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, 2023. 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, 2023. Eddie L. Steiner Paula J. Meiler President, Senior Vice President, Chief Executive Officer Chief Financial Officer 31 REP ORT OF INDEPENDENT REGISTERED 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, 2023 and 2022; 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, 2023 and 2022, 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. 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 . 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. 32 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. Allowance for Credit Losses (ACL) – Qualitative Adjustments The Company’s loan portfolio totaled $701 million as of December 31, 2023, and the associated ACL was $6.6 million. As discussed in Notes 1 and 3 to the consolidated financial statements, determining the amount of the ACL requires significant judgment about the expected future losses, which is based on a baseline lifetime loss rate, calculated using a weighted-average remaining maturities method, which is then adjusted for current qualitative conditions and reasonable and supportable forecasts. Management applies these qualitative adjustments to the baseline lifetime loss rate to reflect changes in the current and forecasted environment, both internal and external, that are different from the conditions that existed during the historical loss calculation period. We identified these qualitative adjustments within the ACL as critical audit matters because they involve a high degree of subjectivity. While the determination of these qualitative adjustments includes analysis of observable data over the historical loss period, the judgments required to assess the directionality and magnitude of adjustments is highly subjective. Auditing these complex judgments and assumptions involved especially challenging auditor judgment due to the nature of audit evidence and the nature and extent of effort required to address these matters. The primary procedures we performed to address this critical audit matter included: • Testing the design, implementation, and operating effectiveness of internal controls over the calculation of the allowance for credit losses, including the qualitative factor adjustments. • Testing the completeness and accuracy of the significant data points that management uses in their evaluation of the qualitative adjustments. • Testing the anchoring calculation that management completes to properly align the magnitude of the adjustments with the Company's historical loss data. • Evaluating the directional consistency and reasonableness of management's conclusions regarding basis points applied (whether positive or negative) based on the trends identified in the underlying data. • Testing the mathematical accuracy of the application of the qualitative adjustments to the loan segments within the ACL calculation. We have served as the Company’s auditor since 2005. Cranberry Township, Pennsylvania March 15, 2024 33 CONSOLIDATED B ALANCE SHEETS December 31, 2023 and 2022 (Dollars in thousands, except per share data) 2023 2022 ASSETS Cash and cash equivalents Cash and due from banks $ 24,463 $ 19,911 Interest-earning deposits in other banks 39,614 66,509 Total cash and cash equivalents 64,077 86,420 Securities Available-for-sale, at fair value 140,080 150,069 Held-to-maturity; fair value of $ 194,730 in 2023 and $ 211,954 in 2022 ($ 0 credit loss allowance) 226,279 247,401 Equity securities 259 244 Restricted stock, at cost 1,535 3,430 Total securities 368,153 401,144 Loans held for sale — 52 Loans 701,404 627,171 Less allowance for credit losses 6,607 6,838 Net loans 694,797 620,333 Premises and equipment, net 13,002 13,414 Goodwill 4,728 4,728 Bank-owned life insurance 25,410 24,709 Accrued interest receivable and other assets 8,522 8,308 TOTAL ASSETS $ 1,178,689 $ 1,159,108 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits Noninterest-bearing $ 301,697 $ 350,283 Interest-bearing 725,730 673,134 Total deposits 1,027,427 1,023,417 Short-term borrowings 35,843 32,550 Other borrowings 1,754 2,461 Allowance for credit losses on off-balance sheet commitments 736 — Accrued interest payable and other liabilities 4,990 4,760 Total liabilities 1,070,750 1,063,188 SHAREHOLDERS’ EQUITY Common stock, $ 6.25 par value. Authorized 9,000,000 shares; issued 2,980,602 shares; and outstanding 2,669,938 shares in 2023 and 2,707,576 in 2022 18,629 18,629 Additional paid-in capital 9,815 9,815 Retained earnings 97,297 86,502 Treasury stock at cost: 310,664 shares in 2023, 273,026 shares in 2022 ( 7,532 ) ( 6,107 ) Accumulated other comprehensive loss ( 10,270 ) ( 12,919 ) Total shareholders’ equity 107,939 95,920 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,178,689 $ 1,159,108 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 34 CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2023 and 2022 (Dollars in thousands, except per share data) 2023 2022 INTEREST AND DIVIDEND INCOME Loans, including fees $ 35,707 $ 26,015 Taxable securities 7,803 6,665 Nontaxable securities 399 436 Other 2,107 1,703 Total interest and dividend income 46,016 34,819 INTEREST EXPENSE Deposits 9,499 2,335 Short-term borrowings 336 106 Other borrowings 40 55 Total interest expense 9,875 2,496 NET INTEREST INCOME 36,141 32,323 CREDIT LOSS EXPENSE Provision (recovery) for credit loss expense - loans 198 ( 895 ) Provision for credit loss expense - off-balance sheet commitments 244 — Total provision (recovery) for credit loss expense 442 ( 895 ) NET INTEREST INCOME AFTER CREDIT LOSS EXPENSE 35,699 33,218 NONINTEREST INCOME Service charges on deposit accounts 1,209 1,174 Trust services 1,013 954 Debit card interchange fees 2,107 2,105 Credit card fees 701 677 Gain on sale of loans, net 161 331 Earnings on bank owned life insurance 702 674 Unrealized gain (loss) on equity securities 15 ( 3 ) Other income 836 799 Total noninterest income 6,744 6,711 NONINTEREST EXPENSES Salaries and employee benefits 13,673 13,446 Occupancy expense 1,138 1,085 Equipment expense 792 781 Professional and director fees 1,471 1,551 Financial institutions tax 767 779 Marketing and public relations 549 551 Software expense 1,651 1,429 Debit card expense 682 734 FDIC insurance expense 514 345 Other expenses 2,823 2,692 Total noninterest expenses 24,060 23,393 INCOME BEFORE INCOME TAXES 18,383 16,536 Federal income tax provision 3,627 3,223 NET INCOME $ 14,756 $ 13,313 Weighted average shares outstanding - basic and diluted 2,679,902 2,714,045 Earnings per share - basic and diluted $ 5.51 $ 4.91 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 35 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2023 and 2022 (Dollars in thousands) 2023 2022 Net income $ 14,756 $ 13,313 Other comprehensive income (loss) Unrealized gain (loss) on available-for-sale securities arising during the period 3,168 ( 13,952 ) Amortization of held-to-maturity discount resulting from transfer 187 289 Income tax effect at 21 % ( 706 ) 2,869 Other comprehensive income (loss) 2,649 ( 10,794 ) Total comprehensive income $ 17,405 $ 2,519 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 36 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDE RS’ EQUITY Years Ended December 31, 2023 and 2022 (Dollars in thousands, except per share data) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total 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 Net income — — 14,756 — — 14,756 Cumulative effect of adoption of ASU 2016-13 — — 52 — — 52 Other comprehensive income — — — — 2,649 2,649 Purchase of 37,638 treasury shares — — — ( 1,425 ) — ( 1,425 ) Cash dividends declared, $ 1.50 per share — — ( 4,013 ) — — ( 4,013 ) BALANCE AT DECEMBER 31, 2023 $ 18,629 $ 9,815 $ 97,297 $ ( 7,532 ) $ ( 10,270 ) $ 107,939 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 37 CONSOLIDATED STATEM ENTS OF CASH FLOWS Years Ended December 31, 2023 and 2022 (Dollars in thousands) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 14,756 $ 13,313 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises, equipment and software 921 960 Deferred income tax expense (benefit) 293 ( 135 ) Provision for (recovery of) credit losses 198 ( 895 ) Gain on sale of loans, net ( 161 ) ( 331 ) Security amortization, net of accretion 828 1,066 Secondary market loan sale proceeds 4,891 10,100 Originations of secondary market loans held-for-sale ( 4,725 ) ( 9,034 ) Earnings on bank-owned life insurance ( 702 ) ( 674 ) Effects of changes in operating assets and liabilities: Net deferred loan fees (costs) 138 ( 106 ) Accrued interest receivable ( 350 ) ( 874 ) Accrued interest payable 253 61 Other assets and liabilities ( 715 ) 940 Net cash provided by operating activities $ 15,625 $ 14,391 CASH FLOWS FROM INVESTING ACTIVITIES Securities: Proceeds from repayments, available-for-sale $ 17,102 $ 15,917 Proceeds from repayments, held-to-maturity 20,993 21,827 Purchases, available-for-sale ( 4,457 ) ( 48,885 ) Purchases, held-to-maturity — ( 94,541 ) Purchases, equity securities — ( 131 ) Redemption of restricted stock 1,895 1,184 Loan (originations) and payments, net ( 74,242 ) ( 78,450 ) Purchases of premises and equipment ( 424 ) ( 366 ) Purchases of software ( 2 ) ( 13 ) Sale of property 9 — Net cash used in investing activities $ ( 39,126 ) $ ( 183,458 ) These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 38 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, 2023 and 2022 (Dollars in thousands) 2023 2022 CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits $ 4,010 $ 20,670 Net change in short-term borrowings 3,293 ( 3,980 ) Repayment of other borrowings ( 707 ) ( 946 ) Cash dividends paid ( 4,013 ) ( 3,526 ) Purchase of treasury stock ( 1,425 ) ( 388 ) Net cash provided by financing activities $ 1,158 $ 11,830 NET DECREASE IN CASH AND CASH EQUIVALENTS ( 22,343 ) ( 157,237 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 86,420 243,657 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 64,077 $ 86,420 SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest $ 9,622 $ 2,435 Income taxes 4,165 2,710 These consolidated financial statements should be read in connection with the accompanying notes to the consolidated financial statements. 39 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 credit 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, 2023 or December 31, 2022. 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 amounts 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. Held-to-maturity securities are recorded at amortized cost. Securities transferred from AFS to HTM are carried at their fair value on the date of transfer. On December 31, 2023, 61 % 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. 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. 40 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 credit 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 individually evaluated, or payments are past due over 90 days. All interest accrued, but not collected for loans placed on nonaccrual or charged-off is reversed and charged 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 CREDIT LOSSES Loan and Leases Policy - In connection with our adoption of ASU 2016-13, we made changes to our loan portfolio segments to align with the methodology applied in determining the allowance under CECL. Refer to Note 3 Loans, for further discussion of these portfolio segments. In addition to our existing segments, our new segmentation breaks out commercial lessors of buildings, and consumer indirect loans as well as separating consumer mortgage loans from home equity line of credit loans. The ACL is a valuation reserve established and maintained by charges against operating 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 (adjusted for expected prepayment), 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 that share similar risk characteristics and evaluation of individual loans that do not share risk characteristics with other loans. The ACL for homogeneous loans is calculated using a life-time loss rate methodology with both a quantitative and a qualitative analysis that is applied on a quarterly basis. The ACL model is comprised of eight distinct portfolio segments: 1) Commercial and Industrial or C&I, 2) Commercial Real Estate, or CRE, 3) Commercial Lessors of Buildings, 4) Construction, 5) Consumer Mortgage, 6) Home Equity Line of Credit or HELOC, 7) Consumer Installment, and 8) Consumer Indirect loans. Each segment has a distinct set of risk characteristics monitored by management. Historical credit loss experience is the basis for the estimation of expected credit losses. We apply 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 the unemployment forecast and management judgment. For periods beyond our two-year reasonable and supportable forecast, we revert to the historical loss rate. The qualitative adjustments for current conditions are based upon changes in lending policies and practices, change in economic conditions, change in nature of the portfolio, experience and ability of lending staff, problem loan trends, quality of the bank’s loan review system, value of underlying collateral for collateral dependent loans, 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. A similar process is employed to calculate a reserve assigned to the portion of off-balance sheet commitments that we expect to fund, specifically unfunded loan commitments, and any needed reserve is recorded in other liabilities. The ACL for individual 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 commercial loans greater than $ 500 thousand 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, and 3) when it is determined by management that a loan does not share similar risk characteristics with other loans. Collateral values are discounted to consider disposal 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. Although we believe our process for determining the ACL appropriately considers all the factors that would likely result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual losses are higher than management estimates, additional provision for credit losses could be required and could adversely affect our earnings or financial position in future periods. 41 The ACL for off-balance sheet commitments is estimated on the likelihood and amount of funding under the same criteria used for loans under the ACL. The ACL for off-balance sheet commitments is recorded in other liabilities in the Consolidated Balance Sheets. HTM Securities - The allowance for HTM debt securities is estimated using a CECL methodology. Any expected credit loss is recorded through the ACL on HTM securities and is deducted from the amortized cost basis on the balance sheet. The majority of HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. Therefore there is no credit loss expectation on these securities. AFS Securities - The AFS securities portfolio is evaluated on a quarterly basis for indicators of impairment. Management reviews the amount of unrealized loss, the credit rating history, market trends of similar security classes, time remaining to maturity, and the source of principal and interest payments to identify securities which could potentially be impaired. For those securities that management intends to sell before the recovery of their amortized cost basis, the difference between fair value and amortized cost is considered to be impaired and is recognized in provision for credit loss expense. For those AFS securities that management does not intend to sell prior to expected recovery of the amortized cost basis, the credit portion of the impairment is recognized through the ACL on AFS securities, while the noncredit portion is recognized through the accumulated other comprehensive income or loss included in shareholders' equity. Non-credit related impairment is a result of other factors, including changes in interest rates. ALLOWANCE FOR LOAN LOSSES Under the incurred loss methodology in 2022 and prior years, the allowance for loan losses was established as losses were estimated to have occurred through a provision for loan losses charged to income. Loan losses were charged against the allowance when management believed the uncollectability of a loan balance was confirmed. Subsequent recoveries, if any, were credited to the allowance. The allowance for loan losses was evaluated on a regular basis by management and was 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 was inherently subjective as it required estimates that were susceptible to significant revision as more information became available. 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 credit 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, 2023 or 2022. 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 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 2023 or 2022. 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. 42 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 $ 196 thousand, $ 178 thousand for the years ended 2023 and 2022, respectively. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated tax return. Deferred income taxes are recorded 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. The unrealized loss on securities transferred from AFS to HTM at the date of transfer, is amortized over the remaining life of the securities as part 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. 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) 2023 2022 Weighted average common shares 2,980,602 2,980,602 Average treasury shares ( 300,700 ) ( 266,557 ) Total weighted average common shares outstanding basic and diluted 2,679,902 2,714,045 Net income $ 14,756 $ 13,313 Earnings per share, basic and diluted 5.51 4.91 SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date these financial statements were issued. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic740): Improvements to Income Tax Disclosure . This new guidance is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this Update address investor 43 requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This Update also includes certain other amendments to improve the effectiveness of income tax disclosures. It is effective for public business entities for annual periods beginning after December 15, 2024. This update is not expected to have a significant impact on the Company's financial statements. ACCOUNTING PRONOUNCEMENTS ADOPTED IN 2023 In June 2016, the FASB issued ASU No. 2016-13, " Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires businesses and other organizations to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans and held-to-maturity securities, net investments in leases, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell the debt securities. This guidance became effective on January 1, 2023 for the Bank. The results reported for periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards. The Bank adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans and held-to-maturity debt securities, available-for-sale debt securities and unfunded commitments. On January 1, 2023, the Bank recorded a cumulative effect increase to retained earnings of $ 52 thousand, net of tax, of which $ 442 thousand related to loans, offset by $ 390 thousand related to unfunded commitments, net of tax. There was no allowance for credit losses recorded for either available-for-sale or held-to-maturity debt securities. See Note 3 for further discussion on the adoption of CECL. The Bank adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for- sale debt securities on 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 date of adoption. The Bank expanded the pooling utilized under the legacy incurred loss method to include additional segmentation based on risk. The impact of the change from the incurred loss model to the current expected credit loss model is detailed below: January 1, 2023 (Dollars in thousands) Pre-adoption Adoption Impact As Reported Assets: ACL on loans Commercial and industrial $ 1,110 $ 658 $ 1,768 Commercial real estate 2,760 ( 541 ) 2,219 Commercial lessors of buildings — 974 974 Construction 803 ( 515 ) 288 Consumer mortgage 1,268 ( 580 ) 688 Home equity line of credit — 201 201 Consumer installment 233 ( 183 ) 50 Consumer indirect — 91 91 Unallocated 664 ( 664 ) — Total allowance for credit losses - loans 6,838 ( 559 ) 6,279 Liabilities: ACL for off-balance sheet commitments — 493 493 Total allowance for credit losses $ 6,838 ( 66 ) $ 6,772 The following table presents the Bank's loan portfolio, prior to the adoption of ASC 326, by category of loans and the impact of the change from the adoption of the standard: 44 (Dollars in thousands) December 31, 2022 Adoption Impact Post Adoption January 1, 2023 Commercial and industrial $ 129,343 $ ( 2,209 ) $ 127,134 Commercial real estate 231,785 ( 70,625 ) 161,160 Commercial lessors of buildings — 83,728 83,728 Construction 55,318 ( 10,452 ) 44,866 Consumer mortgage 194,125 ( 44,338 ) 149,787 Home equity line of credit — 44,243 44,243 Consumer installment 16,387 ( 6,730 ) 9,657 Consumer indirect — 6,383 6,383 626,958 — 626,958 Gross loans prior to deferred fees Deferred loan costs, net 213 — 213 Allowance for credit losses ( 6,838 ) 559 ( 6,279 ) Total net loans $ 620,333 $ 559 $ 620,892 In January 2020, the FASB issued 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 rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. This Update has been adopted and did no t have a significant impact on the Company’s financial statements. In March 2022, the FASB issued 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. The guidance also requires disclosures about the performance of modified loans to borrowers experiencing financial difficulty in the 12 months following the modification. 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. This guidance has been adopted as of January 1, 2023 , however, there have been no reportable loan modifications during the year ended December 31, 2023. 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. 45 NOTE 2 – SECURITIES Securities consisted of the following on December 31: (Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value 2023 Available-for-sale U.S. Treasury securities $ 18,110 $ — $ ( 421 ) $ — $ 17,689 U.S. Government agencies 14,000 — ( 848 ) — 13,152 Mortgage-backed securities of government agencies 72,279 98 ( 7,332 ) — 65,045 Asset-backed securities of government agencies 548 — ( 25 ) — 523 State and political subdivisions 17,476 — ( 890 ) — 16,586 Corporate bonds 29,135 6 ( 2,056 ) — 27,085 Total available-for-sale 151,548 104 ( 11,572 ) — 140,080 Held-to-maturity U.S. Treasury securities 10,305 — ( 798 ) — 9,507 Mortgage-backed securities of government agencies 213,425 — ( 30,534 ) — 182,891 State and political subdivisions 2,549 2 ( 219 ) — 2,332 Total held-to-maturity 226,279 2 ( 31,551 ) — 194,730 Equity securities 185 74 — — 259 Restricted stock 1,535 — — — 1,535 Total securities $ 379,547 $ 180 $ ( 43,123 ) $ — $ 336,604 2022 Available-for-sale U.S. Treasury securities $ 23,194 $ — $ ( 969 ) N/A $ 22,225 U.S. Government agencies 13,999 — ( 1,369 ) N/A 12,630 Mortgage-backed securities of government agencies 77,677 72 ( 8,859 ) N/A 68,890 Asset-backed securities of government agencies 633 — ( 15 ) N/A 618 State and political subdivisions 20,462 — ( 985 ) N/A 19,477 Corporate bonds 28,740 — ( 2,511 ) N/A 26,229 Total available-for-sale 164,705 72 ( 14,708 ) N/A 150,069 Held-to-maturity U.S. Treasury securities 12,753 — ( 1,136 ) N/A 11,617 Mortgage-backed securities of government agencies 232,068 — ( 34,051 ) N/A 198,017 State and political subdivisions 2,580 1 ( 261 ) N/A 2,320 Total held-to-maturity 247,401 1 ( 35,448 ) N/A 211,954 Equity securities 185 59 — N/A 244 Restricted stock 3,430 — — N/A 3,430 Total securities $ 415,721 $ 132 $ ( 50,156 ) N/A $ 365,697 46 The amortized cost and fair value of debt securities on December 31, 2023, 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 $ 18,297 $ 17,833 Due after one through five years 46,446 44,138 Due after five through ten years 18,931 17,157 Due after ten years 67,874 60,952 Total debt securities available-for-sale $ 151,548 $ 140,080 Held-to-maturity Due in one year or less $ 2,497 $ 2,418 Due after one through five years 5,164 4,814 Due after five through ten years 4,905 4,359 Due after ten years 213,713 183,139 Total debt securities held-to-maturity $ 226,279 $ 194,730 Securities with a carrying value of approximately $ 126 million and $ 110 million were pledged on December 31, 2023, and 2022 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 $ 1.0 million and $ 2.9 million on December 31, 2023, and 2022, respectively. Federal Reserve Bank stock was $ 471 thousand on December 31, 2023, and 2022. There were no proceeds from sales of debt securities for the years ended December 31, 2023 and 2022. Unrealized gains and (losses) recognized on equity securities on the consolidated statements of income were $ 15 thousand and $( 3 ) thousand, respectively for the years ended December 31, 2023 and 2022. The Bank monitors the credit quality of held-to-maturity debt securities primarily through utilizing their credit rating. The Bank monitors the credit rating on a quarterly basis. There are no nonperforming held-to-maturity securities. As of December 31, 2023, no ACL was required for any held-to-maturity security. The majority of the securities are explicitly or implicitly guaranteed by the United States government, and any estimate of expected credit losses would be insignificant to the Bank. The following table summarizes the amortized cost of held-to maturity debt securities at December 31, 2023, aggregated by credit quality indicator: (Dollars in thousands) U.S. Treasury securities Mortgage- backed securities of government agencies State and political subdivisions December 31, 2023 Credit rating: AAA / AA / A $ 10,305 $ 213,425 $ 2,549 BBB / BB / B — — — Lower than B — — — Non-rated — — — Total $ 10,305 $ 213,425 $ 2,549 47 The following table presents gross unrealized losses, fair value of securities, aggregated by investment category, and length of time individual available-for-sale securities have been in a continuous unrealized loss position, on December 31 2023: 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 2023 Available-for-sale U.S. Treasury securities $ — $ — $ ( 421 ) $ 17,689 $ ( 421 ) $ 17,689 U.S. Government agencies — — ( 848 ) 13,152 ( 848 ) 13,152 Mortgage-backed securities of government agencies ( 3 ) 1,909 ( 7,329 ) 52,144 ( 7,332 ) 54,053 Asset-backed securities of government agencies — — ( 25 ) 523 ( 25 ) 523 State and political subdivisions ( 28 ) 1,783 ( 862 ) 14,263 ( 890 ) 16,046 Corporate bonds — — ( 2,056 ) 26,586 ( 2,056 ) 26,586 Total temporarily impaired available-for-sale securities $ ( 31 ) $ 3,692 $ ( 11,541 ) $ 124,357 $ ( 11,572 ) $ 128,049 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 There were 126 available-for-sale securities in an unrealized loss position on December 31, 2023, 114 of which were in a continuous loss position for twelve (12) months or more. Each quarter the Company conducts a comprehensive security-level impairment assessment on the securities portfolio. Management believes the Company will fully recover the cost of these securities. Unrealized losses on the Company’s fixed-rate debt securities are a result of interest rate increases. U.S. Treasury securities and investments in securities of U.S. government sponsored agency bonds comprise $ 96 million of total AFS securities. The remaining $ 44 million of non-agency debt securities is made up of Corporate Bonds and debt securities of State and Political Subdivisions. For non-agency debt securities, the Company verified the current credit ratings remain above investment grade. Non-rated debt securities total $ 10 million. Annually, management reviews the credit profile of each non-rated issue and assesses whether any impairment to the contractually obligated cash flow is likely to occur. Based on these reviews, management has concluded the underlying creditworthiness for each security remains sufficient to maintain required payment obligations and, therefore, no allowance for credit losses has been recorded. Management believes the value will recover as the securities approach maturity or market interest rates decline. 48 NOTE 3 – LOANS Loans consisted of the following on December 31: (Dollars in thousands) 2023 Commercial and industrial $ 152,125 Commercial real estate 190,702 Commercial lessors of buildings 82,687 Construction 49,214 Consumer mortgage 166,891 Home equity line of credit 43,269 Consumer installment 10,636 Consumer indirect 5,957 Total loans 701,481 Allowance for credit losses ( 6,607 ) Deferred loan fees, net ( 77 ) Net Loans $ 694,797 (Dollars in thousands) 2022 Commercial $ 129,343 Commercial real estate 231,785 Residential real estate 194,125 Construction & land development 55,318 Consumer 16,387 Total loans 626,958 Allowance for loan losses ( 6,838 ) Deferred loan costs, net 213 Net loans * $ 620,333 * See Note 1 for reclassification of balances due to the adoption of ASC 326. 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 and industrial 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 and industrial 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, 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 49 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. 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 three largest industries compared to total loans at December 31, 2023, included $ 68 million, or 10 % of total loans to lessors of non-residential buildings; $ 40 million, or 6 %, of total loans to animal food producers; and $ 22 million, or 3 % of total loans to lessors of residential buildings. The Company has less than 1 % of total loans outstanding to loans secured by commercial office space. 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 and interest payments, and the adequacy of the collateral received. Allowance for Credit Losses The following table details activity in the allowance for credit losses ("ACL") by portfolio segment for the years ended December 31, 2023, and 2022. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. During 2023, ACL balances were affected by the adoption of ASC 326 which changed the methodology for calculating the allowance for credit losses. These changes resulted in the addition of three new loan categories. In addition to the new methodology changes, the decrease in the commercial real estate provision was primarily related to the payoff of one large loan relationship with a specific allocation and the improvement of other specifically evaluated loans. The decrease in the provision for commercial and industrial loans was primarily due to the recovery of a prior loan charge off. The increase in the provision for commercial lessors of buildings relates to the increase in loans graded special mention. The increase in provision for consumer mortgages primarily relates to increased loan volume. The increase in the consumer indirect category is due to the increase in charge-offs in this portfolio. 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. Summary of Allowance for Credit Losses on Loans The following table details activity in the allowance for credit losses on loans during the year ended December 31 2023: 50 (Dollars in thousands) Beginning ALL Balance Impact of Adopting ASC 326 Charge-offs Recoveries Provisions (Recovery) Ending ACL Balance December 31, 2023 Commercial and industrial $ 1,110 $ 658 $ — $ 181 $ ( 212 ) $ 1,737 Commercial real estate 2,760 ( 541 ) — 9 ( 591 ) 1,637 Commercial lessors of buildings — 974 — — 226 1,200 Construction 803 ( 515 ) — — 45 333 Consumer mortgage 1,268 ( 580 ) — 1 418 1,107 Home equity line of credit — 201 — — 87 288 Consumer installment 233 ( 183 ) ( 46 ) 20 52 76 Consumer indirect — 91 ( 66 ) 31 173 229 Unallocated 664 ( 664 ) — — — — Total $ 6,838 $ ( 559 ) $ ( 112 ) $ 242 $ 198 $ 6,607 Summary of Allowance for Loan Losses The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2022: (Dollars in thousands) Beginning ALL Balance (Recovery) Provision for Loan Losses Charge-offs Recoveries Net (Charge-offs) Recoveries Ending ALL Balance December 31, 2022 Commercial $ 1,240 $ 47 $ ( 227 ) $ 50 $ ( 177 ) $ 1,110 Commercial real estate 2,838 ( 68 ) ( 13 ) 3 ( 10 ) 2,760 Residential real estate 992 273 — 3 3 1,268 Construction & land development 1,380 ( 889 ) — 312 312 803 Consumer 421 ( 175 ) ( 48 ) 35 ( 13 ) 233 Unallocated 747 ( 83 ) 664 Total $ 7,618 $ ( 895 ) $ ( 288 ) $ 403 $ 115 $ 6,838 Age Analysis of Past-Due Loans Receivable and Nonperforming Loans The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past-due status. (Dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90 Days + Past Due Total Past Due Total Loans December 31, 2023 Commercial and industrial $ 151,964 $ 111 $ 50 $ — $ 161 $ 152,125 Commercial real estate 190,702 — — — — 190,702 Commercial lessors of buildings 82,687 — — — — 82,687 Construction 49,214 — — — — 49,214 Consumer mortgage 166,411 307 173 — 480 166,891 Home equity line of credit 42,955 33 281 — 314 43,269 Consumer installment 10,602 25 9 — 34 10,636 Consumer indirect 5,821 52 84 — 136 5,957 Total Loans $ 700,356 $ 528 $ 597 $ — $ 1,125 $ 701,481 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 90 days still accruing interest as of December 31, 2023: 51 (Dollars in thousands) Nonaccrual with no ACL Nonaccrual with ACL Total Nonaccrual Loans Past Due Over 90 Days Still Accruing Total Nonperforming December 31, 2023 Commercial and industrial $ 59 $ — $ 59 $ — $ 59 Commercial real estate 62 — 62 — 62 Commercial lessors of buildings 15 — 15 — 15 Construction — — — — — Consumer mortgage 172 — 172 — 172 Home equity line of credit — — — — — Consumer installment 49 — 49 — 49 Consumer indirect 39 — 39 — 39 Total Loans $ 396 $ — $ 396 $ — $ 396 Interest income recognized on nonaccrual loans as of December 31, 2023 was $ 2 thousand on commercial real estate loans and $ 33 thousand on consumer mortgage loans. Several consumer mortgage loans on nonaccrual are at an amortized cost basis of $ 0 and all payments are being recognized as interest income when received. The following table presents the aging of accruing past due and nonaccrual loans by class of loans as of December 31, 2022: 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 December 31, 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 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 exposure 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. Based on the most recent analysis performed, the following tables present the recorded investment in non-homogeneous loans by internal risk rating system: 52 Term Loans Amortized Costs Basis by Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Total December 31, 2023 Commercial and industrial: Pass $ 32,037 $ 25,996 $ 12,196 $ 5,207 $ 3,388 $ 7,112 $ 45,423 $ — $ 131,359 Special mention 76 225 522 33 33 65 3,872 — 4,826 Substandard 782 2,968 1,021 1,017 106 1,416 8,630 — 15,940 Doubtful — — — — — — — — — Total $ 32,895 $ 29,189 $ 13,739 $ 6,257 $ 3,527 $ 8,593 $ 57,925 $ — $ 152,125 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate: Pass $ 22,206 $ 38,696 $ 54,830 $ 12,233 $ 19,543 $ 21,938 $ 647 $ — $ 170,093 Special Mention 241 1,380 2,292 2,496 — 322 — — 6,731 Substandard 1,150 — 888 — 466 11,374 — — 13,878 Doubtful — — — — — — — — — Total $ 23,597 $ 40,076 $ 58,010 $ 14,729 $ 20,009 $ 33,634 $ 647 $ — $ 190,702 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial lessors of buildings: Pass $ 18,353 $ 22,762 $ 15,455 $ 6,429 $ 3,543 $ 8,934 $ 360 $ — $ 75,836 Special Mention — 436 1,687 — 3,578 — — — 5,701 Substandard — — — 989 — 161 — — 1,150 Doubtful — — — — — — — — — Total $ 18,353 $ 23,198 $ 17,142 $ 7,418 $ 7,121 $ 9,095 $ 360 $ — $ 82,687 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial construction: Pass $ 24,119 $ 14,855 $ 576 $ 272 $ 281 $ 256 $ — $ — $ 40,359 Special Mention — 258 43 635 — — — — 936 Substandard — — — 30 80 — — — 110 Doubtful — — — — — — — — — Total $ 24,119 $ 15,113 $ 619 $ 937 $ 361 $ 256 $ — $ — $ 41,405 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total Pass $ 96,715 $ 102,309 $ 83,057 $ 24,141 $ 26,755 $ 38,240 $ 46,430 $ — $ 417,647 Special Mention 317 2,299 4,544 3,164 3,611 387 3,872 — 18,194 Substandard 1,932 2,968 1,909 2,036 652 12,951 8,630 — 31,078 Doubtful — — — — — — — — — Total $ 98,964 $ 107,576 $ 89,510 $ 29,341 $ 31,018 $ 51,578 $ 58,932 $ — $ 466,919 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — (Dollars in thousands) Pass Special Mention Substandard Doubtful Not Rated Total December 31, 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 53 The Company monitors the credit risk profile by payment activity for the loan classes listed below. Loans past due 90 days or more and loans on nonaccrual status are considered nonperforming. The following table presents the amortized cost in residential consumer loans based on payment activity: Term Loans Amortized Costs Basis by Origination Year Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term (Dollars in thousands) 2023 2022 2021 2020 2019 Prior Total December 31, 2023 Consumer mortgage: Performing $ 24,521 $ 34,798 $ 35,802 $ 32,259 $ 8,931 $ 30,408 $ — $ — $ 166,719 Nonperforming — — — — — 172 — — 172 Total $ 24,521 $ 34,798 $ 35,802 $ 32,259 $ 8,931 $ 30,580 $ — $ — $ 166,891 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Consumer construction: Performing $ 5,463 $ 1,477 $ 264 $ 483 $ 81 $ 41 $ — $ — $ 7,809 Nonperforming — — — — — — — — — Total $ 5,463 $ 1,477 $ 264 $ 483 $ 81 $ 41 $ — $ — $ 7,809 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Home equity line of credit: Performing $ — $ — $ — $ — $ — $ — $ 43,223 $ 46 $ 43,269 Nonperforming — — — — — — — — — Total $ — $ — $ — $ — $ — $ — $ 43,223 $ 46 $ 43,269 YTD gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Consumer installment: Performing $ 5,705 $ 3,067 $ 981 $ 513 $ 118 $ 184 $ 68 $ — $ 10,636 Nonperforming — — — — — — — — — Total $ 5,705 $ 3,067 $ 981 $ 513 $ 118 $ 184 $ 68 $ — $ 10,636 YTD gross charge-offs $ 2 $ 12 $ 19 $ 5 $ 2 $ 6 $ — $ — $ 46 Consumer indirect: Performing $ 858 $ 1,086 $ 622 $ 568 $ 607 $ 2,128 $ — $ — $ 5,869 Nonperforming — 3 — — 81 4 — — 88 Total $ 858 $ 1,089 $ 622 $ 568 $ 688 $ 2,132 $ — $ — $ 5,957 YTD gross charge-offs $ — $ — $ — $ — $ — $ 66 $ — $ — $ 66 Total Performing $ 36,547 $ 40,428 $ 37,669 $ 33,823 $ 9,737 $ 32,761 $ 43,291 $ 46 $ 234,302 Nonperforming — 3 — — 81 176 — — 260 Total $ 36,547 $ 40,431 $ 37,669 $ 33,823 $ 9,818 $ 32,937 $ 43,291 $ 46 $ 234,562 Total YTD gross charge-offs $ 2 $ 12 $ 19 $ 5 $ 2 $ 72 $ — $ — $ 112 Consumer mortgages are substantially secured by one to four family owner occupied properties and consumer indirect loans are substantially secured by recreational vehicles. All nonperforming consumer loans are evaluated when placed on nonaccrual status and may be charged down based on the fair value of the collateral less cost to sell, if that value is lower than the outstanding balance. Modifications to Borrowers Experiencing Financial Difficulty Occasionally, the Bank modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, and other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. In some cases, the Bank may provide multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. There were no modifications of loans to borrowers in financial distress completed during the year ended December 31, 2023. 54 Impaired Loans The following impaired loan information relates to required disclosures under the previous incurred loan loss methodology and are only presented with prior period information. The following table presents the balance in the allowance for loan losses and the ending loan balances by portfolio segment and impairment method at December 31, 2022: (Dollars in thousands) Commercial Commercial Real Estate Residential Real Estate Construction & Land Development Consumer Unallocated Total December 31, 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 The following table presents loans individually evaluated for impairment by class of loans at December 31, 2022: (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 December 31, 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 1 Includes principal, accrued interest, unearned fees, and origination costs . Real Estate Loans in Foreclosure There was no other real estate owned on December 31, 2023, or 2022, respectively. Mortgage loans in the process of foreclosure were $ 8 thousand on December 31, 2023 and $ 17 thousand on December 31, 2022. Mortgage Servicing Rights For the years ended December 31, 2023 and 2022, the Company had outstanding MSRs of $ 600 thousand and $ 621 thousand, respectively. The capitalized additions of servicing rights are included in net gain on sale of loans on the Consolidated Statements of Income. No valuation allowance was recorded on December 31, 2023 or 2022, as the fair value of the MSRs approximates their carrying value. On December 31, 2023, the Company had $ 124 million residential mortgage loans sold with servicing retained as compared to $ 130 million sold with servicing retained on December 31, 2022. Total loans serviced for others including commercial loans, approximated $ 132 million and $ 138 million on December 31, 2023, and 2022, respectively. The following summarizes mortgage servicing rights capitalized and amortized during each year: 55 (Dollars in thousands) 2023 2022 Beginning of year $ 621 $ 604 Capitalized additions 47 97 Amortization ( 68 ) ( 80 ) Valuation allowance — — End of year $ 600 $ 621 NOTE 4 – PREMISES AND EQUIPMENT Premises and equipment consisted of the following on December 31: (Dollars in thousands) 2023 2022 Land and improvements $ 2,540 $ 2,550 Buildings and improvements 14,698 14,459 Furniture and equipment 6,642 6,922 Leasehold improvements 329 329 Premises and equipment, cost 24,209 24,260 Accumulated depreciation 11,207 10,846 Premises and equipment, net $ 13,002 $ 13,414 Depreciation expense amounted to $ 826 thousand and $ 818 thousand for the years ended December 31, 2023, and 2022, 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. 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. The leases relate to bank branches with remaining lease terms of generally 2 to 5 years . Certain lease arrangements contain extension options which are typically 2 to 5 years at the then fair market rental rates. If these extension options are considered reasonably certain of exercise, they are included in the lease term. As of December 31, 2023, operating lease ROU assets were $ 306 thousand, and lease liabilities were $ 299 thousand. These amounts are included in other assets and other liabilities on the Consolidated Balance Sheets. For the years ended December 31, 2023, and 2022, CSB recognized $ 112 thousand, and $ 107 thousand in operating lease cost respectively, which are included in occupancy expense on the Consolidated Statements of Income. The following table summarizes other information related to our operating leases: December 31, 2023 Weighted-average remaining lease term - operating leases in years 2.8 Weighted-average discount rate - operating leases 2.69 % The following table presents aggregate lease maturities and obligations as of December 31, 2023: (Dollars in thousands) December 31, 2023 2024 $ 101 2025 82 2026 79 2027 45 2028 10 2029 and thereafter — Total lease payments 317 Less: interest 18 Present value of lease liabilities $ 299 56 NOTE 6 – INTEREST-BEARING DEPOSITS Interest-bearing deposits on December 31 were as follows: (Dollars in thousands) 2023 2022 Demand $ 256,621 $ 241,227 Savings 277,529 313,826 Time deposits: $250,000 and greater 59,347 28,839 Other 132,233 89,242 Total interest-bearing deposits $ 725,730 $ 673,134 On December 31, 2023, stated maturities of time deposits were as follows: (Dollars in thousands) 2024 $ 155,697 2025 30,442 2026 3,700 2027 1,282 2028 459 Total $ 191,580 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) 2023 2022 Balance at year-end $ 35,843 $ 32,550 Average balance outstanding 32,478 37,367 Maximum month-end balance 37,479 39,073 Weighted-average rate at year-end 1.18 % 0.80 % Weighted-average rate during the year 1.03 0.28 Average balances outstanding during the year represent daily average balances; average interest rates represent interest expenses divided by the related average balances. 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, 2023 December 31, 2022 Securities of U.S. Government agencies and mortgage-backed securities of government agencies pledged, fair value $ 36,002 $ 32,775 Repurchase agreements 35,843 32,550 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 2023 2022 Fixed-rate amortizing 4/1/24 6/1/37 1.97 % 1.16 % 2.01 % $ 1,754 $ 2,461 57 Maturities of other borrowings on December 31, 2023, are summarized as follows for the years ended December 31: (Dollars in thousands) Amount Weighted Average Rate 2024 $ 488 1.94 % 2025 349 1.98 2026 262 1.98 2027 195 1.99 2028 144 1.99 2029 and beyond 316 1.99 Total other borrowings $ 1,754 1.97 % 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 all one-to-four family residential real estate loans. On December 31, 2023, the Company had the capacity to borrow an additional $ 128 million from the FHLB. NOTE 8 – INCOME TAXES Income tax expense was as follows: (Dollars in thousands) 2023 2022 Current $ 3,334 $ 3,358 Deferred 293 ( 135 ) Total income tax provision $ 3,627 $ 3,223 Effective tax rates were 19.7 % and 19.5 % for 2023 and 2022 and differ from the federal statutory rate of 21 % applied to income before taxes due to the following: (Dollars in thousands) 2023 2022 Expected provision using statutory federal income tax rate $ 3,860 $ 3,473 Effect of bond and loan tax-exempt income ( 104 ) ( 113 ) Bank owned life insurance income ( 147 ) ( 141 ) Other 18 4 Total income tax provision $ 3,627 $ 3,223 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) 2023 2022 Allowance for credit losses $ 1,485 $ 1,534 Unrealized loss on securities 2,730 3,434 Other 225 35 Deferred tax assets 4,440 5,003 Premises and equipment ( 554 ) ( 598 ) Federal Home Loan Bank stock dividends ( 95 ) ( 268 ) Deferred loan fees ( 312 ) ( 288 ) Prepaid expenses ( 205 ) ( 188 ) Other ( 640 ) ( 602 ) Deferred tax liabilities ( 1,806 ) ( 1,944 ) Net deferred tax asset $ 2,634 $ 3,059 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 2020 . 58 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 3.25 % in 2023 and 3.00 % in 2022 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 $ 809 thousand and $ 735 thousand for 2023 and 2022, respectively. The Company sponsors a non-qualified deferred compensation plan covering eligible officers. Expense under the plan amounted to $ 6 thousand and $ 3 thousand in 2023 and 2022, 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) 2023 2022 Commitments to extend credit $ 277,553 $ 266,422 Letters of credit 4,379 1,376 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. 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 $ 736 thousand allowance for credit losses for unfunded loan commitments as of December 31, 2023 and $ 0 as of December 31, 2022. The increase in the ACL for unfunded loan commitments was primarily due to construction projects that have not been 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) 2023 2022 Balance at beginning of year $ 332 $ 46 New loans and advances 23 319 Repayments, including loans sold 50 33 Balance at end of year $ 305 $ 332 Deposits from executive officers, directors, their immediate family members, and their related business interests on December 31, 2023, and 2022 were approximately $ 9.3 million and $ 6.2 million. 59 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, 2023 and 2022, the Company and Bank met or exceeded all capital adequacy requirements to which they are subject. As of December 31, 2023, 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. 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 2023 Total capital to risk-weighted assets Consolidated $ 120,824 16.3 % $ 59,480 8.0 % $ 74,349 10.0 % Bank 120,184 16.2 59,446 8.0 74,308 10.0 Tier 1 capital to risk-weighted assets Consolidated 113,481 15.3 44,610 6.0 59,480 8.0 Bank 112,841 15.2 44,585 6.0 59,446 8.0 Common equity tier 1 capital to risk-weighted assets Consolidated 113,481 15.3 33,457 4.5 48,327 6.5 Bank 112,841 15.2 33,439 4.5 48,300 6.5 Tier 1 leverage ratio Consolidated 113,481 9.6 47,340 4.0 59,175 5.0 Bank 112,841 9.5 47,324 4.0 59,155 5.0 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 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, 2024, the Bank could dividend $ 26.5 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 60 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. NOTE 13 – CONDENSED PARENT COMPANY FINANCIAL INFORMATION A summary of condensed financial information of the parent company as of December 31, 2023, and 2022, and for each of the two years in the period ended December 31, 2023, follows: (Dollars in thousands) 2023 2022 CONDENSED BALANCE SHEETS ASSETS Cash deposited with subsidiary bank $ 271 $ 805 Investment in subsidiary bank 107,299 94,749 Equity securities 259 244 Other assets 174 162 TOTAL ASSETS $ 108,003 $ 95,960 LIABILITIES AND SHAREHOLDERS’ EQUITY Total liabilities $ 64 $ 40 Total shareholders’ equity 107,939 95,920 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 108,003 $ 95,960 (Dollars in thousands) 2023 2022 CONDENSED STATEMENTS OF COMPREHENSIVE INCOME Dividends on securities $ 9 $ 7 Dividends from subsidiary 5,200 3,950 Unrealized gain (loss) on equity securities 15 ( 3 ) Total income 5,224 3,954 Operating expenses 391 407 Income before taxes and undistributed equity income of subsidiary 4,833 3,547 Income tax benefit 74 86 Equity earnings in subsidiary, net of dividends 9,849 9,680 NET INCOME $ 14,756 $ 13,313 COMPREHENSIVE INCOME $ 17,405 $ 2,519 (Dollars in thousands) 2023 2022 CONDENSED STATEMENTS OF CASH FLOWS Cash flows from operating activities Net income $ 14,756 $ 13,313 Adjustments to reconcile net income to net cash provided by operating activities: Equity earnings in subsidiary, net of dividends ( 9,849 ) ( 9,680 ) Change in other assets and liabilities ( 3 ) ( 27 ) Net cash provided by operating activities 4,904 3,606 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 ( 4,013 ) ( 3,526 ) Purchase of treasury stock ( 1,425 ) ( 388 ) Net cash used in financing activities ( 5,438 ) ( 3,914 ) Decrease in cash ( 534 ) ( 439 ) Cash at beginning of year 805 1,244 Cash at end of year $ 271 $ 805 61 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, 2023, and December 31, 2022, 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, 2023 Securities available-for-sale U.S. Treasury securities $ 17,689 $ — $ — $ 17,689 U.S. Government agencies — 13,152 — 13,152 Mortgage-backed securities of government agencies — 65,045 — 65,045 Asset-backed securities of government agencies — 523 — 523 State and political subdivisions — 16,586 — 16,586 Corporate bonds — 27,085 — 27,085 Total available-for-sale securities $ 17,689 $ 122,391 $ — $ 140,080 Equity securities $ 213 $ — $ — $ 213 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 62 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: 2023 Carrying Total Fair (Dollars in thousands) Value Level I Level II Level III Value Financial assets Securities held-to-maturity $ 226,279 $ 9,507 $ 185,223 $ — $ 194,730 Net loans 694,797 — — 663,510 663,510 Mortgage servicing rights 600 — — 600 600 Financial liabilities Deposits $ 1,027,427 $ 835,847 $ — $ 193,126 $ 1,028,973 Other borrowings 1,754 — — 1,546 1,546 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 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. 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, 2023, and 2022: (Dollars in thousands) Pretax Tax Effect After-Tax 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 ) Unrealized holding gain on available-for-sale securities arising during the period 3,168 ( 666 ) 2,502 Amortization of held-to-maturity discount resulting from transfer 187 ( 40 ) 147 Total other comprehensive income 3,355 ( 706 ) 2,649 BALANCE AS OF DECEMBER 31, 2023 $ ( 12,999 ) $ 2,729 $ ( 10,270 ) 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. 63 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.