CSB Bancorp, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING The management of CSB Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance that our published financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted the required assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. Management’s assessment did not identify any material weaknesses in the Company’s internal control over financial reporting. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based upon this assessment, management believes that the Company’s internal control over financial reporting is effective as of December 31, 2022. Eddie L. Steiner Paula J. Meiler President, Senior Vice President, Chief Executive Officer Chief Financial Officer 28 REPORT OF INDEPENDENT REGIS TERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of CSB Bancorp, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CSB Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021; the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involve our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 29 Crititcal Audit Matters (continued) Allowance for Loan Losses (ALL) – Qualitative Factors Description of the Matter The Company’s loan portfolio totaled $627 million as of December 31, 2022, and the associated ALL was $6.8 million. As discussed in Notes 1 and 3 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of historical loss experience within each risk category of loans, qualitative adjustment to those historical loss allocations, and testing of certain commercial loans for impairment. Management applies qualitative adjustments to the historical loss rate to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, concentrations of credit risk for the commercial loan portfolios, and other specific industry factors. We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity and are highly difficult to estimate. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity. How We Addressed the Matter in Our Audit We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment. To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL. Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data used in the estimate to third-party macroeconomic data, and other internal and external data points, while considering the existence of new or contrary information. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in the supporting external or internal data. We assessed the reasonableness of the factors from both a directional perspective and from an overall magnitude perspective as compared to the underlying data. We also compared the level of the Company’s ALL reserves to a peer group (adjusted for differences in credit quality) to gain additional evidence of the reasonableness of the magnitude of the ALL overall. We have served as the Company’s auditor since 2005. Cranberry Township, Pennsylvania March 16, 2023 30 CONSOLIDATED B ALANCE SHEETS At December 31, 2022 and 2021 (Dollars in thousands, except per share data) 2022 2021 ASSETS Cash and cash equivalents Cash and due from banks $ 19,911 $ 19,543 Interest-earning deposits in other banks 66,509 224,114 Total cash and cash equivalents 86,420 243,657 Securities Available-for-sale, at fair value 150,069 131,708 Held-to-maturity; fair value of $ 211,954 in 2022 and $ 174,528 in 2021 247,401 174,808 Equity securities 244 115 Restricted stock, at cost 3,430 4,614 Total securities 401,144 311,245 Loans held for sale 52 231 Loans 627,171 549,154 Less allowance for loan losses 6,838 7,618 Net loans 620,333 541,536 Premises and equipment, net 13,414 13,866 Goodwill 4,728 4,728 Bank-owned life insurance 24,709 24,035 Accrued interest receivable and other assets 8,308 4,941 TOTAL ASSETS $ 1,159,108 $ 1,144,239 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits Noninterest-bearing $ 350,283 $ 334,346 Interest-bearing 673,134 668,401 Total deposits 1,023,417 1,002,747 Short-term borrowings 32,550 36,530 Other borrowings 2,461 3,407 Accrued interest payable and other liabilities 4,760 4,240 Total liabilities 1,063,188 1,046,924 SHAREHOLDERS’ EQUITY Common stock, $ 6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; and outstanding 2,707,576 shares in 2022 and 2,718,024 in 2021 18,629 18,629 Additional paid-in capital 9,815 9,815 Retained earnings 86,502 76,715 Treasury stock at cost: 273,026 shares in 2022, 262,578 shares in 2021 ( 6,107 ) ( 5,719 ) Accumulated other comprehensive loss ( 12,919 ) ( 2,125 ) Total shareholders’ equity 95,920 97,315 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,159,108 $ 1,144,239 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 31 CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2022 and 2021 (Dollars in thousands, except per share data) 2022 2021 INTEREST AND DIVIDEND INCOME Loans, including fees $ 26,015 $ 26,124 Taxable securities 6,665 2,613 Nontaxable securities 436 455 Other 1,703 337 Total interest and dividend income 34,819 29,529 INTEREST EXPENSE Deposits 2,335 1,884 Short-term borrowings 106 53 Other borrowings 55 75 Total interest expense 2,496 2,012 NET INTEREST INCOME 32,323 27,517 RECOVERY FOR LOAN LOSSES ( 895 ) ( 655 ) Net interest income, after recovery for loan losses 33,218 28,172 NONINTEREST INCOME Service charges on deposit accounts 1,174 939 Trust services 954 1,059 Debit card interchange fees 2,105 2,050 Credit card fees 677 482 Gain on sale of loans, net 331 1,449 Earnings on bank owned life insurance 674 619 Unrealized (loss) gain on equity securities ( 3 ) 28 Other income 799 699 Total noninterest income 6,711 7,325 NONINTEREST EXPENSES Salaries and employee benefits 13,446 12,599 Occupancy expense 1,085 1,033 Equipment expense 781 714 Professional and director fees 1,551 1,184 Financial institutions tax 779 751 Marketing and public relations 551 461 Software expense 1,429 1,342 Debit card expense 734 710 Amortization of intangible assets — 44 FDIC insurance expense 345 478 Other expenses 2,692 2,777 Total noninterest expenses 23,393 22,093 INCOME BEFORE INCOME TAXES 16,536 13,404 FEDERAL INCOME TAX PROVISION 3,223 2,567 NET INCOME $ 13,313 $ 10,837 EARNINGS PER SHARE Basic and diluted $ 4.91 $ 3.97 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 32 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 Net income $ 13,313 $ 10,837 Other comprehensive loss Unrealized loss on available-for-sale securities arising during the period ( 13,952 ) ( 2,050 ) Unrealized loss on securities transferred from available-for-sale to held-to-maturity — ( 1,976 ) Amortization of held-to-maturity discount resulting from transfer 289 86 Income tax effect at 21 % 2,869 829 Other comprehensive loss ( 10,794 ) ( 3,111 ) Total comprehensive income $ 2,519 $ 7,726 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 33 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDE RS’ EQUITY Years Ended December 31, 2022 and 2021 (Dollars in thousands, except per share data) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total BALANCE AT DECEMBER 31, 2020 $ 18,629 $ 9,815 $ 69,209 $ ( 4,780 ) $ 986 $ 93,859 Net income — — 10,837 — — 10,837 Other comprehensive loss — — — — ( 3,111 ) ( 3,111 ) Purchase of 24,326 treasury shares — — — ( 939 ) — ( 939 ) Cash dividends declared, $ 1.22 per share — — ( 3,331 ) — — ( 3,331 ) BALANCE AT DECEMBER 31, 2021 $ 18,629 $ 9,815 $ 76,715 $ ( 5,719 ) $ ( 2,125 ) $ 97,315 Net income — — 13,313 — — 13,313 Other comprehensive loss — — — — ( 10,794 ) ( 10,794 ) Purchase of 10,448 treasury shares — — — ( 388 ) — ( 388 ) Cash dividends declared, $ 1.30 per share — — ( 3,526 ) — — ( 3,526 ) BALANCE AT DECEMBER 31, 2022 $ 18,629 $ 9,815 $ 86,502 $ ( 6,107 ) $ ( 12,919 ) $ 95,920 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 34 CONSOLIDATED STATEM ENTS OF CASH FLOWS Years Ended December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 13,313 $ 10,837 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises, equipment and software 960 890 Deferred income taxes ( 135 ) ( 131 ) Recovery of provision for loan losses ( 895 ) ( 655 ) Gain on sale of loans, net ( 331 ) ( 1,449 ) Security amortization, net of accretion 1,066 1,288 Secondary market loan sale proceeds 10,100 46,783 Originations of secondary market loans held-for-sale ( 9,034 ) ( 42,394 ) Earnings on bank-owned life insurance ( 674 ) ( 619 ) Effects of changes in operating assets and liabilities: Net deferred loan fees (costs) ( 106 ) ( 386 ) Accrued interest receivable ( 874 ) 523 Accrued interest payable 61 ( 33 ) Other assets and liabilities 940 363 Net cash provided by operating activities $ 14,391 $ 15,017 CASH FLOWS FROM INVESTING ACTIVITIES Securities: Proceeds from repayments, available-for-sale $ 15,917 $ 47,925 Proceeds from repayments, held-to-maturity 21,827 8,660 Purchases, available-for-sale ( 48,885 ) ( 46,267 ) Purchases, held-to-maturity ( 94,541 ) ( 122,580 ) Purchases, equity securities ( 131 ) — Redemption of restricted stock 1,184 — Purchase of bank-owned life insurance — ( 2,000 ) Loan originations and payments, net ( 78,450 ) 58,374 Purchases of premises and equipment ( 366 ) ( 1,989 ) Purchases of software ( 13 ) ( 108 ) Net cash used in investing activities $ ( 183,458 ) $ ( 57,985 ) These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 35 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2022 and 2021 (Dollars in thousands) 2022 2021 CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits $ 20,670 $ 111,185 Net change in short-term borrowings ( 3,980 ) ( 685 ) Repayment of other borrowings ( 946 ) ( 1,257 ) Cash dividends paid ( 3,526 ) ( 3,331 ) Purchase of treasury stock ( 388 ) ( 939 ) Net cash provided by financing activities $ 11,830 $ 104,973 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 157,237 ) 62,005 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 243,657 181,652 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 86,420 $ 243,657 SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest $ 2,435 $ 2,045 Income taxes 2,710 2,425 Noncash investing activities: Transfer of securities from available-for-sale to held-to-maturity — 77,194 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 36 NOTE 1 – SUMMARY OF SIG NIFICANT ACCOUNTING POLICIES CSB Bancorp, Inc. (the “Company” or “CSB”) was incorporated in 1991 in the State of Ohio, and is a registered bank holding company. The Company’s wholly-owned subsidiaries are The Commercial and Savings Bank of Millersburg, Ohio (the “Bank”) and CSB Investment Services, LLC. The Company, through its subsidiaries, operates in one industry segment, the commercial banking industry. The Bank, an Ohio-chartered bank organized in 1879, provides financial services through its sixteen Banking Centers located in Holmes, Stark, Tuscarawas and Wayne counties. These communities are the source of a substantial majority of the Bank’s deposit, loan, and trust activities. The majority of the Bank’s income is derived from commercial and retail lending activities, and investments in securities. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential real estate, commercial real estate, commercial, and installment loans. Substantially, all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid with cash flow from business operations. Real estate loans are secured by both residential and commercial real estate. Significant accounting policies followed by the Company are presented below: USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS In preparing the Consolidated Financial Statements, in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions affecting the reported amounts of assets and liabilities as of the date of the Consolidated Balance Sheets and reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. The most significant estimates susceptible to change in the near term relate to management’s determination of the allowance for loan losses and the fair value of financial instruments. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The Bank has a trust department and the assets held by the Bank in fiduciary or agency capacities for its customers are not included in the Consolidated Balance Sheets as such items are not assets of the Bank. CASH AND CASH EQUIVALENTS For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand and amounts due from banks which mature overnight or within ninety days . CASH RESERVE REQUIREMENTS Effective, March 26, 2020, the Federal Reserve reduced reserve requirements to zero for all depository institutions. There were no required federal reserves included in “Cash and due from banks” at December 31, 2022 or December 31, 2021. When required, reserves are used to facilitate the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These are held in the form of vault cash and depository amount held with the Federal Reserve Bank. Federal law prohibits the Company from borrowing from the Bank unless the loans are secured by specific collateral. DEBT SECURITIES At the time of purchase all debt securities are evaluated and designated as available-for-sale or held-to-maturity. Securities designated as available-for-sale are carried at fair value with unrealized gains and losses on such securities, net of applicable income taxes, recognized as other comprehensive income or loss. During 2021, approximately $ 77 million par value U.S. Treasuries and mortgage-backed securities were transferred from available-for-sale to held-to-maturity. Held-to-maturity securities are carried at their fair value on the date of transfer or at amortized cost if security purchases are designated as held-to-maturity. On December 31, 2022, 62 % of the total investment portfolio was classified as held-to-maturity. The amortized cost of debt securities is adjusted for the accretion of discounts to maturity and the amortization of premiums to the earlier of a bond’s call date or maturity based on the interest method. Such amortization and accretion is included in interest and dividends on securities. Gains and losses on sales of securities are accounted for on a trade date basis, using the specific identification method, and are included in noninterest income. Securities are periodically reviewed for other-than-temporary impairment based upon a number of factors, including, but not limited to: the length of time and extent to which the market value has been less than cost, the financial condition of the underlying issuer, the receipt of principal and interest according to the contractual terms, the ability of the issuer to meet contractual obligations, the likelihood of the security’s ability to recover any decline in its market value and management’s intent, and ability to hold the security for a period of time sufficient to allow for a recovery in market value. Among the factors considered in determining management’s intent and ability to hold the security, is a review of the Company’s capital adequacy, interest rate risk position, and liquidity. The assessment of a security’s ability to recover any decline in market value, the ability of the issuer to meet contractual obligations, and management’s intent and ability to hold the security requires 37 considerable judgment. A decline in value considered to be other-than-temporary, is recorded as a loss within noninterest income in the Consolidated Statements of Income. EQUITY SECURITIES Equity securities are held at fair value. Holding gains and losses are recorded in income. Dividends on equity securities are recognized as income when earned. RESTRICTED STOCK Investments in FHLB and Federal Reserve Bank stock are classified as restricted stock, carried at cost, and evaluated for impairment. The Bank is required to maintain an investment in common stock of the FHLB and Federal Reserve Bank because the Bank is a member of the FHLB and the Federal Reserve System. LOANS Loans that management has the intent and ability to hold for the foreseeable future, until maturity, or pay-off, generally are stated at their outstanding principal amount, adjusted for charge-offs, the allowance for loan losses, and any deferred loan fees or costs on originated loans. Interest is accrued based upon the daily outstanding principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the life of the related loan. Interest income is not reported when full repayment is in doubt, typically when the loan is impaired, or payments are past due over 90 days. All interest accrued, but not collected for loans placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. At origination, a determination is made whether a loan will be held in the Bank’s portfolio or is intended for sale in the secondary market. Mortgage loans held for sale are recorded at the lower of the aggregate cost or fair value. Generally, these loans are held for sale for less than three (3) days. The Bank recognizes gains and losses on sales of the loans held for sale when the sale is completed. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans experiencing insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, construction loans, and troubled debt restructurings by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential real estate or consumer loans for impairment disclosures. OTHER REAL ESTATE OWNED Other real estate acquired through or in lieu of foreclosure is initially recorded at fair value, less estimated costs to sell, and any loan balance in excess of fair value is charged to the allowance for loan losses. Subsequent valuations are periodically performed and write-downs are included in noninterest expenses, as well as expenses related to maintenance of the properties. Gains or losses upon sale are recorded through noninterest income. There was no other real estate owned on December 31, 2022 or 2021. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization are determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed using the straight-line method. Leasehold improvements are amortized over the useful life of the asset, or lease 38 term, whichever is shorter. Expenses for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. GOODWILL Goodwill is not amortized, but is tested for impairment at least annually in the fourth quarter or more frequently if indicators of impairment are present. The evaluation for impairment involves comparing the current fair value of the reporting unit to the carrying value, including goodwill. If the current fair value of a reporting unit exceeds the carrying value, no additional testing is required, and an impairment loss is not recorded. The Company uses market capitalization and multiples of tangible book value methods, based on observable bank acquisitions in the state of Ohio, to determine the estimated current fair value of its reporting unit. Based on this analysis no impairment was recorded in 2022 or 2021. MORTGAGE SERVICING RIGHTS Mortgage servicing rights (“MSRs”) represent the right to service loans for third party investors. MSRs are recognized at fair value as a separate asset upon the sale of mortgage loans to a third-party investor with the servicing rights retained by the Company. Originated MSRs are recorded at allocated fair value at the time of the sale of the loans to the third-party investor. MSRs are amortized in proportion to and over the estimated period of net servicing income. MSRs are carried at amortized cost, less a valuation allowance for impairment, if any. MSRs are evaluated on a discounted earnings basis to determine the present value of future earnings of the underlying serviced mortgages. All assumptions are reviewed annually, or more frequently if necessary, adjusted to reflect current, and anticipated market conditions. BANK-OWNED LIFE INSURANCE The cash surrender value of bank-owned life insurance policies is included as an asset on the Consolidated Balance Sheets and any increases in the cash surrender value are recorded as noninterest income on the Consolidated Statements of Income. In the event of the death of an individual insured under these policies, the Company would receive a death benefit, which would be recorded as noninterest income. REPURCHASE AGREEMENTS Substantially all securities sold under repurchase agreements represent amounts advanced by various customers. Securities owned by the Bank are pledged to secure those obligations. Repurchase agreements are not deposits and are not covered by federal deposit insurance. ADVERTISING COSTS All advertising costs are expensed as incurred. Advertising expenses amounted to $ 178 thousand, $ 165 thousand for the years ended 2022 and 2021, respectively. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated tax return. Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their respective tax bases. Deferred tax assets are recognized for temporary differences deductible in future years’ tax returns and for operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences taxable in future years’ tax returns. The Bank, domiciled in Ohio, is not currently subject to state and local income taxes. COMPREHENSIVE INCOME The Company includes recognized revenue, expenses, gains, and losses in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the Consolidated Balance Sheets, net of tax, these items along with net income are components of comprehensive income. TRANSFERS OF FINANCIAL 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 constraining 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. 39 PER SHARE DATA Earnings per share is computed based on the weighted average number of shares of common stock outstanding during each year. The company currently maintains a simple capital structure, thus, there are no dilutive effects on earnings per share. The weighted average number of common shares outstanding for earnings per share computations was as follows: (Dollars in thousands, except per share data) 2022 2021 Weighted average common shares 2,980,602 2,980,602 Average treasury shares ( 266,557 ) ( 247,476 ) Total weighted average common shares outstanding basic and diluted 2,714,045 2,733,126 Net income $ 13,313 $ 10,837 Earnings per share, basic and diluted 4.91 3.97 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ASU 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments . The Update and all subsequent ASU’s that modified Topic 326, requires financial assets be presented at the net amount expected to be collected (i.e. net of expected credit losses), eliminating the probable recognition threshold for credit losses on financial assets measured at amortized cost. The measurement of expected credit losses should be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amount of any adjustment will be impacted by the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that time. The new current expected credit losses model ("CECL") will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. Management has completed its implementation plan, segmentation and testing, and model validation. The implementation plan included drafting of additional controls and policies to govern data uploads to its third-party vendor, balancing and reconciling, testing and auditing of inputs, and review and decision-making surrounding segmentation, methodologies, qualitative factor adjustments, and reasonable and supportable forecasts. Parallel runs were processed during 2022 and the results were consistent with management's expectations. The implementation plan is currently going through the Company's control structure and internal control testing is being performed. As a result of adopting this standard, which is effective January 1, 2023, the Company has completed the calculation and is in the process of finalizing the qualitative factors, which will determine the total amount of the adjustment to the allowance for loan losses and the reserves for unfunded commitments. These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date. The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios. The Company expects to record no allowance for credit losses related to AFS or HTM debt securities at the date of adoption, January 1, 2023, as the majority of the Company's debt securities are issued by U.S. government entities and agencies and there is zero credit loss expectation on these securities. ASU 2017-04 - Simplifying the Test for Goodwill Impairment. The Update, and all subsequent ASU’s, simplifies the goodwill impairment test. Under the new guidance, Step 2 of the goodwill impairment process that requires an entity to determine the implied fair value of its goodwill by assigning fair value to all its assets and liabilities is eliminated. Instead, the entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual and interim goodwill tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted. In November 2019, the FASB deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a material impact on the Company’s financial statements. ASU 2020-04 - Reference Rate Reform (Topic 848). This update provides 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. 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 allowing 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 through December 31, 2022. 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 Accounting Standards Codification (ASC) 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 40 rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. This Update is not expected to have a significant impact on the Company’s financial statements. ASU 2022-02, Financial Instruments – Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures . The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in Update 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements. RECLASSIFICATION OF COMPARATIVE AMOUNTS Certain comparative amounts from the prior years have been reclassified to conform to current year classifications. Such classifications had no effect on net income or shareholders’ equity. 41 NOTE 2 – SECURITIES Securities consisted of the following on December 31: (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 2022 Available-for-sale U.S. Treasury securities $ 23,194 $ — $ ( 969 ) $ 22,225 U.S. Government agencies 13,999 — ( 1,369 ) 12,630 Mortgage-backed securities of government agencies 77,677 72 ( 8,859 ) 68,890 Asset-backed securities of government agencies 633 — ( 15 ) 618 State and political subdivisions 20,462 — ( 985 ) 19,477 Corporate bonds 28,740 — ( 2,511 ) 26,229 Total available-for-sale 164,705 72 ( 14,708 ) 150,069 Held-to-maturity U.S. Treasury securities 12,753 — ( 1,136 ) 11,617 Mortgage-backed securities of government agencies 232,068 — ( 34,051 ) 198,017 State and political subdivisions 2,580 1 ( 261 ) 2,320 Total held-to-maturity 247,401 1 ( 35,448 ) 211,954 Equity securities 185 59 — 244 Restricted stock 3,430 — — 3,430 Total securities $ 415,721 $ 132 $ ( 50,156 ) $ 365,697 2021 Available-for-sale U.S. Treasury securities $ 4,982 $ — $ ( 10 ) $ 4,972 U.S. Government agencies 13,999 — ( 327 ) 13,672 Mortgage-backed securities of government agencies 78,224 393 ( 843 ) 77,774 Asset-backed securities of government agencies 760 — ( 7 ) 753 State and political subdivisions 23,189 343 ( 201 ) 23,331 Corporate bonds 11,238 57 ( 89 ) 11,206 Total available-for-sale 132,392 793 ( 1,477 ) 131,708 Held-to-maturity U.S. Treasury securities 12,700 32 ( 39 ) 12,693 Mortgage-backed securities of government agencies 159,916 504 ( 766 ) 159,654 State and political subdivisions 2,192 3 ( 14 ) 2,181 Total held-to-maturity 174,808 539 ( 819 ) 174,528 Equity securities 53 62 — 115 Restricted stock 4,614 — — 4,614 Total securities $ 311,867 $ 1,394 $ ( 2,296 ) $ 310,965 42 The amortized cost and fair value of debt securities on December 31, 2022, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (Dollars in thousands) Amortized Cost Fair Value Available-for-sale Due in one year or less $ 5,966 $ 5,790 Due after one through five years 64,574 60,342 Due after five through ten years 24,930 22,979 Due after ten years 69,235 60,958 Total debt securities available-for-sale $ 164,705 $ 150,069 Held-to-maturity Due in one year or less $ 2,497 $ 2,418 Due after one through five years 7,412 6,794 Due after five through ten years 4,761 4,155 Due after ten years 232,731 198,587 Total debt securities held-to-maturity $ 247,401 $ 211,954 Securities with a carrying value of approximately $ 110.1 million and $ 103.0 million were pledged on December 31, 2022, and 2021 respectively, to secure public deposits, as well as other deposits and borrowings as required or permitted by law. Restricted stock primarily consists of investments in FHLB and Federal Reserve Bank stock. The Bank’s investment in FHLB stock amounted to $ 2.9 million and $ 4.1 million on December 31, 2022, and 2021, respectively. Federal Reserve Bank stock was $ 471 thousand on December 31, 2022, and 2021. There were no proceeds from sales of debt securities for the years ended December 31, 2022 and 2021. Gains and (losses) recognized on equity securities on the consolidated statements of income of $( 3 ) thousand and $ 28 thousand, respectively for the years ended December 31, 2022 and 2021 were unrealized. 43 The following table presents gross unrealized losses, fair value of securities, aggregated by investment category, and length of time individual securities have been in a continuous unrealized loss position, on December 31: Less Than 12 Months 12 Months or More Total (Dollars in thousands) Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value 2022 Available-for-sale U.S. Treasury securities $ ( 798 ) $ 17,405 $ ( 171 ) $ 4,820 $ ( 969 ) $ 22,225 U.S. Government agencies — — ( 1,369 ) 12,630 ( 1,369 ) 12,630 Mortgage-backed securities of government agencies ( 1,046 ) 16,188 ( 7,813 ) 44,519 ( 8,859 ) 60,707 Asset-backed securities of government agencies — — ( 15 ) 618 ( 15 ) 618 State and political subdivisions ( 189 ) 9,079 ( 796 ) 9,848 ( 985 ) 18,927 Corporate bonds ( 1,165 ) 13,502 ( 1,346 ) 12,727 ( 2,511 ) 26,229 Held-to-maturity U.S. Treasury securities — — ( 1,136 ) 11,617 ( 1,136 ) 11,617 Mortgage-backed securities of government agencies ( 9,733 ) 79,325 ( 24,318 ) 118,692 ( 34,051 ) 198,017 State and political subdivisions — — ( 261 ) 1,903 ( 261 ) 1,903 Total temporarily impaired securities $ ( 12,931 ) $ 135,499 $ ( 37,225 ) $ 217,374 $ ( 50,156 ) $ 352,873 2021 Available-for-sale U.S. Treasury securities $ ( 10 ) $ 4,972 $ — $ — $ ( 10 ) $ 4,972 U.S. Government agencies ( 69 ) 2,930 ( 258 ) 10,742 ( 327 ) 13,672 Mortgage-backed securities of government agencies ( 574 ) 43,595 ( 269 ) 12,653 ( 843 ) 56,248 Asset-backed securities of government agencies — — ( 7 ) 753 ( 7 ) 753 State and political subdivisions ( 201 ) 9,646 — — ( 201 ) 9,646 Corporate bonds ( 44 ) 5,710 ( 45 ) 955 ( 89 ) 6,665 Held-to-maturity U.S. Treasury securities ( 39 ) 9,837 — — ( 39 ) 9,837 Mortgage-backed securities of government agencies ( 766 ) 98,906 — — ( 766 ) 98,906 State and political subdivisions ( 14 ) 1,749 — — ( 14 ) 1,749 Total temporarily impaired securities $ ( 1,717 ) $ 177,345 $ ( 579 ) $ 25,103 $ ( 2,296 ) $ 202,448 There were 200 securities in an unrealized loss position on December 31, 2022, 90 of which were in a continuous loss position for twelve (12) or more months. At least quarterly, the Company conducts a comprehensive security-level impairment assessment. The assessments are based on the nature of the securities, the extent and duration of the securities, the extent and duration of the loss, and management’s intent to sell or if it is more likely than not that management will be required to sell a security before recovery of its amortized cost basis, which may be maturity. Management believes the Company will fully recover the cost of these securities and it does not intend to sell these securities and likely will not be required to sell them before the anticipated recovery of the remaining amortized cost basis, which may be maturity. As a result, management concluded that these securities were not other-than-temporarily impaired on December 31, 2022. 44 NOTE 3 – LOANS Loans consisted of the following on December 31: (Dollars in thousands) 2022 2021 Commercial $ 129,343 $ 123,933 Commercial real estate 231,785 194,754 Residential real estate 194,125 168,247 Construction & land development 55,318 46,042 Consumer 16,387 16,074 Total loans before deferred loan (fees) and costs 626,958 549,050 Deferred loan (fees) and costs 213 104 Total loans $ 627,171 $ 549,154 Loan Origination/Risk Management The Company has certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand their business. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and occasionally projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. However, the cash flows of borrowers may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. With respect to loans to developers and builders secured by non-owner occupied properties, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption, lease rates, and financial analysis of developers and property owners. Construction and land development loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction and land development loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or permanent financing from the Company. These loans are closely monitored by on-site inspections and are considered to have higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. The Company originates consumer loans utilizing a judgmental underwriting process. Policies and procedures are developed and modified, as needed, by management to monitor and manage consumer loan risk. This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk. The Company engages an independent loan review vendor that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures. Paycheck Protection Program The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020 and provided over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. The PPP provided loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash flow assistance to employers who maintained their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. During 2021 and 2020, the 45 Company originated 1,351 PPP loans with principal balances of $ 128.9 million. The PPP loans are 100 % guaranteed by the SBA and are eligible for forgiveness by the SBA to the extent that the proceeds were used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan was made if certain conditions were met regarding employee retention and compensation levels. The majority of PPP loans deemed eligible for forgiveness by the SBA have been repaid by the SBA to the Company. As of December 31, 2022, the Company has received $ 128.5 million in loan forgiveness from the SBA. The remaining $ 359 thousand of PPP loans are included in the Commercial loan category with no allowance for loan losses allocated. Concentrations of Credit Nearly all the Company’s lending activity occurs within the State of Ohio, including the four counties of Holmes, Stark, Tuscarawas, and Wayne, as well as other markets. The majority of the Company’s loan portfolio consists of commercial and industrial and commercial real estate loans. Credit concentrations, including commitments, as determined using North American Industry Classification Codes (NAICS), to the four largest industries compared to total loans at December 31, 2022, included $ 73 million, or 12 %, of total loans to lessors of non-residential buildings; $ 26 million, or 4 %, of total loans to assisted living facilities for the elderly; $ 17 million, or 3 %, of total loans to lessors of other real estate property; and $ 17 million, or 3 %, of total loans to home centers (hardware stores). These loans are generally secured by real property and equipment, with repayment expected from operational cash flow. Credit evaluation is based on a review of cash flow coverage of principal, interest payments, and the adequacy of the collateral received. Allowance for Loan Losses The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2022, and 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. During 2022, the decrease in the provision (recovery) for loan losses for construction and land development and commercial real estate loans was primarily related to the improvement in loans to businesses that were negatively impacted by the COVID-19 pandemic, the reduction of impaired and adversely classified loans, as well as a large recovery received on a previously charged-off loan. The decrease in the provision for consumer loans was primarily related to the tightening of underwriting guidelines pertaining to the RV portfolio along with a decline in RV loan balances and fewer consumer loan charge-offs in 2022. The provision related to residential real estate loans increased as a result of the growth in loan balances along with an increase in the general loss ratios due to elevated levels of economic uncertainty associated with increased inflation and higher interest rates. During 2021, the increase in the provision for loan losses for construction and land development loans was primarily related to loans to assisted living facilities that have been affected by the COVID-19 pandemic. The decrease in the provision related to commercial, commercial real estate and residential real estate loans was primarily related to the improvement in economic conditions along with fewer delinquent and nonperforming loans and improvement in adversely classified loans. The provision related to consumer loans increased primarily as a result of the increase in historical losses of loans in this category. Summary of Allowance for Loan Losses (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction & Land Development Consumer Unallocated Total December 31, 2022 Beginning balance $ 1,240 $ 2,838 $ 992 $ 1,380 $ 421 $ 747 $ 7,618 (Recovery) provision for loan losses 47 ( 68 ) 273 ( 889 ) ( 175 ) ( 83 ) ( 895 ) Charge-offs ( 227 ) ( 13 ) — — ( 48 ) ( 288 ) Recoveries 50 3 3 312 35 403 Net (charge-offs) recoveries ( 177 ) ( 10 ) 3 312 ( 13 ) 115 Ending balance $ 1,110 $ 2,760 $ 1,268 $ 803 $ 233 $ 664 $ 6,838 December 31, 2021 Beginning balance $ 1,739 $ 3,469 $ 1,156 $ 756 $ 352 $ 802 $ 8,274 (Recovery) provision for loan losses ( 495 ) ( 639 ) ( 189 ) 624 99 ( 55 ) ( 655 ) Charge-offs ( 35 ) — — — ( 95 ) ( 130 ) Recoveries 31 8 25 — 65 129 Net (charge-offs) recoveries ( 4 ) 8 25 — ( 30 ) ( 1 ) Ending balance $ 1,240 $ 2,838 $ 992 $ 1,380 $ 421 $ 747 $ 7,618 46 The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and impairment method as of December 31: (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction & Land Development Consumer Unallocated Total 2022 Allowance for loan losses: Ending allowance balances attributable to loans: Individually evaluated for impairment $ — $ — $ — $ — $ 4 $ — $ 4 Collectively evaluated for impairment 1,110 2,760 1,268 803 229 664 6,834 Total ending allowance balance $ 1,110 $ 2,760 $ 1,268 $ 803 $ 233 $ 664 $ 6,838 Loans: Loans individually evaluated for impairment $ 123 $ 113 $ 677 $ — $ 123 $ 1,036 Loans collectively evaluated for impairment 129,220 231,672 193,448 55,318 16,264 625,922 Total ending loans balance $ 129,343 $ 231,785 $ 194,125 $ 55,318 $ 16,387 $ 626,958 2021 Allowance for loan losses: Ending allowance balances attributable to loans: Individually evaluated for impairment $ 208 $ 9 $ 2 $ — $ 3 $ — $ 222 Collectively evaluated for impairment 1,032 2,829 990 1,380 418 747 7,396 Total ending allowance balance $ 1,240 $ 2,838 $ 992 $ 1,380 $ 421 $ 747 $ 7,618 Loans: Loans individually evaluated for impairment $ 342 $ 291 $ 856 $ 329 $ 137 $ 1,955 Loans collectively evaluated for impairment 123,591 194,463 167,391 45,713 15,937 547,095 Total ending loans balance $ 123,933 $ 194,754 $ 168,247 $ 46,042 $ 16,074 $ 549,050 47 The following table presents loans individually evaluated for impairment by class of loans as of December 31: (Dollars in thousands) Unpaid Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment 1 Related Allowance Average Recorded Investment Interest Income Recognized 2022 Commercial $ 123 $ 124 $ — $ 124 $ — $ 327 $ 7 Commercial real estate 117 92 20 112 — 118 4 Residential real estate 733 166 518 683 — 758 31 Construction & land development — — — — — 123 — Consumer 127 6 121 127 4 130 8 Total impaired loans $ 1,101 $ 387 $ 659 $ 1,046 $ 4 $ 1,456 $ 50 2021 Commercial $ 354 $ 134 $ 208 $ 342 $ 208 $ 1,397 $ 23 Commercial real estate 433 233 59 292 9 1,945 85 Residential real estate 925 571 291 862 2 826 31 Construction & land development 646 330 — 330 — 330 — Consumer 141 23 119 142 3 132 8 Total impaired loans $ 2,499 $ 1,291 $ 677 $ 1,968 $ 222 $ 4,630 $ 147 1 Includes principal, accrued interest, unearned fees, and origination costs. The following table presents the aging of accruing past due and nonaccrual loans by class of loans as of December 31: Accruing Loans (Dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days + Past Due Nonaccrual Total Past Due and Nonaccrual Total Loans 2022 Commercial $ 129,270 $ 70 $ 3 $ — $ — $ 73 $ 129,343 Commercial real estate 231,693 — — — 92 92 231,785 Residential real estate 193,794 95 137 — 99 331 194,125 Construction & land development 55,286 32 — — — 32 55,318 Consumer 16,091 103 128 — 65 296 16,387 Total loans $ 626,134 $ 300 $ 268 $ — $ 256 $ 824 $ 626,958 2021 Commercial $ 123,698 $ 5 $ 17 $ 5 $ 208 $ 235 $ 123,933 Commercial real estate 194,615 — — — 139 139 194,754 Residential real estate 167,689 191 — — 367 558 168,247 Construction & land development 45,713 — — — 329 329 46,042 Consumer 15,863 171 — — 40 211 16,074 Total loans $ 547,578 $ 367 $ 17 $ 5 $ 1,083 $ 1,472 $ 549,050 Troubled Debt Restructurings The Company had troubled debt restructurings (“TDRs”) of $ 944 thousand as of December 31, 2022, with $ 4 thousand of specific reserves allocated to customers whose loan terms have been modified in TDRs. On December 31, 2022, $ 916 thousand of the loans classified as TDRs were performing in accordance with their modified terms. The remaining $ 28 thousand were classified as nonaccrual. On December 31, 2021, the Company had TDRs of $ 1.3 million, with $ 14 thousand of specific reserves allocated. 48 There were no l oan modifications considered TDRs completed during the year ended December 31, 2022.The following table represents the loan modification considered TDRs completed during the year ended December 31, 2021: (Dollars in thousands) Number Of Loans Restructured Pre-Modification Recorded Investment Post-Modification Recorded Investment 2021 Commercial 4 $ 960 $ 960 Commercial Real Estate 2 1,686 1,686 Residential Real Estate 1 159 159 Consumer 1 13 13 Total restructured loans 8 $ 2,818 $ 2,818 The loans restructured were modified by changing the monthly payment to interest only and extending the maturity dates. No principal reductions were made. No ne of the loans restructured in 2021 subsequently defaulted in 2022. Real Estate Loans in Foreclosure There was no other real estate owned on December 31, 2022, or 2021, respectively. Mortgage loans in the process of foreclosure were $ 17 thousand on December 31, 2022. There were no mortgage loans in the process of foreclosure on December 31, 2021. Credit Quality Indicators The Company categorizes commercial and commercial real estate loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes commercial loans with an outstanding balance greater than $ 500 thousand. This analysis is performed on an annual basis. The Company uses the following definitions for risk ratings: Pass. Loans classified as pass (Cash Secured, Exceptional, Acceptable, Monitor or Pass Watch) may exhibit a wide array of characteristics but at a minimum represent an acceptable risk to the Bank. Borrowers in this rating may have leveraged but acceptable balance sheet positions, satisfactory asset quality, stable to favorable sales and earnings trends, acceptable liquidity, and adequate cash flow. Loans are considered fully collectable and require an average amount of administration. While generally adhering to credit policy, these loans may exhibit occasional exceptions that do not result in undue risk to the Bank. Borrowers are generally capable of absorbing setbacks, financial and otherwise, without the threat of failure. Special Mention. Loans classified as special mention have a material weakness deserving of management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses jeopardizing the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, values, highly questionable, and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. Loans listed as not rated are either less than $ 500 thousand or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class was as follows on December 31: (Dollars in thousands) Pass Special Mention Substandard Doubtful Not Rated Total 2022 Commercial $ 119,353 $ 282 $ 7,927 $ — $ 1,781 $ 129,343 Commercial real estate 220,414 485 8,352 — 2,534 231,785 Construction & land development 40,640 6,655 — — 8,023 55,318 Total $ 380,407 $ 7,422 $ 16,279 $ — $ 12,338 $ 416,446 2021 Commercial $ 114,608 $ 5,959 $ 2,203 $ — $ 1,163 $ 123,933 Commercial real estate 176,547 7,313 10,186 — 708 194,754 Construction & land development 33,205 5,439 329 — 7,069 46,042 Total $ 324,360 $ 18,711 $ 12,718 $ — $ 8,940 $ 364,729 49 Management monitors the credit quality of residential real estate and consumer loans as homogenous groups. These loans are evaluated based on delinquency status and included in the past due table in this section. Nonperforming loans include loans past due 90 days and greater and loans on nonaccrual of interest status. Mortgage Servicing Rights For the years ended December 31, 2022 and 2021, the Company had outstanding MSRs of $ 621 thousand and $ 604 thousand, respectively. The capitalized additions of servicing rights is included in net gain on sale of loans on the consolidated statement of income. No valuation allowance was recorded on December 31, 2022 or 2021, as the fair value of the MSRs exceeded their carrying value. On December 31, 2022, the Company had $ 130.1 million residential mortgage loans with servicing retained as compared to $ 133.8 million with servicing retained on December 31, 2021. Total loans serviced for others approximated $ 137.5 million and $ 142.1 million on December 31, 2022, and 2021, respectively. The following summarizes mortgage servicing rights capitalized and amortized during each year: (Dollars in thousands) 2022 2021 Beginning of year $ 604 $ 488 Capitalized additions 97 224 Amortization ( 80 ) ( 108 ) Valuation allowance — — End of year $ 621 $ 604 NOTE 4 – PREMISES AND EQUIPMENT Premises and equipment consisted of the following on December 31: (Dollars in thousands) 2022 2021 Land and improvements $ 2,550 $ 2,550 Buildings and improvements 14,459 14,420 Furniture and equipment 6,922 6,621 Leasehold improvements 329 329 24,260 23,920 Accumulated depreciation 10,846 10,054 Premises and equipment, net $ 13,414 $ 13,866 Depreciation expense amounted to $ 818 thousand, $ 753 thousand for the years ended December 31, 2022, and 2021, respectively. NOTE 5 – LEASES Operating leases in which the Company is the lessee are recorded as operating lease Right of Use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated balance sheets. The Company does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. The Company elected to adopt the transition method, which uses a modified retrospective transition approach. ROU assets and operating lease liabilities are recognized as of the date of adoption based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the date of initial application. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in occupancy and equipment expense in the consolidated statements of income and other comprehensive income. The leases relate to bank branches with remaining lease terms of generally 3 to 5 years . Certain lease arrangements contain extension options which are typically 5 years at the then fair market rental rates. As these extension options are generally considered reasonably certain of exercise, they are included in the lease term. As of December 31, 2022, operating lease ROU assets were $ 316 thousand, and liabilities were $ 307 thousand. For the years ended December 31, 2022, and 2021, CSB recognized $ 107 thousand, and $ 105 thousand in operating lease cost respectively. The following table summarizes other information related to our operating leases: December 31, 2022 Weighted-average remaining lease term - operating leases in years 3.2 Weighted-average discount rate - operating leases 3.15 % 50 The following table presents aggregate lease maturities and obligations as of December 31, 2022: (Dollars in thousands) December 31, 2022 2023 $ 96 2024 105 2025 74 2026 46 2027 6 2028 and thereafter — Total lease payments 327 Less: interest 20 Present value of lease liabilities $ 307 NOTE 6 – INTEREST-BEARING DEPOSITS Interest-bearing deposits on December 31 were as follows: (Dollars in thousands) 2022 2021 Demand $ 241,227 $ 242,387 Savings 313,826 304,639 Time deposits: $250,000 and greater 28,839 26,213 Other 89,242 95,162 Total interest-bearing deposits $ 673,134 $ 668,401 On December 31, 2022, stated maturities of time deposits were as follows: (Dollars in thousands) 2023 $ 66,598 2024 41,712 2025 5,960 2026 1,934 2027 1,877 Total $ 118,081 NOTE 7 – BORROWINGS Short-term borrowings Short-term borrowings include overnight repurchase agreements, federal funds purchased, and short-term advances through the FHLB. The outstanding balances and related information for short-term borrowings are summarized as follows: (Dollars in thousands) 2022 2021 Balance at year-end $ 32,550 $ 36,530 Average balance outstanding 37,367 38,680 Maximum month-end balance 39,073 39,665 Weighted-average rate at year-end 0.80 % 0.12 % Weighted-average rate during the year 0.28 0.14 Average balances outstanding during the year represent daily average balances; average interest rates represent interest expenses divided by the related average balances. 51 The following table provides additional detail regarding the collateral pledged to secure repurchase agreements accounted for as secured borrowings: Remaining Contractual Maturity Overnight and Continuous (Dollars in thousands) December 31, 2022 December 31, 2021 Securities of U.S. Government agencies and mortgage-backed securities of government agencies pledged, fair value $ 32,775 $ 36,737 Repurchase agreements 32,550 36,530 Other borrowings The following table sets forth information concerning other borrowings: Maturity Range Weighted Average Interest Stated Interest Rate Range At December 31, (Dollars in thousands) From To Rate From To 2022 2021 Fixed-rate amortizing 4/1/24 6/1/37 1.94 % 1.16 % 2.01 % $ 2,461 $ 3,407 Maturities of other borrowings on December 31, 2022, are summarized as follows for the years ended December 31: (Dollars in thousands) Amount Weighted Average Rate 2023 $ 707 1.87 % 2024 488 1.94 2025 349 1.98 2026 262 1.98 2027 195 1.99 2028 and beyond 460 1.99 $ 2,461 1.94 % Monthly principal and interest payments, as well as 10 % – 20 % principal curtailments on the borrowings’ anniversary dates are due on the fixed-rate amortizing borrowings. FHLB borrowings are secured by a blanket collateral agreement. On December 31, 2022, the Company had the capacity to borrow an additional $ 122 million from the FHLB. NOTE 8 – INCOME TAXES Income tax expense was as follows: (Dollars in thousands) 2022 2021 Current $ 3,358 $ 2,698 Deferred ( 135 ) ( 131 ) Total income tax provision $ 3,223 $ 2,567 Effective tax rates were 19.5 % and 19.2 % for 2022 and 2021 and differ from the federal statutory rate of 21 % applied to income before taxes due to the following: (Dollars in thousands) 2022 2021 Expected provision using statutory federal income tax rate $ 3,473 $ 2,815 Effect of bond and loan tax-exempt income ( 113 ) ( 121 ) Bank owned life insurance income ( 141 ) ( 130 ) Other 4 3 Total income tax provision $ 3,223 $ 2,567 52 The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities on December 31 were as follows: (Dollars in thousands) 2022 2021 Allowance for loan losses $ 1,534 $ 1,698 Unrealized loss on securities 3,434 565 Other 35 50 Deferred tax assets 5,003 2,313 Premises and equipment ( 598 ) ( 683 ) Federal Home Loan Bank stock dividends ( 268 ) ( 376 ) Deferred loan fees ( 288 ) ( 267 ) Prepaid expenses ( 188 ) ( 157 ) Other ( 602 ) ( 505 ) Deferred tax liabilities ( 1,944 ) ( 1,988 ) Net deferred tax asset (liability) $ 3,059 $ 325 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 Statements of Income. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years prior to 2019 . NOTE 9 – EMPLOYEE BENEFITS The Company sponsors a contributory 401(k) profit-sharing plan (the “Plan”) covering substantially all employees who meet certain age and service requirements. The Plan permits investment in the Company’s common stock subject to various limitations and provides for discretionary profit sharing and matching contributions. The discretionary profit-sharing contribution is determined annually by the Board of Directors and amounted to 3 % in 2022 and 2021 of each eligible participant’s compensation. Beginning in 2018, the Plan provided for a 100 % Company match up to a maximum of 4 % of eligible compensation. The Company auto enrolls all eligible new hires into the Plan. Expense under the Plan amounted to approximately $ 735 thousand and $ 615 thousand for 2022 and 2021, respectively. The Company sponsors a non-qualified deferred compensation plan covering eligible officers. Expense under the plan amounted to $ 3 thousand and $ 0.6 thousand in 2022 and 2021, respectively. NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are primarily loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract amount of these instruments reflects the extent of involvement the Bank has in these financial instruments. The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Bank uses the same credit policies in making loan commitments as it does for on-balance sheet loans. The following financial instruments whose contract amount represents credit risk were outstanding on December 31: (Dollars in thousands) 2022 2021 Commitments to extend credit $ 266,422 $ 246,838 Letters of credit 1,376 964 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. Consumer commitments generally have fixed expiration dates and commercial commitments are generally due on demand and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral, obtained if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include residential real estate, accounts receivable, recognized inventory, property, plant and equipment, and income-producing commercial properties. 53 Letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company requires collateral supporting these commitments when deemed appropriate. The Company had $ 0 reserve for unfunded loan commitments as of December 31, 2022 and $ 128 thousand as of December 31, 2021. The decrease in the reserve for unfunded loan commitments was due to a construction project that was completed and fully drawn. NOTE 11 – RELATED-PARTY TRANSACTIONS In the ordinary course of business, loans are made by the Bank to executive officers, directors, their immediate family members, and their related business interests consistent with Federal Reserve Regulation O and GAAP definition of related parties. The following is an analysis of activity of related-party loans for the years ended December 31: (Dollars in thousands) 2022 2021 Balance at beginning of year $ 46 $ 84 New loans and advances 319 11 Repayments, including loans sold 33 49 Balance at end of year $ 332 $ 46 Deposits from executive officers, directors, their immediate family members, and their related business interests on December 31, 2022, and 2021 were approximately $ 6.2 million and $ 6.2 million. NOTE 12 – REGULATORY MATTERS The Company (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial performance. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines involving quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of Total capital, Tier 1 capital and Common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes as of December 31, 2022 and 2021, the Company and Bank met or exceeded all capital adequacy requirements to which they are subject. As of December 31, 2022, the most recent notification from federal and state banking agencies categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” an institution must maintain minimum Total risk-based, Tier 1 risk-based, Common equity Tier 1, and Tier 1 leverage ratios as set forth in the following tables. There are no known conditions or events since that notification that Management believes have changed the Bank’s category. 54 The actual capital amounts and ratios of the Company and Bank as of December 31 are presented in the following tables: Actual Minimum Required For Capital Adequacy Purposes Minimum Required To Be Well Capitalized Under Prompt Corrective Action (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio 2022 Total capital to risk-weighted assets Consolidated $ 110,949 16.0 % $ 55,339 8.0 % $ 69,174 10.0 % Bank 109,778 15.9 55,315 8.0 69,144 10.0 Tier 1 capital to risk-weighted assets Consolidated 104,111 15.1 41,505 6.0 55,339 8.0 Bank 102,940 14.9 41,486 6.0 55,315 8.0 Common equity tier 1 capital to risk-weighted assets Consolidated 104,111 15.1 31,128 4.5 44,963 6.5 Bank 102,940 14.9 31,115 4.5 44,943 6.5 Tier 1 leverage ratio Consolidated 104,111 8.8 47,370 4.0 59,213 5.0 Bank 102,940 8.7 47,358 4.0 59,197 5.0 2021 Total capital to risk-weighted assets Consolidated $ 101,999 17.5 % $ 46,615 8.0 % $ 58,268 10.0 % Bank 100,547 17.3 46,599 8.0 58,248 10.0 Tier 1 capital to risk-weighted assets Consolidated 94,712 16.3 34,961 6.0 46,615 8.0 Bank 93,260 16.0 34,949 6.0 46,599 8.0 Common equity tier 1 capital to risk-weighted assets Consolidated 94,712 16.3 26,221 4.5 37,875 6.5 Bank 93,260 16.0 26,212 4.5 37,861 6.5 Tier 1 leverage ratio Consolidated 94,712 8.3 45,441 4.0 56,801 5.0 Bank 93,260 8.2 45,433 4.0 56,791 5.0 The Company’s primary source of funds with which to pay dividends, are dividends received from the Bank. The payment of dividends by the Bank to the Company is subject to restrictions by its regulatory agencies. These restrictions generally limit dividends to current year net income and prior two-years ’ net retained earnings. Also, dividends may not reduce capital levels below the minimum regulatory requirements disclosed in the prior table. Under these provisions, on January 1, 2023, the Bank could dividend $ 23.3 million to the Company. The Company does not anticipate the financial need to obtain regulatory approval to pay dividends. Federal law prevents the Company from borrowing from the Bank unless loans are secured by specific obligations. Further, such secured loans are limited to an amount not exceeding ten percent of the Bank’s common stock and capital surplus. 55 NOTE 13 – CONDENSED PARENT COMPANY FINANCIAL INFORMATION A summary of condensed financial information of the parent company as of December 31, 2022, and 2021, and for each of the two years in the period ended December 31, 2022, follows: (Dollars in thousands) 2022 2021 CONDENSED BALANCE SHEETS ASSETS Cash deposited with subsidiary bank $ 805 $ 1,244 Investment in subsidiary bank 94,749 95,863 Securities available-for-sale 244 115 Other assets 162 143 TOTAL ASSETS $ 95,960 $ 97,365 LIABILITIES AND SHAREHOLDERS’ EQUITY Total liabilities $ 40 $ 50 Total shareholders’ equity 95,920 97,315 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 95,960 $ 97,365 (Dollars in thousands) 2022 2021 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME Dividends on securities $ 7 $ 3 Dividends from subsidiary 3,950 4,150 Unrealized (loss) gain on equity securities ( 3 ) 28 Total income 3,954 4,181 Operating expenses 407 341 Income before taxes and undistributed equity income of subsidiary 3,547 3,840 Income tax benefit ( 86 ) ( 65 ) Equity earnings in subsidiary, net of dividends 9,680 6,932 NET INCOME $ 13,313 $ 10,837 COMPREHENSIVE INCOME $ 2,519 $ 7,726 (Dollars in thousands) 2022 2021 CONDENSED STATEMENTS OF CASH FLOWS Cash flows from operating activities Net income $ 13,313 $ 10,837 Adjustments to reconcile net income to cash provided by operations: Equity earnings in subsidiary, net of dividends ( 9,680 ) ( 6,932 ) Change in other assets, liabilities ( 27 ) ( 22 ) Net cash provided by operating activities 3,606 3,883 Cash flows from investing activities Purchase of equity securities ( 131 ) — Net cash used in investing activities ( 131 ) — Cash flows from financing activities Cash dividends paid ( 3,526 ) ( 3,331 ) Purchase of treasury stock ( 388 ) ( 939 ) Net cash used in financing activities ( 3,914 ) ( 4,270 ) Decrease in cash ( 439 ) ( 387 ) Cash at beginning of year 1,244 1,631 Cash at end of year $ 805 $ 1,244 56 NOTE 14 – FAIR VALUE MEASUREMENTS The Company provides disclosures about assets and liabilities carried at fair value. The framework provides a fair value hierarchy prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. The three broad levels of the fair value hierarchy are described below: Level I: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets the Company has the ability to access. Level II: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices observable for the asset or liability; inputs derived principally from or corroborated by observable market data by or other means including certified appraisals. If the asset or liability has a specified (contractual) term, the Level II input must be observable for substantially the full term of the asset or liability. Level III: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The following table presents the assets reported on the consolidated statements of financial condition at their fair value on a recurring basis as of December 31, 2022, and December 31, 2021, by level within the fair value hierarchy. No liabilities were carried at fair value. As required by the accounting standards, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Equity securities with readily determinable values and U.S. Treasury Notes are valued at the closing price reported on the active market on which the individual securities are traded. Obligations of U.S. government agencies, mortgage-backed securities, asset-backed securities, obligations of states and political subdivisions and corporate bonds are valued at observable market data for similar assets. Equity securities without readily determinable values are carried at amortized cost, adjusted for impairment and observable price changes. (Dollars in thousands) Level I Level II Level III Total Assets: December 31, 2022 Securities available-for-sale U.S. Treasury securities $ 22,225 $ — $ — $ 22,225 U.S. Government agencies — 12,630 — 12,630 Mortgage-backed securities of government agencies — 68,890 — 68,890 Asset-backed securities of government agencies — 618 — 618 State and political subdivisions — 19,477 — 19,477 Corporate bonds — 26,229 — 26,229 Total available-for-sale securities $ 22,225 $ 127,844 $ — $ 150,069 Equity securities $ 198 $ — $ — $ 198 Assets: December 31, 2021 Securities available-for-sale U.S. Treasury securities $ 4,972 $ — $ — $ 4,972 U.S. Government agencies — 13,672 — 13,672 Mortgage-backed securities of government agencies — 77,774 — 77,774 Asset-backed securities of government agencies — 753 — 753 State and political subdivisions — 23,331 — 23,331 Corporate bonds — 11,206 — 11,206 Total available-for-sale securities $ 4,972 $ 126,736 $ — $ 131,708 Equity securities $ 69 $ — $ — $ 69 57 There were no assets measured on a nonrecurring basis as of December 31, 2022, and 2021, respectively. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral securing the impaired loans include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included unobservable inputs and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs. NOTE 15 – FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of recognized financial instruments carried at amortized cost as of December 31 were as follows: 2022 Carrying Total Fair (Dollars in thousands) Value Level I Level II Level III Value Financial assets Securities held-to-maturity $ 247,401 $ 11,617 $ 200,337 $ — $ 211,954 Loans held for sale 52 55 — — 55 Net loans 620,333 — — 600,720 600,720 Mortgage servicing rights 621 — — 621 621 Financial liabilities Deposits $ 1,023,417 $ 905,335 $ — $ 114,478 $ 1,019,813 Other borrowings 2,461 — — 2,321 2,321 2021 Carrying Total Fair (Dollars in thousands) Value Level I Level II Level III Value Financial assets Securities held-to-maturity $ 174,808 $ 12,693 $ 161,835 $ — $ 174,528 Loans held for sale 231 238 — — 238 Net loans 541,536 — — 548,317 548,317 Mortgage servicing rights 604 — — 604 604 Financial liabilities Deposits $ 1,002,747 $ 881,372 $ — $ 121,005 $ 1,002,377 Other borrowings 3,407 — — 3,431 3,431 Other financial instruments carried at amortized cost include cash and cash equivalents, restricted stock, bank-owned life insurance, accrued interest receivable, short-term borrowings, and accrued interest payable, all of which have a level 1 fair value that approximates their carrying value. 58 NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE LOSS The following table presents the changes in accumulated other comprehensive (loss) income by component net of tax for the years ended December 31, 2022, and 2021: (Dollars in thousands) Pretax Tax Effect After-Tax BALANCE AS OF DECEMBER 31, 2020 $ 1,249 $ ( 263 ) $ 986 Unrealized holding loss on available-for-sale securities arising during the period ( 2,050 ) 432 ( 1,618 ) Unrealized loss on securities transferred from available-for-sale to held to maturity ( 1,976 ) 415 ( 1,561 ) Amortization of held-to-maturity discount resulting from transfer 86 ( 18 ) 68 Total other comprehensive loss ( 3,940 ) 829 ( 3,111 ) BALANCE AS OF DECEMBER 31, 2021 $ ( 2,691 ) $ 566 $ ( 2,125 ) Unrealized holding loss on available-for-sale securities arising during the period ( 13,952 ) 2,930 ( 11,022 ) Amortization of held-to-maturity discount resulting from transfer 289 ( 61 ) 228 Total other comprehensive loss ( 13,663 ) 2,869 ( 10,794 ) BALANCE AS OF DECEMBER 31, 2022 $ ( 16,354 ) $ 3,435 $ ( 12,919 ) NOTE 17 – CONTINGENT LIABILITIES In the normal course of business, the Company is subject to pending and threatened legal actions. Although, the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions, management believes that the outcome of any or all such actions will not have a material adverse effect on the results of operations or shareholders’ equity of the Company. The Company has an employment agreement with an officer. Upon the occurrence of certain types of termination of employment, the Company may be required to make specified severance payments if termination occurs within a specified period of time, generally two years from the date of the agreement, or pursuant to certain change in control transactions. NOTE 18– QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of selected quarterly financial data (unaudited) for the years ended December 31: (Dollars in thousands, except per share data) Interest Income Net Interest Income Net Income Basic and Diluted Earnings Per Share 2022 First quarter $ 7,242 $ 6,865 $ 2,701 $ 0.99 Second quarter 8,003 7,630 3,209 1.18 Third quarter 9,156 8,560 3,650 1.35 Fourth quarter 10,418 9,268 3,753 1.39 2021 First quarter $ 7,581 $ 7,008 $ 2,885 $ 1.05 Second quarter 7,014 6,471 2,745 1.00 Third quarter 7,805 7,325 2,901 1.06 Fourth quarter 7,129 6,713 2,306 0.85 59 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.