Building on
Shared Values
2012 annual report
Chairman’s letter to the Shareholders
William P. Hayes,
Chairman, President, and
Chief Executive Officer
In January 2013, a research report was released on the banking industry, prepared in collaboration with Harris
Interactive, entitled “State of the Bank.” Aiming to take some “vital signs” of the industry based on a variety of
indicators that are primarily qualitative and centered on the customer experience, the report sums up its findings
as demonstrating a state of “disconnect between the banking industry and its customers.”
Reading that assessment of our industry brought home for me once again the beauty of Kish Bank as an institution
that, after more than 100 successful years, continues to operate independently, maintaining as our primary source of
strength an unwavering focus on customer and community, built on a solid base of shareholder loyalty. At Kish, we’re
far from being in a state of disconnect with our customers. Connection, rather, is what our culture is—and always
has been—about.
Our connection with our customer and community is what allows us to be a positive force for local economic change
and development, and for the continued growth and prosperity of our region. It puts us in a position of strength as
we look ahead toward our planned efforts to pursue new horizons of opportunity—all while remaining unwaveringly
focused on our core, community-centered values.
Just as with the preceding three years, Kish Bancorp began 2012 with a principal focus on risk assessment and risk
reduction. The Great Recession, which began in late 2007 and lasted until 2009, and the stubbornly slow recovery
that ensued, had created significant and sustained headwinds for the economy and for banking. Regulators had
responded to the difficult environment by intensifying their focus on bank oversight and requiring more formal actions
where there were areas of concern. Risk management was the watchword that guided the actions of our industry
as well as the Corporation.
At the outset of 2012, Kish Bank was intently concentrating on several remaining risk factors that were critical to
addressing the issues set forth in a regulatory agreement entered into in February 2011. The central focus of this
effort was on problem loan management and the level of classified loans. By mid-year 2012, management had
documented substantial completion of these as well as all other matters under the agreement. While final validation
of that completion would await a regulatory examination in September and final review in December, we were pleased
3
“ connection...
is what our culture
is – and always has
been – about.”
– William P. Hayes
contents
Chairman’s Letter
to the Shareholders
3-5
A Year of Unwavering Focus
6-8
Financial Highlights
9-11
Independent Auditor’s Report
12
Financial Statements
13-17
Notes to Consolidated
Financial Statements
The People of Kish
18-49
50-51
www.KishBank.com
20 12 during the latter half of the year to return our full attention and
Contributing positively to the change in net income was a reduction in
resources to serving our customers and growing our business. We
the provision for potential loan losses. In 2012, $270 thousand was set
Walter Kay, Senior Vice President and Senior
Information Officer, brings to our team more than 20
It is an honor to have Coach Washington on board, and we look
forward to seeing the impact that her high visibility, leadership and
could do so with the confidence that our team had faced this period
aside from earnings through the loan loss provision, as compared to
years of experience in senior-level leadership of enterprise
representation will have on deepening the appreciation of the value
of adversity and responded to the challenge with a dedication and
$800 thousand in 2011. As the level of classified loans declined, other
information technology operations in a variety of industries,
that Kish brings to our region.
professionalism that demonstrated its readiness to perform at the next
loan quality metrics remained positive. At year end, the allowance for
including banking.
level. It was a stronger, more capable team that was ready to continue
loan losses was $6.867 million, or 1.92 percent of total loans
its campaign of “Building to a Billion.” We had also demonstrated our
outstanding. The Bank’s reserves continue to reflect a strengthened
continuing commitment to our customers and communities.
balance sheet that protects Kish from unforeseen negative
In this context, we are pleased to report that profitable operations
continued in 2012, with net income of $3.630 million, earnings per
share of $6.10, and return on average shareholders’ equity of 8.01
percent. While net income was equal to the prior year, the additional
developments in the economy that may impact the Bank’s loan
portfolio. Actual charge-offs for the year remained modest, and
the Bank’s delinquent loans have been sustained at exceptionally
low levels.
common stock raised in late 2011 and early 2012 of $3.8 million
We are also pleased to note that, as we enter 2013, demand for
served to depress both EPS and ROE by approximately 10 percent.
new credit by businesses has begun to accelerate, a trend that is
Higher capital levels were necessary and prudent during the period of
expected to continue with further economic recovery and improving
elevated risk. As the Corporation’s risk parameters improve, strategies
business confidence.
William Hoyne, Executive Vice President and
Chief Credit Officer, is an industry veteran with more
As we conclude this review of another successful year for Kish Bank
and look ahead to a promising future, we gratefully acknowledge the
continued support and encouragement of you, our shareholders.
than 45 years in banking. He brings to Kish a distinguished
As investors, you contribute in so many ways to the vitality of our
track record of successfully managing the integrity and
community. It is your loyalty and confidence that has helped to define
profitability of lending portfolios, both in strong economies
the unique culture and values of Kish Bank and will continue to do
and challenging times.
Last but certainly not least, we are also pleased to welcome to
our “extended team” one of the most noted leaders of the Central
Pennsylvania community. Coquese Washington, Head Coach of the
Penn State Lady Lion basketball team, is a uniquely qualified advocate
for “the Kish way of doing business.” In her early interactions with
so as we work together to achieve our goals and advance toward
the exciting new horizons that await us.
Sincerely,
to either employ the additional capital or return it to shareholders are
under active evaluation. We believe ROE and EPS growth will continue
to be the key performance measures that drive long-term shareholder
performance. Our goal is to live up to a reputation for financial
performance that has merited, for a sixth consecutive year, a position
among the top 200 Community Banks in the U.S. Dividends per share
were sustained at $3.24 per share for the year, although, based on the
increase in outstanding shares, total dividends paid grew by
11.3 percent to $1.96 million from $1.76 million in 2011. The dividend
per share rate has been sustained throughout the recession.
Net interest income after provision for loan losses during 2012
was $16.546 million, an increase of $104 thousand, or 0.6 percent,
compared to 2011. This modest expansion reflected the slow growth
in earning assets and a contraction in the net interest margin as
new and existing borrowers moved to refinance existing debt at
Noninterest income declined $1.0 million, or 12.57 percent, to $7.0
Kish, Coach Washington developed an appreciation of the core values
million for 2012 from $8.0 million in 2011. 2011 results were skewed
that she shares with us, including a commitment to excellent
William P. Hayes
by the addition of $2.1 million of business property income related to a
performance and to the importance of serving as a leader and mentor
Chairman, President, and Chief Executive Officer
business loan workout with ongoing operations. Excluding this revenue
in the community. This appreciation not only motivated her to choose
from 2011 noninterest income, as well as investment securities gains,
Kish as her bank, but also to agree to serve as a “Kish ambassador.”
core noninterest income increased by $1.0 million, or 20.1 percent,
driven primarily by excellent strength in residential mortgage
origination activities, sustained growth in retail deposit service fees
and stronger revenues from our wealth management unit.
Noninterest expense was $19.4 million during 2012, a decrease of $1.0
million, or 4.9 percent, from $20.4 million in 2011. The primary driver
of the decrease in 2012 expenses was the elimination of the cost of
managing the business property described in the previous paragraph,
as well as a reduction in the cost of federal deposit insurance.
significantly lower rates. The yield on the securities portfolio declined
In addition to capital investments to prepare for the future that are
as new investments also reflected the low yields created by the Fed’s
reflected in these financial results, 2012 also witnessed several key
sustained easing of monetary policy. As reported in the quarterly
additions to the Kish team that will further enhance our customer-
statements, net interest income in the fourth quarter of 2012 was
focused culture and accelerate progress toward Kish’s long-term
$4.213 million, an increase of $45 thousand, or 1.1 percent,
corporate goals:
compared to $4.168 million for the fourth quarter of 2011.
Bill Hayes and Coquese Washington
Introducing our new Kish ambassador
4
5
A Year of
Unwavering
Focus
Left:
Oksana DeArment
Kish associate, teaching
children to save
Right:
Sandy Berardis,
Greg Hayes,
John Arrington
Kish associates
building a home for
Habitat for Humanity
A Focus on our community
At Kish, community focus is a strategic objective. From top to bottom, we’re a
team that takes pride in putting our time and resources to work to build better
communities. A major part of this unwavering focus is realized in our direct role
as an institution that works closely with the individuals, entrepreneurs, and
business leaders that make our communities so vibrant, meeting their financial
needs at a highly personalized level.
But it doesn’t stop there. In 2012, we also moved our longstanding community
service commitment to the next level by forming regional groups that integrate
community involvement into our official operations: the Kish Community Action
Teams (CATs).
Activities under the CAT umbrella are broad and far-reaching. They encompass, for
example, our sponsorship and engagement in causes like fighting breast cancer
through our Power of Pink program in partnership with the Pennsylvania Pink Zone
and the Penn State Lady Lion Basketball Team; an initiative to send bankers into
classrooms to help young students get a head start on a lifetime of good financial
habits through the Teach Children to Save Program; and participation in a range of
other community activities, including Habitat for Humanity and United Way.
Our CAT program also supports the efforts of Kish associates to pursue their
passions to serve individually, applying their talents, interests, energies, and
drive to community involvement as EMTs, musicians, coaches, pet rescuers,
and more. After just one year, the CATs already have become a driving force
clients to protect what matters most to them… to the deep, first-hand expertise of Kish Travel Specialists that enables
them to help clients enjoy more memorable travel experiences.
To further enhance our service across the organization, we strengthened our team with several key hires. Natalie
Xanthopoulous, Insurance Specialist, focuses on delivering exemplary service to insurance clients as our insurance
presence continues to grow, especially in the Centre County area. Walter Kay, Senior Vice President and Senior
Information Officer, applies his comprehensive information technology expertise to ensure that Kish will always
meet the highest standards of security and privacy of clients’ personal and financial information. Walter also leads the
company’s initiative to grow the customer base through the application of data and information systems.
In keeping with our unwavering focus on fulfilling client needs, we engaged the services of our marketing consultant
to help us reenergize Kish Travel with more innovative approaches to service and elevate further the travel experience
we provide our clients. Carol Herrmann, who joined Kish in 2011, will lead this change in her new role as Kish
in making our service commitment more visible and in shaping our
Travel CEO.
internal culture and external impact.
A Focus on
our clients
One of the factors that makes Kish such a
rewarding institution to be involved with is
our ability to serve clients in ways that
make an important difference in their
lives—from the breadth and depth of
products and services from Kish Bank
and Kish Financial Solutions that allow
us to help clients as they work toward
their goals and dreams… to the
comprehensive coverages available to
Kish Insurance Specialists as they work with
Enhancing our facilities was another priority in 2012. Kish Bank has been well received in McVeytown, having first
opened its doors there more than 15 years ago. Since then, our McVeytown business has grown along with our
clients’ needs for the full range of financial and related services Kish provides. In February 2012, we broke ground on
a beautiful new branch facility to better serve these growing needs. Ten months
later, the doors of the new McVeytown branch opened, offering the added
conveniences of off-street parking, ATM service, and a two-lane drive-thru.
This updated facility creates yet another opportunity to further enhance service
to existing clients, to introduce more individuals and organizations to the
full breadth of Kish services, and to strengthen our signature “expect more”
culture and approach to doing business.
Bruce, Kym & Ryan Burke
Owners, One on One Fitness
6
The new McVeytown Branch
7
20 12 Left:
Kish Travel’s Disney Night
The Tone Rangers serenade
guests with Disney tunes
Below:
Coquese Washington
Head Coach, Penn State
Lady Lion Basketball Team
Financial Highlights
Five Year Summary
For the YeAr
Net Income
Net Income Before Taxes
Total Dividends Declared
At YeAr end (in 000’s)
Total Assets
Total Loans (Net)
Total Deposits
Stockholders’ Equity
Loan Loss Reserve
Net Loan Losses (Recoveries)
rAtio AnAlYsis
Return on Average Assets*
Return on Average Equity*
Dividend Declared/Net Income
Loan/Deposits
Primary Capital/Total Assets
Total Capital/Risk Weighted Assets
Loan Loss Reserve/Loans
Net Loan Losses to Total Loans (Net)
per shAre dAtA
Basic Earnings
Fully Diluted Earnings
Dividends Paid
Equity (Book Value)
Equity Plus Loan Loss Reserve
2012
$3,629,794
4,168,872
1,960,051
2011
$3,631,298
4,070,114
1,760,493
2010
$3,556,124
4,026,669
1,739,714
2009
$3,213,423
3,586,370
1,721,575
2008
$3,937,791
4,817,481
1,713,474
$557,575
351,040
460,450
46,252
6,867
445
0.65%
8.61%
54.00%
76.24%
9.53%
14.05%
1.92%
0.12%
$6.10
6.09
3.24
76.20
87.51
$560,069
362,163
454,660
43,517
7,043
3
0.65%
9.82%
48.48%
79.66%
9.03%
13.85%
1.91%
0.00%
$6.74
6.72
3.24
72.95
84.75
$556,623
367,306
446,002
35,729
6,245
1,001
0.65%
10.31%
48.92%
82.36%
7.54%
11.67%
1.67%
0.27%
$6.72
6.68
3.24
66.54
78.17
$527,396
367,824
407,721
34,062
5,397
252
0.64%
9.73%
53.57%
90.21%
7.48%
11.26%
1.44%
0.07%
$6.08
6.07
3.24
63.61
73.69
$476,263
333,434
352,729
31,302
3,305
(5)
0.84%
12.75%
43.51%
94.53%
7.27%
10.40%
0.98%
0.00%
$7.47
7.47
3.24
59.04
65.27
Average Shares Outstanding (#)
594,611
538,735
529,343
528,125
527,044
* Due to fluctuations in the mark to market valuation for investment securities, we do not include them in our total for average assets and average equity.
A Focus on communicating the
Unique Value of Kish
As a shareholder, you already know that Kish is much more than just another bank. We’re
a distinctively diversified financial institution that meets not only the deposit and credit
needs of our clients, but also provides a suite of complementary services in travel, wealth
management, insurance, and more. Add to that mix our unwavering commitment to our
clients and our communities, and you have a highly effective client-centric organization.
To continue to strengthen the community’s understanding of our mission and all Kish does to
fulfill it, we proudly brought on board our new Kish ambassador, Coquese Washington, Head Coach
of the Penn State Lady Lion Basketball Team and a client who chose Kish Bank based on values she
shares with us. We look forward to engaging her in a full range of internal and external activities throughout
the coming years.
2012, a year in which we celebrated the 100th anniversary of our charter, has given us the opportunity to
reflect on how our community bank has enjoyed the privilege of helping the individuals, businesses, and
organizations in our markets survive, thrive, and maintain stability while navigating through a century of
changing financial tides.
Today, our community impact is stronger than ever. Working together with the great people and
organizations we serve toward full realization of the values we share remains our primary reason for
being. This is reflected not only in the value of the financial services we provide, but also in our
continued community support and involvement.
8
9
Financial Highlights
Financial Highlights
Financial Highlights
$5.0
$4.0
$3.0
$2.0
$1.0
$0.0
$50.0
$40.0
$30.0
$20.0
$10.0
$0.0
Net Income (in millions)
Earnings and Dividends per Share
Basic Earnings per Share
Dividends per Share
Loan Loss Reserve/Loans
Loan Loss Reserve/Loans
PA Bank Operating Companies with $500mm to $1B in Assets*
PA Bank Operating Companies with $500mm to $1B in Assets*
Kish Bancorp
Kish Bancorp
Total Noninterest Income and
Total Noninterest Income and
Components (in millions)
Components (in millions)
Bank Svc Fees*
Bank Svc Fees*
Sec Gains
Sec Gains
Insurance
Insurance
KFS
KFS
Travel
Travel
$8.00
$6.00
$4.00
$2.00
$0.00
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Net Interest Income After
Provision (in millions)
Stockholders' Equity (in millions)
and ROE
Stockholders' Equity
ROE
15.00%
12.00%
9.00%
6.00%
3.00%
0.00%
$18.0
$15.0
$12.0
$9.0
$6.0
$3.0
$0.0
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
2.00%
2.00%
1.50%
1.50%
1.00%
1.00%
0.50%
0.50%
0.00%
0.00%
$600
$600
$500
$500
$400
$400
$300
$300
$200
$200
$100
$100
$0
$0
$8.0
$8.0
$6.0
$6.0
$4.0
$4.0
$2.0
$2.0
$0.0
$0.0
2012
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
* Source - SNL Financial, median values
* Source - SNL Financial, median values
* Excluding unrelated business income
* Excluding unrelated business income
Balance Sheet (in millions)
Balance Sheet (in millions)
Assets
Assets
Loans
Loans
Deposits
Deposits
Stock Valuation (per share)
Stock Valuation (per share)
Book Value
Book Value
Market Value
Market Value
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
$100.00
$100.00
$80.00
$80.00
$60.00
$60.00
$40.00
$40.00
$20.00
$20.00
$0.00
$0.00
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
10
11
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
Independent auditor’s report
Independent Auditor’s Report
Board of Directors and Stockholders,
Kish Bancorp, Inc.
We have audited the accompanying consolidated financial statements
Opinion
of Kish Bancorp, Inc. and subsidiaries which comprise the consolidated
In our opinion, the consolidated financial statements referred to above
balance sheet as of December 31, 2012 and 2011; the related consolidated
present fairly, in all material respects, the financial position of Kish
statements of income, comprehensive income, changes in stockholders’
Bancorp, Inc. and subsidiaries as of December 31, 2012 and 2011, and
equity, and cash flows for the years then ended; and the related notes to
the results of their operations and their cash flows for the years then ended
the financial statements.
in accordance with accounting principles generally accepted in the United
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of
these consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance
with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements
States of America.
Wexford, Pennsylvania
March 20, 2013
Kish Bancorp, Inc.
Consolidated Audited Financial Statements
December 31, 2012
Independent Auditor’s Report ..............................................................12
Page Number
are free of material misstatement.
Financial Statements
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the consolidated financial statements.
Consolidated Balance Sheet ...........................................................13
Consolidated Statement of Income .................................................14
The procedures selected depend on the auditor’s judgment, including
Consolidated Statement of Comprehensive Income .......................15
Consolidated Statement of Changes in Stockholders’ Equity ..........16
Consolidated Statement of Cash Flows ..........................................17
Notes to Consolidated Financial Statements ................................ 18–49
the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. Accordingly, we express no such opinion. An
audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made
by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
12
KISH BANCORP, INC.
CONSOLIDATED BALANCE SHEET
Consolidated Balance Sheet
ASSETS
Cash and due from banks
Interest-bearing deposits with other institutions
Cash and cash equivalents
Certificates of deposit in other financial institutions
Investment securities available for sale
Loans held for sale
Loans
Less allowance for loan losses
Net loans
Premises and equipment
Goodwill
Regulatory stock
Bank-owned life insurance
Accrued interest and other assets
December 31,
2012
2011
$
$
8,944,401
14,848,221
23,792,622
9,592,946
31,588,825
41,181,771
2,374,375
136,214,232
1,619,833
114,170,492
584,380
1,401,376
357,907,840
6,867,370
351,040,470
15,078,798
1,668,699
4,794,900
12,517,831
9,508,580
369,205,842
7,042,911
362,162,931
14,211,627
1,668,699
4,042,400
12,097,673
7,512,072
TOTAL ASSETS
$
557,574,887
$
560,068,874
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing demand
Savings
Money market
Time
Total deposits
Short-term borrowings
Other borrowings
Accrued interest and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY
$
$
55,046,956
9,658,721
47,336,921
189,715,682
158,691,542
460,449,822
4,157,290
42,121,094
4,594,956
511,323,162
54,985,004
8,021,861
40,358,678
177,667,176
173,627,594
454,660,313
5,696,162
52,049,918
4,145,495
516,551,888
Preferred stock, $.50 par value; 500,000 shares authorized,
no shares issued and outstanding
Common stock, $.50 par value; 2,000,000 shares authorized,
674,374 and 663,791 shares issued
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost (67,380 and 67,237)
TOTAL STOCKHOLDERS' EQUITY
-
-
337,187
3,376,514
45,323,860
2,907,315
(5,693,151)
46,251,725
331,896
2,979,269
43,654,117
2,466,659
(5,914,955)
43,516,986
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
557,574,887
$
560,068,874
See accompanying notes to consolidated financial statements.
3
13
Consolidated Statement of Income
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Consolidated Statement of Comprehensive Income
INTEREST AND DIVIDEND INCOME
Interest and fees on loans:
Taxable
Exempt from federal income tax
Interest and dividends on investment securities:
Taxable
Exempt from federal income tax
Interest-bearing deposits with other institutions
Other dividend income
Total interest and dividend income
INTEREST EXPENSE
Deposits
Short-term borrowings
Other borrowings
Total interest expense
NET INTEREST INCOME
Provision for loan losses
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
NONINTEREST INCOME
Service fees on deposit accounts
Investment securities gains, net
Investment securities impairment loss
Gain on sale of loans, net
Earnings on bank-owned life insurance
Insurance commissions
Travel agency commissions
Business property income
Other
Total noninterest income
NONINTEREST EXPENSE
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional fees
Advertising
Federal deposit insurance
Loss on sale of other assets
Other
Total noninterest expense
Income before income taxes
Income taxes
NET INCOME
EARNINGS PER SHARE
Basic
Diluted
See accompanying notes to the consolidated financial statements.
4
14
Year Ended December 31,
2012
2011
$
17,767,995
956,766
$
19,773,794
1,030,427
2,077,035
1,180,783
128,265
102,529
22,213,373
3,412,997
94,657
1,889,289
5,396,943
1,832,161
1,336,001
83,224
63,870
24,119,477
4,266,998
203,640
2,406,192
6,876,830
16,816,430
270,000
17,242,647
800,000
16,546,430
16,442,647
1,573,098
797,324
-
1,901,882
416,414
888,876
194,174
-
1,207,008
6,978,776
10,449,906
2,435,665
1,683,149
392,961
414,113
743,008
-
3,237,532
19,356,334
4,168,872
539,078
1,483,286
840,576
(8,728)
797,914
416,069
886,733
236,580
2,059,377
1,270,226
7,982,033
9,969,960
2,847,007
1,574,312
356,458
436,651
1,074,877
353,018
3,742,283
20,354,566
4,070,114
438,816
$
$
3,629,794
$
3,631,298
6.10 $
6.09
6.74
6.72
Net income
Other comprehensive income:
Securities available for sale:
Unrealized holding gains on
available-for-sale securities
Tax effect
Reclassification adjustment for net gains
realized in net income
Tax effect
Impairment losses included in net income
Tax effect
Total other comprehensive income
Year Ended December 31,
2012
2011
$
3,629,794
$
3,631,298
1,464,984
(498,095)
4,532,228
(1,540,957)
(797,324)
271,091
(840,576)
285,795
-
-
8,728
(2,968)
440,656
2,442,250
Total comprehensive income
$
4,070,450
$
6,073,548
See accompanying notes to the consolidated financial statements.
5
15
Consolidated Statement of Changes in Stockholders’ equity
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Consolidated Statement of Cash Flows
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OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses
Investment securities gains, net
Investment securities impairment loss
Proceeds from sale of loans held for sale
Origination of loans held for sale
Gain on sales of loans, net
Depreciation, amortization, and accretion
Deferred income taxes
Decrease in accrued interest receivable
Decrease in accrued interest payable
Earnings on bank-owned life insurance
Decrease in prepaid federal deposit insurance
Loss on sale of other assets
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Maturities of certificates of deposit
Purchase of certificates of deposit
Investment securities available for sale:
Proceeds from sale of investments
Proceeds from repayments and maturities
Purchases
Decrease in loans, net
Purchase of regulatory stock
Redemption of regulatory stock
Purchase of premises and equipment
Purchase of bank-owned life insurance ("BOLI")
Proceeds from sale of other real estate owned
Net cash provided by (used for) investing activities
FINANCING ACTIVITIES
Increase in deposits, net
Decrease in short-term borrowings, net
Proceeds from other borrowings
Repayments of other borrowings
Proceeds from sale of common stock
Purchases of treasury stock
Proceeds from sale of treasury stock
Cash dividends
Net cash used for financing activities
Increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings
Income taxes
SUPPLEMENTAL DISCLOSURE OF NON-CASH CASH FLOW INFORMATION
Real estate acquired in settlement of loans
Investment sales not settled
See accompanying notes to consolidated financial statements.
7
17
Year Ended December 31,
2011
2012
$
3,629,794
$
3,631,298
270,000
(797,324)
-
47,056,498
(44,337,620)
(1,901,882)
1,112,213
31,885
282,921
(182,013)
(416,414)
709,737
-
(364,059)
5,093,736
800,000
(840,576)
8,728
24,715,642
(24,400,762)
(797,914)
1,557,325
(104,051)
167,919
(101,444)
(416,069)
1,035,498
353,018
143,275
5,751,887
250,000
(1,004,542)
1,114,261
-
21,211,034
28,756,606
(72,690,346)
10,025,751
(962,436)
206,000
(1,901,683)
-
894,098
(15,215,518)
5,786,760
(1,538,872)
2,000,000
(11,928,824)
625,057
(269,245)
17,808
(1,960,051)
(7,267,367)
(17,389,149)
41,181,771
53,533,950
21,467,880
(64,388,175)
7,038,702
(213,000)
332,400
(1,516,320)
(16,000)
789,466
18,143,164
8,658,327
(1,912,483)
2,712,000
(13,533,222)
3,176,897
(23,227)
85,590
(1,760,493)
(2,596,611)
21,298,440
19,883,331
$
$
$
23,792,622
$
41,181,771
5,578,956
685,000
826,710
2,066,250
$
$
6,978,272
482,000
54,841
-
notes to Consolidated Financial Statements
KISH BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
notes to Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
A summary of the significant accounting and reporting policies applied in the presentation of the accompanying
consolidated financial statements follows:
defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes.
Otherwise, the entire difference between fair value and amortized cost is charged to earnings.
Nature of Operations and Basis of Presentation
Kish Bancorp, Inc. (the “Company”) is a diversified financial services organization whose principal activity is the
ownership and management of its subsidiaries, Kishacoquillas Valley National Bank (the “Bank”), Kish Travel
Services, Inc., and the Bank’s subsidiaries, Kish Agency, Inc. and Tri Valley Properties, LLC. The Company
generates commercial and industrial, agricultural, commercial mortgage, residential real estate, and consumer loans
and deposit services to its customers located primarily in central Pennsylvania and the surrounding areas. The
Bank operates under a national bank charter and provides full banking services. Deposits are insured by the
Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law. Kish Agency, Inc. provides
insurance products and services. Kish Travel Services, Inc. is a Pennsylvania business established to provide travel
services to its customers. Tri Valley Properties, LLC is a limited liability company established to hold and manage
real estate and other property acquired through debts previously contracted.
The consolidated financial statements include the accounts of Kish Bancorp, Inc., and its subsidiaries,
Kishacoquillas Valley National Bank and Kish Travel Services, Inc., after elimination of all intercompany
transactions.
The accounting principles followed by the Company and the methods of applying these principles conform to U.S.
generally accepted accounting principles (“GAAP”) and to general practice within the banking industry.
Management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the Consolidated Balance Sheet date and revenues
and expenses for that period. Actual results could differ from those estimates.
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as
securities held to maturity, available for sale, or trading. Debt securities acquired with the intent and ability to hold
to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, which are computed
using the interest method and recognized as adjustments of interest income. Debt securities which are held
principally as a source of liquidity are classified as available for sale. Unrealized holding gains and losses for
available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized.
Realized security gains and losses are computed using the specific identification method for debt securities and the
average cost method for marketable equity securities. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in current earnings. Realized securities gains and losses are
computed using the specific identification method. The Company does not have trading securities or securities
held to maturity as of December 31, 2012 and 2011. Interest and dividends on investment securities are recognized
as income when earned.
Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions
warrant such an evaluation to determine whether a decline in their value is other than temporary. For debt
securities, management considers whether the present value of cash flows expected to be collected are less than the
security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline,
the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than
not that the Company would be required to sell the security before its anticipated recovery in market value, to
determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than
temporary, if the investor does not intend to sell the security, and it is more likely than not that it will not be
required to sell the security before recovery of the security’s amortized cost basis, the charge to earnings is limited
to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference
Common stock of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and Federal Reserve Bank represents
ownership in institutions that are wholly owned by other financial institutions. These equity securities are
accounted for at cost and are shown separately on the Consolidated Balance Sheet.
The Bank is a member of the FHLB and, as such, is required to maintain a minimum investment in stock of the
FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the
FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and, as such, is
classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the
ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of
whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the
significance of the decline in net assets of the FHLB as compared with the capital stock amount and the length of
time this situation has persisted; (b) commitments by the FHLB to make payments required by law or regulation
and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory
changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management evaluated the
stock and concluded that the stock was not impaired for the periods presented herein.
Loans
Loans are reported at their principal amount net of the allowance for loan losses and deferred origination fees or
costs. Interest on loans is recognized as income when earned on the accrual method. Generally, the policy has
been to stop accruing interest on loans when it is determined that a reasonable doubt exists as to the collectability
of additional interest. Interest previously accrued but deemed uncollectible is deducted from current interest
income. Payments received on nonaccrual loans are recorded as income or applied against principal according to
management’s judgment as to the collectability of such principal. Nonaccrual loans will generally be put back on
accrual status after demonstrating six consecutive months of no delinquency.
The allowance for loan losses is established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized is
accounted for as an adjustment of the related loan’s yield. Management is amortizing these amounts over the
contractual life of the related loans.
In general, fixed rate, permanent residential mortgage loans originated by the Bank are held for sale and are carried
in the aggregate at the lower of cost or market. The Bank sells these loans to various other financial institutions.
Currently, the Bank retains the servicing of those loans sold to the FHLB and releases the servicing of loans sold to
all other institutions.
8
18
9
19
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
Goodwill
The allowance for loan losses represents the amount that management estimates is adequate to provide for probable
losses inherent in its loan portfolio as of the Consolidated Balance Sheet date. The allowance method is used in
providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited
to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The
provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past
loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The
estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of
future cash flows expected on impaired loans, are particularly susceptible to change in the near term.
Impaired loans are those for which it is probable the Company will not be able to collect all amounts due according
to the contractual terms of the loan agreement. The Company evaluates commercial and industrial, agricultural,
state and political subdivisions, commercial real estate, and all troubled debt restructuring loans for possible
impairment. Consumer and residential real estate loans are also evaluated if part of a commercial lending
relationship. The Company individually evaluates such loans for impairment and does not aggregate loans by
major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual
loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to
payment delinquency or uncertain collectability while not classifying the loan as impaired, provided the loan is not
a commercial or commercial real estate classification. Factors considered by management in determining
impairment include payment status and collateral value. The amount of impairment for these types of loans is
determined by the difference between the present value of the expected cash flows related to the loan using the
original interest rate and its recorded value, or as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-
balance homogenous loans and are measured for impairment collectively. Loans that experience insignificant
payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances
concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay,
and the amount of shortfall in relation to the principal and interest owed.
In addition to the allowance for loan losses, the Company also estimates probable losses related to unfunded
lending commitments, such as letters of credit, financial guarantees and unfunded loan commitments. Unfunded
lending commitments are subject to individual reviews and are analyzed and segregated by risk according to the
Company’s internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss
experience, current economic conditions, performance trends within specific portfolio segments and any other
pertinent information, result in the estimation of the reserve for unfunded lending commitments. Provision for
credit losses related to the loan portfolio and unfunded lending commitments are reported in the Consolidated
Statement of Income.
The Company accounts for goodwill using a two-step process for testing the impairment of goodwill on at least an
annual basis. This approach could cause more volatility in the Company’s reported net income because impairment
losses, if any, could occur irregularly and in varying amounts.
Bank-Owned Life Insurance (“BOLI”)
The Company purchased life insurance policies on certain key employees. BOLI is recorded at its cash surrender
value, or the amount that can be realized.
Real Estate Owned
Real estate acquired by foreclosure is included with other assets on the Consolidated Balance Sheet at the lower of
the recorded investment in the property or its fair value less estimated costs of sale. Prior to foreclosure, the value
of the underlying collateral is written down by a charge to the allowance for loan losses if necessary. Any
subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of
related income and losses on their disposition, are included in other noninterest expense.
Treasury Stock
Treasury stock is carried at cost. Sales are determined by the first-in, first-out method.
Advertising Costs
Advertising costs are expensed as the costs are incurred. Advertising expense amounted to $414,113 and $436,651
for 2012 and 2011, respectively.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities
are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are
calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator.
The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and
convertible securities are adjusted in the denominator.
Premises and Equipment
Stock Options
Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is
principally computed on the straight-line method over the estimated useful lives of the related assets, which range
from 3 to 7 years for furniture, fixtures, and equipment, and 31 to 39½ years for building premises and leasehold
improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major
additions and improvements are capitalized.
As of December 31, 2012 and 2011, the Company recorded compensation expense of $46,863 and $42,100 related
to share-based compensation awards. At December 31, 2012, there was approximately $18,029 in unrecognized
compensation cost related to unvested share-based compensation awards granted. That cost is expected to be
recognized over the next two years.
10
20
11
21
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2.
EARNINGS PER SHARE
Stock Options (Continued)
For purposes of computing stock compensation expense, the Company estimated the fair values of stock options
using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can
materially affect fair value estimates. The fair value of each option is amortized into compensation expense on a
straight-line basis between the grant date for the option and each vesting date. The fair value of each stock option
granted was estimated using the following weighted-average assumptions:
Grant
Year
2012
2011
Expected
Dividend
Yield
Risk-Free
Interest Rate
Expected
Volatility
Expected
Life (in Years)
5.31
5.79
%
%
2.23
3.27
%
%
12.25
17.71
%
%
10.00
10.00
The weighted-average fair value of each stock option granted for 2012 and 2011 was $1.90 and $5.01, respectively.
There were no stock options exercised during the years ended December 31, 2012 and 2011.
Mortgage Servicing Rights (“MSRs”)
The Company has agreements for the express purpose of selling loans in the secondary market. The Company
retains servicing rights for certain loans. Originated MSRs are recorded by allocating total costs incurred between
the loan and servicing rights based on their relative fair values. MSRs are amortized in proportion to the estimated
servicing income over the estimated life of the servicing portfolio. The Company performs an impairment review
of the MSRs and recognizes impairment through a valuation account. MSRs are a component of accrued interest
and other assets on the Consolidated Balance Sheet. Gains and losses on sales of loans are recognized at settlement
dates and are determined by the difference between the sales proceeds and the carrying value of the loans. All
sales are made with limited recourse. For the years ended December 31, 2012 and 2011, the Company recorded
gross servicing rights of $671,967 and $470,047 with a reserve for impairment of $315,477 and $150,322,
respectively.
Transfer of Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company;
(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
Cash Flow Information
The Company has defined cash and cash equivalents as those amounts included in the balance sheet captions “Cash
and due from banks” and “Interest-bearing deposits with other institutions” that have original maturities of less
than 90 days.
Reclassification of Comparative Amounts
Certain items previously reported have been reclassified to conform to the current year’s format. Such
reclassifications did not affect net income or stockholders’ equity.
There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per
share; therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the
basic and diluted earnings per share computation.
Weighted-average common shares outstanding
Average treasury stock shares
Average unearned nonvested restricted
share plan shares
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share
Additional common stock equivalents
(nonvested stock) used to calculate
diluted earnings per share
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share
2012
2011
672,382
(67,303)
616,925
(69,675)
(10,468)
(8,515)
594,611
538,735
272
923
710
1,291
595,806
540,736
Options to purchase 68,626 and 48,620 shares of common stock at a price of $51.50 to $96.75, as of
December 31, 2012 and 2011, and 8,801 and 4,956 shares of restricted stock ranging in price from $51.00 to
$76.35, respectively, were not included in the computation of diluted earnings per share. To include these shares
would have been antidilutive.
3.
INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of investment securities available for sale are as follows:
2012
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
$
4,992,428
44,667,778
$
114,029
680,635
$
$
(27,397)
(74,593)
5,079,060
45,273,820
48,039,353
4,015,236
29,931,421
131,646,216
162,990
3,241,734
9,806
872,420
4,918,624
55,254
(50,758)
(408,537)
(7,567)
(568,852)
-
51,230,329
3,616,505
30,796,274
135,995,988
218,244
U.S. treasury securities
U.S. government agency securities
Obligations of states and political
subdivisions
Corporate securities
Mortgage-backed securities in
government-sponsored entities
Total debt securities
Equity securities in financial institutions
Total
$
131,809,206
$
4,973,878
$
(568,852)
$
136,214,232
12
22
13
23
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
3.
INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)
3.
INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)
2011
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
$
23,682,923
$
688,742
$
(50)
$
24,371,615
51,204,454
3,365,045
31,861,904
110,114,326
318,800
3,054,779
-
451,776
4,195,297
56,725
(36,077)
(463,700)
(3,093)
(502,920)
(11,736)
54,223,156
2,901,345
32,310,587
113,806,703
363,789
U.S. government agency securities
Obligations of states and political
subdivisions
Corporate securities
Mortgage-backed securities in
government-sponsored entities
Total debt securities
Equity securities in financial institutions
Total
$
110,433,126
$
4,252,022
$
(514,656)
$
114,170,492
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment
category and length of time that the individual securities have been in a continuous unrealized loss position, at
December 31, 2012 and 2011.
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
2012
Twelve Months or Greater
Fair
Value
Gross
Unrealized
Losses
Total
Fair
Value
Gross
Unrealized
Losses
$
3,010,780
$
(27,397)
$
12,999,055
(74,593)
3,206,412
877,282
(50,758)
(8,571)
-
-
-
1,567,534
$
-
-
$
3,010,780
$
(27,397)
12,999,055
(74,593)
-
(399,966)
3,206,412
2,444,816
(50,758)
(408,537)
1,079,860
21,173,389
$
(7,567)
(168,886)
$
-
$
1,567,534
$
-
(399,966)
$
1,079,860
22,740,923
$
(7,567)
(568,852)
U.S. treasury
securities
U.S. government
agency securities
Obligations of states
and political
subdivisions
Corporate securities
Mortgage-backed
securities in govern-
ment-sponsored
entities
Total
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
2011
Twelve Months or Greater
Fair
Value
Gross
Unrealized
Losses
Total
Fair
Value
Gross
Unrealized
Losses
$
999,950
$
(50)
$
-
$
-
$
999,950
$
(50)
321,942
2,315,813
(82)
(81,732)
436,796
585,532
(35,995)
(381,968)
758,738
2,901,345
(36,077)
(463,700)
6,745,746
10,383,451
(3,093)
(84,957)
-
1,022,328
-
(417,963)
6,745,746
11,405,779
(3,093)
(502,920)
167,456
(11,736)
-
-
167,456
(11,736)
U.S. government
agency securities
Obligations of states
and political
subdivisions
Corporate securities
Mortgage-backed
securities in govern-
ment-sponsored
entities
Total debt securities
Equity securities in
financial institutions
Total
$
10,550,907
$
(96,693)
$
1,022,328
$
(417,963)
$
11,573,235
$
(514,656)
U.S. treasury securities. The unrealized loss on two investments in U.S. treasury notes was caused by interest rate
increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less
than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and
it is not more likely than not that the Company will be required to sell the investments before recovery of their
amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-
temporarily impaired at December 31, 2012.
U.S. government agency securities. The unrealized loss on ten investments in U.S. government obligations and
direct obligations of U.S. government agencies was caused by interest rate increases. The contractual terms of
these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the
investments. Because the Company does not intend to sell the investments and it is not more likely than not that
the Company will be required to sell the investments before recovery of their amortized cost basis, which
may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at
December 31, 2012.
Obligations of states and political subdivisions. The Company’s unrealized losses on seven municipal bonds
relates to investments within the governmental service sector. The unrealized losses are primarily caused by recent
decreases in profitability and profit forecasts, in general, by industry analysts. The contractual terms of these
investments do not permit the issuer to settle the security at a price less than the par value of the investment. The
Company currently does not believe it is probable that it will be unable to collect all amounts due according to the
contractual terms of the investments. Because the Company does not intend to sell the investments and it is not
more likely than not that the Company will be required to sell the investments before recovery of their par value,
which may be maturity, it does not consider these investments to be other-than-temporarily impaired at
December 31, 2012.
Corporate securities. The Company had unrealized losses on investments in six different debt securities with an
aggregate fair value of $2,444,816 at December 31, 2012. The unrealized losses on these debt securities amounted
to $408,537 at December 31, 2012. Due to dislocations in the credit markets broadly, and the lack of trading and
new issuances, market price indications generally reflect the lack of liquidity in the market. Prices on debt
securities were calculated by a third-party valuation company. The valuation methodology is based on the premise
that the fair value of the security’s collateral should approximate the fair value of its liabilities. Based on cash flow
forecasts for the securities, the Company expects to recover the remaining amortized cost of these securities.
14
24
15
25
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
3.
INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)
4.
LOANS
Furthermore, the Company does not intend to sell these securities and it is not more likely than not that the
Company will be required to sell these securities before recovery of their cost basis, which may be maturity.
Therefore, it does not consider these investments to be other-than-temporarily impaired at December 31, 2012.
Mortgage-backed securities in government-sponsored entities. The unrealized losses on the Company’s
investment in one mortgage-backed securities were caused by interest rate increases. The Company purchased this
investment at a premium relative to its face amount, and the contractual cash flows of the investment are
guaranteed by an agency of the U.S. government. Accordingly, it is expected that the security would not be settled
at a price less than the amortized cost basis of the Company’s investment. Because the decline in market value is
attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the
investment and it is not more likely than not that the Company will be required to sell the investment before
recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be
other-than-temporarily impaired at December 31, 2012.
Equity securities. The Company’s investments in three marketable equity securities consist primarily of common
stock of entities in the financial services industry. As of December 31, 2011, the Company recognized in earnings
impairment charges of $8,728 on one investment in common stock of a community bank, resulting from
the duration and extent to which the market value has been less than the cost and the performance of the
financial institution over the past two years. In 2012, the Company sold this security for a gain of $26,743. As of
December 31, 2012, the Company had no equity securities at an unrealized loss position.
The amortized cost and fair value of debt securities at December 31, 2012, by contractual maturity, are shown
below. Expected maturities of mortgage-backed securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Available for Sale
Amortized
Cost
$
2,263,153
18,172,632
46,546,919
64,663,512
Fair
Value
2,299,637
18,720,045
48,547,217
66,429,089
$
$
131,646,216
$
135,995,988
Investment securities with a carrying value of $75,688,114 and $79,829,596 at December 31, 2012 and 2011,
respectively, were pledged to secure deposits and other purposes as required by law.
The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment
securities available for sale for the years ended December 31:
Proceeds from sales
Gross gains
Gross losses
Other-than-temporary impairment loss
2012
2011
$
$
21,211,034
814,552
17,228
-
53,533,950
939,368
98,792
8,728
Major classifications of loans are summarized as follows:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivisions
Consumer
Residential real estate
Less allowance for loan losses
Net loans
$
2012
2011
$
113,748,488
77,537,911
19,442,003
24,657,876
45,091,647
77,429,915
357,907,840
6,867,370
120,270,997
79,754,672
19,294,360
25,125,149
45,026,255
79,734,409
369,205,842
7,042,911
$
351,040,470
$
362,162,931
Mortgage loans serviced by the Company for others amounted to $69,900,031 and $54,190,608 at December 31,
2012 and 2011, respectively.
The Company grants residential, commercial, and consumer loans to customers throughout its trade area, which is
concentrated in central Pennsylvania. Such loans are subject to, at origination, credit risk assessment by
management following the Company’s lending policy. Although the Company has a diversified loan portfolio at
December 31, 2012 and 2011, a substantial portion of its debtors’ ability to honor their loan agreements is
dependent upon the economic stability of its immediate trade area.
In the normal course of business, loans are extended to directors, executive officers, and their associates. A
summary of loan activity for those directors, executive officers, and their associates with loan balances in excess of
$60,000 for the year ended December 31, 2012 is as follows:
2011
Additions
Amounts
Collected
2012
$
6,333,420
$
19,605,007
$
16,948,965
$
8,989,462
5.
ALLOWANCE FOR LOAN LOSSES
Management has an established methodology to determine the adequacy of the allowance for loan losses that
assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan
losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the
following pools: commercial real estate loans, commercial and industrial loans, agricultural loans, state and
political subdivision loans, consumer loans, and residential real estate loans. Historical loss percentages for each
risk category are calculated and used as the basis for calculating allowance allocations. These historical loss
percentages are calculated over a three-year period for all portfolio segments. Certain qualitative factors are then
added to the historical loss percentages to get the adjusted factor to be applied to nonclassified loans.
16
26
17
27
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
The following qualitative factors are analyzed to determine allocations for nonclassified loans for each portfolio
segment:
Changes in lending policies and procedures
Changes in economic and business conditions
Changes in nature and volume of the loan portfolio
Changes in lending staff experience and ability
Changes in past-due loans, nonaccrual loans, and classified loans
Changes in loan review
Changes in underlying value of collateral-dependent loans
Levels of credit concentrations
Effects of external factors, such as legal and regulatory requirements
These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the Bank’s
operating environment. During 2012, management elevated the qualitative factors reserve percentage for all pools
of loans, although the increase was higher for commercial real estate loans and commercial and industrial loans.
Changes in lending staff experience and ability, changes in the nature and volume of the loan portfolio, changes in
the loan review process, and the effect of external factors all contributed to the increase in factor percentages for
various loan pools. Changes in the underlying value of collateral-dependent loans also contributed to the factor
percentage increase for commercial real estate loans. The increase in factor percentages for consumer loans and
loans to state and political subdivisions was attributable to changes in economic and business conditions, as well as
changes in the lending staff. The change in credit staff experience and ability factor percentage was increased
because of the resignation of the Chief Credit Officer and the addition of some new, less experienced lending
personnel. Though a new Chief Credit Officer has been hired with over 40 years of experience in the banking
industry, potential risk levels remain elevated as his time with the Bank has been nominal and requires validation.
The effect of external factors’ percentage increased due to a number of reasons, including the enactment of the
Dodd-Frank Act and continued lack of economic growth. The changes in the underlying value of collateral-
dependent loans in the commercial real estate category are attributable to ongoing modest declines in market value
of commercial real estate within the Bank’s primary market area, while the changes in economic and business
conditions increase in the consumer loan category are attributable to stubbornly high unemployment numbers in
the Bank’s market area.
We consider commercial real estate loans, commercial and industrial loans, agricultural loans and consumer loans
to be riskier than one-to-four family residential mortgage loans. Commercial real estate loans entail significant
additional credit risks compared to one-to-four family residential mortgage loans, as they involve large loan
balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience
on loans secured by income-producing properties typically depends on the successful operation of the related real
estate project and/or business operation of the borrower who is also the primary occupant, and thus may be subject
to a greater extent to adverse conditions in the real estate market and in the general economy. Commercial and
industrial loans, along with agricultural loans, involve a higher risk of default than residential mortgage loans of
like duration since their repayment is generally dependent on the successful operation of the borrower’s business
and the sufficiency of collateral, if any. The repayment of agricultural loans can also be impacted by commodity
prices going up and down. Although a customer’s ability to repay for both one-to-four family residential mortgage
loans and consumer loans is highly dependent on the local economy, especially employment levels, consumer
loans as a group generally present a higher degree of risk because of the nature of collateral, if any.
State and political subdivision loans carry approximately the same risk as residential real estate loans as most state
and political subdivision loans are either backed by the full taxing authority of a municipality or the revenue of a
municipal authority.
The following tables present, by portfolio segment, the changes in the allowance for loan losses and the recorded
investment in loans as of and for the years ended December 31:
Commercial
Real Estate
Commercial
and
Industrial
Agricultural
2012
State and
Political
Subdivisions
Consumer
Residential
Real Estate
Unallocated
Total
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance
individually evaluated
for impairment
Ending balance
collectively evaluated
for impairment
Loans:
Individually evaluated
for impairment
Collectively evaluated
for impairment
$
$
3,610,905
(270,731)
3,208
(697,305)
2,646,077
2,082,685
(23,732)
2,148
(41,449)
2,019,652
$
$
202,520
(23,376)
-
41,041
220,185
$
$
101,551
-
-
30,463
132,014
$
$
$
$
$
311,203
(108,292)
3,439
141,136
347,486
361,607
(28,205)
-
137,336
470,738
372,440
-
-
658,778
1,031,218
$
$
7,042,911
(454,336)
8,795
270,000
6,867,370
$
$
$
$
309,060
$
645,765
$
-
$
-
$
-
$
22,240
$
-
$
977,065
$
2,337,017
$
1,373,887
$
220,185
$
132,014
$
347,486
$
448,498
$
1,031,218
$
5,890,305
$
4,361,721
$
1,579,920
$
407,170
$
-
$
161,774
$
593,021
$
-
$
7,103,606
109,386,767
75,957,991
19,034,833
24,657,876
44,929,873
76,836,894
-
350,804,234
Ending balance
$
113,748,488
$
77,537,911
$
19,442,003
$
24,657,876
$
45,091,647
$
77,429,915
$
-
$
357,907,840
Commercial
Real Estate
Commercial
and
Industrial
Agricultural
2011
State and
Political
Subdivisions
Consumer
Residential
Real Estate
Unallocated
Total
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance
individually evaluated
for impairment
Ending balance
collectively evaluated
for impairment
Loans:
Individually evaluated
for impairment
Collectively evaluated
for impairment
$
3,023,441
-
-
587,464
3,610,905
$
$
$
1,854,554
(6,258)
9,738
224,651
2,082,685
$
$
255,190
-
1,402
(54,072)
202,520
$
$
105,893
-
-
(4,342)
101,551
$
$
403,463
(10,691)
3,279
(84,848)
311,203
$
$
455,083
-
-
(93,476)
361,607
$
$
147,817
-
-
224,623
372,440
$
$
6,245,441
(16,949)
14,419
800,000
7,042,911
$
495,725
$
272,299
$
-
$
-
$
29,000
$
59,840
$
-
$
856,864
$
3,115,180
$
1,810,386
$
202,520
$
101,551
$
282,203
$
301,767
$
372,440
$
6,186,047
$
4,476,570
$
1,252,246
$
90,993
$
-
$
104,289
$
269,806
$
-
$
6,193,904
115,794,427
78,502,426
19,203,367
25,125,149
44,921,966
79,464,603
-
363,011,938
Ending balance
$
120,270,997
$
79,754,672
$
19,294,360
$
25,125,149
$
45,026,255
$
79,734,409
$
-
$
369,205,842
18
28
19
29
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
Reserve requirement for commercial real estate loans decreased by $697,304 from 2011 to 2012, while those for
commercial and industrial loans decreased by $41,449 during the same period. This was a direct result of
decreases during 2012 of criticized and classified assets which at $27.8 million at December 31, 2012, indicates a
42.41 percent or $20.5 million decrease from December 31, 2011. While the reduced balances in criticized and
classified assets signify better management of the portfolio and reduced risk to the Bank, management has chosen
to adopt a more conservative approach and evaluate sustained performance of these loans.
Credit Quality Information (Continued)
For consumer and residential real estate loans, the Company evaluates credit quality based on whether the loan is
considered performing or nonperforming. Nonperforming loans are those loans past due 90 days or more and loans
on nonaccrual. The following tables present the balances of consumer and residential real estate loans by classes
of loan portfolio based on payment performance as of December 31:
Credit Quality Information
The following tables represent the commercial credit exposures by internally-assigned grades for the years ended
December 31, 2012 and 2011, respectively. The grading analysis estimates the capability of the borrower to repay
the contractual obligations under the loan agreements as scheduled or at all. The Company’s internal credit risk
grading system is based on experiences with similarly graded loans.
The Company’s internally-assigned grades are as follows:
Pass loans are loans which are protected by the current net worth and paying capacity of the obligor or by the value
of the underlying collateral. Special Mention loans are loans where a potential weakness or risk exists, which
could cause a more serious problem if not corrected. Substandard loans are loans that have a well-defined
weakness based on objective evidence and are characterized by the distinct possibility that the Company will
sustain some loss if the deficiencies are not corrected. Doubtful loans have all the weaknesses inherent in a
substandard asset and these weaknesses make collection or liquidation in full highly questionable and improbable,
based on existing circumstances. Finally, loans classified as Loss are considered uncollectible, or of such value
that continuance as an asset is not warranted.
Commercial
Real Estate
Commercial
and
Industrial
$
$
102,453,018
4,970,737
6,285,096
39,637
-
$
69,619,198
5,320,354
2,362,688
235,671
-
2012
Agricultural
18,013,206
784,330
563,974
80,493
-
State and
Political
Subdivisions
$
24,657,876
$
-
-
-
-
Total
214,743,298
11,075,421
9,211,758
355,801
-
$
113,748,488
$
77,537,911
$
19,442,003
$
24,657,876
$
235,386,278
Commercial
Real Estate
Commercial
and
Industrial
$
$
90,581,881
9,447,786
17,856,862
2,384,468
-
$
63,974,717
5,523,313
9,731,488
525,154
-
2011
Agricultural
$
17,650,944
598,908
1,044,508
-
-
State and
Political
Subdivisions
$
24,912,457
212,692
-
-
-
Total
197,119,999
15,782,699
28,632,858
2,909,622
-
$
120,270,997
$
79,754,672
$
19,294,360
$
25,125,149
$
244,445,178
Pass
Special Mention
Substandard
Doubtful
Loss
Total
Pass
Special Mention
Substandard
Doubtful
Loss
Total
Performing
Nonperforming
Total
Performing
Nonperforming
Total
Consumer
45,030,460
61,187
45,091,647
Consumer
44,872,546
153,709
45,026,255
$
$
$
$
2012
Residential
Real Estate
77,028,748
401,167
77,429,915
2011
Residential
Real Estate
79,066,061
668,348
79,734,409
$
$
$
$
$
$
$
$
Total
122,059,208
462,354
122,521,562
Total
123,938,607
822,057
124,760,664
Age Analysis of Past-Due Loans by Class
The following are tables which show the aging analysis of past-due loans as of December 31:
2012
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
Greater
Past Due
Total
Past Due
Current
Total
Loans
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
Total
$
-
237,590
-
112,696
139,288
418,377
907,951
$
$
$
$
$
$
27,099
81,851
3,675
-
43,201
-
155,826
3,517,492
80,560
323,002
-
61,187
401,167
4,383,408
3,544,591
400,001
326,677
112,696
243,676
819,544
5,447,185
110,203,897
77,137,910
19,115,326
24,545,180
44,847,971
76,610,371
352,460,655
113,748,488
77,537,911
19,442,003
24,657,876
45,091,647
77,429,915
357,907,840
$
$
$
$
$
2011
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
Greater
Past Due
Total
Past Due
Current
Total
Loans
$
$
$
$
$
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
Total
954,872
480,256
257,928
118,908
189,895
138,046
2,139,905
$
1,194,157
-
-
-
45,219
-
$
1,239,376
2,783,066
729,903
90,993
-
153,709
668,348
4,426,019
4,932,095
1,210,159
348,921
118,908
388,823
806,394
7,805,300
115,338,902
78,544,513
18,945,439
25,006,241
44,637,432
78,928,015
361,400,542
120,270,997
79,754,672
19,294,360
25,125,149
45,026,255
79,734,409
369,205,842
$
$
$
$
$
Recorded
Investment
90 Days
and Accruing
-
$
-
-
-
3,676
-
3,676
$
Recorded
Investment
90 Days
and Accruing
-
$
-
-
-
49,420
398,542
447,962
$
20
30
21
31
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired Loans
Impaired Loans (Continued)
Management considers commercial real estate loans, commercial and industrial loans, agricultural loans, and state
and political subdivision loans which are 90 days or more past due to be impaired. After becoming 90 days or
more past due, these categories of loans are measured for impairment. Any consumer and residential real estate
loans related to these delinquent loans are also considered to be impaired. Troubled debt restructurings are
measured for impairment at the time of restructuring. These loans are analyzed to determine if it is probable that
all amounts will not be collected according to the contractual terms of the loan agreement. If management
determines that the fair value of the impaired loan is less than the recorded investment in the loan (net of previous
charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through
a provision or through a charge to the allowance for loan losses.
The following tables include the recorded investment and unpaid principal balances for impaired loans with the
associated allowance amount as of December 31:
Recorded
Investment
Unpaid
Principal
Balance
2012
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
$
With an allowance recorded:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
Total:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
$
3,413,066
436,829
407,170
-
161,774
372,194
$
3,413,066
436,829
407,170
-
161,774
372,194
4,791,033
4,791,033
$
-
-
-
-
-
-
-
948,655
1,143,091
-
-
-
220,827
948,655
1,143,091
-
-
-
220,827
2,312,573
2,312,573
4,361,721
1,579,920
407,170
-
161,774
593,021
4,361,721
1,579,920
407,170
-
161,774
593,021
309,060
645,765
-
-
-
22,240
977,065
309,060
645,765
-
-
-
22,240
$
3,589,772
642,595
252,420
-
113,093
387,838
4,985,718
1,746,439
1,165,633
6,251
-
35,377
188,666
3,142,366
5,336,211
1,808,228
258,671
-
148,470
576,504
Total
$
7,103,606
$
7,103,606
$
977,065
$
8,128,084
$
32,786
10,993
-
-
-
753
44,532
2,955
-
-
-
-
-
2,955
35,741
10,993
-
-
-
753
47,487
With no related allowance recorded:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
$
With an allowance recorded:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
Total:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
Recorded
Investment
Unpaid
Principal
Balance
2011
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
2,561,616
287,539
90,993
-
57,083
231,066
$
2,561,616
287,539
90,993
-
57,083
231,066
3,228,297
3,228,297
-
-
-
-
-
-
-
$
$
2,318,776
1,236,654
173,373
-
94,985
224,562
4,048,350
129,281
59,394
3,893
-
8,351
4,112
205,031
1,914,954
964,707
-
-
47,206
38,740
1,914,954
964,707
-
-
47,206
38,740
2,965,607
2,965,607
4,476,570
1,252,246
90,993
-
104,289
269,806
4,476,570
1,252,246
90,993
-
104,289
269,806
495,725
272,299
-
-
29,000
59,840
856,864
495,725
272,299
-
-
29,000
59,840
483,530
147,859
-
-
11,801
22,598
665,788
2,802,306
1,384,513
173,373
-
106,786
247,160
-
-
-
-
-
-
-
129,281
59,394
3,893
-
8,351
4,112
205,031
Total
$
6,193,904
$
6,193,904
$
856,864
$
4,714,138
$
Nonaccrual Loans
Loans are considered nonaccrual upon reaching 90 days of delinquency even though the Company may be
receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on
nonaccrual status, previously accrued but unpaid interest is deducted from interest income.
On the following table are the loan balances on nonaccrual status as of December 31:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivision
Consumer
Residential real estate
Total
2012
$
4,361,721
1,579,920
407,170
-
161,774
593,021
$
2011
4,476,570
1,252,246
90,993
-
104,289
269,806
$
7,103,606
$
6,193,904
22
32
23
33
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
6.
PREMISES AND EQUIPMENT
Troubled Debt Restructuring
Major classifications of premises and equipment are summarized as follows:
The Company’s loan portfolio also includes certain loans that have been modified in a troubled debt restructuring,
where economic concessions have been granted to borrowers who have experienced or are expected to experience
financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could
include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.
When the Company modifies a loan, management evaluates any possible impairment based on the present value of
expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when
the sole remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases,
management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If
management determines that the value of the modified loan is less than the recorded investment in the loan,
impairment is recognized by segment of class of loan, as applicable, through a charge-off to the allowance.
Segment and class status is determined by the loan’s classification at origination. As of December 31, 2012 no
specific reserves have been established against the troubled debt restructurings. Also, as of December 31, 2012 no
charge-offs for the troubled debt restructurings were required.
Loan modifications that are considered troubled debt restructurings completed during the years ended December 31
were as follows:
2012
Pre-Modification
Post-Modification
Number of Outstanding Recorded Outstanding Recorded
Contracts
Investment
Investment
Land and land improvements
Building and leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Total
2012
2011
$
$
793,458
16,623,584
5,530,468
22,947,510
7,868,712
793,458
15,535,165
5,538,570
21,867,193
7,655,566
$
15,078,798
$
14,211,627
Depreciation and amortization charged to operations was $1,034,512 in 2012 and $937,985 in 2011.
7.
GOODWILL
As of each of the years ended December 31, 2012 and 2011, goodwill had a carrying amount of $1,668,699. The
gross carrying amount of goodwill was tested for impairment in the third quarter, after the annual forecasting
process. There was no impairment for the years ended December 31, 2012 and 2011.
8.
DEPOSITS
The scheduled maturities of time deposits approximate the following:
Troubled debt restructurings:
Commercial real estate
Commercial and industrial
Agricultural
Residential real estate
Total
2
2
1
3
8
$
121,576
668,167
85,993
323,287
$
121,576
668,167
85,993
323,287
$
1,199,023
$
1,199,023
2011
Pre-Modification
Post-Modification
Year Ending
December 31,
2013
2014
2015
2016
2017
Thereafter
Number of Outstanding Recorded Outstanding Recorded
Contracts
Investment
Investment
Troubled debt restructurings:
Commercial real estate
Commercial and industrial
Total
4
1
5
$
2,148,060
50,299
$
2,148,060
50,299
$
2,198,359
$
2,198,359
$
Amount
78,690,900
29,957,826
17,120,175
5,561,284
6,765,087
20,596,270
$
158,691,542
The aggregate of all time deposit accounts of $100,000 or more amounted to $54,466,112 and $62,843,237 at
December 31, 2012 and 2011, respectively.
9.
SHORT-TERM BORROWINGS
Short-term borrowings include overnight repurchase agreements through the FHLB, Federal Funds Purchased, and
repurchase agreements with customers. Short-term borrowings also include a $5,000,000 unsecured line of credit
with a commercial bank for the years ended December 31, 2012 and 2011, respectively. The line of credit
agreement contains various covenants requiring the Company to maintain certain levels of financial performance.
The outstanding balances and related information for short-term borrowings are summarized as follows:
Balance at year-end
Average balance outstanding
Maximum month-end balance
Weighted-average rate at year-end
Weighted-average rate during the year
$
2012
2011
$
4,157,290
6,354,923
11,001,139
2.50%
1.43%
5,696,162
10,577,428
16,028,082
1.56%
1.93%
24
34
25
35
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
10. OTHER BORROWINGS
10. OTHER BORROWINGS (Continued)
The following table sets forth information concerning other borrowings:
Description
Convertible
Fixed rate
Fixed rate amortizing
Mid-term repos
Subordinated capital notes
Note payable
Maturity Range
From
To
n/a
01/07/13
07/17/13
07/08/13
03/23/19
03/17/35
n/a
11/14/17
06/26/18
07/08/13
03/02/21
11/23/35
Weighted-
Average
Interest Rate
Stated Interest
Rate Range
From
To
At December 31,
2012
2011
n/a
3.09
3.36
1.53
7.82
4.21
% n/a % n/a % $
-
$
1.09
1.95
1.53
3.86
2.31
4.96
6.53
1.53
8.50
6.11
25,014,605
3,170,489
3,000,000
4,750,000
6,186,000
5,000,000
28,484,805
4,629,113
3,000,000
4,750,000
6,186,000
$
42,121,094
$
52,049,918
Maturities of other borrowings at December 31, 2012 are summarized as follows:
Year Ending
December 31,
2013
2014
2015
2016
2017
2018 and after
$
Amount
15,262,119
4,217,600
4,026,822
2,012,000
5,457,229
11,145,324
$
42,121,094
Weighted-
Average Rate
3.34 %
3.19
2.81
1.34
2.35
5.79
3.70 %
Borrowing capacity consists of credit arrangements with the FHLB. FHLB borrowings are subject to annual
renewal, incur no service charges, and are secured by a blanket security agreement on certain investment and
mortgage-backed securities, outstanding residential mortgages, and the Bank’s investment in FHLB stock. As of
December 31, 2012, the Bank’s maximum borrowing capacity with the FHLB was approximately $165 million.
The Company formed a special purpose entity (“Entity”) to issue $3,093,000 of fixed/floating rate subordinated
debt securities with a stated maturity of March 17, 2035. The rate on these securities is determined quarterly and
floats based on three-month LIBOR plus 2.00 percent. The Entity may redeem them, in whole or in part, at face
value on or after March 17, 2010. The Company borrowed the proceeds from the Entity in the form of a
$3,093,000 note payable, which is included in the liabilities section of the Company’s Consolidated Balance Sheet.
The Company formed an additional special purpose entity to issue $3,093,000 of fixed/floating rate subordinated
debt securities with a stated maturity of November 23, 2035. These securities bear a fixed rate of 6.11 percent until
November 23, 2015, at which time the rate is determined quarterly and floats based on three-month LIBOR plus
1.50 percent. The Entity may redeem them, in whole or in part, at face value on or after November 23, 2010. The
Company borrowed the proceeds from the Entity in the form of a $3,093,000 note payable, which is included in the
liabilities section of the Company’s Consolidated Balance Sheet.
The Company’s minority interests in these entities were recorded at the initial investment amount and are included
in the accrued interest and other assets on the Consolidated Balance Sheet. These entities are not consolidated as
part of the Company’s consolidated financial statements.
The Bank may request a Federal Reserve Advance secured by acceptable collateral. The Bank’s maximum
borrowing capacity with the Federal Reserve Bank as of December 31, 2012, is approximately $11.7 million.
26
36
The Bank also maintains a $5.0 million and $4.0 million federal funds line of credit with two other financial
institutions. The Bank did not have outstanding borrowings related to these lines of credit at December 31, 2012.
The Company issued $3,000,000 of fixed rate subordinated debt securities with stated maturities of
March 23, 2019 through June 26, 2019. These securities bear a fixed annual rate of 8.5 percent. The Company
may redeem them, in whole or in part, at face value on or after March 23, 2014. These borrowings are included in
the liabilities section of the Company’s Consolidated Balance Sheet.
The Company issued $1,700,000 of fixed rate subordinated debt securities with stated maturities of November 12,
2020 through February 10, 2021 and $50,000 of adjustable rate subordinated debt securities with a stated maturity
of March 2, 2021. The fixed securities bear an annual rate of 6.75 percent and the adjustable rate securities bear a
rate of three-month LIBOR plus 3.50 percent and adjust quarterly. The Company may redeem them, in whole or in
part, at face value on or after November 12, 2015. These borrowings are included in the liabilities section of the
Company’s Consolidated Balance Sheet.
11.
INCOME TAXES
The provision for federal income taxes consists of:
Current
Deferred
Total provision
2012
2011
$
$
507,193
31,885
$
542,867
(104,051)
539,078
$
438,816
The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities are as follows:
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Core deposit intangible assets
Alternative minimum tax carryforward
Asset valuation allowances
Employee compensation accruals
Nonaccrual interest receivable
Capital loss carryforward
Other
Deferred tax assets
Deferred tax liabilities:
Premises and equipment
Goodwill
Deferred loan fees
Partnerships
Other
Unrealized gain on available-for-sale securities
Deferred tax liabilities
$
2012
2011
$
2,334,906
213,444
24,382
519,020
348,672
275,083
166,997
232,403
2,940
4,117,847
1,088,401
550,359
116,088
229,620
5,417
1,451,711
3,441,596
2,394,590
235,036
32,759
479,512
313,102
266,212
84,741
228,767
-
4,034,719
1,052,800
506,450
141,356
168,844
5,417
1,270,707
3,145,574
Net deferred tax assets
$
676,251
$
889,145
No valuation allowance was established at December 31, 2012 and 2011 in view of the Company’s ability to
carryback taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income
as evidenced by the Company’s earnings potential.
27
37
notes to Consolidated Financial Statements
11.
INCOME TAXES (Continued)
The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is
as follows:
Provision at statutory rate
Tax-exempt interest
Life insurance income
Other
Actual tax expense
and effective rate
2012
2011
% of
Pretax
Income
% $
34.0
(17.4)
(2.3)
(1.3)
Amount
1,385,395
(804,586)
(99,776)
(42,217)
% of
Pretax
Income
%
34.0
(19.7)
(2.5)
(1.0)
Amount
1,417,418
(726,767)
(96,343)
(55,230)
539,078
13.0 % $
438,816
10.8 %
$
$
The Company prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax
positions should be recognized in the financial statements only when it is more likely than not that the tax position
will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all
relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the
first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that
no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent
financial reporting period in which that threshold is no longer met.
There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company
recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income
taxes in the Consolidated Statement of Income. The Company’s federal and state income tax returns for taxable
years through 2008 have been closed for purposes of examination by the Internal Revenue Service and the
Pennsylvania Department of Revenue.
12. EMPLOYEE BENEFITS
Savings Plan
The Bank maintains a qualified 401(k) salary reduction and profit sharing plan that covers substantially all
employees. Under the plan, employees make voluntary, pretax contributions to their accounts, and the Bank
contributions to the plan are at the discretion of the Board of Directors. Contributions by the Bank charged to
operations were $251,048 and $214,295 for the years ended December 31, 2012 and 2011, respectively. The fair
value of plan assets includes $705,376 and $627,270 pertaining to the value of the Company’s common stock that
is held by the plan as of December 31, 2012 and 2011, respectively.
Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan that allows directors to defer fees. Outstanding
balances under this arrangement for 2012 and 2011 were $627,775 and $691,282, respectively, and are reported as
“Other liabilities” on the Consolidated Balance Sheet. Expenses related to this plan were $50,398 and $1,616 for
December 31, 2012 and 2011, respectively.
notes to Consolidated Financial Statements
12. EMPLOYEE BENEFITS (Continued)
Restricted Stock Plan
The Company maintains a Restricted Stock Plan (the “Plan”). Employees and non-employee corporate directors
are eligible to receive awards of restricted stock based upon performance-related requirements. Awards granted
under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements
including continuous employment or service with the Company. The Company has authorized 12,000 shares of the
Company’s common stock. The Plan assists the Company in attracting, retaining and motivating employees and
non-employee directors to make substantial contributions to the success of the Company and to increase the
emphasis on the use of equity as a key component of compensation. Compensation expense recognized related to
the vesting of shares was $203,857 and $193,319 for the years ended December 31, 2012 and 2011, respectively.
The following is a summary of the status of the Company’s restricted stock as of December 31, 2012, and changes
therein during the year then ended:
Nonvested at January 1, 2012
Granted
Vested
Forfeited
Number of
Shares of
Restricted Stock
9,522
4,748
(3,394)
(733)
Weighted-
Average
Grant Date
Fair Value
$ 62.89
61.17
63.98
61.39
Nonvested at December 31, 2012
10,143
$ 61.54
Stock Option Plan
The Company has a fixed director and employee stock-based compensation plan. The plan has total options
available to grant of 190,000 shares of common stock. The exercise price for the purchase of shares subject to a
stock option may not be less than 100 percent of the fair market value of the shares covered by the option on the
date of the grant. The term of stock options will not exceed ten years from the date of grant. Options granted are
primarily vested evenly over a three-year period from the grant date.
The following table presents share data related to the outstanding options:
Outstanding, January 1, 2012
Granted
Exercised
Forfeited
Outstanding, December 31, 2012
Exercisable at year-end
Number of
Options
78,237
12,200
-
(11,301)
79,136
54,993
Weighted-
Average
Exercise
Price
77.04
60.00
-
90.00
75.23
77.63
$
$
$
28
38
29
39
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
12. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
The following table summarizes the characteristics of stock options at December 31, 2012:
Grant Date
12/29/03
03/16/04
05/26/04
06/30/04
01/05/05
02/03/05
02/09/05
02/10/05
02/24/05
03/29/05
04/26/05
07/08/05
12/08/05
12/10/05
12/16/05
12/22/05
01/25/07
02/23/07
01/31/08
03/26/09
10/27/09
04/01/10
04/28/11
10/11/11
12/22/11
04/02/12
$
Exercise
Price
91.25
91.25
94.00
96.75
93.00
93.00
93.00
95.00
96.00
96.00
96.00
96.00
95.00
95.25
95.00
95.00
88.00
90.00
76.35
51.00
70.00
68.25
59.50
62.00
56.00
60.00
Outstanding
Contractual
Average
Life
Average
Exercise
Price
1.00 $
1.20
1.40
1.49
2.01
2.09
2.11
0.21
2.15
2.24
2.32
2.52
2.93
2.94
2.96
2.97
4.07
4.15
4.08
6.23
6.82
7.25
8.24
8.77
8.98
9.24
91.25
91.25
94.00
96.75
93.00
93.00
93.00
95.00
96.00
96.00
96.00
96.00
95.00
95.25
95.00
95.00
88.00
90.00
76.35
51.00
70.00
68.25
59.50
62.00
56.00
60.00
Shares
3,168
3,450
734
2,618
8,127
380
26
100
42
3
441
333
1,401
3
150
4,440
545
525
6,750
9,800
1,000
10,300
11,800
500
300
12,200
79,136
Exercisable
Average
Exercise
Price
91.25
91.25
94.00
96.75
93.00
93.00
93.00
95.00
96.00
96.00
96.00
96.00
95.00
95.25
95.00
95.00
88.00
90.00
76.35
51.00
70.00
68.25
59.50
62.00
56.00
$
Shares
3,168
3,450
734
2,618
8,127
380
26
100
42
3
441
333
1,401
3
150
4,440
545
525
6,750
9,800
1,000
6,798
3,894
165
100
-
54,993
13. COMMITMENTS
In the normal course of business, there are outstanding commitments and contingent liabilities such as
commitments to extend credit, financial guarantees, and letters of credit that are not reflected in the accompanying
consolidated financial statements. The Company does not anticipate any losses as a result of these transactions.
These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the Consolidated Balance Sheet.
13. COMMITMENTS (Continued)
The contract or notional amounts of those instruments reflect the extent of involvement the Company has in the
particular classes of financial instruments that consisted of the following:
Commitments to extend credit
Standby letters of credit
Total
2012
2011
$
$
106,638,654
5,424,804
$
94,033,585
5,091,765
112,063,458
$
99,125,350
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance
of a customer to a third party. These instruments are issued primarily to support bid or performance-related
contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option
subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon
expiration of the commitment period. For secured letters of credit, the collateral is typically Bank deposit
instruments or real estate.
The Bank has committed to various operating leases for their branch and office facilities. Some of these leases
include renewal options as well as specific provisions relating to rent increases. The minimum annual rental
commitments under these leases outstanding at December 31, 2012 are as follows:
2013
2014
2015
2016
2017
Thereafter
Total
Minimum
Lease Payment
272,992
269,032
269,032
235,363
235,363
3,598,280
4,880,062
$
$
Rent expense under leases for each of the years ended December 31, 2012 and 2011 was $364,896 and $285,923,
respectively.
Contingent Liabilities
The Company from time to time may be a party in various legal actions from the normal course of business
activities. Management believes the liability, if any, arising from such actions will not have a material adverse
effect on the Company’s financial position.
30
40
31
41
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
14. REGULATORY RESTRICTIONS
Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The required
reserve at December 31, 2012 and 2011, was $1,503,000 and $1,513,000, respectively.
Loans
Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific
obligations. Further, such secured loans are limited in amount to 10 percent of the Bank’s common stock and
capital surplus.
Dividends
The approval of the Comptroller of the Currency is required before a national bank can pay any dividends up to the
Company if the total of all dividends declared in any calendar year would exceed net profits, as defined for that
year, combined with its retained net profits for the two preceding calendar years less any required transfers to
surplus. Under this formula, the amount available for payment of dividends in 2013, without prior approval of the
Comptroller, is approximately $8.1 million plus net profits retained in 2013 up to the date of the dividend
declaration.
In order to manage capital and support safety and soundness of the Company and the Bank, management has
decided to provide the banking regulators with written notice of any intention to pay dividends or make any capital
distributions.
15. REGULATORY CAPITAL
Federal regulations require the Company and the Bank to maintain minimum amounts of capital. Specifically, each
is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted
assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”)
established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Should any
institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a
series of increasingly restrictive regulatory actions.
As of December 31, 2012 and 2011, the FDIC categorized the Company and the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution,
Total risk-based, Tier I risk-based, and Tier I leverage capital ratios must be at least 10 percent, 6 percent, and 5
percent, respectively.
15. REGULATORY CAPITAL (Continued)
The Company’s actual capital ratios are presented in the following table that shows the Company met all
regulatory capital requirements:
2012
2011
Amount
Ratio
Amount
Ratio
Total capital
(to risk-weighted assets)
Actual
For capital adequacy purposes
To be well capitalized
Tier I capital
(to risk-weighted assets)
Actual
For capital adequacy purposes
To be well capitalized
Tier I capital
(to average assets)
Actual
For capital adequacy purposes
To be well capitalized
$
$
$
58,458,296
33,288,986
41,611,233
% $
14.05
8.00
10.00
55,927,625
32,307,719
40,384,648
48,203,132
16,644,493
24,966,740
% $
11.58
4.00
6.00
45,912,913
16,153,859
24,230,789
48,203,132
22,334,023
27,917,528
% $
8.63
4.00
5.00
45,912,913
22,229,663
27,787,078
%
13.85
8.00
10.00
%
11.37
4.00
6.00
%
8.26
4.00
5.00
The Bank’s actual capital ratios are presented in the following table which shows the Bank met all regulatory
capital requirements:
Total capital
(to risk-weighted assets)
Actual
For capital adequacy purposes
To be well capitalized
Tier I capital
(to risk-weighted assets)
Actual
For capital adequacy purposes
To be well capitalized
Tier I capital
(to average assets)
Actual
For capital adequacy purposes
To be well capitalized
2012
2011
Amount
Ratio
Amount
Ratio
$
$
$
58,557,150
33,124,360
41,405,450
% $
14.14
8.00
10.00
54,533,683
32,179,644
40,224,655
53,100,024
16,562,180
24,843,270
% $
12.82
4.00
6.00
49,313,930
16,089,862
24,134,793
53,100,024
22,247,473
27,809,341
% $
9.55
4.00
5.00
49,313,930
22,135,707
27,669,634
%
13.56
8.00
10.00
%
12.26
4.00
6.00
%
8.91
4.00
5.00
32
42
33
43
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
16.
FAIR VALUE MEASUREMENTS
16.
FAIR VALUE MEASUREMENTS (Continued)
The following disclosures show the hierarchal disclosure framework associated with the level of pricing
observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations
are as follows:
Level I:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:
Pricing inputs are other than the quoted prices in active markets, which are either directly or
indirectly observable as of the reported date. The nature of these assets and liabilities includes items
for which quoted prices are available but traded less frequently and items that are fair-valued using
other financial instruments, the parameters of which can be directly observed.
Level III:
Valuations derived from valuation techniques in which one or more significant inputs or significant
value drivers are unobservable.
This hierarchy requires the use of observable market data when available.
The following tables present the assets reported on the Consolidated Balance Sheet at their fair value as of
December 31, 2012 and 2011, by level within the fair value hierarchy. Financial assets and liabilities are classified
in their entirety based on the lowest level of input that is significant to the fair value measurement.
Assets:
U.S. treasury securities
U.S. government agency
securities
Obligations of states and
political subdivisions
Corporate securities
Mortgage-backed securities
in government-sponsored
entities
Total debt securities
Equity securities
December 31, 2012
Level I
Level II
Level III
Total
$
-
-
-
-
$
5,079,060 $
45,273,820
51,230,329
3,495,781
-
-
$
5,079,060
45,273,820
-
120,724
51,230,329
3,616,505
-
-
218,244
30,796,274
135,875,264
-
-
120,724
-
30,796,274
135,995,988
218,244
Total
$
218,244
$
135,875,264
$
120,724
$
136,214,232
Assets:
U.S. government agency
securities
Obligations of states and
political subdivisions
Corporate securities
Mortgage-backed securities
in government-sponsored
entities
Total debt securities
Equity securities
December 31, 2011
Level I
Level II
Level III
Total
$
-
-
-
$
24,371,615 $
-
$
24,371,615
54,223,156
2,801,028
-
100,317
54,223,156
2,901,345
-
-
363,789
32,310,587
113,706,386
-
-
100,317
-
32,310,587
113,806,703
363,789
Total
$
363,789
$
113,706,386
$
100,317
$
114,170,492
Financial instruments are considered Level III when their values are determined using pricing models, discounted
cash flow methodologies or similar techniques, and at least one significant model assumption or input is
unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments
typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial
instruments also include those for which the determination of fair value requires significant management judgment
or estimation. The following table presents the changes in the Level III fair-value category for the years ended
December 31, 2012 and 2011.
Balance, January 1, 2011
Sales
Net change on unrealized gain on investment
securities available for sale
Balance, January 1, 2012
Sales
Net change on unrealized gain on investment
securities available for sale
Balance, December 31, 2012
Corporate
Securities
$
1,454,151
(1,339,795)
(14,039)
100,317
-
20,407
$
120,724
The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at
their fair value as of December 31, 2012 and 2011, by level within the fair value hierarchy. Impaired loans that are
collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used
to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as
Level I inputs and observable inputs employed by certified appraisers for similar assets classified as Level II
inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and
34
44
35
45
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
16.
FAIR VALUE MEASUREMENTS (Continued)
17.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
assumptions developed by management based on the best information available under each circumstance, the asset
valuation is classified as Level III input. Other real estate owned is measured at fair value, less cost to sell at the
date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower
of carrying amount, or fair value less cost to sell. The fair value for mortgage servicing rights is estimated by
discounting contractual cashflows and adjusting for prepayment estimates. Discount rates are based upon rates
generally charged for such loans with similar characteristics.
Assets:
Impaired loans
Other real estate owned
Mortgage servicing rights
Assets:
Impaired loans
Other real estate owned
Mortgage servicing rights
Level I
Level II
Level III
Total
December 31, 2012
$
$
$
$
-
-
-
Level I
-
-
-
$
-
-
-
6,126,540 $
287,385
356,490
6,126,540
287,385
356,490
December 31, 2011
Level II
Level III
Total
$
-
-
-
$
5,337,040
370,173
319,725
5,337,040
370,173
319,725
The following table provides a listing of significant unobservable inputs used in the fair value measurement
process for items valued utilizing Level III techniques as of December 31, 2012.
Corporate securities
Fair Value
$
120,724
Impaired loans
$
6,126,541
Other real estate owned
$
287,385
Mortage servicing rights
$
356,490
Valuation
Technique
Discounted
cash flows
Property
appraisals
Property
appraisals
Discounted
cash flows
Unobservable
Input
Range
Projected defaults
0 projected defaults
Discount rate
17.76% discount rate
Management discount for
property type and recent
market volatality
Management discount for
property type and recent
market volatality
0% - 15% discount
0% - 15% discount
Discount rate
2.11 - 2.75% discount
Prepayment speeds
2.49 - 4.29 prepaymnet
factor
135,875,264
-
-
-
-
-
-
-
-
-
-
120,724
-
361,572,848
-
-
-
356,490
$
164,018,944
-
42,741,294
-
The estimated fair values of the Company’s financial instruments at December 31 are as follows:
Carrying
Value
Fair
Value
2012
Level
I
Level
II
Level
III
$
23,792,622
2,374,375
$
23,792,622
2,374,375
$
23,792,622
2,374,375
$
$
-
-
-
-
Financial assets:
Cash and cash equivalents
Certificates of deposit
Investment securities
available for sale
Loans held for sale
Net loans
Regulatory stock
Bank-owned life insurance
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
136,214,232
584,380
351,040,470
4,794,900
12,517,831
1,806,098
356,490
136,214,232
584,380
361,572,848
4,794,900
12,517,831
1,806,098
356,490
218,244
584,380
-
4,794,900
12,517,831
1,806,098
-
Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
$
$
460,447,071
4,157,290
42,121,094
766,587
465,777,223
4,157,290
42,741,294
766,587
$
301,758,279
4,157,290
$
-
766,587
2011
Carrying
Value
Fair
Value
$
41,181,771
1,619,833
$
41,181,771
1,619,833
114,170,492
1,401,376
362,162,931
4,602,584
12,097,673
2,089,706
319,725
114,170,492
1,401,376
367,556,756
4,602,584
12,097,673
2,089,706
319,725
Financial assets:
Cash and cash equivalents
Certificates of deposit
Investment securities
available for sale
Loans held for sale
Net loans
Regulatory stock
Bank-owned life insurance
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
$
$
454,660,313
5,696,162
52,049,918
948,603
460,020,954
5,696,162
53,352,801
948,603
36
46
37
47
notes to Consolidated Financial Statements
notes to Consolidated Financial Statements
17.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
17.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates
an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction
between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial
instrument, the estimated fair value would be calculated based upon the market price per trading unit of the
instrument.
If no readily available market exists, the fair value estimates for financial instruments should be based upon
management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future
estimated losses, and other factors as determined through various option pricing formulas or simulation modeling.
As many of these assumptions result from judgments made by management based upon estimates, which are
inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of
a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based
may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments,
the estimated fair value of financial instruments would not represent the full value of the Company.
Deposits
The fair values of certificates of deposit are based on the discounted value of contractual cash flows. The discount
rates are estimated using rates currently offered for similar instruments with similar remaining maturities.
Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end.
Other Borrowings
Fair values for other borrowings are estimated using a discounted cash flow calculation that applies contractual
costs currently being offered for similar borrowings.
Commitments to Extend Credit
These financial instruments are generally not subject to sale, and estimated fair values are not readily available.
The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of
credit, and the fair value, determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with similar credit risk, are not
considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are
presented in Note 13.
The Company employed simulation modeling in determining the estimated fair value of financial instruments for
which quoted market prices were not available based upon the following assumptions:
18.
SUBSEQUENT EVENTS
Cash and Cash Equivalents, Certificates of Deposit, Loans Held for Sale, Regulatory Stock, Accrued
Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings
Management has reviewed events occurring through March 20, 2013, the date the financial statements were issued,
and no subsequent events occurred requiring accrual or disclosure.
The fair value is equal to the current carrying value.
Investment Securities Available for Sale
The fair value of investment securities is equal to the available quoted market price. If no quoted market price is
available, fair value is estimated using the quoted market price for similar securities. Fair values for certain
corporate bonds were determined utilizing discounted cash flow models, due to the absence of a current market to
provide reliable market quotes for the instruments.
Loans
The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar
terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were
available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair
value.
Bank-Owned Life Insurance
The fair value is equal to the cash surrender value of the life insurance policies.
Mortgage Servicing Rights
The fair value for mortgage servicing rights is estimated by discounting contractual cash flows and adjusting for
prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar
characteristics.
38
48
39
49
the people of Kish Bank
BOARD OF DIRECTORS
OF KISH BANCORP, INC.
William P. Hayes, Chairman
James J. Lakso, Vice Chairman
William L. Dancy, Secretary
Spyros A. Degleris, Member
William S. Lake, Member
Alan J. Metzler, Member
Phyllis L. Palm, Member
Delmont R. Sunderland,
Member
BOARD OF DIRECTORS
OF KISH BANK
William P. Hayes, Chairman
James J. Lakso, Vice Chairman
William L. Dancy, Secretary
Spyros A. Degleris, Member
William S. Lake, Member
Alan J. Metzler, Member
Phyllis L. Palm, Member
CENTRE COUNTy
REGIONAl BOARD
Randall A. Bachman, Member
Thomas F. Brown, Member
Spyros A. Degleris, Member
David Horner, Member
Michael J. Krentzman, Member
Karen P. Shute, Member
Brandon M. Zlupko, Member
HUNTINGDON
COUNTy REGIONAl BOARD
Arthur J. DeCamp, Member
Wayne A. Hearn, Member
Steven Huston, Member
James J. Lakso, Member
Robert L. Orr, Member
Pamela Prosser, Member
Burgess A. Smith, Member
Delmont R. Sunderland,
Member
MIFFlIN COUNTy
REGIONAl BOARD
Michael A. Buffington, Member
Christina Calkins-Mazur,
Member
Ronald M. Cowan, Member
William L. Dancy, Member
Eric K. Fowler, Member
Nichola A. Hidlay, Member
William S. Lake, Member
Harvard K. McCardle, Member
Alan J. Metzler, Member
Gary L. Oden, Member
Phyllis L. Palm, Member
John Pannizzo, Member
ExECUTIVE OFFICERS
William P. Hayes, President,
Chief Executive Officer
J. Bradley Scovill, Senior
Executive Vice President,
Chief Operating Officer
John E. Arrington, Executive
Vice President, Sales &
Retail Banking Manager
William J. Hoyne, Vice President,
Chief Credit Officer
Sangeeta Kishore, Executive
Vice President, Chief Financial Officer
Robert S. McMinn, Executive
Vice President, Financial
Services and General Counsel
James L. Shilling, Jr., Executive
Vice President, Senior Lending Officer
SENIOR OFFICERS
Walter J. Kay, Senior Vice President,
Senior Information Officer
Amy M. Muchler, Senior Vice
President, Deposit Operations and
Branch Administration Director
Gerhard Royer, Senior Vice
President, Commercial Lender
Stanley N. Ayers, Vice President,
Special Assets Manager
Ronald B. Beyer, CFA®, Vice
President, Profitability & Investment
Portfolio Manager
Kathleen M. Boop, Vice President,
Personal Lines Insurance Manager
Larry E. Burger, Vice President,
Commercial Relationship Manager
David A. Coble, Vice President,
Branch Manager
John P. Cunningham, II, Vice
President, Regional Market Manager
Wade E. Curry, LUTCF, Vice
President, Investment Services
Ann K. Guss, Vice President,
Residential Lender
Allana L. Hartung, Vice President,
Commercial Relationship Manager
Gregory T. Hayes, Vice President,
Loan Services Manager
Carol M. Herrmann, Vice President,
Administration and Communications
Director/CEO, Kish Travel
Marsha K. Kuhns, Vice President,
Branch Manager
John Q. Massie, Vice President,
Commercial Relationship Manager
Scott R. Reigle, Vice President,
Accounting and Controls Manager/
BSA Officer
Melissa K. Royer, Vice President,
Service Support Manager &
Security Officer
Cheryl E. Shope, Vice President,
Residential Lender
Lana M. Walker, Vice President,
Commercial Relationship Manager
Debra K. Weikel, Vice President,
Loan Operations Director
Suzanne M. White, Vice President,
Human Resource Director
Jeffrey D. Wilson, Vice President,
CEO, Kish Agency
William W. Yaudes, Vice President,
Regional Market Manager
OFFICERS
Kimberly A. Bubb, Assistant Vice
President, Services and
Systems Manager
Oksana F. DeArment, Assistant
Vice President, Administrative
Services Manager
Terra L. Decker, Assistant BSA
Officer/Fraud Manager
Lucinda K. Dell, Assistant Vice
President, Mortgage Underwriting
Manager
Paul J. Fochler, Assistant Vice
President, Risk Manager
Carol K. Kennedy, Consumer
Lending Officer
Jeremy G. Mattern, Assistant
Vice President, Credit Administration
Manager
Peter K. Ort, Branch Manager
Matthew Q. Raptosh, Assistant Vice
President, Commercial Lender
Stephanie L. Strickler, CFMP,
Assistant Vice President,
Marketing Manager
N. Robert Sunday, III, Assistant
Vice President, Compliance Officer
Kayelene Sunderland, Assistant
Vice President, Wealth Management/
Trust Administrator
D. Michael Whalen, General Manager,
Kish Travel
Penny L. Zesiger, Assistant Vice
President, Residential Lender
KISH BANK EMPlOyEES
Natalie B. Allison, Commercial
Documentation Specialist
Tammy S. Anna, Customer Service
Teller
Amber V. Arnold, Deposit Operations
Specialist
Christina L. Bagrosky, Customer
Service Teller
Barry L. Bargo, Courier
Douglas C. Baxter, Accounting
Manager
Melissa D. Beale, Customer Service
Teller
Sara M. Bean, Marketing and
Communications Specialist
Emily S. Bloom, Executive Assistant
Julie L. Bond, Personal Banker
Stacy A. Boozel, Mortgage
Operations Specialist
Megan M. Boyer, Customer Service
Teller
Linda M. Brechbiel, Administrative
Assistant
Terry L. Buckwalter, Customer
Service Courier
Brittany A. Byler, Customer
Service Teller
Ruth H. Carper, Mortgage
Operations Underwriter
Karen L. Carter, Mortgage
Operations Underwriter
Stephanie L. Chilcote, Lending
Assistant
Ashley A. Clark, Deposit
Operations Specialist
Brenda Collins, Mortgage
Operations Specialist
Alisha D. Cooper, Personal Banker
Mary A. Cowher, Branch Manager
Richard D. Crider, ALCO Specialist
Jason M. Cunningham, Branch
Manager
Kati E. Deans, Mortgage Operations
Specialist
Peggy J. Dearing, Operations
Assistant
Jannifer N. Diehl, Loan Operations
Specialist
Mary S. Dietz, Collections Manager
Megan D. Dietz, Investment
Services Assistant
Angela D. Drake, Service Support
Specialist
Brandi M. Dufford, Deposit
Operations Specialist
Amanda S. Dutrow, Administrative
Assistant
Alexis E. Ertley, Personal Banker
Keatyn M. Fletcher, Loan
Operations Specialist
Ellen V. Fornicola, Personal Banker
Troy J. Frank, Network Administrator
Joshua A. Fritchman, Financial
Analyst
Jodie M. Gibboney, Personal Banker
Karen S. Gilbert, Commercial
Documentation Specialist
Beth N. Metz Gilmore, Human
Resources Assistant
Janice Y. Glick, Personal Banking
Specialist
Jessica L. Grove, Loan Operations
Specialist
Candee A. Gutshall, Branch
Operations Specialist
Sharon A. Hall, Personal Banker
Lisa J. Hamler, Customer Service
Teller
Jeffrey T. Hayes, Financial Advisor
KISH TRAVEl
EMPlOyEES
Sandra K. Berardis, Travel
Specialist
Jolene Byler, Travel Specialist
Donna R. Feicke, Administrative
Assistant
Sandra L. Hunley, Travel Specialist
Antonietta M. Naimo, Personal
Banker
Seth J. Napikoski, Credit Analyst
Carol A. Noland, BSA/Fraud
Specialist
Stanley E. Null, Courier
Titus D. O, Personal Banker
Valerie Ochs, Branch Manager
D. James Owen, Residential Lender
Melissa A. Paladino, Application
Support Specialist
Constance F. Palm, Residential
Lender
Chelsea N. Pannebaker, Customer
Service Teller
Anne E. Parks, Customer
Service Teller
Susan K. Peachey, Branch
Operations Specialist
Janet Pekar, Customer
Service Teller
Stephanie Powell, Deposit
Operations Specialist
Susan C. Rainey, Customer
Service Teller
Jesse L. Reed, Assistant
Branch Manager
Amber N. Resto, Personal Banker
Linnea G. Ripka, Loan Operations
Assistant
Billie A. Rupert, Investment
Services Assistant
Krista M. Rupert, Customer
Service Teller
Elise C. Santarelli, Credit Analyst
Leslie J. Sauer, Accounting
Specialist
Melissa A. Sellers, Consumer
Lender
April L. Shawver, Personal Banker
Alison M. Shoop, Customer
Service Teller
Kylie M. Singer, Personal Banker
Jolene S. Snare, Customer
Service Teller
Julie A. Snare, Payroll & Benefits
Administrator
Glenn E. Snyder, Jr., Facilities
Manager
Paula A. Stimeling, Mortgage
Operations Specialist
Wendy S. Strohecker, Deposit
Operations Manager
Crystal M. Sunderland, Service
Support Specialist
Angela E. Swartzentruber,
Personal Banker
Christopher E. Sweeney,
Financial Planner
Cynthia G. Swineford, Customer
Service Teller
Patricia A. Trinclisti, Customer
Service Teller
Donald L. Varner, Facilities
Supervisor
Jeanne L. Wagner, Customer
Service Teller
Dana E. Watson, Operations
Assistant
Rebecca M. Watt, Mortgage
Operations Manager
Elaine S. Weller, Branch Manager
Debra J. Wert, Commercial
Documentation Specialist
Rick W. Wert, Information
Security Administrator
Danielle A. Yeater, Commercial
Loan Operations Specialist
Crystal D. Yoder, Customer
Service Teller
Delores K. Yoder, Commercial
Documentation Specialist
Judy A. Yoder, Customer
Service Teller
Roland G. Yoder, Courier
Nancy A. Zimmerman, Personal
Banker
Alicia R. Zook, Customer
Service Teller
KISH INSURANCE
EMPlOyEES
Jennifer R. Beachel, Systems
Operations Utilization Manager
Arlene M. Byler, Commercial Lines
Customer Service Representative
Duane J. Coy, Insurance Specialist
Megan S. Diemert, Personal
Lines Insurance Specialist
Marlene K. Johnson, Personal
Lines Customer Service
Representative
Amber E. Oborski, Personal Lines
Customer Service Representative
Gina K. Perrin, Personal Lines
Insurance Specialist
Tracy S. Powell, Personal Lines
Customer Service Representative
Cindy J. Robinson, Commercial
Lines Customer Service
Representative
J. Anthony Willard, Commercial
Lines Insurance Specialist
Natalie D. Xanthopoulos,
Insurance Specialist
Ashley L. Henry, Profitability
Specialist
R. Michael Henry, Technical
Support Specialist
Sallie M. Hicks, Branch Operations
Specialist
Donald F. Hindman, Courier
Christina A. Hinkle, Commercial
Documentation Specialist
Lara A. Hoffman, Regional
Assistant Branch Manager
Sandra D. Hummel, Operations
Assistant
Lauren M. Jeranka, Loan
Documentation Review Manager
Karen M. Johnson, Personal
Banker
Paula J. Kauffman, Commercial
Loan Operations Specialist
Michael S. Kearns, Data Analyst
John J. Keeler, Commercial
Relationship Manager
Lisa A. Kennedy, Training &
Organizational Development
Manager
Brittany E. Kern, Services and
Systems Analyst
Darla S. King, Service Support
Specialist
Abbey N. Knepp, Services and
Systems Analyst
Cynthia G. Knorr, File Clerk
Chelcee L. Kyle, Customer
Service Teller
Carolyn M. Leacy, Customer
Service Teller
Lori A. Legradi, Customer
Service Teller
Heidi C. Leonard, Consumer
Lender
Carmella J. Long, Personal Banker
Tina K. McCurdy, Branch
Operations Specialist
Jackson K. McDonald, Credit
Analyst
Kathryn A. McKnight, Collections
Assistant
Kristie R. McKnight, Commercial
Lender Trainee
Duane K. McMullen, Jr.,
Accounting Specialist
Shelley V. Merrell, Deposit
Operations Specialist
Mary A. Miller, Administrative
Assistant
Joanna M. Minium, Loan
Operations Assistant
Jennifer A. Mitchell, Mortgage
Operations Underwriter
Amanda J. Myers, Customer
Service Teller
Tina L. Nace, Loan Operations
Specialist
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