Kish Bancorp, Inc.
Annual Report 2014

Plain-text annual report

CLEARLY FOCUSED 2014 ANNUAL REPORT CHAIRMAN’S LETTER TO THE SHAREHOLDERS Kish Bancorp registered another year of strong performance in 2014. The Corporation had positive gains in earnings, loans and deposits, and in the revenues from its related affiliates, Kish Financial Solutions, Kish Insurance, and Kish Travel. At the same time, the Kish team made significant progress in improving the Corporation’s structure, processes, and capacity to deliver and maintain superior client services. We were pleased to announce that Kish Bank was recognized for the eighth 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 the competition and banking industry peers. With a healthy balance sheet, an improved tolerance for risk, and the team’s focus on learning and mastering new and better ways to serve internal and external clients, there is good cause for optimism regarding the Corporation’s ability not only to sustain the strong performance trends of recent years, but also to seize opportunities for growth. In 2014, the team achieved this strengthened position in a competitive marketplace by maintaining an unwavering focus on Kish’s customers. During the year, clients validated this focus by giving Kish very high marks in a Customer Satisfaction Survey conducted for Kish Bank by an experienced survey company widely recognized within the financial services industry. It was gratifying to learn that a robust sample of Kish Bank customers across the three-county region rated their experiences with Kish in the high 90 percentages in areas including staff knowledge, speed of service, accuracy, timeliness of statements, and the design and comfort of our facilities—all high priority areas. What was the one thing they liked best about Kish? The people: their knowledge, friendliness, and professionalism. Indeed, in a world that grows less service-oriented with each passing year, the Kish team’s professionalism and client focus is clearly a differentiating factor for Kish. At Kish, we get that. It is the reason why the theme of the 2014 Annual Report is a simple one: Clearly Focused. After one of the most difficult periods in banking history, we believe the stars for Kish are clearly aligned, and that the clear focus on serving clients exceptionally well can now lead to a period of strong growth and sustained financial performance. The basis for that positive outlook is rooted in the excellent foundation laid over the past several years and the record performance achieved in 2014. Highlights for the year are as follows: • Record net income and net interest income • New highs for loans outstanding • Growth in the depth and breadth of the Kish team • Continued strength in Kish Bank’s credit quality measures • Robust results by the wealth management, insurance, and travel divisions • Reduced noninterest expenses • Double-digit expansion in total shareholders’ equity • Increased dividend levels William P. Hayes Chairman of the Board, President and Chief Executive Officer With an unwavering focus on fulfilling client needs, we will achieve long-term shareholder returns. CONTENTS Chairman’s Letter to the Shareholders Clearly Focused—Kish Gets It Right Financial Highlights Independent Auditor’s Report 1 3 7 9 ii Kish Bancorp, Inc. 2014 Annual Report 1 Lady Lion Pink Zone, which raises funds to help support breast cancer programs at our local hospitals in Centre, Huntingdon, and Mifflin counties. Kish has supported this effort for three consecutive years and has raised a total of $46,441. Kish Travel and Kish Insurance served as the presenting sponsor for the 2014–2015 season of Lady Lion Basketball, which brought attention, goodwill, and business to Kish. In addition, Kish supported literally dozens of other worthy causes across all of our markets, both financially and in person. These efforts are discussed later in this report. As we conclude this review of another year of progress for Kish Bancorp, we want to express our heartfelt gratitude to you, our shareholders, for your continued support and encouragement. We are buoyed by your loyalty and confidence in Kish’s business model, one that is central to the Corporation’s extraordinary culture, the people and communities we serve, and our ambitious goals for the future. Sincerely, William P. Hayes Chairman of the Board, President and Chief Executive Officer In addition to the foregoing key performance metrics, 2014 also registered several enhancements to the Kish team. We welcomed Ed Friedman to the Kish Bank and Kish Bancorp Boards of Directors, bringing with him not only a wealth of knowledge in residential and commercial development, but also a deep commitment to the long- term future of the central Pennsylvania areas we serve. We also are pleased to note new additions to our regional boards in Huntingdon and Centre counties. Francis Vaughn, Vice President for Human Resources at Mutual Benefit Group in Huntingdon, joined the Huntingdon County Regional Board in August. Paul Silvis, the founder of Restek Corporation and currently Head Coach of SilcoTek Corporation, joined the Centre County Regional Board. Paul is a leader and innovator strongly committed to providing opportunities to employees on his team, as well as supporting the central Pennsylvania community. We also gratefully acknowledge the continued growth of our leadership team recognized in the appointment of Peter Collins to the position of Executive Vice President and Chief Credit Officer at the Bank. Peter brings thirty years of increasing responsibility in credit at both large and intermediate size banks, ranging across and including commercial and industrial lending, credit policy, credit analysis, real estate lending, and commercial real estate lending. We expanded our wealth management and trust services in Centre County with the addition in 2014 of Daniel Keane, Vice President and Wealth Management Advisor and Trust Officer. Dan comes to us with twenty- five years of experience in the industry. We also enhanced our Finance Department with the addition of Robert Crane as Senior Vice President and Profitability Director, who brings more than twenty years of experience in accounting and finance to Kish. Suzanne White was promoted to Senior Vice President and Human Resource Director, recognizing the expanding role that she plays in the growth and strategic progress of the Company. In addition, the promotions of Gregory Hayes and Debra Weikel to the positions of Executive Vice President, Head of Retail Banking and Client Solutions and Senior Vice President, Loan Administration, respectively, further enhanced Kish’s focus on client services. The promotions support Kish’s new structural alignment that focuses on proactive, centralized support of the Bank’s sales and service functions, coupled with a centralized focus on providing direct client solutions. I am also proud to say that the Kish family once again did its part in giving back to the community, working hard to support those causes important to Kish’s communities, customers, and employees. During 2014, the team once again partnered with Kish’s ambassador and advocate, Coquese Washington, Head Coach of Women’s Basketball at Penn State. She has been a leader in growing the 2 Kish Bancorp, Inc. Clearly focused— Kish gets it right For 115 years, Kish Bank and Kish Bancorp have maintained a clear and consistent client-focused approach to banking and financial services. The Corporation’s highest priority, understanding and meeting clients’ needs with exceptional care and quality, is built into Kish’s brand promise with two simple words: Expect More. In 2014, the Corporation worked diligently across its four business lines—Kish Bank, Kish Financial Solutions, Kish Insurance, and Kish Travel—to sharpen its focus on providing superior client service while achieving strong and sustained results for shareholders. For every team member at Kish, this means getting it right every time. Taking care of business and getting the details right is mission critical to any enterprise, but more so for financial service companies like Kish, companies that operate in a highly competitive environment subject to significant regulatory oversight, volatile economic forces, and global fraud threats. Kish must be able to manage all of these, while operating successfully for shareholders and our communities. The financial results and highlights included in this report validate that, in 2014, the Corporation achieved strong results across all key performance measures. Kish Bancorp, a financial services and bank holding company, has at its core a successful and deeply rooted regional community bank. Kish Bank is guided by its locally focused board of directors and management team, and disciplined by a forward looking strategic planning process that has enabled it to grow and expand in a manner that is designed to provide the services of a big bank with the feel and care of a local bank. Decisions are made promptly in the local communities Kish serves. Terri Whitsel, Owner, TAZ Fitness Burnham 2014 Annual Report 3 This, combined with an unwavering commitment to customer service of the highest order, is the Kish hallmark. It is foundational to the business model and key to the Corporation’s future growth and development. So, in 2014, Kish set an important corporate objective to test performance relative to service quality standards. This effort included both one-on-one customer interviews conducted by internal staff, as well as a formal and anonymous questionnaire delivered online by a survey company widely respected in the industry. The one-on-one customer interviews engaged relationship managers across all of Kish’s business lines. Customers who do business across multiple business units were identified to determine their assessment of the Kish business model. The conversations that resulted led to a clear conclusion that these clients like doing business with Kish because Kish puts them first. What they said was that Kish listened to them, took the time to understand their goals, counseled them on their options, and ultimately provided them the financing and/or financial solutions they needed to help them achieve something that was important to them. They told us, most importantly, that what matters to them also matters to Kish. And that became the theme of a campaign that commenced in 2014 and continues into 2015. It is also represented in these pages. At the end of this process, these clients allowed Kish to tell their stories across its three-county marketplace. Their stories were not only moving and inspiring; they also validated the role that a financial services company like Kish plays in the community. They provided an intimate behind-the- numbers understanding of the impact Kish has had on their lives. Featured clients were: • A first time business owner who can’t imagine banking anywhere else because Kish Bank has been able to deliver everything he has needed without losing the hometown feel he values. • A local dentist who is intentional about pursuing business opportunities in his drive to provide a secure future for his young children. He feels that Kish actively partnered with him to find solutions tailored to his needs. • A retiree and his wife, who trust Kish Financial Solutions with their personal investments; feel comfortable with everything about Kish Bank, from the tellers, to the assistant managers, to the executive team; and who consider Kish Travel services to be “bend-over-backwards” excellent. • Women and small business owners who enjoy everything at Kish, from the one-stop shop service of our business bankers, to the tellers, to the travel team. For them, Kish’s Wealth Management team makes it simple to offer a 401(k) to their employees, a nice benefit for them. • A first time female business owner without extensive business experience who got not only the financing, but the encouragement and advice she needed to proceed in a manner that allows her to balance business and family life. • A young, upwardly mobile professional couple with student loans who were so happy with their first mortgage experience with Kish Bank that they did not even consider looking anywhere else when they were ready to buy a larger home for their growing family, one they could share more widely with their extended family and friends. These customers exemplify the kinds of business relationships Kish values. The knowledge that the work done by Kish associates helps businesses, individuals, families, and communities grow and prosper is a major force in motivating employees. Kish also engaged the services of a widely respected survey research firm that worked to design and distribute a formal and anonymous online Customer Satisfaction Survey. Close to 500 clients responded promptly to the survey. With the exception of rating the convenience of the Bank’s ATM locations, which was rated Truly Exceptional or Good by 81 percent of the respondents, all scores were in the nineties to high nineties. On the question, “Taking everything into consideration, how would you rate your overall experience with Kish Bank?”—95 percent of the respondents rated the Bank Truly Exceptional or Good. While it was gratifying to see data on this and other points of interest, the Corporation does not intend to rest on its laurels. Customer feedback will be secured routinely as a means to help Kish continue to improve the delivery of client service. At Kish, happy customers lead to the kinds of positive financial results contained in the pages of this report. THE KISH TEAM Kish Bancorp has an extraordinarily talented, dedicated, and responsive family of employees who diligently learn new skills to adjust to rapid changes in the industry. Kish Bank and its affiliate companies focused in 2014 on improving collaboration between sales and sales support. This resulted in several strategic realignments in the Corporation that have rapidly produced stronger processes and stronger alliance between the front line and centralized service support, allowing customer service to reach higher levels both internally and externally. An important part of the Corporation’s carefully considered realignment had been to establish a Mortgage unit under centralized leadership. The objective, going forward, is to sharply increase Kish’s market share of mortgages in the Centre County region. The Corporation also further elevated its Human Resource management activities, leading to positive improvements in recruiting, training, and internal communication efforts. In addition, advancements in the Corporation’s employee performance evaluation process were implemented. These and other noteworthy improvements in Human Resources help to expand Kish’s reputation as an employer of choice in the region, reflected in the increasing talent pool at Kish, from the entry to the executive level. KISH IN THE COMMUNITY The engagement of the Kish family in the community is a core value and strategic priority for the Corporation. Individuals who come together in a powerful way make positive differences. Although the focus of the Corporation’s engagement varies according to emerging needs in the community, Kish targets four general areas: children, health, housing, and economic development. The establishment of Kish’s Community Action Teams several years ago has helped to make more visible the commendable work by members of the Kish team. Kish employees are supported by the availability of three days of paid time off each year as an incentive for them to volunteer their time to assist with community needs. In 2014, employee activities ranged from raising money to contribute to activities designed to improve health, to plunging into frigid water to raise funds to improve water safety in an area where there was a tragic accident, to building an extensive garden for a local school, to teaching thousands of young students at local schools about financial literacy under the American Bankers Association’s Teach Children to Save program. In addition, Kish executives are Top: Deb Shawley and Karen Bower Owners, IFC Services, Inc. Mt. Union Bottom: Jim Porter Owner, J Porter Enterprises, LLC McAlevy’s Fort 2014 Annual Report 5 Top: Richard and Shirley Hoffman Lewistown Middle: Dr. Robert Jeanmenne State College Bottom: Valerie, David, and Dr. Christian Long Huntingdon 4 Kish Bancorp, Inc. 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 2014 2013 2012 2011 2010 $4,358,608 $4,216,873 $3,629,794 $3,631,298 $3,556,124 5,130,129 2,005,848 4,980,589 1,971,992 4,168,872 1,960,051 4,070,114 1,760,493 4,026,669 1,739,714 $659,600 $630,132 $557,575 $560,069 $556,623 414,061 508,616 48,853 6,009 219 0.67% 9.54% 46.02% 81.41% 8.32% 13.07% 1.43% 0.05% $3.63 3.60 1.64 39.96 44.87 381,261 494,374 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 Average Shares Outstanding (#) 1,199,207 1,192,755 1,189,222 1,077,470 1,058,686 encouraged to give back to the community by volunteering for at least one non-profit board. Kish Bank has always supported its communities by directing funds where they are needed. In addition, the Corporation tries to leverage its gifts through volunteer support and action. For several years, Kish has been a leader in Relay for Life, the signature event for the American Cancer Society. In 2014, Penn State’s Lady Lion Basketball program presented the Hank Gambocurta Service Award to “The People of Kish,” for their creative efforts and outstanding fundraising results for The Pink Zone, a major annual philanthropic effort of the Lady Lions that supports breast cancer awareness, education, programs, and research. Beneficiaries include all three of the local hospitals in Kish’s three-county market. KISH BANK PARTNER AND AMBASSADOR, LADY LION BASKETBALL HEAD COACH, COQUESE WASHINGTON Kish Bank’s partnership with Ms. Washington deepened in 2014, and she continues to make appearances sponsored by Kish. In October, Ms. Washington promoted breast health at J.C. Blair Memorial Hospital in Huntingdon, where she and Kish were very well received. In addition, Kish Insurance and Kish Travel were presenting co-sponsors for the 2014–2015 Lady Lion Basketball season. These sponsorships produced highly visible recognition for both Kish affiliates at Penn State’s Bryce Jordan Center during all Lady Lion Basketball games played there. Kish Bank is sponsoring Ms. Washington’s remarks on “Building Championship Teams” at an upcoming Pennsylvania Bankers Association meeting. Kish Bank’s relationship with Ms. Washington, a leader in her field and at Penn State, continues to expand appreciation of the value that Kish brings to the region. KISH SHAREHOLDERS Loyal shareholders are a highly valued part of Kish’s corporate culture and are in keeping with the long-term commitment the Corporation has to the central Pennsylvania region. Kish Bancorp is fortunate to have shareholders that truly understand the benefit and the opportunities inherent to a community bank. A number of Kish shareholders have seen Kish create opportunities and solve problems consistently, over a long period of time, and in a select few cases, over multiple generations. Such shareholder loyalty and support allows Kish not only to deliver the positive financial results noted herein, but also to provide the proven benefits of a community bank to the people and businesses in the region. As Kish Bank and its affiliates continue to deliver their services focused ever more clearly on what matters to its clients and communities, the benefits will accrue to the shareholders, both those who know the Corporation well, and those who want to know it better. Coquese Washington Head Coach, Penn State® Lady Lion Basketball Team and Kish Client *Per share data for the years 2010 through 2012 have been adjusted to post stock split levels for comparability. 2014 Annual Report 7 Net Income (in millions) Net Interest Income After Provision (in millions) INDEPENDENT AUDITOR'S REPORT $21.0 $18.0 $15.0 $12.0 $9.0 $6.0 $3.0 $0.0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Balance Sheet (in millions) Stockholders' Equity (in millions) and ROE Assets Loans Deposits Stockholders' Equity ROE $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 2010 2011 2012 2013 2014 15.00% 12.00% 9.00% 6.00% 3.00% 0.00% 2010 2011 2012 2013 2014 Earnings and Dividends per Share Stock Valuation (per share) Basic Earnings per Share Dividends per Share Book Valuation e Market Value $60.00 $40.00 $20.00 $0.00 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 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, 2014 and 2013; 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 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, 2014 and 2013, 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 11, 2015 KISH BANCORP, INC. CONSOLIDATED AUDITED FINANCIAL STATEMENTS DECEMBER 31, 2014 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 9 10 11 12 13 14 15 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 $700 $600 $500 $400 $300 $200 $100 $0 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 8 Kish Bancorp, Inc. 2014 Annual Report 9 CONSOLIDATED BALANCE SHEET KISH BANCORP, INC. KISH BANCORP, INC. CONSOLIDATED BALANCE SHEET CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF INCOME KISH BANCORP, INC. CONSOLIDATED STATEMENT OF INCOME ASSETS ASSETS Cash and due from banks Interest-bearing deposits with other institutions Cash and due from banks Interest-bearing deposits with other institutions Cash and cash equivalents Cash and cash equivalents Certificates of deposit in other financial institutions Investment securities available for sale Certificates of deposit in other financial institutions Investment securities available for sale Loans held for sale Loans held for sale Loans Less allowance for loan losses Loans 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 shares issued 1,348,750 shares issued Additional paid-in capital Additional paid-in capital Retained earnings Retained earnings Accumulated other comprehensive income (loss) Accumulated other comprehensive income (loss) Treasury stock, at cost (124,778 and 130,736 shares in 2014 Treasury stock, at cost (124,778 and 130,736 shares in 2014 and 2013, respectively) and 2013, respectively) TOTAL STOCKHOLDERS' EQUITY TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY See accompanying notes to consolidated financial statements. See accompanying notes to consolidated financial statements. 2 2 10 Kish Bancorp, Inc. December 31, December 31, 2014 2014 2013 2013 $ $ $ $ $ $ $ $ 7,008,968 $ 7,008,968 $ 8,680,120 8,680,120 15,689,088 15,689,088 2,753,312 184,323,726 2,753,312 184,323,726 75,050 75,050 420,069,812 420,069,812 6,008,601 6,008,601 414,061,211 414,061,211 13,392,122 13,392,122 1,668,699 1,668,699 6,634,200 6,634,200 14,120,894 14,120,894 6,881,312 6,881,312 659,599,614 $ 659,599,614 $ 65,435,614 $ 65,435,614 $ 10,465,169 10,465,169 53,877,709 53,877,709 195,721,101 195,721,101 183,115,908 183,115,908 508,615,501 508,615,501 11,206,134 3,706,134 86,195,352 93,695,352 4,729,471 4,729,471 610,746,458 610,746,458 7,057,478 7,057,478 7,382,070 7,382,070 14,439,548 14,439,548 980,000 188,080,483 980,000 188,080,483 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 9,693,018 630,132,117 630,132,117 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 - - 674,375 674,375 2,932,003 2,932,003 49,584,308 49,584,308 550,729 550,729 (4,888,259) (4,888,259) 48,853,156 48,853,156 659,599,614 $ 659,599,614 $ - - 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 40,680,635 630,132,117 630,132,117 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 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, 2014 2013 $ 17,323,124 1,152,588 $ 16,822,468 985,438 3,273,010 1,474,594 58,284 310,561 23,592,161 3,220,026 111,283 1,630,742 4,962,051 2,972,983 1,334,865 61,967 165,741 22,343,462 2,998,445 114,516 1,693,949 4,806,910 18,630,110 300,000 17,536,552 (900,000) 18,330,110 18,436,552 1,709,309 519,346 - 649,675 424,465 1,067,665 286,797 1,834,912 6,492,169 11,568,198 2,630,711 1,702,035 403,077 256,269 373,062 384,973 2,373,830 19,692,155 5,130,124 771,521 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 $ $ 4,358,603 $ 4,216,873 3.63 $ 3.60 3.54 3.51 See accompanying notes to the consolidated financial statements. 3 2014 Annual Report 11 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME KISH BANCORP, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY KISH BANCORP, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2014 Year Ended December 31, 2013 Net income Other comprehensive income (loss): Securities available for sale: Change in unrealized holding gains (losses) on Net income available-for-sale securities Other comprehensive income (loss): Tax effect Securities available for sale: Change in unrealized holding gains (losses) 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 income (loss) Impairment losses included in net income Total comprehensive income (loss) Tax effect Total other comprehensive income (loss) Total comprehensive income (loss) $ $ $ $ 4,358,603 $ Year Ended December 31, 4,216,873 2014 2013 4,358,603 $ 8,993,241 (3,057,702) 4,216,873 (11,700,139) 3,978,048 8,993,241 (519,346) (3,057,702) 176,578 (11,700,139) (461,842) 3,978,048 157,026 - (519,346) - 176,578 5,592,771 - 9,951,374 $ - 117,500 (461,842) (39,950) 157,026 (7,949,357) 117,500 (3,732,484) (39,950) 5,592,771 (7,949,357) 9,951,374 $ (3,732,484) See accompanying notes to the consolidated financial statements. See accompanying notes to the consolidated financial statements. 4 12 Kish Bancorp, Inc. 4 . 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 ) s s o L ( e m o c n I 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 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 7 7 8 , 9 ( 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 ) s e r a h s 5 7 3 , 4 7 6 ( d n e d i v i d ) s e r a h s 0 4 4 , 2 ( 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 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 ) 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 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 s o l e v i s n e h e r p m o c r e h t O 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 - 8 5 0 , 4 2 3 0 6 , 8 5 3 , 4 1 7 7 , 2 9 5 , 5 - ) 1 2 4 , 6 3 ( 5 3 8 , 2 0 2 ) 8 4 8 , 5 0 0 , 2 ( ) 8 9 8 , 5 5 2 ( 1 2 4 , 2 9 2 3 4 5 , 2 4 4 ) 7 5 3 , 3 4 1 ( ) 8 9 8 , 5 5 2 ( 1 0 8 , 7 7 3 1 7 7 , 2 9 5 5 , 3 0 6 , 8 5 3 , 4 ) 8 4 8 , 5 0 0 , 2 ( 8 5 0 , 4 2 ) 1 2 4 , 6 3 ( ) 3 4 5 , 2 4 4 ( 7 5 3 , 3 4 1 5 3 8 , 2 0 2 ) 0 8 3 , 5 8 ( ) s e r a h s 0 5 2 , 9 ( 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 s n o i t p O k c o t S f o e s i c r e x E ) s e r a h s 4 2 4 , 2 ( 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 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 ) s e r a h s 3 0 8 , 6 ( 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 0 7 9 , 7 ( 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 4 6 . 1 $ ( s d n e d i v i d h s a C 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 e v i s n e h e r p m o c r e h t O e m o c n i t e N 6 5 1 , 3 5 8 , 8 4 $ ) 9 5 2 , 8 8 8 , 4 ( $ 9 2 7 , 0 5 5 $ 8 0 3 , 4 8 5 , 9 4 $ 3 0 0 , 2 3 9 , 2 $ 5 7 3 , 4 7 6 $ 4 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 2014 Annual Report 13 CONSOLIDATED STATEMENT OF CASH FLOWS KISH BANCORP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS 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 other than temporary impairment loss Proceeds from sale of loans held for sale Origination of loans held for sale Gain on sales of loans Depreciation, amortization, and accretion Deferred income taxes Increase in accrued interest receivable Increase (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 Purchase of bank-owned life insurance Investment securities available for sale: Proceeds from sale of investments Proceeds from repayments and maturities Purchases Increase in loans, net Purchase of regulatory stock Redemption of regulatory stock Purchase of premises and equipment Proceeds from sale of other real estate owned Net cash used for investing activities FINANCING ACTIVITIES Increase in deposits, net Increase in short-term borrowings, net Proceeds from other borrowings Repayments of other borrowings Purchases of treasury stock Proceeds from sale of treasury stock Exercise of Stock Options Cash dividends Net cash provided by financing activities Increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest on deposits and borrowings Income taxes SUPPLEMENTAL DISCLOSURE OF NON-CASH CASH FLOW INFORMATION Real estate acquired in settlement of loans Payment of stock dividend See accompanying notes to consolidated financial statements. 14 Kish Bancorp, Inc. 6 Year Ended December 31, 2013 2014 $ 4,358,603 $ 4,216,873 300,000 (519,346) - 17,094,834 (16,447,059) (649,675) 1,283,772 (73,365) (19,473) (29,450) (424,465) - (46,151) 416,512 5,244,737 490,000 (2,263,312) (775,943) 24,782,208 13,367,014 (25,622,254) (33,138,681) (982,400) 1,215,600 (274,006) 57,372 (23,144,402) 14,241,886 6,791,555 17,394,587 (17,273,077) (255,898) 292,421 (36,421) (2,005,848) 19,149,205 1,249,540 14,439,548 (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 1,394,375 - - 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 (9,353,074) 23,792,622 $ $ $ 15,689,088 $ 14,439,548 4,991,500 $ 685,000 4,782,277 395,000 38,000 $ - 489,793 337,188 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2014 and 2013. 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 7 2014 Annual Report 15 KISH BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investment Securities (Continued) Allowance for Loan Losses 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. 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. 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. Premises and Equipment 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. 16 Kish Bancorp, Inc. 8 9 2014 Annual Report 17 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Goodwill Stock Options (Continued) 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 $256,269 and $311,999 for 2014 and 2013, 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. Stock Options As of December 31, 2014 and 2013, the Company recorded compensation expense of $24,058 and $34,527 related to share-based compensation awards. At December 31, 2014, there was approximately $22,140 in unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next three years. 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 2014 2013 Expected Dividend Yield Risk-Free Interest Rate Expected Volatility Expected Life (in Years) 4.44 % 4.86 % 2.74 % 1.95 % 10.52 % 10.66 % 10.00 10.00 The weighted-average fair value of each stock option granted for 2014 and 2013 was $1.63 and $0.86, respectively. Stock options exercised during the years ended December 31, 2014 and 2013 were 5,481 and 6,380. 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, 2014 and 2013, the Company recorded gross servicing rights of $732,590 and $742,128 with a reserve for impairment of $257,685 and $259,865, 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. 18 Kish Bancorp, Inc. 2014 Annual Report 19 10 11 2. EARNINGS PER SHARE 3. INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued) 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 2014 2013 1,348,750 1,348,748 (126,184) (132,493) (23,359) (23,500) 1,199,207 1,192,755 228 318 10,052 7,696 1,209,487 1,200,769 Options to purchase 135,641 shares of common stock at a price of $25.50 to $48.00, as of December 31, 2014, and 19,556 shares of restricted stock ranging in price from $28.00 to $39.50 were not included in the computation of diluted earnings per share. To include these shares would have been antidilutive. 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. 3. INVESTMENT SECURITIES AVAILABLE FOR SALE The amortized cost and fair value of investment securities available for sale are as follows: 2014 Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost $ 11,874,760 $ 64,166,317 - 110,599 $ (123,180) $ (1,072,973) 11,751,580 63,203,943 62,818,588 14,142,440 28,691,421 181,693,526 1,795,759 1,804,696 300,279 320,568 2,536,142 122,875 (189,183) (174,093) 64,434,101 14,268,626 (246,266) (1,805,695) (18,881) 28,765,723 182,423,973 1,899,753 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 $ 183,489,285 $ 2,659,017 $ (1,824,576) $ 184,323,726 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 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, 2014 and 2013. Less than Twelve Months Gross Unrealized Losses Fair Value 2014 Twelve Months or Greater Gross Unrealized Losses Fair Value Total Fair Value Gross Unrealized Losses $ - $ - $ 11,751,580 $ (123,180) $ 11,751,580 $ (123,180) 3,980,680 (19,078) 46,936,583 (1,053,895) 50,917,263 (1,072,973) 2,413,441 321,794 (7,058) (6,483) 10,715,337 4,786,877 (182,125) (167,610) 13,128,778 5,108,671 (189,183) (174,093) 2,764,210 (30,008) 13,041,453 (216,258) 15,805,663 (246,266) 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 Equity securities in financial institutions $ Total 730,617 10,210,742 $ (18,881) (81,508) $ - 87,231,830 $ - (1,743,068) $ 730,617 97,442,572 $ (18,881) (1,824,576) 20 Kish Bancorp, Inc. 2014 Annual Report 21 12 13 3. INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued) 3. INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued) Less than Twelve Months Gross Unrealized Losses Fair Value 2013 Twelve Months or Greater Gross Unrealized Losses Fair Value 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 U.S. treasury securities. The unrealized loss on 6 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, 2014. U.S. government agency securities. The unrealized loss on 41 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, 2014. Obligations of states and political subdivisions. The Company’s unrealized losses on 23 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, 2014. Corporate securities. The Company had unrealized losses on investments in 7 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, 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, 2014. Mortgage-backed securities in government-sponsored entities. The unrealized losses on 11 of the Company’s investments in mortgage-backed securities were caused by interest rate increases. The Company purchased 11 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, 2014. Equity Securities. The Company had unrealized losses on investments in 5 different equity securities. 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 these securities and it is not more likely than not that the Company will be required to sell the investments before recovery of the book value, it does not consider these investments to be other- than- temporarily impaired at December 31, 2014 The amortized cost and fair value of debt securities at December 31, 2014, 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 $ 1,006,675 $ 19,133,538 100,368,651 61,184,662 Fair Value 1,016,706 19,386,022 100,485,411 61,535,834 $ 181,693,526 $ 182,423,973 Investment securities with a carrying value of $84,298,315 and $71,388,656 at December 31, 2014 and 2013, respectively, were pledged to secure deposits and other purposes as required by law. The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment securities available for sale for the years ended December 31: Proceeds from sales Gross gains Gross losses Other-than-temporary impairment loss 2014 2013 $ 24,782,208 $ 615,334 95,988 - 16,873,095 512,423 50,581 117,500 22 Kish Bancorp, Inc. 2014 Annual Report 23 14 15 4. LOANS 5. ALLOWANCE FOR LOAN LOSSES (Continued) Major classifications of loans are summarized as follows: The following qualitative factors are analyzed to determine allocations for nonclassified loans for each portfolio segment: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Less allowance for loan losses Net loans $ 2014 2013 139,885,732 $ 57,253,972 19,504,821 36,357,220 8,097,292 158,970,775 420,069,812 6,008,601 125,959,918 51,447,386 19,588,155 30,282,161 7,219,608 152,691,125 387,188,353 5,927,823 $ 414,061,211 $ 381,260,530 Mortgage loans serviced by the Company for others amounted to $73,230,046 and $74,621,700 at December 31, 2014 and 2013, 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, 2014 and 2013, 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, 2014, is as follows: Balance 2012 Additions Amounts Collected Balance 2013 Additions Amounts Collected Balance 2014 $ 8,989,462 $ 7,931,823 $ 12,451,249 $ 4,470,036 $ 8,319,121 $ 4,905,042 $ 7,884,115 5. ALLOWANCE FOR LOAN LOSSES Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: commercial real estate loans, commercial and industrial loans, agricultural loans, state and political subdivision loans, consumer loans, and residential real estate loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over a three-year period for all portfolio segments. Certain qualitative factors are then added to the historical loss percentages to get the adjusted factor to be applied to non-classified loans. • 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 2014, management elevated the qualitative factors reserve percentage for the consumer and commercial real estate pool of loans because of the changes in the volume and severity of past dues, non-accrual and classified loans as well as changes in competitive, legal and regulatory environment. In 2013, qualitative factors were elevated for residential real estate loans because of increased regulations for residential lending. These factors were kept at the same level for 2014. In 2013, the change in credit staff experience and ability factor percentage was increased because of the resignation of the Chief Credit Officer. In 2014, a new chief credit officer was hired along with additional credit staff with greater expertise in commercial and industrial lending. While qualitative factors related to changes in lending staff experience and ability were kept at the same level for all the pools, it was decreased for commercial and industrial lending. With improvement in the economic and business conditions, the reserve factors related to agricultural loans were decreased slightly. All other pools of loans were left unchanged due to immaterial changes in the environmental trends. 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 2013. 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. 24 Kish Bancorp, Inc. 2014 Annual Report 25 16 17 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) 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. 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 2014 State and Political Subdivisions Consumer Residential Real Estate Unallocated Total Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision Ending balance Ending balance individually evaluated for impairment Ending balance collectively evaluated for impairment Loans: $ $ $ $ Individually evaluated for impairment $ Collectively evaluated for impairment 2,545,590 (38,393) 1,501 469,760 2,978,458 $ $ 1,082,500 (196,294) 9,510 (86,059) 809,657 $ $ 219,126 - 1,600 (10,346) 210,380 821,321 $ 81,828 $ - $ $ $ 164,348 - - 26,141 190,489 - $ $ $ 53,732 (952) 3,806 9,456 66,042 $ $ 1,086,486 $ - - 67,539 1,154,025 $ 776,041 - - (176,491) 599,550 3,306 $ 35,000 $ - $ $ $ 5,927,823 (235,639) 16,417 300,000 6,008,601 941,455 2,157,137 $ 727,829 $ 210,380 $ 190,489 $ 62,736 $ 1,119,025 $ 599,550 $ 5,067,146 7,205,504 $ 837,052 $ 362,362 $ 98,843 $ 8,092 $ 926,597 $ 9,438,450 132,680,228 56,416,920 19,142,459 36,258,377 8,089,200 158,044,178 410,631,362 Ending balance $ 139,885,732 $ 57,253,972 $ 19,504,821 $ 36,357,220 $ 8,097,292 $ 158,970,775 $ 420,069,812 Commercial Real Estate Commercial and Industrial Agricultural 2013 State and Political Subdivisions Consumer Residential Real Estate Unallocated Total Allowance for loan losses: Beginning balance Charge-offs Recoveries Provision Ending balance Ending balance individually evaluated for impairment Ending balance collectively evaluated for impairment Loans: $ $ $ $ Individually evaluated for impairment $ Collectively evaluated for impairment 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 $ 8,107,585 120,427,400 50,274,428 19,148,549 30,175,441 7,217,808 151,837,142 379,080,768 Reserve requirement for commercial real estate loans increased by $467,868 from 2013 to 2014, while those for commercial and industrial loans decreased by $272,843 during the same period. This was a direct result of increases in outstanding balances in commercial real estate loans during 2014 and decrease in impaired, criticized and classified assets for commercial and industrial loans which at $2.2 million at December 31, 2014, indicates a 41 percent or $1.5 million decrease from December 31, 2013. Credit Quality Information The following tables represent the commercial credit exposures by internally-assigned grades for the years ended December 31, 2014 and 2013, 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 $ 130,084,660 $ 2,302,154 7,498,918 - - $ 139,885,732 $ Commercial and Industrial 54,721,479 $ 2,189,688 312,956 29,849 - 57,253,972 $ Pass Special Mention Substandard Doubtful Loss Total $ Commercial Real Estate 115,161,687 $ 2,901,867 7,857,972 38,392 - $ 125,959,918 $ Commercial and Industrial 47,349,424 $ 2,712,998 1,384,964 - - 51,447,386 $ Pass Special Mention Substandard Doubtful Loss Total 2014 Agricultural 17,944,555 $ 211,321 1,348,945 - - 19,504,821 $ 2013 Agricultural 17,457,107 $ 886,505 1,244,543 - - 19,588,155 $ State and Political Subdivisions 36,357,220 $ - - - - 36,357,220 $ State and Political Subdivisions 30,282,161 $ - - - - 30,282,161 $ Total 239,107,914 4,703,163 9,160,819 29,849 - 253,001,745 Total 210,250,379 6,501,370 10,487,479 38,392 - 227,277,620 Ending balance $ 125,959,918 $ 51,447,386 $ 19,588,155 $ 30,282,161 $ 7,219,608 $ 152,691,125 $ 387,188,353 26 Kish Bancorp, Inc. 2014 Annual Report 27 18 19 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) Credit Quality Information (Continued) Age Analysis of Past-Due Loans by Class (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: Performing Nonperforming Total Performing Nonperforming Total 2014 Residential Real Estate Consumer $ $ $ $ 8,089,200 $ 8,092 8,097,292 $ 158,492,274 478,501 158,970,775 2013 Residential Real Estate Consumer 7,169,056 50,552 7,219,608 $ $ 152,078,370 612,755 152,691,125 $ $ $ $ Total 166,581,474 486,593 167,068,067 Total 159,247,426 663,307 159,910,733 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: 2014 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Loans Recorded Investment 90 Days and Accruing 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Loans Recorded Investment 90 Days and Accruing 2013 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 - 2,169,976 $ 607,175 - 3,856,354 $ 757,726 - 122,103,564 $ 50,689,660 19,588,155 125,959,918 $ 51,447,386 19,588,155 - 290 17,792 64,123 $ - - 387,261 3,164,412 $ - 50,552 612,755 5,277,387 $ 30,282,161 7,169,056 152,078,370 381,910,966 $ 30,282,161 7,219,608 152,691,125 387,188,353 $ - - - - - - - Impaired Loans 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. Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total $ 1,177,425 $ 261,814 330,426 - 19,638 234,314 $ 2,023,617 $ 150,000 $ - - 6,028,078 $ 191,753 - 7,355,503 $ 453,567 330,426 132,530,229 $ 56,800,405 19,174,395 139,885,732 $ 57,253,972 19,504,821 - - - 150,000 $ - 8,092 478,501 6,706,424 $ - 27,730 712,815 8,880,041 $ 36,357,220 8,069,562 158,257,960 411,189,771 $ 36,357,220 8,097,292 158,970,775 420,069,812 $ - - - - - - - 28 Kish Bancorp, Inc. 2014 Annual Report 29 20 21 5. ALLOWANCE FOR LOAN LOSSES (Continued) 5. ALLOWANCE FOR LOAN LOSSES (Continued) Impaired Loans (Continued) Impaired Loans (Continued) The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount as of December 31: 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 Recorded Investment Unpaid Principal Balance 2014 Related Allowance Average Recorded Investment Interest Income Recognized 4,164,729 $ 755,224 362,362 98,844 - 891,597 4,164,729 $ 755,224 362,362 98,844 - 891,597 6,272,756 6,272,756 $ - - - - - - - 3,790,302 $ 650,586 243,449 103,054 839 1,041,076 5,829,306 119,559 33,696 10,973 4,783 - 16,383 185,394 3,040,774 81,828 - - 8,092 35,000 3,040,774 81,828 - - 8,092 35,000 3,165,694 3,165,694 7,205,504 837,052 362,362 98,843 8,092 926,597 7,205,503 837,052 362,362 98,844 8,092 926,597 821,321 81,828 - - 3,306 35,000 941,455 821,321 81,828 - - 3,306 35,000 1,053,788 299,952 2,083 - 4,070 2,917 1,362,810 4,844,090 950,538 245,532 103,054 4,909 1,043,993 - - - - - - - 119,559 33,696 10,973 4,783 - 16,383 Total $ 9,438,450 $ 9,438,450 $ 941,455 $ 7,192,116 $ 185,394 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 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 $ 2014 6,028,078 191,753 - - 8,092 478,501 $ 2013 4,307,478 763,760 290,389 - - 576,149 $ 6,706,424 $ 5,937,776 30 Kish Bancorp, Inc. 2014 Annual Report 31 22 23 5. ALLOWANCE FOR LOAN LOSSES (Continued) 6. PREMISES AND EQUIPMENT Troubled Debt Restructuring Major classifications of premises and equipment are summarized as follows: The Company’s loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment of class of loan, as applicable, through a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination. As of December 31, 2014, a specific reserve allocation of $0 has been established against the troubled debt restructurings. Also, as of December 31, 2014, no charge-offs for the troubled debt restructurings were required. The restructuring of the loans was either an extension of the maturity date or temporary reduction or moratorium on the payment terms or amounts. No modifications involved any changes in principal balance for 2014 or 2013. There were no loans modified in a troubled debt restructuring from January 1, 2012 through December 31, 2013, that subsequently defaulted (i.e., 90 days or more past due following a modification) during the years ended December 31, 2014 and 2013. Loan modifications that are considered troubled debt restructurings completed during the years ended December 31 were as follows: 2014 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 Total - $ 3 3 - - 4 10 $ - $ 316,054 262,690 - - 309,143 887,887 $ - 316,054 262,690 - - 309,143 887,887 2013 Pre-Modification Number of Outstanding Recorded Contracts Investment Post-Modification Outstanding Recorded Investment 1,988,730 $ 525,680 - 109,487 68,528 154,370 2,846,795 $ 5 $ 5 - 1 1 2 14 $ 24 1,988,730 525,680 - 109,487 68,528 154,370 2,846,795 Troubled debt restructurings: Commercial real estate Commercial and industrial Agricultural State and political subdivisions Consumer Residential real estate Total 32 Kish Bancorp, Inc. Land and land improvements Building and leasehold improvements Furniture, fixtures, and equipment Less accumulated depreciation Total 2014 2013 $ 790,550 $ 16,771,799 5,706,234 23,268,583 9,876,461 793,458 16,699,029 5,559,109 23,051,596 8,918,890 $ 13,392,122 $ 14,132,706 Depreciation and amortization charged to operations was $1,060,741 in 2014 and $1,063,679 in 2013. 7. GOODWILL As of each of the years ended December 31, 2014 and 2013, goodwill had a carrying amount of $1,668,699. The gross carrying amount of goodwill was tested for impairment in the 4th quarter, after the annual forecasting process. There was no impairment for the years ended December 31, 2014 and 2013. 8. DEPOSITS The scheduled maturities of time deposits approximate the following: Year Ending December 31, 2015 2016 2017 2018 2019 Thereafter Amount 64,930,796 26,290,797 12,864,223 25,381,450 19,724,085 33,924,557 183,115,908 $ $ The aggregate of all time deposit accounts of $250,000 or more amounted to $12,397,255 and $16,041,379 at December 31, 2014 and 2013, respectively. Total amount of Brokered Deposits for each of the years ended December 31, 2014 and 2013 were $7,450,000 and $7,650,000 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, 2014 and 2013, 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 $ 2014 2013 11,206,134 $ 6,778,791 12,165,513 1.00% 1.67% 4,414,579 7,146,587 14,546,188 2.51% 1.60% 25 2014 Annual Report 33 10. OTHER BORROWINGS 10. OTHER BORROWINGS (Continued) The following table sets forth information concerning other borrowings: Description Fixed rate Fixed rate amortizing Mid-term repos Subordinated capital notes Note payable Maturity Range From To 12/18/23 08/26/15 04/24/23 07/08/15 07/08/16 01/28/15 12/26/24 11/12/20 11/23/35 03/17/35 Weighted- Average Interest Rate 1.76 1.76 0.63 5.35 4.18 Stated Interest Rate Range From To 1.08 0.36 3.76 2.24 6.53 0.99 6.75 6.11 % 0.93 % 4.96 % $ At December 31, 2014 27,639,850 $ 20,599,502 26,500,000 5,270,000 6,186,000 2013 32,859,450 15,878,392 26,500,000 4,650,000 6,186,000 Maturities of other borrowings at December 31, 2014, are summarized as follows: $ 86,195,352 $ 86,073,842 Year Ending December 31, 2015 2016 2017 2018 2019 2020 and after $ Amount 12,619,749 19,512,000 7,647,961 6,676,920 4,300,201 35,438,521 $ 86,195,352 Weighted- Average Rate 1.19 % 0.77 1.70 1.27 1.19 2.80 1.81 % 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, 2014, the Bank’s maximum borrowing capacity with the FHLB was approximately $201 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, 2014, is approximately $8.4 million. 34 Kish Bancorp, Inc. 26 The Bank also maintains a $10.0 million, $5.0 million and a $4.0 million federal funds line of credit with three other financial institutions. The Bank did not have outstanding borrowings related to these lines of credit at December 31, 2014. The Company issued $3,620,000 of fixed rate subordinated debt securities with stated maturities of March 24, 2024 through December 26, 2024. These securities bear a fixed annual rate of 4.75 percent. The Company may redeem them, in whole or in part, at face value on or after March 24, 2019. 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. $100,000 of these notes were redeemed in June 2013. 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 2014 844,886 $ (73,365) 2013 603,091 160,625 771,521 $ 763,716 $ $ 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 $ 2014 2013 2,042,924 $ 261,879 24,382 602,640 257,452 330,636 223,286 91,681 - 2,000 3,836,880 871,965 95,779 550,876 271,052 6,498 283,712 2,079,882 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 Net deferred tax assets $ 1,756,998 $ 4,564,760 27 2014 Annual Report 35 11. INCOME TAXES (Continued) No valuation allowance was established at December 31, 2014 and 2013, 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 $ $ 2014 Amount 1,744,244 (893,242) (102,113) 22,632 % of Pretax Income 34.0 % $ (17.4) (2.0) 0.8 Amount 1,693,400 (788,903) (106,239) (34,542) 2013 % of Pretax Income 34.0 % (15.9) (2.1) (0.7) 771,521 15.4 % $ 763,716 15.3 % 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 2010 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 $284,999 and $269,876 for the years ended December 31, 2014 and 2013, respectively. The fair value of plan assets includes $989,672 and $822,066 pertaining to the value of the Company’s common stock that is held by the plan as of December 31, 2014 and 2013, respectively. Deferred Compensation Plan The Company has a nonqualified deferred compensation plan that allows directors and senior executives to defer fees and salaries. Outstanding balances under this arrangement for 2014 and 2013 were $770,231 and $721,824, respectively, and are reported as “Other liabilities” on the Consolidated Balance Sheet. Expenses related to this plan were $46,098 and $101,914 for December 31, 2014 and 2013, respectively. 12. EMPLOYEE BENEFITS (Continued) Restricted Stock Plan The Company maintains a Restricted Stock Plan (the “Plan”). Employees and non-employee corporate directors are eligible to receive awards of restricted stock based upon performance-related requirements. Awards granted under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements including continuous employment or service with the Company. The Company has authorized 24,000 shares of the Company’s common stock to the plan. The Plan assists the Company in attracting, retaining and motivating employees and non-employee directors to make substantial contributions to the success of the Company and to increase the emphasis on the use of equity as a key component of compensation. Compensation expense recognized related to the vesting of shares was $202,835 and $237,596 for the years ended December 31, 2014 and 2013, respectively. The following is a summary of the status of the Company’s restricted stock as of December 31, 2014, and changes therein during the year then ended: Nonvested at January 1, 2014 Granted Vested Forfeited Number of Shares of Restricted Stock 20,492 9,250 (7,762) (2,424) Weighted- Average Grant Date Fair Value $ 31.78 36.69 32.36 32.50 Nonvested at December 31, 2014 19,556 $ 33.71 Stock Option Plan The Company has a fixed director and employee stock-based compensation plan. The plan has total options available to grant of 380,000 shares of common stock. The exercise price for the purchase of shares subject to a stock option may not be less than 100 percent of the fair market value of the shares covered by the option on the date of the grant. The term of stock options will not exceed ten years from the date of grant. Options granted are primarily vested evenly over a three-year period from the grant date. The following table presents share data related to the outstanding options: Outstanding, January 1, 2014 Granted Exercised Forfeited Outstanding, December 31, 2014 Exercisable at year-end Number of Options 180,036 17,280 (5,481) (56,194) 135,641 98,782 Weighted- Average Exercise Price 36.67 36.63 30.07 37.20 35.10 35.45 $ $ $ 36 Kish Bancorp, Inc. 2014 Annual Report 37 28 29 12. EMPLOYEE BENEFITS (Continued) Stock Option Plan (Continued) The following table summarizes the characteristics of stock options at December 31, 2014: Grant Date 01/05/05 02/09/05 02/10/05 02/24/05 07/08/05 12/20/05 12/22/05 01/25/07 02/23/07 01/31/08 03/26/09 10/27/09 04/01/10 04/28/11 04/02/12 04/01/13 08/01/13 09/12/13 04/01/14 09/22/14 11/03/14 $ Exercise Price 46.50 47.50 47.50 48.00 47.50 47.50 47.50 44.00 45.00 38.18 25.50 35.00 34.13 29.75 30.00 33.25 34.05 35.00 36.50 39.50 38.90 Shares 13,124 52 200 84 666 2,802 6,360 654 1,050 10,800 12,600 2,000 13,800 15,200 18,200 20,769 2,000 300 13,980 500 500 135,641 Outstanding Contractual Average Life Average Exercise Price 0.01 $ 0.10 0.11 0.15 0.51 0.96 0.97 2.06 2.14 3.08 4.23 4.82 5.25 6.32 7.25 8.25 8.58 8.70 9.25 9.73 9.84 46.50 47.50 47.50 48.00 47.50 47.50 47.50 44.00 45.00 38.18 25.50 35.00 34.13 29.75 30.00 33.25 34.05 35.00 36.50 39.50 38.90 Exercisable Average Exercise Price 46.50 47.50 47.50 48.00 47.50 47.50 47.50 44.00 45.00 38.18 25.50 35.00 34.13 29.75 30.00 33.25 34.05 35.00 36.50 39.50 38.90 Shares 13,124 $ 52 200 84 666 2,802 6,360 654 1,050 10,800 12,600 2,000 13,800 15,200 12,122 6,504 666 98 - - - 98,782 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 2014 2013 $ $ 103,938,735 $ 5,447,421 103,035,768 5,146,000 109,386,156 $ 108,181,768 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, 2014, are as follows: 2015 2016 2017 2018 2019 Thereafter Total Minimum Lease Payment 295,112 257,076 257,076 257,076 257,076 3,425,738 4,749,154 $ $ 13. COMMITMENTS Contingent Liabilities In the normal course of business, there are outstanding commitments and contingent liabilities such as commitments to extend credit, financial guarantees, and letters of credit that are not reflected in the accompanying consolidated financial statements. The Company does not anticipate any losses as a result of these transactions. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The 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. Rent expense under leases for each of the years ended December 31, 2014 and 2013, was $300,880 and $300,945, respectively. 38 Kish Bancorp, Inc. 2014 Annual Report 39 30 31 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, 2014 and 2013, was $1,771,000 and $1,656,000, 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, 2014, 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, 2014 and 2013, the FDIC categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well-capitalized financial institution, Total risk-based, Tier I risk-based, and Tier I leverage capital ratios must be at least 10 percent, 6 percent, and 5 percent, respectively. 15. REGULATORY CAPITAL (Continued) The Company’s actual capital ratios are presented in the following table that shows the Company met all regulatory capital requirements: 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 2014 2013 Amount Ratio Amount Ratio $ $ $ 64,697,824 39,598,293 49,497,866 13.07 % $ 8.00 10.00 61,373,773 37,294,894 46,618,618 53,147,425 19,799,146 29,698,720 10.74 % $ 4.00 6.00 50,568,087 18,647,447 27,971,171 53,147,425 26,516,759 33,145,949 8.02 % $ 4.00 5.00 50,568,087 25,415,096 31,768,871 13.17 % 8.00 10.00 10.85 % 4.00 6.00 7.96 % 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 2014 2013 Amount Ratio Amount Ratio $ $ $ 64,845,014 39,441,798 49,302,247 13.15 % $ 8.00 10.00 62,402,925 37,115,336 46,394,171 58,611,413 19,720,899 29,581,348 11.89 % $ 4.00 6.00 56,302,396 18,557,668 27,836,502 58,611,413 26,449,196 33,061,495 8.86 % $ 4.00 5.00 56,302,396 25,339,017 31,673,771 13.45 % 8.00 10.00 12.14 % 4.00 6.00 8.89 % 4.00 5.00 40 Kish Bancorp, Inc. 32 33 2014 Annual Report 41 16. FAIR VALUE MEASUREMENTS (Continued) 16. FAIR VALUE MEASUREMENTS 16. 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, 2014 and 2013, 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, 2014 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 - - - - - - $ 11,751,580 $ 63,203,943 64,434,101 14,268,626 28,765,723 182,423,973 1,899,753 - Total $ 1,899,753 $ 182,423,973 $ - - - - - - - - $ 11,751,580 63,203,943 64,434,101 14,268,626 28,765,723 182,423,973 1,899,753 $ 184,323,726 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 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 FAIR VALUE MEASUREMENTS (Continued) 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 Financial instruments are considered Level III when their values are determined using pricing models, discounted instruments also include those for which the determination of fair value requires significant management judgment cash flow methodologies or similar techniques, and at least one significant model assumption or input is or estimation. The following table presents the changes in the Level III fair-value category for the years ended unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments December 31, 2013. typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The following table presents the changes in the Level III fair-value category for the years ended December 31, 2013. Balance, January 1, 2013 Sales Net change on unrealized gain on investment securities available for sale Balance, January 1, 2013 Transfer out of Level III Sales Net change on unrealized gain on investment Balance, December 31, 2013 securities available for sale Transfer out of Level III - 229,276 (350,000) 120,724 Corporate - Securities 229,276 120,724 (350,000) - Corporate Securities $ $ $ Balance, December 31, 2013 $ - The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value as of December 31, 2014 and 2013, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at Level I inputs and observable inputs employed by certified appraisers for similar assets classified as Level II their fair value as of December 31, 2014 and 2013, by level within the fair value hierarchy. Impaired loans that are inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used assumptions developed by management based on the best information available under each circumstance, the asset to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as valuation is classified as Level III input. Other real estate owned is measured at fair value, less cost to sell at the Level I inputs and observable inputs employed by certified appraisers for similar assets classified as Level II date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and of carrying amount, or fair value less cost to sell. The fair value for mortgage servicing rights is estimated by assumptions developed by management based on the best information available under each circumstance, the asset discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon rates valuation is classified as Level III input. Other real estate owned is measured at fair value, less cost to sell at the generally charged for such loans with similar characteristics. date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower of carrying amount, or fair value less cost to sell. The fair value for mortgage servicing rights is estimated by discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar characteristics. Assets: Impaired loans Other real estate owned Mortgage servicing rights Assets: Impaired loans Other real estate owned Mortgage servicing rights Assets: Impaired loans Other real estate owned Mortgage servicing rights Assets: Impaired loans Other real estate owned Mortgage servicing rights 8,496,995 $ 200,531 Level III 474,905 8,496,995 $ 200,531 474,905 7,214,696 $ 237,150 Level III 482,263 7,214,696 $ 237,150 482,263 8,496,995 200,531 Total 474,905 8,496,995 200,531 Total 474,905 7,214,696 237,150 Total 482,263 7,214,696 237,150 482,263 - - Level I - - - Level I - - - Level I - - - - - $ - - - $ - - - $ - - - $ - - December 31, 2013 December 31, 2013 December 31, 2014 December 31, 2014 Level III Level III Level II Level II Level II Level II Level I Total $ $ $ $ $ $ $ $ 35 42 Kish Bancorp, Inc. 2014 Annual Report 43 34 35 16. FAIR VALUE MEASUREMENTS (Continued) 17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS 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, 2014 and 2013. December 31, 2014 Impaired loans Fair Value 8,496,995 $ Other real estate owned $ 200,531 Mortage servicing rights $ 474,905 December 31, 2013 Impaired loans Fair Value 7,214,696 $ Other real estate owned $ 237,150 Mortage servicing rights $ 482,263 Valuation Techniques Property appraisals Property appraisals Unobservable Inputs Management discount for property type and recent market volatility Management discount for property type and recent market volatility Range 0% - 70% discount Weighted Average (17.88%) 0% - 15% discount Weighted Average (8.44%) Discounted cash flows Discount rate Prepayment speeds 2.65 - 3.48% discount Weighted Average (3.07%) 1.32 - 3.70 prepayment factor Weighted Average (1.88%) Valuation Techniques Property appraisals Property appraisals Unobservable Inputs Management discount for property type and recent market volatility Management discount for property type and recent market volatility Range 0% - 15% discount Weighted Average (15%) 0% - 15% discount Weighted Average (7.00%) Discounted cash flows Discount rate Prepayment speeds 2.96 - 3.98% discount Weighted Average (3.47%) 1.23 - 3.71 prepayment factor Weighted Average (2.02%) The estimated fair values of the Company’s financial instruments at December 31 are as follows: Carrying Value Fair Value 2014 Level I Level II Level III $ 15,689,088 $ 2,753,312 15,689,088 $ 2,753,312 15,689,088 $ 2,753,312 $ - - 184,323,726 75,050 414,061,211 6,634,200 14,120,894 2,096,708 474,905 184,323,726 75,050 413,000,346 6,634,200 14,120,894 2,096,708 474,905 1,899,753 75,050 - 6,634,200 14,120,894 2,096,708 - 182,423,973 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 $ 508,615,501 $ 3,706,134 93,695,352 761,770 510,517,363 $ 3,706,134 92,638,893 761,770 325,499,593 $ 3,706,134 - 761,770 Carrying Value Fair Value 2013 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: $ 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 - 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 - 791,220 187,851,620 - - - - - - - - - - - - - - - - - - - - - - - - - - 413,000,346 - - - 474,905 $ 185,017,770 - 92,638,893 Level III $ - - - - - 381,396,348 - - - 482,263 $ 188,721,976 - 85,169,364 - 36 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. 37 44 Kish Bancorp, Inc. 2014 Annual Report 45 17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued) 17. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued) 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. 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. 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. 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 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: The following table presents the changes in accumulated other comprehensive (loss) income by component net of tax for the year ended December 31, 2014: Accumulated other comprehensive (loss) income, January 1, 2013 Other comprehensive loss before reclassification Amounts reclassified from accumulated other comprehensive (loss) income Accumulated other comprehensive Accumulated other comprehensive (loss) income, December 31, 2013 Other comprehensive income before reclassification Amounts reclassified from accumulated other comprehensive (loss) income Accumulated other comprehensive (loss) income, December 31, 2014 Net Unrealized Gains (Losses) on Investment Securities $ 2,907,315 (7,722,091) (227,266) (5,042,042) 5,935,539 (342,768) $ 550,729 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. 46 Kish Bancorp, Inc. 2014 Annual Report 47 38 39 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued) The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the year ended December 31, 2014, and 2013: Unrealized gains on investment securities December 31, 2014 Unrealized gains on investment securities December 31, 2013 Other-than-temporary impairment losses December 31, 2013 Amount Reclassified from Accumulated Other Comprehensive Income (Loss) Affected Line Item in the Consolidated Statement of Income Where Net Income Is Presented $ $ $ $ $ $ (519,346) 176,578 (342,768) (461,842) 157,026 (304,716) 117,500 (39,950) 77,550 Investment securities gains, net Income taxes Investment securities gains, net Income taxes Investment securities impairment loss Income taxes 19. SUBSEQUENT EVENTS Management has reviewed events occurring through March 11, 2015, the date the financial statements were issued, and no subsequent events occurred requiring accrual or disclosure. 40 48 Kish Bancorp, Inc. BOARD OF DIRECTORS OF KISH BANCORP, INC. William P. Hayes, Chairman EXECUTIVE OFFICERS William P. Hayes, Chairman, President and Chief Executive Officer Sangeeta Kishore, Senior Executive Vice President, Chief Financial Officer and Senior Risk Officer Peter D. Collins, Executive Vice President, Chief Credit Officer Gregory T. Hayes, Executive Vice President, Head of Retail Banking and Client Solutions Robert S. McMinn, Executive Vice President, General Counsel James L. Shilling, Jr., Executive Vice President, Senior Lending Officer SENIOR OFFICERS Robert L. Crane, Senior Vice President, Profitability Director Walter J. Kay, Senior Vice President, Chief Technology 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 Suzanne M. White, Senior Vice President, Human Resource Director Stanley N. Ayers, Vice President, Special Assets Manager Douglas C. Baxter, Vice President, Accounting and Controls Manager Kathleen M. Boop, Vice President, Personal Lines Insurance Manager Kimberly A. Bubb, Vice President, Services and Systems Manager Larry E. Burger, Vice President, Commercial Relationship Manager David A. Coble, Vice President, Branch Manager John P. Cunningham, II, Vice President, Regional Market Manager Wade E. Curry, LUTCF, Vice President, Investment Services Ann K. Guss, Vice President, Residential Lender Allana L. Hartung, Vice President, Commercial Relationship Manager Carol M. Herrmann, Vice President, Marketing, Administration, and Communications Director/CEO, Kish Travel Daniel L. Keane, CTFA, AEP®, Vice President, Wealth Management Advisor and Trust Officer Marsha K. Kuhns, Vice President, Branch Manager John Q. Massie, Vice President, Commercial Relationship Manager Denise F. Quinn, Vice President, Commercial Relationship Manager Melissa K. Royer, Vice President, Service Support Manager N. Robert Sunday, III, Vice President, Compliance Officer Cheryl E. Shope, Vice President, Residential Lender Kayelene G. Sunderland, Vice President, Wealth Management/Trust Administrator Jeffrey D. Wilson, Vice President/CEO, Kish Agency William W. Yaudes, Vice President, Regional Market Manager James J. Lakso, Vice Chairman William L. Dancy, Secretary Spyros A. Degleris, Member Edward A. Friedman, Member Paul G. Howes, Member William S. Lake, Member Phyllis L. Palm, Member Paul H. Silvis, Member BOARD OF DIRECTORS OF KISH BANK William P. Hayes, Chairman James J. Lakso, Vice Chairman William L. Dancy, Secretary Spyros A. Degleris, Member Edward A. Friedman, Member Paul G. Howes, Member William S. Lake, Member Phyllis L. Palm, Member Paul H. Silvis, Member CENTRE COUNTY REGIONAL BOARD Spyros A. Degleris, Member Adam R. Fernsler, Member Edward A. Friedman, Member Alan G. Hawbaker, Member Paul G. Howes, 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 Stephen C. Huston, Member James J. Lakso, Member Dominick F. Peruso, Jr., Member Pamela Prosser, Member Burgess A. Smith, Member Delmont R. Sunderland, Member Frances V. Vaughn, Member MIFFLIN COUNTY REGIONAL BOARD Michael A. Buffington, Member Christina Calkins-Mazur, Member Ronald M. Cowan, Member William L. Dancy, Member James W. Felmlee, Member Eric K. Fowler, Member William S. Lake, Member Harvard K. McCardle, Member Alan J. Metzler, Member Gary L. Oden, Member Phyllis L. Palm, Member John Pannizzo, Member 4255 East Main Street, Belleville, PA 17004 | 1-888-554-4748 | www.KishBank.com 

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