 2023, holders of these notes exchanged with the Company notes at face value totaling $2,830,000 in exchange for the equivalent value in new common stock share issuances. 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. In 2021, the Company issued $20,000,000 of fixed rate subordinated capital notes with a stated maturity of April 7, 2031. The fixed securities bear an annual rate of 4.00 percent. The Company may redeem them, in whole or in part, at face value on or after April 7, 2026. 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, 2023, is being utilized to hedge $115.0 million in floating rate debt. At December 31, 2023 and 2022, the information pertaining to outstanding interest rate swap agreements is as follows: 2023 2022 Notional amount Weighted-average pay rate $ 208,235,812 $ 3.58 % 147,437,424 3.39 % Receive rate Weighted-average maturity in years Unrealized gain (loss) relating to interest rate swaps 1 or 3-Mo. Fallback Rate (SOFR); 1-Mo. Term SOFR 1 or 3-Mo. Libor; 1-Mo. Term SOFR 4.0 3,719,694 5.0 4,757,978 34 44 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 45 Cash Flow Hedges of Interest Rate Risk Derivative Instruments 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, 2023 and 2022, the Company had eleven interest rate swaps with a notional of $115.0 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 periods ended December 31, 2023 and 2022. 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, 2023, the fair value of derivatives in a net asset position, which includes accrued interest and any credit valuation adjustments related to these agreements, was $3,719,694. At December 31, 2023, the Company had no required cash collateral with its derivative counterparties and was holding cash collateral of certain derivative counterparties in the amount of $9,030,000. Fair Values of Derivative Instruments on the Balance Sheet The following table presents the fair values of derivative instruments in the consolidated balance sheet: December 31, 2023 Interest rate derivatives December 31, 2022 Interest rate derivatives Assets Liabilities Balance Sheet Location Fair Value Balance Sheet Location Fair Value Other assets $ 9,255,978 Other liabilities $ (5,536,284 ) Other assets $ 11,650,894 Other liabilities $ (6,892,916 ) 35 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, 2023, 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, 2023 2022 Cash flow interest rate swap Maturing in 2024 Maturing in 2025 $ 6,000,000 $ 6,000,000 22,000,000 22,000,000 Maturing in 2026 Maturing in 2027 Maturing in 2028 Maturing in 2030 32,000,000 22,000,000 10,000,000 10,000,000 - 40,000,000 5,000,000 5,000,000 Interest Rate Paid Fixed Fixed Fixed Fixed Fixed Fixed Interest Rate Received Fair Value December 31, 2023 2022 3 Mo. SOFR, 0 look back 3 Mo. SOFR, 0 look back 3 Mo. SOFR / Daily Wtd Avg USA SOFR 3 Mo. SOFR, 0 look back Daily Wtd Avg USA SOFR 3 Mo. SOFR, 0 look back $ 105,609 $ 254,978 863,128 1,352,949 969,351 1,550,817 528,196 707,473 472,589 780,821 891,761 $ 115,000,000 $ 65,000,000 $ 3,719,694 $ 4,757,978 Customer interest rate swap Maturing in 2025 Maturing in 2026 $ 9,100,000 $ 9,100,000 9,266,000 9,266,000 Maturing in 2027 Maturing in 2029 10,776,388 10,776,388 10,470,000 10,470,000 Maturing in 2030 Maturing in 2031 30,700,424 19,902,036 17,203,000 17,203,000 Maturing in 2032 Maturing in 2035 2,000,000 2,000,000 3,720,000 3,720,000 $ 93,235,812 $ 82,437,424 Third party interest rate swap Maturing in 2025 Maturing in 2026 $ 9,100,000 $ 9,100,000 9,266,000 9,266,000 Maturing in 2027 Maturing in 2029 10,776,388 10,776,388 10,470,000 10,470,000 Maturing in 2030 Maturing in 2031 30,700,424 19,902,036 17,203,000 17,203,000 Maturing in 2032 Maturing in 2035 2,000,000 2,000,000 3,720,000 3,720,000 $ 93,235,812 $ 82,437,424 1 Mo. SOFR + Margin 1 Mo. SOFR + Margin 1 Mo. SOFR CME Term + Margin 1 Mo. SOFR + Margin 1 Mo. SOFR CME Term + Margin 1 Mo. SOFR + Margin 1 Mo. SOFR CME Term + Margin 1 Mo. SOFR + Margin Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed $ (197,592 ) $ (163,287 ) (291,326 ) (232,956 ) 90,879 (744,976 ) 45,994 (942,636 ) (1,699,229 ) (2,163,077 ) (2,044,541 ) (2,415,478 ) (135,103 ) (642,434 ) (167,466 ) (725,971 ) $ (5,536,283 ) $ (6,892,916 ) 1 Mo. SOFR + Margin 1 Mo. SOFR + Margin 1 Mo. SOFR CME Term + Margin 1 Mo. SOFR + Margin 1 Mo. SOFR CME Term + Margin 1 Mo. SOFR + Margin 1 Mo. SOFR CME Term + Margin 1 Mo. SOFR + Margin $ 197,592 $ 163,287 291,326 232,956 (90,879 ) 744,976 (45,994 ) 942,636 1,699,229 2,163,077 2,044,541 2,415,478 135,103 642,434 167,466 725,971 $ 5,536,283 $ 6,892,916 Fixed Fixed Fixed Fixed Fixed Fixed Fixed Fixed 36 46 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 47 12. INCOME TAXES The provision for federal income taxes for the years ended December 31, 2023 and 2022 consists of: Current Deferred $ 2023 2,683,649 $ (29,206 ) 2022 2,243,421 179,626 Total provision $ 2,654,443 $ 2,423,047 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, 2023 and 2022 are as follows: 2023 2022 Deferred tax assets: $ Allowance for credit losses Deferred compensation Deferred incentive credits Deferred loan fees Asset valuation allowances Employee compensation accruals Nonaccrual interest receivable Unrealized loss on available-for-sale securities Partnerships Lease liability Capital loss carryforward Other Deferred tax assets Deferred tax liabilities: Premises and equipment Goodwill Deferred loan fees Unrealized gain on swaps - balance sheet hedge Fair value adjustment - equity securities Right of use asset Deferred tax liabilities Net deferred tax assets 1,584,444 $ 429,821 176,110 79,627 407,694 243,278 13,375 4,438,460 169,031 947,835 - 691 8,490,366 976,111 431,657 - 716,784 135,715 919,429 3,179,696 2,170,398 431,972 203,917 - 62,437 290,265 12,986 5,266,059 105,907 927,950 978 691 9,473,560 660,323 405,166 35,880 975,427 166,196 904,204 3,147,196 6,326,364 $ 5,310,670 $ No valuation allowance was established at December 31, 2023 and 2022, 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 reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is as follows: 2023 2022 Provision at statutory rate Tax-exempt interest Life insurance income Investment tax credits Other Income tax expense and effective rate % of Pretax Income % of Pretax Income Amount $ 3,392,373 (213,359 ) (224,309 ) (329,442 ) 29,180 21.0 % (1.3 ) (1.4 ) (2.0 ) 0.1 Amount $ 3,209,503 (250,825 ) (166,018 ) (329,442 ) (40,171 ) 21.0 % (1.6 ) (1.1 ) (2.2 ) (0.3 ) $ 2,654,443 16.4 % $ 2,423,047 15.8 % 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 2017 have been generally 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 $572,498 and $531,135 for the years ended December 31, 2023 and 2022, respectively. The fair value of plan assets includes $3,155,149 and $3,049,640 pertaining to the value of the Company’s common stock that is held by the plan as of December 31, 2023 and 2022, respectively. 37 38 48 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 49 Deferred Compensation Plan Stock Option Plan The Company has nonqualified deferred compensation plans that allow directors and senior executives to defer fees and salaries. Outstanding balances under these arrangements as of December 31, 2023 and 2022 were $2,046,767 and $2,057,010, respectively, and are reported as “Other liabilities” on the Consolidated Balance Sheet. Expenses related to these plans were $175,021 and ($228,263) for the years ended December 31, 2023 and 2022, respectively. Restricted Stock Plan The Company maintains a Restricted Stock Plan (the “Plan”). Employees and board members 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 177,409 shares and 194,100 shares as of December 31, 2023 and 2022, 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. Compensation expense recognized related to restricted stock awards was $439,194 and $557,833 for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, unrecognized compensation cost related to restricted stock awards was $1,288,195, which is expected to be recognized over a weighted average life of 3.25 years. The following is a summary of the status of the Company’s outstanding restricted stock awards as of December 31, 2023 and 2022, and changes therein during the years then ended: Outstanding at December 31, 2021 Granted Released from Restrictions Forfeited Outstanding at December 31, 2022 Granted Released from Restrictions Forfeited Outstanding at December 31, 2023 Shares of Restricted Stock Outstanding Weighted- Average Grant Date Fair Value 73,186 $ 17,355 (22,089 ) (1,208 ) 67,244 22,428 (24,377 ) (5,737 ) 59,558 $ 28.98 36.35 28.01 30.16 31.18 33.52 30.41 28.31 32.65 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 77,955 and 114,056 shares as of December 31, 2023 and 2022, 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 $233,159 and $188,518 for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, unrecognized compensation cost related to stock option awards was $337,465 which is expected to be recognized over a weighted-average life of 1.84 years. The following table presents share data related to the outstanding option awards: Incentive Stock Options Weighted- Average Exercise Price Non-Qualified Stock Options Weighted- Average Exercise Price Options Outstanding Outstanding, December 31, 2021 Granted Exercised Forfeited/Expired Outstanding, December 31, 2022 Granted Exercised Forfeited/Expired Options Outstanding 164,617 $ 32,190 (14,788 ) (3,000 ) 179,019 31,940 (22,626 ) (7,902 ) 27.42 36.00 24.24 30.38 29.17 33.80 25.52 33.35 Outstanding, December 31, 2023 180,431 $ 30.27 Exercisable at December 31, 2023 122,343 $ 28.51 67,652 $ 7,585 (15,820 ) (1,304 ) 58,113 12,063 (9,858 ) - 60,318 $ 40,846 $ 23.34 36.00 19.16 28.89 26.01 33.80 21.27 - 28.34 25.69 39 40 50 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 51 Option awards outstanding and exercisable as of December 31, 2023: 14. COMMITMENTS Incentive Stock Options Expiration Date Exercise Price Share Awards Outstanding Share Awards Exercisable Remaining Contractual Life (years) 03/15/24 03/15/24 03/15/24 03/15/24 04/01/24 04/01/25 03/30/26 10/31/26 12/12/26 04/03/27 04/02/28 04/01/29 04/03/30 12/01/30 04/03/31 10/01/31 03/25/32 04/03/33 29.63 31.60 30.05 36.00 18.25 19.48 22.00 22.40 22.38 27.00 29.63 31.60 25.65 30.00 30.05 38.25 36.00 33.80 800 800 533 266 3,222 5,568 6,300 1,000 1,000 7,150 20,700 22,901 22,027 2,900 25,634 1,500 28,090 30,040 180,431 800 800 533 266 3,222 5,568 6,300 1,000 1,000 7,150 20,700 22,901 22,027 2,900 16,824 1,000 9,352 - 122,343 0.21 0.21 0.21 0.21 0.25 1.25 2.25 2.84 2.95 3.26 4.26 5.25 6.26 6.92 7.26 7.76 8.24 9.26 Non-Qualified Stock Options Expiration Date Exercise Price Share Awards Outstanding Share Awards Exercisable Remaining Contractual Life (years) 04/01/24 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 04/03/31 03/25/32 04/03/33 18.25 19.48 22.00 22.40 22.38 27.00 29.63 31.60 25.65 28.25 30.05 36.00 33.80 2,222 4,436 7,656 1,000 1,000 8,064 1,260 2,780 4,677 1,000 6,575 7,585 12,063 60,318 2,222 4,436 7,656 1,000 1,000 8,064 1,260 2,780 4,677 1,000 4,229 2,522 - 40,846 0.25 1.25 2.25 2.84 2.95 3.26 4.26 5.25 6.26 6.83 7.26 8.24 9.26 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 $ 478,016,671 $ 390,351,246 7,301,502 9,388,062 Total $ 487,404,733 $ 397,652,748 2023 2022 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. In accordance with 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 $4,378,232 and $4,305,731 related to these operating leases is included in Accrued Interest and Other Assets on the Consolidated Balance Sheet as of December 31, 2023 and 2022, respectively. A combined lease liability of $4,513,498 and $4,418,809 related to these operating leases is included in Accrued Interest and Other Liabilities on the Consolidated Balance Sheet as of December 31, 2023 and 2022, respectively. 52 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 53 41 42 Maturities of our lease liabilities for all operating leases for each of the next five years and thereafter are as follows: 16. REGULATORY CAPITAL $ 2024 2025 2026 2027 2028 Thereafter Total lease payments Less: imputed interest Present value of lease liabilities $ Operating Lease Payments 488,605 468,014 394,024 392,816 404,307 3,488,569 5,636,335 1,122,837 4,513,498 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 3.36% and 3.22%, and a weighted-average remaining lease term of 13.0 years and 14.1 years as of December 31, 2023 and 2022, 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 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 2023 and 2022. Dividends The Pennsylvania Banking Code restricts the availability of capital surplus for dividend purposes. At December 31, 2023, the Bank had a capital surplus of $24,179,048 which was not available for distribution to the Company as dividends. 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, 2023 and 2022, 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 2023 2022 Amount Ratio Amount Ratio $ 144,144,790 10.70 % $ 129,819,958 11.57 % 107,771,297 8.00 134,714,121 10.00 89,781,117 8.00 112,226,396 10.00 $ 103,977,598 60,621,354 87,564,178 7.72 % $ 4.50 6.50 85,694,466 50,501,878 72,947,157 7.64 % 4.50 6.50 $ 109,977,598 80,828,472 107,771,297 8.16 % $ 6.00 8.00 91,694,466 67,335,838 89,781,117 8.17 % 6.00 8.00 $ 109,977,598 60,567,620 75,709,524 7.26 % $ 4.00 5.00 91,694,466 52,701,512 65,876,890 6.96 % 4.00 5.00 43 44 54 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 55 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 2023 2022 Amount Ratio Amount Ratio $ 144,144,393 10.61 % $ 120,906,721 10.71 % 108,636,951 8.00 135,796,189 10.00 8.00 90,281,978 112,852,473 10.00 $ 134,744,200 61,108,285 88,267,523 9.92 % $ 110,378,229 50,783,613 4.50 73,354,107 6.50 9.78 % 4.50 6.50 $ 134,744,200 81,477,713 108,636,951 9.92 % $ 110,378,229 67,711,484 6.00 90,281,978 8.00 9.78 % 6.00 8.00 $ 134,744,200 60,507,205 75,634,006 8.91 % $ 110,378,229 52,638,947 4.00 65,798,684 5.00 8.39 % 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, 2023 and 2022, 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, 2023 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 Collateralized mortgage obligations Equity securities $ - $ - - - 26,507,745 $ 58,373,229 - $ 26,507,745 - 58,373,229 34,783,092 1,437,714 - - 34,783,092 1,437,714 - - 2,712,968 30,068,198 27,807,826 - 30,068,198 - - 27,807,826 2,712,968 - Total $ 2,712,968 $ 178,977,804 $ - $ 181,690,772 Derivatives at fair value: (1) Assets Liabilities $ $ - $ - $ 9,255,978 $ (5,536,284 ) $ - $ - $ 9,255,978 (5,536,284 ) Level I Level II Level III Total December 31, 2022 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 Collateralized mortgage obligations Equity securities $ - $ - - - 19,132,495 $ 43,007,551 - $ 19,132,495 - 43,007,551 34,276,710 6,452,429 - - 34,276,710 6,452,429 - - 2,858,117 26,471,896 25,967,470 - - 26,471,896 - 25,967,470 2,858,117 - Total $ 2,858,117 $ 155,308,551 $ - $ 158,166,668 Derivatives at fair value: (1) Assets Liabilities $ $ - $ - $ 11,650,894 $ (6,892,916 ) $ - $ 11,650,894 (6,892,916 ) - $ (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. 45 46 56 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 57 Collateral Dependent 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, 2023 and 2022, 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. Collateral dependent impaired loans as of December 31, 2023 consists of a single commercial loan, with all inventory and equipment of the business assigned as loan collateral. Assets: Collateral dependent impaired loans Mortgage servicing rights Assets: Impaired loans Mortgage servicing rights Level I Level II Level III Total December 31, 2023 $ - $ - - $ - 149,934 $ 162,412 149,934 162,412 Level I Level II Level III Total December 31, 2022 - $ - - $ 2,046,591 $ 2,046,591 175,583 - 175,583 $ 47 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, 2023 and 2022. Valuation Fair Value Techniques Unobservable Inputs Range December 31, 2023 Collateral dependent impaired loans $ 149,934 Property appraisals Management discount for property type and recent market volatility 15.00% - 100.00% discount Weighted Average (15.00%) Mortgage servicing rights $ 162,412 Discounted cash flows Discount rate 5.85% - 6.44% discount Weighted Average (6.15%) Prepayment speeds 1.10% - 1.56% prepayment factor Weighted Average (1.26%) Valuation Fair Value Techniques Unobservable Inputs Range December 31, 2022 Impaired loans $ 1,844,464 Impaired loans $ 202,127 Discounted cash flows Property appraisals Discount rate Management discount for property type and recent market volatility 4.00% - 10.00% discount Weighted Average (5.20%) 15.00% - 100.00% discount Weighted Average (23.13%) Mortgage servicing rights $ 175,683 Discounted cash flows Discount rate 5.19% - 5.90% discount Weighted Average (5.55%) Prepayment speeds 1.30% - 5.28% prepayment factor Weighted Average (1.50%) 48 58 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 59 18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS 19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The estimated fair values of the Company’s financial instruments not required to be measured or reported at fair value at December 31, 2023 and 2022 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, 2023 and 2022: Carrying Value Fair Value 2023 Level I Level II Level III Financial assets: Investment securities held to maturity Net loans Financial liabilities: Deposits Other borrowings Financial assets: Investment securities held to maturity Net loans Financial liabilities: Deposits Other borrowings 10,891,602 $ $ 1,225,317,002 1,166,903,286 9,972,415 $ - $ - 9,972,415 $ - - 1,166,903,286 $ 1,179,069,408 $ 1,195,773,897 $ 776,423,191 $ 41,418,608 39,149,549 - - $ 419,350,706 39,149,549 - Carrying Value Fair Value 2022 Level I Level II Level III 10,763,833 $ $ 1,013,169,883 10,070,997 $ 953,469,471 - $ - 10,070,997 $ - - 953,469,471 $ 1,037,119,718 $ 1,031,116,751 $ 734,720,701 $ 52,413,653 48,344,590 - - $ 296,396,050 48,344,590 - Accumulated other comprehensive loss, December 31, 2021 Other comprehensive loss 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, 2022 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, 2023 Net Unrealized Gains (Losses) on Investment Securities Cash Flow Hedges Total $ (392,915 ) $ (1,179,618 ) $ (1,572,533 ) (19,417,150 ) - (19,417,150 ) (348 ) - (348 ) - 4,849,082 4,849,082 $ (19,810,413 ) $ 3,669,464 $ (16,140,949 ) 3,113,225 125 - - 3,113,225 125 - (972,993 ) (972,993 ) $ (16,697,063 ) $ 2,696,471 $ (14,000,592 ) As of December 31, 2023 and 2022, 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. The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss for the year ended December 31, 2023 and 2022: Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Consolidated Statement of Income where Net Income is Presented Unrealized losses on investment securities, December 31, 2023 Unrealized gains on investment securities, December 31, 2022 $ $ $ $ (158 ) Investment securities losses, net 33 Income tax benefit (125 ) 440 Investment securities gains, net (92 ) Income tax expense 348 20. SUBSEQUENT EVENTS Management has reviewed events occurring through March 14, 2024, the date the financial statements were issued, and no additional subsequent events occurred requiring accrual or disclosure. 49 50 60 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 61 Board of Directors of Kish Bancorp, Inc. Kathleen L. Rhine, Michael K. Halloran, William P. Hayes, Angela D. Thompson, Frances V. Vaughn Front row: George V. Woskob, Paul H. Silvis, William L. Dancy, Paul G. Howes, Gregory T. Hayes, James A. Troha, William S. Lake, Eric J. Barron Back row: BOARD OF DIRECTORS OF KISH BANK William P. Hayes, Chairman Paul G. Howes, Vice Chairman Eric J. Barron, Member William L. Dancy, Member Michael K. Halloran, Member Gregory T. Hayes, Member William S. Lake, Member Kathleen L. Rhine, Member Paul H. Silvis, Member James A. Troha, Member Angela D. Thompson, Member Frances V. Vaughn, Member George V. Woskob, Member BLAIR COUNTY REGIONAL BOARD Maryann Joyce Bistline, Member Elizabeth M. Burke, Member George C. Ferris, II, Member James P. Foreman, Member Robert G. Okonak, Jr., Member Randolph W. Tarpey, Member William D. Thompson, III, Member CENTRE COUNTY REGIONAL BOARD A. Christian Baum, Member Adam R. Fernsler, Member H. Amos Goodall, Jr., 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 Wayne A. Hearn, Member James J. Lakso, Member Burgess A. Smith, Member Delmont R. Sunderland, Member Angela D. Thompson, Member Douglas A. Tietjens, Member James A. Troha, Member Frances V. Vaughn, Member JUNIATA COUNTY REGIONAL BOARD Philip D. Bomberger, Member Jeffrey N. Brown, Member Ronald N. Colledge, Member Vincenzo Evola, Jr., Member Jorge Flores de Valgaz, Member Clarissa J. Goodling, Member Maxwell R. Manbeck, Member Robert J. Rowles, Member Anita K. Rudy, Member MIFFLIN COUNTY REGIONAL BOARD Susan L. Cannon, Member William L. Dancy, Member Michael K. Halloran, Member Melinda K. Kenepp, Member William S. Lake, Member Harvard K. McCardle, Member Alan J. Metzler, Member John Pannizzo, Member James L. Shilling, Jr., Member Kirk E. Thomas Member KISH BANK EXECUTIVE LEADERSHIP William P. Hayes, Executive Chairman Gregory T. Hayes, President and Chief Timothy P. Burris, Vice President, Chief Operating Officer, Kish Agency Alta Corman-Wolf, Vice President, Residential Lender Lucas D. Craig, Vice President, Financial Advisor Jason M. Cunningham, Vice President, Branch Manager Carolyn L. Donaldson, Vice President, Community Engagement and Relationship Development Officer Harry W. Felty, Vice President, Commercial Relationship Manager Beth N. Metz Gilmore, Vice President, Human Resources Director Polly A. Gipe, Vice President, BSA Executive Officer Officer Keith A. Crissman, Executive Vice President, Chief Revenue Officer Mark J. Cvrkel, Executive Vice President, Chief Financial Officer Robert S. McMinn, Executive Vice Roxanne R. Greising, Vice President, Credit Administration Director Jeffrey A. Gum, Vice President, Managing Director, Kish Benefits Consulting President, General Counsel Allana L. Hartung, Vice President, Richard A. Sarfert, Executive Vice President, Chief Credit Officer Suzanne M. White, Executive Vice President, Chief Human Resource Officer Kimberly A. Bubb, Sr. Vice President, Systems and Operations Director Garen M. Jenco, Sr. Vice President, Client Experience Officer Thomas Minichiello, III, Sr. Vice Commercial Relationship Manager Jeffrey T. Hayes, Vice President, Financial Advisor Matthew D. Heaps, Vice President, Commercial Relationship Manager Edward M. Henderson, Vice President, Wealth Advisor and Trust Officer Ashley L. Henry, Vice President, Business Process Manager Crystal L. Himes, Vice President, President, Retail Banking Director Residential Lender Mark E. Yerger, Sr. Vice President, Terry P. Horner, Vice President, Chief Information Officer KISH BANK SENIOR OFFICERS Robert L. Bilger, Sr. Vice President, Senior Lending Officer Allan F. Bills, Sr. Vice President, Technical Accounting and Balance Sheet Management Tina M. Collins, Sr. Vice President, Accounting and Internal Controls Director Wade E. Curry, LUTCF, Sr. Vice President, Kish Financial Solutions Director Kenneth M. Goetz, Sr. Vice President, Managing Director, Ohio Kristie R. McKnight, Sr. Vice President, Middle Market Relationship Manager Amy M. Muchler, Sr. Vice President, Audit Manager Craig E. Muthler, Sr. Vice President, Middle Market Relationship Manager Jeffrey D. Wilson, Sr. Vice President, CEO, Kish Agency Gary L. Wimer, Sr. Vice President, Managing Director, Ohio Larry E. Burger, Vice President, Business Development Officer Business Development Officer Holly A. Johnson, Vice President, Mortgage Banking Manager Wade A. Keiffer, Vice President, Credit Administration Portfolio Manager Lisa A. Kennedy, Vice President, Training and Organizational Development Manager Jessica L. Kitt, Vice President, Retail Banking Sales Manager Marsha K. Kuhns, Vice President, Residential Lender John Q. Massie, Vice President, Commercial Relationship Manager Seth J. Napikoski, Vice President, Commercial Relationship Manager Melissa K. Royer, Vice President, Technical Advisor Caleb J. Shertzer, Commercial Relationship Manager Cheryl E. Shope, Vice President, Residential Lender Wendy S. Strohecker, Vice President, Bank Operations Manager N. Robert Sunday, III, Vice President, Compliance Officer Lindsey J. Swigart, Vice President, Branch Administration Manager 62 Board of Directors and Officers Board of Directors and Officers 63 4255 East Main Street, Belleville, PA 17004 | 1-800-981-5474 | MyKish.com 

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