Kish Bancorp, Inc.
Annual Report 2013

Plain-text annual report

Chairman’s Letter to the shareholders William P. Hayes Chairman of the Board and Chief Executive Officer Kish Bancorp had an exceptional year in 2013. The Corporation reported record earnings. Asset growth resumed its traditional double digit upward momentum. Growth in revenues in the non- bank units was strong with corresponding increases in profitability. Regulatory matters were resolved. The strength of the team was augmented. Kish’s market share rose across all markets. Kish was recognized for the seventh consecutive year as one of the “Top 200 Community Banks” in America by American Banker Magazine. In addition, key performance and quality metrics continued to affirm the Corporation’s strong position relative to our competitors and banking industry peers. It is gratifying to report such positive financial results to the shareholders, but we are also pleased to note that the Corporation validated a number of other factors critical to Kish’s strong foundation for the future. It is a foundation that is the cornerstone of Kish’s business model—the culture of service to our clients. To put this clearly, we simply say: "What matters to our customers, matters to Kish." The Corporation’s mission statement captures it well: “With an unwavering focus on fulfilling client needs, we will achieve superior, long-term shareholder returns.” The Kish brand, built upon the Corporation’s “expect more” promise, further underscores our focus on clients. The Kish Bancorp team takes this promise very seriously, because our focus on client service excellence sets us apart in the world of increasing economic and regulatory uncertainty, growing consolidation, and rapidly changing delivery channels. So whether it is through a robust strategic planning process or in day-to-day decision-making, the driving force behind all we do is client acquisition and retention. Inside the Kish team, we recognize and emphasize that the service excellence chain is one that links profitability, growth, customer acquisition, customer loyalty, relationship expansion, and employee satisfaction. Our team knows that customer loyalty is an outgrowth of customer satisfaction, which can only emanate from the value of services provided by motivated, loyal, and 2013 Annual Report 1 Contents Chairman’s Letter to the Shareholders Doing What Matters Financial Highlights Independent Auditor’s Report 1 4 7 10 With an unwavering focus on fulfilling client needs, we will achieve superior, long-term shareholder returns. supported employees. Of course, that means the stronger our team, not only in markets and across markets, but also across Kish’s four business lines, the better we are able to satisfy our customers and keep the Corporation both profitable and growing. We are pleased to report that in 2013, the Kish model served us well. • Kish’s 2013 net income of $4.2 million represented an increase of $0.6 million, or 16.17%, from $3.6 million in 2012 and was the highest annual net income in the Corporation’s history. • Earnings per share reached $3.54 compared to $3.05 per share in 2012. (Per share data has been adjusted to reflect the two-for-one stock split announced in May 2013.) • The two-for-one stock split was declared in recognition of prospects for future growth and the Corporation’s strong underlying financial fundamentals. • Net interest income after provisions for loan losses, at $18.4 million for 2013, increased by $1.9 million, or 11.4%, from $16.6 million the prior year. • Noninterest income, though lower due to reduced margins on mortgage origination fees and lower gains on securities, was strengthened by the results of Kish’s wealth management, insurance and travel units. • Total assets for year end 2013 rose to a record $630 million, an increase of $73 million, or 13.0%, compared to total assets of $558 million at December 31, 2012. • Total loans for the period ending December 31, 2013 increased by $29 million, or 8.2%, to $387 million from $356 million the prior year, and total deposits increased by $34 million to $494 million from $460 million, an increase of 7.4%. • Loan quality remained exceptionally strong, providing for a reduction in the loan loss reserve of $0.9 million, which contributed directly to net income. • Net charge-offs in 2013 remained near zero. • Delinquent loans remain very low and ranked Kish Bank in the top 5% of its peers. • Return on shareholders’ equity was 9.7% compared to 8.61% in 2012. • Noninterest expense was $19.9 million in 2013, a modest increase of $624 thousand, or 3.2%, from $19.3 million in 2012. Primary drivers of this increase were employee benefits expenses associated with higher healthcare costs and employer taxes, and increased core processing expenses related to customer activity. We are also pleased to note that as we enter 2014, the Bank does so having completed a conversion of its banking charter from a national to a Pennsylvania state charter. Kish Bank is now supervised by the Pennsylvania Department of Banking and Securities and the FDIC. The holding company will continue to have the Federal Reserve as its regulator. The charter conversion will have no impact on Bank customers, will not have a material effect on the Bank’s current business activities or sources of revenue, and will reduce annual regulatory assessments. We expect that the Bank and its customers also will benefit from the experience and insight provided by the Pennsylvania Department of Banking and Securities through its focus on Pennsylvania community banks and financial institutions. In addition, the supervision provided by the Pennsylvania Department of Banking and Securities and the FDIC will be of a similar quality and thoroughness to that delivered by federal regulators in the past. In addition to the foregoing key performance metrics, 2013 also witnessed several enhancements to the Kish team. Paul G. Howes of State College joined our Board of Directors, bringing with him a wealth of knowledge and experience in corporate management, strategy, sales, and marketing that will strengthen the Corporation’s governance body. President and Chief Operating Officer, J. Bradley Scovill, was also appointed to the Bank’s Board of Directors. We also are pleased to note new additions to our regional boards: James W. Felmlee in Mifflin County; Dominick F. Peruso, Jr. in Huntingdon County; and Alan G. Hawbaker, Adam R. Fernsler and Paul H. Silvis in Centre County. All understand and support Kish’s unique role in our markets and share a firm commitment to the communities where we live and work. We also wish to acknowledge the continuing growth of our senior leadership team, recognized in the promotions of J. Bradley scovill to the position of President and Chief Operating Officer, and his appointment to the Bank’s Board of Directors, and sangeeta Kishore to the position of Senior Executive Vice President, Chief Financial Officer and Senior Risk Officer. Both of these individuals bring strong banking and finance experience to Kish, along with a passionate commitment to the Corporation’s business model. Their leadership contributes greatly to our success and, indeed, is accelerating progress toward the achievement of Kish’s long-term corporate goals. Throughout 2013, Kish has enjoyed and deepened its partnership with Lady Lion Basketball Coach Coquese Washington, who this season led her young team to an unprecedented third consecutive Big Ten Championship. Our relationship with this bright and able woman, a leader in her field and at Penn State, has deepened the appreciation of the value that Kish brings to our region. We also wish to acknowledge the many contributions of several directors whose terms on the Board will end with the 2014 Shareholders Meeting. With both gratitude and friendship, we extend our appreciation to Alan Metzler, Owner of Metzler Forest Products, and Delmont Sunderland, President and CEO of World Marketing of America, Inc. We are grateful not only for the time they devoted to Kish, but also the insight and guidance they provided the Board. Although business obligations and time demands prevent them from standing for reelection in 2014, they will continue to benefit Kish through their participation on the Kish Regional Boards in Mifflin and Huntingdon counties, respectively. As we conclude this review of another year of progress for Kish Bancorp, we gratefully acknowledge the continued support and encouragement of you, our shareholders. We are honored by your loyalty and confidence in the Kish business model, one that contributes greatly to Kish’s extraordinary culture, the communities we serve, and our ambitious goals for the future. Sincerely, William P. Hayes Chairman of the Board and Chief Executive Officer 2 Kish Bancorp, Inc. 2013 Annual Report 3 Above: Kish team members pause for a photo at the United Way Day of Caring. Left: Bill Hayes and Coquese Washington present Frances Vaughn and Lisa Mallon of J.C. Blair Memorial Hospital with a check from The Pink Zone. (Photo courtesy of MJEMs Photos.) Kish has a culture that is unique to its people, one that has been honed for over a century, deeply rooted in central Pennsylvania, and enlightened consistently by leadership engagement with the banking and financial services industry across the Commonwealth and nation. A community bank, one committed to being a positive force in the life of our communities, is at our core. That core is broadened by our non-banking business units: Kish Insurance, Kish Wealth Management, and Kish Travel. Ours is a story about how a passionate commitment to great service defines a company and its team. Ours is a story that creates sustainability through every twist in the economic and regulatory environment. Every single person on the Kish team constructs the human connection between the numbers that define us and the clients we serve. Our people connect our shared values to our diverse business model. They make the difference, and they bring the Kish experience to life with the firm conviction—based on experience—that finding solutions, resolving problems, and creating opportunity for our clients will build long-term relationships that allow us to acquire and retain customers in a manner that delivers performance for our shareholders. They do what matters. our CLients Companies like Kish, with a passion for great service as the means to define our culture and our team, pay attention to client feedback. We welcome feedback, we respond to it, and we adjust accordingly. Kish clients include the full spectrum of people who live in our three-county market area: Mifflin County, Huntingdon County, and Centre County. Using our mortgage business as an example, Kish finances everything from modest starter homes to grand residences on large tracts of land, and everything in between. In 2013, Kish prepared diligently to implement the new mortgage regulations under Dodd-Frank in January 2014, thereby staying current and protecting this important business for the future. Homeownership and investment in residential real estate generally are still very much part of the American dream. Financing that dream is an important aspect of the Bank’s business operations. Indeed, Kish is welcoming members of the growing international communities in our markets, who also are pursuing home ownership in the United States, right here in central Pennsylvania. Our non-banking businesses reflect the same commitment to serving the people in our market area. Kish Insurance insures everything from personal items such as engagement rings to multi-million-dollar commercial properties. Kish Wealth Management invests and manages funds for retired state employees, small business owners, globally successful entrepreneurs, and high net worth individuals, many of whom choose to retire amidst the natural and cultural riches of central Pennsylvania. Kish Travel books business ranging from airline tickets for clients visiting family members to extended luxury domestic and international travel for multi-generational families. Regardless of the individual need, Kish is committed to fulfilling the goals and the dreams of those who live and work in our communities. The common thread across our business lines is our “expect more” service promise—a promise that both differentiates and defines Kish. What kind of feedback are we receiving? Here are a few examples that illustrate the efforts behind the numbers: Commercial Lending “We were doing a large equipment upgrade and were basing our decision on ‘when’ by the advice of our CPA during our fourth quarter meetings. … [A competitor] took over three weeks to get a financing proposal together for us. … I wanted to get a feel for a competitive rate. I had that [from Kish] within a day … [and] everything was set up for the closing in a matter of a couple days. … Over the weekend, my wife and I made the decision to move our checking and credit line to you as well. … And what totally blew us away is how we were treated during the change process—we felt like we were your most important customer. … It was very refreshing.” Mortgage Lending “My formerly upset coworker approached me today and figured that I must have contacted someone for her at Kish. [She was upset about how Kish dealt with her daughter’s effort to secure a starter home loan.] She was very pleased with your bank for reaching out and reconnecting with her daughter. … Someone did a nice job establishing respect and trust with her family and she was happy. Thanks for following up!” Kish Wealth Management “A year or two ago, we made the decision to change our simple IRA to a 401(k) and felt that we wanted to look at other options. … I thought I would give [Kish Wealth Management] a shot. Well, to put it mildly, we were thrilled and moved our retirement accounts to Kish.” Kish Insurance “Everyone at Kish Insurance understands customer service and our unique needs. They really treat us as people, not just as another account or number. They’re basically like our friends, willing to help you on any level. When Kish says ‘expect more,’ they mean it.” Kish Travel “One of the Bank’s clients with a significant commercial loan and deposit relationship reached out to Kish to provide him with a Disney Travel package that he could use as a prize for a challenge that he is promoting. After some general discussions, he asked the Travel team to put together the package based on a very tight budget with several undetermined variables. The real challenge to Kish was that he was planning to launch the program a short Nationally-acclaimed broadcast journalist Gail Buckner speaks to guests about Social Security at an event hosted by Kish. 4 Kish Bancorp, Inc. 2013 Annual Report 5 three days later and he needed marketing information for his website. The Travel and Marketing teams took the challenge and truly delivered the Kish experience. … The materials [needed] were delivered to the client a day early.” our emPLoYees Kish employees know that caring for and nurturing our clients is an absolute organizational priority that requires collaboration between sales, service, and support, with a special focus on client information management. They are not satisfied knowing that existing accounts are managed properly—they also must anticipate and meet client needs as they change and grow over time in a rapidly and constantly changing marketplace of products, ideas, and needs. Kish employees know that the value customers assign to service is directly related to the performance of satisfied, motivated, and productive employees who are passionate about the services they deliver. Kish employees recognize that giving back matters and they volunteer countless hours in the community, above and beyond their daily business responsibilities. The same thing is true of Kish senior officers, most of whom serve on non-profit boards. Kish values leaders who are passionate about service and dedicated to developing teams capable of sustaining a client-focused culture. Our teams acquired significant new customers in 2013 and outperformed the competition in every area. In 2013, two Service Quality Teams, comprised of our most promising young leaders, were formed to conduct an exhaustive analysis of the Corporation’s service channels. Their work was extensive and their recommendations comprehensive, many of which have been implemented and all of which have been included in Kish’s three- year strategic plan. This is yet further evidence of our commitment to ensure that Kish’s “expect more” promise is fresh and continues to stand out in the constantly changing and competitive environment around us. What kind of feedback are we receiving about our employees? Here are a couple of examples: “Thank you for creating a culture in Kish that makes business banking a true partnership. And give your staff a huge raise—they are amazing!” “I love your team at the South Atherton branch. I walk in and they know my name, and even though they are usually busy, no one ever fails to say hello. They’re great. I love going in there.” our sHareHoLders Kish has always been and continues to be blessed by loyal shareholders who are keenly aware that Kish not only talks the talk of community banking, but walks the walk in our market area. They know that local ownership and local decisions make a measurable difference for the individuals, businesses, and municipalities that we serve. Kish shareholders see us working in our markets, finding solutions, solving problems, and creating opportunities for individuals, families (often over multiple generations), small business, and larger corporations. Financial Highlights Five-Year Summary For tHe Year Net Income Net Income Before Taxes Total Dividends Declared at Year end (in $000s) Total Assets Total Loans (Net) Total Deposits Stockholders’ Equity Loan Loss Reserve Net Loan Losses (Recoveries) ratio anaLYsis Return on Average Assets* Return on Average Equity* Dividend Declared/Net Income Loans/Deposits Primary Capital/Total Assets Total Capital/Risk Weighted Assets Loan Loss Reserve/Loans Net Loan Losses to Total Loans (Net) Per sHare data** Basic Earnings Fully Diluted Earnings Dividends Paid Equity (Book Value) Equity Plus Loan Loss Reserve 2013 2012 2011 2010 2009 $4,216,873 $3,629,794 $3,631,298 $3,556,124 $3,213,423 4,980,589 1,971,992 4,168,872 1,960,051 4,070,114 1,760,493 4,026,669 1,739,714 3,586,370 1,721,575 $630,132 $557,575 $560,069 $556,623 $527,396 381,261 494,374 40,681 5,928 34 0.69% 9.70% 46.76% 77.12% 7.40% 13.17% 1.53% 0.01% $3.54 3.51 1.62 33.40 38.27 351,040 460,450 46,252 6,867 445 0.65% 8.61% 54.00% 76.24% 9.53% 14.05% 1.92% 0.12% $3.05 3.05 1.62 38.10 43.76 362,163 454,660 43,517 7,043 3 0.65% 9.82% 48.48% 79.66% 9.03% 13.85% 1.91% 0.00% $3.37 3.36 1.62 36.48 42.38 367,306 446,002 35,729 6,245 1,001 0.65% 10.31% 48.92% 82.36% 7.54% 11.67% 1.67% 0.27% $3.36 3.34 1.62 33.27 39.09 367,824 407,721 34,062 5,397 252 0.64% 9.73% 53.57% 90.21% 7.48% 11.26% 1.44% 0.07% $3.04 3.04 1.62 31.81 36.85 Average Shares Outstanding (#) 1,192,755 1,189,222 1,077,470 1,058,686 1,056,250 Bill Hayes congratulates Amanda Dutrow, the 2013 MVP, at the Employee Recognition Dinner. Through their support, Kish shareholders enable the Corporation to continue to work hard to achieve its considerable goals, embrace the challenges and opportunities before us, exceed our service quality standards, execute our business model, and—critically important—help build and protect the communities where we work and live, all as our business lines evolve and grow. *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. **Per share data for the years 2009 through 2012 have been adjusted to post stock split levels for comparability. 6 Kish Bancorp, Inc. 2013 Annual Report 7 $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 PA Bank Operating Companies with $500mm to $1B in Assets* Total Noninterest Income and Components (in millions) Kish Bancorp Bank Svc Fees* Sec Gains Insurance KFS Travel $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2.00% 1.50% 1.00% 0.50% 0.00% $8.0 $6.0 $4.0 $2.0 $0.0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 *EPS and dividends per share have been adjusted to reflect the 2-for-1 stock split in May 2013 *Source: SNL Financial, median values Stockholders' Equity (in millions) and ROE Net Interest Income After Provision (in millions) Balance Sheet (in millions) Stock Valuation (per share)* Assets Loans Deposits Book Value Market Value Stockholders' Equity ROE 15.00% $21.0 $18.0 12.00% $15.0 9.00% 6.00% 3.00% 0.00% $12.0 $9.0 $6.0 $3.0 $0.0 $700 $600 $500 $400 $300 $200 $100 $0 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 *Book Value and Market Value per share have been adjusted to reflect the 2-for-1 stock split in May 2013 8 Kish Bancorp, Inc. 2013 Annual Report 9 Independent Auditor’s report Consolidated Balance Sheet KISH BANCORP, INC. KISH BANCORP, INC. CONSOLIDATED BALANCE SHEET CONSOLIDATED BALANCE SHEET indePendent auditor's rePort Board oF direCtors and stoCKHoLders KisH BanCorP, inC. rePort on tHe FinanCiaL statements We have audited the accompanying consolidated financial statements of Kish Bancorp, Inc. and subsidiaries which comprise the consolidated balance sheet as of December 31, 2013 and 2012; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements. management’s resPonsiBiLitY For tHe FinanCiaL statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. auditor’s resPonsiBiLitY Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express 10 Kish Bancorp, Inc. no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. oPinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kish Bancorp, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Wexford, Pennsylvania March 24, 2014 KisH BanCorP, inC. ConsoLidated audited FinanCiaL statements deCemBer 31, 2013 Independent Auditor’s Report Financial Statements Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Stockholders’ Equity Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements 10 11 12 13 14 15 16 ASSETS ASSETS Cash and due from banks Cash and due from banks Interest-bearing deposits with other institutions Interest-bearing deposits with other institutions Cash and cash equivalents Cash and cash equivalents Certificates of deposit in other financial institutions Certificates of deposit in other financial institutions Investment securities available for sale Investment securities available for sale Loans held for sale Loans held for sale Loans Loans Less allowance for loan losses Less allowance for loan losses Net loans Net loans Premises and equipment Premises and equipment Goodwill Goodwill Regulatory stock Regulatory stock Bank-owned life insurance Bank-owned life insurance Accrued interest and other assets Accrued interest and other assets TOTAL ASSETS TOTAL ASSETS LIABILITIES LIABILITIES Deposits: Deposits: Noninterest-bearing Noninterest-bearing Interest-bearing demand Interest-bearing demand Savings Savings Money market Money market Time Time Total deposits Total deposits Short-term borrowings Short-term borrowings Other borrowings Other borrowings Accrued interest and other liabilities Accrued interest and other liabilities TOTAL LIABILITIES TOTAL LIABILITIES STOCKHOLDERS' EQUITY STOCKHOLDERS' EQUITY Preferred stock, $.50 par value; 500,000 shares authorized, Preferred stock, $.50 par value; 500,000 shares authorized, no shares issued and outstanding no shares issued and outstanding Common stock, $.50 par value; 2,000,000 shares authorized, Common stock, $.50 par value; 2,000,000 shares authorized, 1,348,750 and 674,375 shares issued in 2013 and 2012, 1,348,750 and 674,375 shares issued in 2013 and 2012, respectively respectively Additional paid-in capital Additional paid-in capital Retained earnings Retained earnings Accumulated other comprehensive (loss) income Accumulated other comprehensive (loss) income Treasury stock, at cost (130,736 and 134,760 shares in 2013 Treasury stock, at cost (130,736 and 134,760 shares in 2013 and 2012, respectively) and 2012, respectively) TOTAL STOCKHOLDERS' EQUITY TOTAL STOCKHOLDERS' EQUITY December 31, December 31, 2013 2013 2012 2012 $ $ $ $ 7,057,478 7,057,478 7,382,070 7,382,070 14,439,548 14,439,548 980,000 980,000 188,080,483 188,080,483 73,150 73,150 387,188,353 387,188,353 5,927,823 5,927,823 381,260,530 381,260,530 14,132,706 14,132,706 1,668,699 1,668,699 6,867,400 6,867,400 12,936,583 12,936,583 9,693,018 9,693,018 8,944,401 8,944,401 14,848,221 14,848,221 23,792,622 23,792,622 2,374,375 2,374,375 136,214,232 136,214,232 584,380 584,380 357,907,840 357,907,840 6,867,370 6,867,370 351,040,470 351,040,470 15,078,798 15,078,798 1,668,699 1,668,699 4,794,900 4,794,900 12,517,831 12,517,831 9,508,580 9,508,580 $ $ $ $ 630,132,117 630,132,117 $ $ 557,574,887 557,574,887 $ $ 57,821,658 57,821,658 8,361,927 8,361,927 51,305,439 51,305,439 188,625,283 188,625,283 188,259,308 188,259,308 494,373,615 494,373,615 4,414,579 4,414,579 86,073,842 86,073,842 4,589,446 4,589,446 589,451,482 589,451,482 55,046,956 55,046,956 9,658,721 9,658,721 47,336,921 47,336,921 189,715,682 189,715,682 158,691,542 158,691,542 460,449,822 460,449,822 4,157,290 4,157,290 42,121,094 42,121,094 4,594,956 4,594,956 511,323,162 511,323,162 - - - - 674,375 674,375 3,126,097 3,126,097 47,231,553 47,231,553 (5,042,042) (5,042,042) (5,309,348) (5,309,348) 40,680,635 40,680,635 337,187 337,187 3,376,514 3,376,514 45,323,860 45,323,860 2,907,315 2,907,315 (5,693,151) (5,693,151) 46,251,725 46,251,725 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ $ 630,132,117 630,132,117 $ $ 557,574,887 557,574,887 See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements. 2 2 2013 Annual Report 11 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 other than temporary impairment loss Gain on sale of loans, net Earnings on bank-owned life insurance Insurance commissions Travel agency commissions Other Total noninterest income NONINTEREST EXPENSE Salaries and employee benefits Occupancy and equipment Data processing Professional fees Advertising Federal deposit insurance Pennsylvania shares tax Other Total noninterest expense Income before income taxes Income taxes NET INCOME EARNINGS PER SHARE Basic Diluted Year Ended December 31, 2013 2012 $ 16,822,468 985,438 $ 17,767,995 956,766 2,972,983 1,334,865 61,967 165,741 22,343,462 2,998,445 114,516 1,693,949 4,806,910 2,077,035 1,180,783 128,265 102,529 22,213,373 3,412,997 94,657 1,889,289 5,396,943 17,536,552 (900,000) 16,816,430 270,000 18,436,552 16,546,430 1,597,716 461,842 (117,500) 1,059,328 416,184 931,873 212,552 1,896,595 6,458,590 11,353,347 2,568,023 1,748,436 330,564 311,999 434,577 494,076 2,673,531 19,914,553 4,980,589 763,716 1,573,098 797,324 - 1,901,882 416,414 888,876 194,174 1,141,168 6,912,936 10,449,906 2,435,665 1,683,149 392,961 414,113 743,008 440,052 2,731,640 19,290,494 4,168,872 539,078 $ $ 4,216,873 $ 3,629,794 3.54 $ 3.51 3.05 3.05 See accompanying notes to the consolidated financial statements. 12 Kish Bancorp, Inc. 3 KISH BANCORP, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year Ended December 31, 2013 2012 Net income Other comprehensive (loss) income: Securities available for sale: Change in unrealized holding (losses) gains on Net income available-for-sale securities Other comprehensive (loss) income: Tax effect Securities available for sale: Change in unrealized holding (losses) gains on Reclassification adjustment for net gains available-for-sale securities realized in net income Tax effect Tax effect Reclassification adjustment for net gains Impairment losses included in net income realized in net income Tax effect Tax effect Total other comprehensive (loss) income Impairment losses included in net income Tax effect Total comprehensive (loss) income Total other comprehensive (loss) income Total comprehensive (loss) income $ $ $ $ 4,216,873 $ Year Ended December 31, 3,629,794 2013 2012 $ 4,216,873 (11,700,139) 3,978,048 3,629,794 1,464,984 (498,095) (11,700,139) (461,842) 3,978,048 157,026 117,500 (461,842) (39,950) 157,026 (7,949,357) 117,500 (39,950) (3,732,484) $ 1,464,984 (797,324) (498,095) 271,091 - (797,324) - 271,091 440,656 - - 4,070,450 (7,949,357) 440,656 (3,732,484) $ 4,070,450 See accompanying notes to the consolidated financial statements. See accompanying notes to the consolidated financial statements. 4 4 2013 Annual Report 13 Consolidated Statement of Changes in Stockholders’ Equity Consolidated Statement of Cash Flows KISH BANCORP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS . C N I , P R O C N A B H S I K Y T I U Q E ' S R E D L O H K C O T S N I S E G N A H C F O T N E M E T A T S D E T A D I L O S N O C l a t o T ' s r e d l o h k c o t S y t i u q E y r u s a e r T k c o t S d e t a l u m u c c A r e h t O e v i s n e h e r p m o C e m o c n I ) s s o L ( d e n i a t e R s g n i n r a E l a n o i t i d d A n i - d i a P l a t i p a C n o m m o C k c o t S 6 8 9 , 6 1 5 , 3 4 $ ) 5 5 9 , 4 1 9 , 5 ( $ 9 5 6 , 6 6 4 , 2 $ 7 1 1 , 4 5 6 , 3 4 $ 9 6 2 , 9 7 9 , 2 $ 6 9 8 , 1 3 3 $ 1 1 0 2 , 1 3 r e b m e c e D , e c n a l a B - - 3 6 8 , 6 4 6 5 6 , 0 4 4 4 9 7 , 9 2 6 , 3 7 5 8 , 3 0 2 ) 1 5 0 , 0 6 9 , 1 ( 7 5 0 , 5 2 6 ) 5 4 2 , 9 6 2 ( 8 0 8 , 7 1 ) 2 0 0 , 5 4 ( 5 4 0 , 2 7 2 ) 5 4 2 , 9 6 2 ( 6 0 0 , 4 6 2 6 5 6 , 0 4 4 4 9 7 , 9 2 6 , 3 ) 1 5 0 , 0 6 9 , 1 ( 3 6 8 , 6 4 ) 5 4 0 , 2 7 2 ( 2 0 0 , 5 4 7 5 8 , 3 0 2 s e r a h s n a l p k c o t s d e t c i r t s e r d e n r a e n u f o n o i t a z i t r o m A ) e r a h s r e p 2 6 . 1 $ ( s d n e d i v i d h s a C n a l p k c o t s d e t c i r t s e r y b s e r a h s f o e s a h c r u P n a l p k c o t s d e t c i r t s e r y b s e r a h s f o e r u t i e f r o F x a t f o t e n , e m o c n i e v i s n e h e r p m o c r e h t O e s n e p x e n o i t a s n e p m o c n o i t p o k c o t S e m o c n i t e N 6 6 7 , 9 1 6 1 9 2 , 5 ) s e r a h s 6 6 1 , 1 2 ( k c o t s n o m m o c e u s s i w e n f o e l a S ) 8 9 1 , 6 4 2 ( ) s e r a h s 8 3 8 , 8 ( k c o t s y r u s a e r t f o e s a h c r u P ) s e r a h s 8 3 4 , 5 ( k c o t s y r u s a e r t f o e l a S 5 2 7 , 1 5 2 , 6 4 ) 1 5 1 , 3 9 6 , 5 ( 5 1 3 , 7 0 9 , 2 0 6 8 , 3 2 3 , 5 4 4 1 5 , 6 7 3 , 3 7 8 1 , 7 3 3 2 1 0 2 , 1 3 r e b m e c e D , e c n a l a B - - - 7 2 5 , 4 3 3 7 8 , 6 1 2 , 4 ) 7 5 3 , 9 4 9 , 7 ( 6 7 2 , 2 6 6 9 5 , 7 3 2 ) 3 1 0 , 1 0 2 ( ) 2 9 9 , 1 7 9 , 1 ( 0 0 8 , 5 0 4 ) 0 2 1 , 3 7 ( ) 3 1 0 , 1 0 2 ( 6 3 1 , 2 5 2 ) 7 5 3 , 9 4 9 , 7 ( 3 7 8 , 6 1 2 , 4 7 2 5 , 4 3 ) 0 0 8 , 5 0 4 ( ) 2 9 9 , 1 7 9 , 1 ( 0 2 1 , 3 7 6 9 5 , 7 3 2 ) 0 6 8 , 9 8 1 ( ) 8 8 1 , 7 3 3 ( 8 8 1 , 7 3 3 s e r a h s n a l p k c o t s d e t c i r t s e r d e n r a e n u f o n o i t a z i t r o m A n a l p k c o t s d e t c i r t s e r y b s e r a h s f o e r u t i e f r o F ) s e r a h s 8 3 9 , 5 ( k c o t s y r u s a e r t f o e s a h c r u P ) s e r a h s 1 8 1 , 5 ( k c o t s y r u s a e r t f o e l a S ) e r a h s r e p 2 6 . 1 $ ( s d n e d i v i d h s a C n a l p k c o t s d e t c i r t s e r y b s e r a h s f o e s a h c r u P a f o m r o f e h t n i d e t c e f f e t i l p s k c o t S x a t f o t e n , s s o l e v i s n e h e r p m o c r e h t O e s n e p x e n o i t a s n e p m o c n o i t p o k c o t S ) s e r a h s 5 7 3 , 4 7 6 ( d n e d i v i d e m o c n i t e N 5 3 6 , 0 8 6 , 0 4 $ ) 8 4 3 , 9 0 3 , 5 ( $ ) 2 4 0 , 2 4 0 , 5 ( $ 3 5 5 , 1 3 2 , 7 4 $ 7 9 0 , 6 2 1 , 3 $ 5 7 3 , 4 7 6 $ 3 1 0 2 , 1 3 r e b m e c e D , e c n a l a B . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c e h t o t s e t o n g n i y n a p m o c c a e e S 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 Increase (decrease) in accrued interest receivable Increase (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 (Increase) decrease in loans, net Purchase of regulatory stock Redemption of regulatory stock Purchase of premises and equipment Proceeds from sale of other real estate owned Net cash used for investing activities FINANCING ACTIVITIES Increase in deposits, net Increase (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 provided by (used for) financing activities 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 Payment of stock dividend Investment sales not settled See accompanying notes to consolidated financial statements. Year Ended December 31, 2012 2013 $ 4,216,873 $ 3,629,794 (900,000) (461,842) 117,500 31,374,585 (29,804,027) (1,059,328) 1,324,709 160,625 (271,137) 24,633 (416,184) 19,663 - 2,173,573 6,499,643 270,000 (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 1,394,375 - 250,000 (1,004,542) 16,873,095 17,242,435 (95,876,698) (29,809,849) (3,095,200) 1,022,700 (117,586) 490,910 (91,875,818) 33,923,793 257,289 54,946,653 (10,993,905) - (201,013) 62,276 (1,971,992) 76,023,101 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) $ $ $ (9,353,074) (17,389,149) 23,792,622 41,181,771 14,439,548 $ 23,792,622 $ $ 4,782,277 395,000 489,793 337,188 - 5,578,956 685,000 826,710 - 2,066,250 14 Kish Bancorp, Inc. 6 2013 Annual Report 15 Notes to Consolidated Financial Statements KISH BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investment Securities (Continued) KISH BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting and reporting policies applied in the presentation of the accompanying consolidated financial statements follows: 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, Kish Bank (the “Bank”), Kish Travel Services, Inc., and the Bank’s subsidiary, Kish Agency, Inc. The Company generates commercial and industrial, agricultural, commercial mortgage, residential real estate, and consumer loans and deposit services to its customers located primarily in central Pennsylvania and the surrounding areas. The Bank operates under a Pennsylvania Department of Banking and Securities bank charter and provides full banking services. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law. Kish Agency, Inc. provides insurance products and services. Kish Travel Services, Inc. is a Pennsylvania business established to provide travel services to its customers. The consolidated financial statements include the accounts of Kish Bancorp, Inc., and its subsidiaries, Kish Bank and Kish Travel Services, Inc., after elimination of all 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, 2013 and 2012. 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 16 Kish Bancorp, Inc. 7 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. 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 as regulatory stock. The Bank is a member of the FHLB and, as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and, as such, is classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared with the capital stock amount and the length of time this situation has persisted; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. Management evaluated the stock and concluded that the stock was not impaired for the periods presented herein. Loans Loans 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 fair value. The Bank sells these loans to various other financial institutions. Currently, the Bank retains the servicing of those loans sold to the FHLB and releases the servicing of loans sold to all other institutions. 8 2013 Annual Report 17 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 $311,999 and $414,113 for 2013 and 2012, 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 Split Land is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 7 years for furniture, fixtures, and equipment, and 31 to 39½ years for building premises and leasehold improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. The Board of Directors declared a two-for-one stock split effected in the form of a stock dividend payable May 27, 2013. All references to share and per share amounts in the consolidated financial statements, except the Consolidated Balance Sheet, and accompanying notes to the consolidated financial statements have been retroactively restated to reflect the stock split. Stock Options As of December 31, 2013 and 2012, the Company recorded compensation expense of $34,527 and $46,863 related to share-based compensation awards. At December 31, 2013, there was approximately $17,367 in unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next three years. 18 Kish Bancorp, Inc. 2013 Annual Report 19 9 10 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 2013 2012 Expected Dividend Yield Risk-Free Interest Rate Expected Volatility Expected Life (in Years) 4.86 5.79 % % 1.95 3.27 % % 10.66 17.71 % % 10.00 10.00 The weighted-average fair value of each stock option granted for 2013 and 2012 was $0.86 and $0.95, respectively. There were no stock options exercised during the years ended December 31, 2013 and 2012. 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, 2013 and 2012, the Company recorded gross servicing rights of $742,128 and $671,967 with a reserve for impairment of $259,865 and $315,477, 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 2013 2012 1,348,748 1,344,764 (132,493) (134,606) (23,500) (20,936) 1,192,755 1,189,222 318 544 7,696 1,846 1,200,769 1,191,612 Options to purchase 111,752 shares of common stock at a price of $33.25 to $48.38 as of December 31, 2013, and 19,404 shares of restricted stock ranging in price from $25.50 to $35.00 were not included in the computation of diluted earnings per share. To include these shares would have been antidilutive. Options to purchase 137,252 shares of common stock at a price of $25.50 to $48.38, as of December 31, 2012, and 17,602 shares of restricted stock ranging in price from $25.50 to $38.18 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: 2013 Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost $ 18,561,953 65,628,145 $ $ - 31,431 (1,201,833) (5,081,769) $ 17,360,120 60,577,807 62,046,304 15,811,281 33,524,915 195,572,598 147,340 1,363,020 92,517 183,434 1,670,402 81,523 (1,460,544) (453,734) 61,948,780 15,450,064 (1,193,500) (9,391,380) - 32,514,849 187,851,620 228,863 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 $ 195,719,938 $ 1,751,925 $ (9,391,380) $ 188,080,483 20 Kish Bancorp, Inc. 2013 Annual Report 21 11 12 3. INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued) 3. INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued) 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 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, 2013 and 2012. Less than Twelve Months Gross Unrealized Losses Fair Value 2013 Twelve Months or Greater Fair Value Gross Unrealized Losses Total Fair Value Gross Unrealized Losses $ 15,510,740 $ (1,013,136) $ 1,849,380 $ (188,697) $ 17,360,120 $ (1,201,833) 53,959,407 (4,606,460) 4,598,130 (475,309) 58,557,537 (5,081,769) 23,469,685 11,718,297 (1,308,822) (450,044) 1,218,147 496,310 (151,722) (3,690) 24,687,832 12,214,607 (1,460,544) (453,734) 20,855,574 125,513,703 $ (1,193,500) (8,571,962) $ - $ 8,161,967 $ - (819,418) $ 20,855,574 133,675,670 $ (1,193,500) (9,391,380) 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 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 U.S. treasury securities. The unrealized loss on ten 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, 2013. U.S. government agency securities. The unrealized loss on 51 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, 2013. Obligations of states and political subdivisions. The Company’s unrealized losses on 44 municipal bonds relate to investments within the governmental service sector. The unrealized losses are primarily caused by interest rate increases. 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, 2013. Mortgage-backed securities in government-sponsored entities. The unrealized losses on 15 of the Company’s investments in mortgage-backed securities were caused by interest rate increases. The Company purchased 14 of these investments at a premium relative to its face amount, and the contractual cash flows of the investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities 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 investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2013. 22 Kish Bancorp, Inc. 2013 Annual Report 23 13 14 3. INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued) 4. LOANS Corporate securities. The Company had unrealized losses on investments in 20 different debt securities that were primarily the result of interest rate increases. The Company currently does not believe it is probable that it will be unable to collect all amounts due, other than the security described below, according to the contractual terms of the investments. Because 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 the investments before recovery of the amortized cost basis, it does not consider these investments to be other- than- temporarily impaired at December 31, 2013. During the year ended December 31, 2013, management recorded an other-than-temporary impairment loss of $117,500 on a pre-tax basis for one security. It was determined by management in the current year to utilize a Level II valuation for the security instead of the Level III method utilized in prior years due to improvements in the activity for the security. Of the recorded loss, all $117,500 was determined to be credit related and recognized in earnings and none was determined to be attributable to other factors and recognized in accumulated other comprehensive (loss) income. 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, 2013. The amortized cost and fair value of debt securities at December 31, 2013, 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 2,675,686 14,793,316 104,322,383 73,781,213 $ Fair Value 2,701,747 15,177,414 99,933,848 70,038,611 $ 195,572,598 $ 187,851,620 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 $ 2013 2012 $ 125,959,918 51,447,386 19,588,155 30,282,161 7,219,608 152,691,125 387,188,353 5,927,823 113,792,683 54,280,110 19,824,927 24,657,876 6,551,541 138,800,703 357,907,840 6,867,370 $ 381,260,530 $ 351,040,470 Mortgage loans serviced by the Company for others amounted to $74,621,700 and $69,900,031 at December 31, 2013 and 2012, 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, 2013 and 2012, 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, 2013, is as follows: 2012 Additions Amounts Collected 2013 $ 8,989,462 $ 7,931,823 $ 12,451,249 $ 4,470,036 Investment securities with a carrying value of $71,388,656 and $75,688,114 at December 31, 2013 and 2012, respectively, were pledged to secure deposits and other purposes as required by law. 5. ALLOWANCE FOR LOAN LOSSES 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 2013 2012 $ $ 16,873,095 512,423 50,581 117,500 21,211,034 814,552 17,228 - 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. 24 Kish Bancorp, Inc. 2013 Annual Report 25 15 16 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: State and political subdivision loans carry the lowest risk as most state and political subdivision loans are either backed by the full taxing authority of a municipality or the revenue of a municipal authority.  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 2013, management elevated the qualitative factors reserve percentage for the residential real estate pool of loans because of the changes in the volume of loans and changes in the lending policy due to the new regulations for residential lending. In 2012, changes in lending staff experience and ability contributed to the increase in factor percentages for various loan pools. The change in credit staff experience and ability factor percentage was increased because of the resignation of the Chief Credit Officer. Late in 2012, the bank hired a new Chief Credit Officer with over 40 years of experience in the banking industry. Over the year, the addition of an experienced Chief Credit Officer has resulted in lowered potential risk and has led the Bank to revert the increase in this reserve factor for commercial loans. Changes in the volume and severity of past dues, non- accruals, and classified loans have also contributed to a decrease in the reserve levels of commercial loans with continued improvement in the level of classified loans. With improvement in the competitive landscape, the reserve factors related to commercial loans were decreased slightly. All other pools of loans were left unchanged due to continued severity of regulatory requirements as a consequence of the Dodd-Frank Act. No significant changes have been noted in the market value of real estate or the unemployment numbers within the Bank’s primary market area; accordingly, the reserve levels related to these factors were left unchanged from 2012. 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. 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 2013 State and Political Subdivisions Consumer Residential Real Estate Unallocated Total 2,646,720 (5,658) 1,349 (96,821) 2,545,590 $ 1,692,945 $ - 1,390 (611,835) 1,082,500 $ $ 223,688 - 3,600 (8,162) 219,126 498,957 $ 390,932 $ - $ $ $ 132,014 - - 32,334 164,348 - $ $ $ 56,185 (16,772) 2,754 11,565 53,732 - $ $ $ 814,169 (27,341) 1,131 298,527 1,086,486 $ 1,301,649 $ - - (525,608) 776,041 $ 3,000 $ - 6,867,370 (49,771) 10,224 (900,000) 5,927,823 892,889 2,046,633 $ 691,568 $ 219,126 $ 164,348 $ 53,732 $ 1,083,486 $ 776,041 $ 5,034,934 5,532,518 $ 1,172,958 $ 439,606 $ 106,720 $ 1,800 $ 853,983 $ 120,427,400 50,274,428 19,148,549 30,175,441 7,217,808 151,837,142 Ending balance $ 125,959,918 $ 51,447,386 $ 19,588,155 $ 30,282,161 $ 7,219,608 $ 152,691,125 $ - - - $ 8,107,585 379,080,768 $ 387,188,353 Commercial Real Estate Commercial and Industrial Agricultural 2012 State and Political Subdivisions Consumer Residential Real Estate Unallocated Total 2,714,374 (270,731) 3,208 199,869 2,646,720 $ $ 1,736,219 (23,732) 2,148 (21,690) 1,692,945 $ $ 229,406 (23,376) - 17,658 223,688 309,060 $ 642,765 $ - $ $ $ 135,388 - - (3,374) 132,014 - $ $ $ 57,623 (108,292) 3,439 103,415 56,185 - $ $ $ 834,980 (28,205) - 7,394 814,169 $ 1,334,921 $ - - (33,272) $ 1,301,649 25,240 $ - 7,042,911 (454,336) 8,795 270,000 6,867,370 977,065 2,337,660 $ 1,050,180 $ 223,688 $ 132,014 $ 56,185 $ 788,929 $ 1,301,649 $ 5,890,305 4,263,950 $ 1,138,112 $ 407,170 $ - $ - $ 1,294,374 $ 109,528,733 53,141,998 19,417,757 24,657,876 6,551,541 137,506,329 - - - $ 7,103,606 350,804,234 $ 357,907,840 2013 Annual Report 27 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 $ $ $ $ $ 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 $ $ $ $ $ $ $ $ $ 26 Kish Bancorp, Inc. 17 18 Ending balance $ 113,792,683 $ 54,280,110 $ 19,824,927 $ 24,657,876 $ 6,551,541 $ 138,800,703 $ 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) Reserve requirement for commercial real estate loans decreased by $101,130 from 2013 to 2012, while those for commercial and industrial loans decreased by $610,445 during the same period. This was a direct result of decreases during 2013 of criticized and classified assets which at $10.8 million at December 31, 2013, indicates a 4.40 percent or $0.5 million decrease from December 31, 2012. 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, 2013 and 2012, 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 $ 115,161,687 2,901,867 7,857,972 38,392 - Commercial and Industrial 2013 Agricultural $ 47,349,424 2,712,998 1,384,964 17,457,107 886,505 1,244,543 - - - - State and Political Subdivisions $ 30,282,161 $ - - - - Total 210,250,379 6,501,370 10,487,479 38,392 - $ 125,959,918 $ 51,447,386 $ 19,588,155 $ 30,282,161 $ 227,277,620 Commercial Real Estate Commercial and Industrial $ $ 102,497,213 4,970,737 6,285,096 39,637 - $ 46,361,397 5,320,354 2,362,688 235,671 - 2012 Agricultural 18,396,130 784,330 563,974 80,493 - State and Political Subdivisions $ 24,657,876 $ - - - - Total 191,912,616 11,075,421 9,211,758 355,801 - $ 113,792,683 $ 54,280,110 $ 19,824,927 $ 24,657,876 $ 212,555,596 Pass Special Mention Substandard Doubtful Loss Total Pass Special Mention Substandard Doubtful Loss Total Performing Nonperforming Total Performing Nonperforming Total Consumer 7,169,056 50,552 7,219,608 Consumer 6,551,541 - 6,551,541 $ $ $ $ $ $ $ $ 2013 Residential Real Estate 152,078,369 612,756 152,691,125 2012 Residential Real Estate 137,973,341 827,362 138,800,703 $ $ $ $ Total 159,247,425 663,308 159,910,733 Total 144,524,882 827,362 145,352,244 Age Analysis of Past-Due Loans by Class The following are tables which show the aging analysis of past-due loans as of December 31: 30-59 Days Past Due 60-89 Days Past Due Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ 1,686,378 104,510 - - 50,262 207,702 $ 2,048,852 $ $ - 46,041 - - 290 17,792 64,123 $ $ 2013 Total Past Due 3,856,354 757,726 - - 50,552 612,755 5,277,387 $ $ 90 Days or Greater Past Due 2,169,976 607,175 - - - 387,261 3,164,412 $ $ Current 122,103,564 50,689,661 19,588,155 30,282,161 7,169,056 152,078,369 381,910,966 $ $ Total Loans 125,959,918 51,447,387 19,588,155 30,282,161 7,219,608 152,691,124 387,188,353 $ $ Recorded Investment 90 Days and Accruing - - - - - - - 28 Kish Bancorp, Inc. 2013 Annual Report 29 19 20 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) Age Analysis of Past-Due Loans by Class (Continued) Impaired Loans (Continued) 30-59 Days Past Due 60-89 Days Past Due Commercial real estate $ Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ 145,128 92,461 - 112,696 139,288 418,378 907,951 $ $ 27,099 81,851 3,675 - 5,339 37,862 155,826 $ $ Impaired Loans 2012 Total Past Due 3,380,774 198,809 326,677 112,696 144,627 1,283,602 5,447,185 $ $ 90 Days or Greater Past Due 3,208,547 24,497 323,002 - - 827,362 4,383,408 $ $ Current 110,411,909 54,081,301 19,498,250 24,545,180 6,406,914 137,517,101 352,460,655 $ $ Total Loans 113,792,683 54,280,110 19,824,927 24,657,876 6,551,541 138,800,703 357,907,840 $ $ Recorded Investment 90 Days and Accruing - - - - 3,676 - 3,676 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 2013 Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate $ $ 4,941,131 513,708 439,606 106,720 1,800 830,136 $ 4,941,131 513,708 439,606 106,720 1,800 830,136 6,833,101 6,833,101 - - - - - - - $ $ 3,786,578 272,439 309,261 113,558 150 723,120 5,205,106 With an allowance recorded: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate 591,387 659,250 - - - 23,847 591,387 659,250 - - - 23,847 1,274,484 1,274,484 5,532,518 1,172,958 439,606 106,720 1,800 853,983 5,532,518 1,172,958 439,606 106,720 1,800 853,983 498,957 390,932 - - - 3,000 892,889 498,957 390,932 - - - 3,000 - - 216 181 26,883 27,280 43,204 58,859 - - - - 741,525 754,885 - - - 89,302 1,585,712 102,063 4,528,103 1,027,324 309,261 113,558 150 812,422 43,204 58,859 216 181 - 26,883 Total $ 8,107,585 $ 8,107,585 $ 892,889 $ 6,790,818 $ 129,343 30 Kish Bancorp, Inc. 2013 Annual Report 31 21 22 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) Impaired Loans (Continued) Troubled Debt Restructuring 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 subdivisions Consumer Residential real estate $ With an allowance recorded: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate $ 3,315,295 206,195 407,170 - - 862,373 $ 3,315,295 206,195 407,170 - - 862,373 4,791,033 4,791,033 $ - - - - - - - 948,655 931,917 - - - 432,001 948,655 931,917 - - - 432,001 2,312,573 2,312,573 4,263,950 1,138,112 407,170 - - 1,294,374 4,263,950 1,138,112 407,170 - - 1,294,374 309,060 642,765 - - - 25,240 977,065 309,060 642,765 - - - 25,240 $ 3,486,939 303,323 252,420 - - 943,036 4,985,718 1,746,439 950,295 6,251 - 35,377 404,004 3,142,366 5,233,378 1,253,618 258,671 - 35,377 1,347,040 Total $ 7,103,606 $ 7,103,606 $ 977,065 $ 8,128,084 $ 32,786 10,993 - - - 753 44,532 - 2,955 - - - - 2,955 32,786 13,948 - - - 753 47,487 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 subdivisions Consumer Residential real estate Total 2013 $ 4,307,478 763,760 290,389 - - 576,149 $ 2012 4,263,945 1,127,286 407,170 - - 1,305,205 $ 5,937,776 $ 7,103,606 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, 2013, a specific reserve allocation of $19,000 has been established against the troubled debt restructurings. Also, as of December 31, 2013, 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: 2013 Pre-Modification Number of Outstanding Recorded Contracts Investment Post-Modification Outstanding Recorded Investment Troubled debt restructurings: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate $ 5 5 - 1 1 2 $ 1,988,730 525,680 - 109,487 68,528 154,370 Total 14 $ 2,846,795 $ 1,988,730 525,680 - 109,487 68,528 154,370 2,846,795 Troubled debt restructurings: Commercial real estate Commercial and industrial Agricultural Residential real estate Total 2012 Pre-Modification Number of Outstanding Recorded Contracts Investment Post-Modification Outstanding Recorded Investment 2 2 1 3 8 $ $ $ 121,576 668,167 85,993 323,287 1,199,023 $ 121,576 668,167 85,993 323,287 1,199,023 32 Kish Bancorp, Inc. 2013 Annual Report 33 23 24 6. PREMISES AND EQUIPMENT 10. OTHER BORROWINGS Major classifications of premises and equipment are summarized as follows: The following table sets forth information concerning other borrowings: Land and land improvements Building and leasehold improvements Furniture, fixtures, and equipment Less accumulated depreciation Total 2013 2012 $ $ 793,458 16,699,029 5,559,109 23,051,596 8,918,890 793,458 16,623,584 5,530,468 22,947,510 7,868,712 $ 14,132,706 $ 15,078,798 Description Fixed rate Fixed rate amortizing Mid-term repos Subordinated capital notes Note payable Maturity Range From To 02/28/22 01/02/14 04/24/23 07/08/15 n/a n/a 03/02/21 03/23/19 11/23/35 03/17/35 Weighted- Average Interest Rate 1.26 1.97 n/a 7.84 4.21 Stated Interest Rate Range From To 1.68 n/a 3.86 2.31 6.53 n/a 8.50 6.11 % 0.24 % 4.96 % $ At December 31, 2013 59,359,450 15,878,392 $ - 4,650,000 6,186,000 2012 25,014,605 3,170,489 3,000,000 4,750,000 6,186,000 Depreciation and amortization charged to operations was $1,063,679 in 2013 and $1,034,512 in 2012. 7. GOODWILL As of each of the years ended December 31, 2013 and 2012, 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, 2013 and 2012. 8. DEPOSITS The scheduled maturities of time deposits approximate the following: Year Ending December 31, 2014 2015 2016 2017 2018 Thereafter Amount 81,538,278 28,826,249 18,964,312 10,851,753 24,879,773 23,198,943 188,259,308 $ $ The aggregate of all time deposit accounts of $100,000 or more amounted to $77,823,755 and $54,466,112 at December 31, 2013 and 2012, 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, 2013 and 2012, 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 $ 2013 2012 $ 4,414,579 7,146,587 14,546,188 2.51% 1.60% 4,157,290 6,354,923 11,001,139 2.50% 1.43% Maturities of other borrowings at December 31, 2013, are summarized as follows: $ 86,073,842 $ 42,121,094 Year Ending December 31, 2014 2015 2016 2017 2018 2019 and after $ Amount 12,217,600 7,825,268 19,512,000 8,059,118 6,711,203 31,748,653 $ 86,073,842 Weighted- Average Rate 1.33 % 1.74 0.77 1.78 1.30 3.17 1.95 % 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, 2013, the Bank’s maximum borrowing capacity with the FHLB was approximately $191 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, 2013, is approximately $14.8 million. 34 Kish Bancorp, Inc. 25 26 2013 Annual Report 35 10. OTHER BORROWINGS (Continued) 11. INCOME TAXES (Continued) The Bank also maintains a $10.0 million and $5.0 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, 2013. 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 2013 603,091 160,625 $ 2012 507,193 31,885 763,716 $ 539,078 $ $ 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 Unrealized loss on available-for-sale securities 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 $ 2013 2012 $ 2,015,460 245,420 24,382 653,531 230,344 330,512 231,618 117,401 2,597,415 2,000 6,448,083 942,803 550,876 99,472 272,332 17,840 - 1,883,323 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 1,497,709 3,487,594 Net deferred tax assets $ 4,564,760 $ 630,253 No valuation allowance was established at December 31, 2013 and 2012, in view of the Company’s ability to carryback taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential. The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate is as follows: Provision at statutory rate Tax-exempt interest Life insurance income Other Actual tax expense and effective rate $ $ 2013 Amount 1,693,400 (788,903) (106,239) (34,542) % of Pretax Income % $ 34.0 (15.9) (2.1) (0.7) Amount 1,417,418 (726,767) (96,343) (55,230) 2012 % of Pretax Income % 34.0 (17.4) (2.3) (1.3) 763,716 15.3 % $ 539,078 13.0 % 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 2009 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 $269,876 and $251,048 for the years ended December 31, 2013 and 2012, respectively. The fair value of plan assets includes $822,066 and $705,376 pertaining to the value of the Company’s common stock that is held by the plan as of December 31, 2013 and 2012, respectively. Deferred Compensation Plan The Company has a nonqualified deferred compensation plan that allows directors to defer fees. Outstanding balances under this arrangement for 2013 and 2012 were $721,824 and $627,775, respectively, and are reported as “Other liabilities” on the Consolidated Balance Sheet. Expenses related to this plan were $101,914 and $50,398 for December 31, 2013 and 2012, respectively. 36 Kish Bancorp, Inc. 2013 Annual Report 37 27 28 12. EMPLOYEE BENEFITS (Continued) 12. EMPLOYEE BENEFITS (Continued) Restricted Stock Plan Restricted Stock Plan The Company maintains a Restricted Stock Plan (the “Plan”). Employees and non-employee corporate directors 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 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 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 24,000 shares of the including continuous employment or service with the Company. The Company has authorized 24,000 shares of the Company’s common stock. The Plan assists the Company in attracting, retaining and motivating employees and 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 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 emphasis on the use of equity as a key component of compensation. Compensation expense recognized related to the vesting of shares was $237,596 and $203,857 for the years ended December 31, 2013 and 2012, respectively. the vesting of shares was $237,596 and $203,857 for the years ended December 31, 2013 and 2012, respectively. The following is a summary of the status of the Company’s restricted stock as of December 31, 2013, and changes The following is a summary of the status of the Company’s restricted stock as of December 31, 2013, and changes therein during the year then ended: therein during the year then ended: Nonvested at January 1, 2013 Nonvested at January 1, 2013 Granted Granted Vested Vested Forfeited Forfeited Number of Number of Shares of Shares of Restricted Stock Restricted Stock 20,288 20,288 9,877 9,877 (7,233) (7,233) (2,440) (2,440) Weighted- Weighted- Average Average Grant Date Grant Date Fair Value Fair Value $ 30.77 $ 30.77 33.43 33.43 31.65 31.65 34.35 34.35 Nonvested at December 31, 2013 Nonvested at December 31, 2013 20,492 20,492 $ 31.78 $ 31.78 Stock Option Plan Stock Option Plan The Company has a fixed director and employee stock-based compensation plan. The plan has total options 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 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 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 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. primarily vested evenly over a three-year period from the grant date. The following table presents share data related to the outstanding options: The following table presents share data related to the outstanding options: Outstanding, January 1, 2013 Outstanding, January 1, 2013 Granted Granted Exercised Exercised Forfeited Forfeited Outstanding, December 31, 2013 Outstanding, December 31, 2013 Exercisable at year-end Exercisable at year-end Number of Number of Options Options 158,272 158,272 28,100 28,100 - - (6,336) (6,336) 180,036 180,036 119,701 119,701 Weighted- Weighted- Average Average Exercise Exercise Price Price 37.62 37.62 33.34 33.34 - - 45.63 45.63 36.67 36.67 30.19 30.19 $ $ $ $ $ $ 12. EMPLOYEE BENEFITS (Continued) Stock Option Plan (Continued) The following table summarizes the characteristics of stock options at December 31, 2013: Grant Date 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 04/01/13 $ Exercise Price 45.63 47.00 48.38 46.50 46.50 46.50 47.50 48.00 48.00 48.00 48.00 47.50 47.63 47.50 47.50 44.00 45.00 38.18 25.50 35.00 34.13 29.75 31.00 28.00 30.00 33.25 Shares 6,900 1,468 5,236 16,254 760 52 200 84 6 882 666 2,802 6 300 8,880 1,090 1,050 13,500 19,600 2,000 20,600 23,600 1,000 600 24,400 28,100 180,036 Outstanding Contractual Average Life Average Exercise Price 0.20 $ 0.40 0.49 1.01 1.09 1.11 0.21 1.15 1.24 1.32 1.52 1.93 1.94 1.96 1.97 3.07 3.15 3.08 5.23 5.82 6.25 7.24 7.77 7.98 8.24 9.25 45.63 47.00 48.38 46.50 46.50 46.50 47.50 48.00 48.00 48.00 48.00 47.50 47.63 47.50 47.50 44.00 45.00 38.18 25.50 35.00 34.13 29.75 31.00 28.00 30.00 33.25 Exercisable Average Exercise Price 45.63 47.00 48.38 46.50 46.50 46.50 47.50 48.00 48.00 48.00 48.00 47.50 47.63 47.50 47.50 44.00 45.00 38.18 25.50 35.00 34.13 29.75 31.00 28.00 30.00 33.25 $ Shares 6,900 1,468 5,236 16,254 760 52 200 84 6 882 666 2,802 6 300 8,880 1,090 1,050 13,500 19,200 2,000 13,596 15,576 660 400 8,133 - 119,701 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. 38 Kish Bancorp, Inc. 2013 Annual Report 39 29 29 30 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 2013 2012 $ $ 103,035,768 5,146,000 $ 106,638,654 5,424,804 108,181,768 $ 112,063,458 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 its 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, 2013, are as follows: 2014 2015 2016 2017 2018 Thereafter Total Minimum Lease Payment 290,569 286,609 252,940 252,940 252,940 3,658,435 4,994,433 $ $ Rent expense under leases for each of the years ended December 31, 2013 and 2012, was $300,945 and $364,896, 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. 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, 2013 and 2012, was $1,656,000 and $1,503,000, 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 Pennsylvania Banking Code restricts the availability of capital surplus for dividend purposes. At December 31, 2013, the Bank had a capital surplus of $3,236,250, which was not available for distribution to the Company as dividends. 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, 2013 and 2012, 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. 40 Kish Bancorp, Inc. 2013 Annual Report 41 31 32 15. REGULATORY CAPITAL (Continued) 16. FAIR VALUE MEASUREMENTS The Company’s actual capital ratios are presented in the following table that shows the Company met all regulatory capital requirements: 2013 2012 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 $ $ $ 61,373,773 37,294,894 46,618,618 % $ 13.17 8.00 10.00 58,458,296 33,288,986 41,611,233 50,568,087 18,647,447 27,971,171 % $ 10.85 4.00 6.00 48,203,132 16,644,493 24,966,740 50,568,087 25,415,096 31,768,871 % $ 7.96 4.00 5.00 48,203,132 22,334,023 27,917,528 % 14.05 8.00 10.00 % 11.58 4.00 6.00 % 8.63 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 2013 2012 Amount Ratio Amount Ratio $ $ $ 62,402,925 37,115,336 46,394,171 % $ 13.45 8.00 10.00 58,557,150 33,124,360 41,405,450 56,302,396 18,557,668 27,836,502 % $ 12.14 4.00 6.00 53,100,024 16,562,180 24,843,270 56,302,396 25,339,017 31,673,771 % $ 8.89 4.00 5.00 53,100,024 22,247,473 27,809,341 % 14.14 8.00 10.00 % 12.82 4.00 6.00 % 9.55 4.00 5.00 The following disclosures show the hierarchical disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows: Level I: 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, 2013 and 2012, 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. December 31, 2013 Level I Level II Level III Total $ 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 in financial institutions - - - - $ 17,360,120 $ 60,577,807 61,948,780 15,450,064 - - 228,863 32,514,849 187,851,620 - Total $ 228,863 $ 187,851,620 $ - - - - - - - - $ 17,360,120 60,577,807 61,948,780 15,450,064 32,514,849 187,851,620 228,863 $ 188,080,483 December 31, 2012 Level I Level II Level III Total $ 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 in financial institutions - - - - $ 5,079,060 $ 45,273,820 - - $ 5,079,060 45,273,820 51,230,329 3,495,781 - - 218,244 30,796,274 135,875,264 - - 120,724 - 120,724 - 51,230,329 3,616,505 30,796,274 135,995,988 218,244 33 34 Total $ 218,244 $ 135,875,264 $ 120,724 $ 136,214,232 42 Kish Bancorp, Inc. 2013 Annual Report 43 16. 16. FAIR VALUE MEASUREMENTS (Continued) FAIR VALUE MEASUREMENTS (Continued) 16. FAIR VALUE MEASUREMENTS (Continued) Financial instruments are considered Level III when their values are determined using pricing models, discounted 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 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 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 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 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 or estimation. The following table presents the changes in the Level III fair-value category for the years ended December 31, 2013 and 2012. December 31, 2013 and 2012. Balance, January 1, 2012 Balance, January 1, 2012 Sales Sales Net change on unrealized gain on investment Net change on unrealized gain on investment securities available for sale securities available for sale Balance, January 1, 2013 Balance, January 1, 2013 Sales Sales Net change on unrealized gain on investment Net change on unrealized gain on investment securities available for sale securities available for sale Transfer out of Level III Transfer out of Level III Balance, December 31, 2013 Balance, December 31, 2013 Corporate Corporate Securities Securities $ $ 100,317 100,317 - - 20,407 20,407 120,724 120,724 - - 229,276 229,276 (350,000) (350,000) $ $ - - The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value as of December 31, 2013 and 2012, by level within the fair value hierarchy. Impaired loans that are their fair value as of December 31, 2013 and 2012, 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 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 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 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 inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset 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 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 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 of carrying amount, or fair value less cost to sell. The fair value for mortgage servicing rights is estimated by discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon rates discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar characteristics. generally charged for such loans with similar characteristics. Assets: Assets: Impaired loans Impaired loans Other real estate owned Other real estate owned Mortgage servicing rights Mortgage servicing rights Assets: Assets: Impaired loans Impaired loans Other real estate owned Other real estate owned Mortgage servicing rights Mortgage servicing rights $ $ $ $ Level I Level I Level II Level II Level III Level III Total Total December 31, 2013 December 31, 2013 $ $ - - - - - - $ $ - - - - - - 7,214,696 $ 7,214,696 $ 237,150 237,150 482,263 482,263 7,214,696 7,214,696 237,150 237,150 482,263 482,263 Level I Level I Level II Level II Level III Level III Total Total December 31, 2012 December 31, 2012 $ $ - - - - - - 6,126,541 $ 6,126,541 $ 287,385 287,385 356,490 356,490 6,126,541 6,126,541 287,385 287,385 356,490 356,490 $ $ - - - - - - 35 35 The following tables provide a listing of significant unobservable inputs used in the fair value measurement process for items valued utilizing Level III techniques as of December 31, 2013 and 2012. December 31, 2013 Impaired loans Fair Value 7,214,696 $ Other real estate owned $ 239,150 Mortage servicing rights $ 482,263 Valuation Techniques Property appraisals Property appraisals Discounted cash flows December 31, 2012 Corporate securities Impaired loans $ $ Fair Value 120,724 Valuation Techniques Discounted cash flows 6,126,541 Property appraisals Other real estate owned $ 287,385 Mortage servicing rights $ 356,490 Property appraisals Discounted cash flows Unobservable Inputs Management discount for property type and recent market volatility Management discount for property type and recent market volatility Range 0% - 15% discount 0% - 15% discount Discount rate 2.96 - 3.98% discount Prepayment speeds 1.23 - 3.71 prepayment factor Unobservable Inputs Projected defaults Range 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 prepayment factor 36 44 Kish Bancorp, Inc. 2013 Annual Report 45 17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS 17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued) The estimated fair values of the Company’s financial instruments at December 31 are as follows: Carrying Value Fair Value 2013 Level I Level II Level III $ 14,439,548 980,000 $ 14,439,548 980,000 $ 14,439,548 980,000 $ $ - - 188,080,483 73,150 381,260,530 6,867,400 12,936,583 2,077,235 482,263 188,080,483 73,150 381,396,348 6,867,400 12,936,583 2,077,235 482,263 228,863 73,150 - 6,867,400 12,936,583 2,077,235 - 187,851,620 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 $ $ 494,373,615 4,414,579 86,073,842 791,220 494,836,282 4,414,841 85,169,364 791,220 $ 306,114,306 4,414,841 $ - 791,220 Carrying Value Fair Value 2012 Level I Level II 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: $ 23,792,622 2,374,375 $ 23,792,622 2,374,375 $ 23,792,622 2,374,375 $ 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 $ $ 460,449,822 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 $ - 766,587 135,875,264 - - - - - - - - - - - - - - - - - - - - - - - - - - 381,396,348 - - - 482,263 $ 188,721,976 - 85,169,364 - - - Level III $ 120,724 - 361,572,848 - - - 356,490 $ 164,018,944 - 42,741,294 - 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. 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: Cash and Cash Equivalents, Certificates of Deposit, Loans Held for Sale, Regulatory Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings 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. 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. 37 38 46 Kish Bancorp, Inc. 2013 Annual Report 47 17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued) 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. 18. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table presents the changes in accumulated other comprehensive (loss) income by component net of tax for the year ended December 31, 2013: Accumulated other comprehensive (loss) income, January 1, 2013 Other comprehensive loss before reclassification Amounts reclassified from accumulated other comprehensive (loss) income Accumulated other comprehensive (loss) income, December 31, 2013 $ $ Net Unrealized Gains (Losses) on Investment Securities 2,907,315 (7,722,091) (227,266) (5,042,042) The following table presents significant amounts reclassified out of each component of accumulated other comprehensive (loss) income for the year ended December 31, 2013: Unrealized gains (losses) on investment securities Other than temporary impairment losses Amount Relcassified from Accumulated Other Comprehensive (Loss) Income Affected Line Item in the Statement Where Net Income Is Presented $ $ $ $ (461,842) 157,026 (304,816) 117,500 (39,950) 77,550 Investment securities gains, net Income taxes Investment securities impairment loss Income taxes 19. SUBSEQUENT EVENTS Management has reviewed events occurring through March 24, 2014, the date the financial statements were issued, and no subsequent events occurred requiring accrual or disclosure. 39 48 Kish Bancorp, Inc. senior oFFiCers gregory t. Hayes, Senior Vice President, Systems and Client Solutions Director Walter J. Kay, Senior Vice President, Senior Information Officer amy m. muchler, Senior Vice President, Bank Operations and Support Director gerhard royer, Senior Vice President, Commercial Lender debra K. Weikel, Senior Vice President, Loan Administration Director stanley n. ayers, Vice President, Special Assets Manager Kathleen m. Boop, Vice President, Personal Lines Insurance Manager Larry e. Burger, Vice President, Commercial Relationship Manager Carol m. Herrmann, Vice President, Marketing, Administration, and Communications Director/CEO, Kish Travel daniel L. Keane, CTFA, AEP®, Vice President, Wealth Management Advisor & Trust Officer marsha K. Kuhns, Vice President, Branch Manager John Q. massie, Vice President, Commercial Relationship Manager Jeremy g. mattern, Vice President, Credit Administration Manager denise F. Quinn, Vice President, Commercial Relationship Manager melissa K. royer, Vice President, Service Support Manager Cheryl e. shope, Vice President, Residential Lender Kayelene g. sunderland, Vice President, Wealth Management/ Trust Administrator suzanne m. White, Vice President, Human Resource Director Jeffrey d. Wilson, Vice President/ CEO, Kish Agency William W. Yaudes, Vice President, Regional Market Manager Board oF direCtors oF KisH BanCorP, inC. William P. Hayes, Chairman miFFLin CountY regionaL Board michael a. Buffington, Member James J. Lakso, Vice Chairman Christina Calkins-mazur, Member William L. dancy, Secretary ronald m. Cowan, Member spyros a. degleris, Member William L. dancy, Member Paul g. Howes, Member William s. Lake, Member alan J. metzler, Member Phyllis L. Palm, Member James W. Felmlee, Member eric K. Fowler, Member William s. Lake, Member Harvard K. mcCardle, Member delmont r. sunderland, Member alan J. metzler, Member gary L. oden, Member Phyllis L. Palm, Member John Pannizzo, Member exeCutive oFFiCers William P. Hayes, Chairman and Chief Executive Officer Board oF direCtors oF KisH BanK William P. Hayes, Chairman James J. Lakso, Vice Chairman William L. dancy, Secretary spyros a. degleris, Member Paul g. Howes, Member William s. Lake, Member alan J. metzler, Member Phyllis L. Palm, Member J. Bradley scovill, President, Chief david a. Coble, Vice President, Operating Officer Branch Manager sangeeta Kishore, Senior Executive Vice President, Chief Financial Officer and Senior Risk Officer 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 J. Bradley scovill, Member John e. arrington, Executive Vice President, Sales & Retail Banking Manager William J. Hoyne, Executive Vice President, Chief Credit Officer robert s. mcminn, Executive Vice President, General Counsel James L. shilling, Jr., Executive Vice President, Senior Lending Officer Centre CountY regionaL Board thomas F. Brown, Member spyros a. degleris, Member adam r. Fernsler, Member alan g. Hawbaker, Member michael J. Krentzman, Member Paul H. silvis, Member Brandon m. Zlupko, Member Huntingdon CountY regionaL Board arthur J. deCamp, Member Wayne a. Hearn, Member steven Huston, Member James J. Lakso, Member dominick F. Peruso, Jr., Member Pamela Prosser, Member Burgess a. smith, Member delmont r. sunderland, Member 4255 East Main Street, Belleville, PA 17004 | 1-888-554-4748 | www.KishBank.com 

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