c h a i r m a n ’ s l e t t e r t o t h e s h a r e h o l d e r s
The 2017 Annual Report represents a special opportunity for us to reflect
on an extraordinary watershed year for Kish Bancorp. Because the term
“watershed” has the potential for a range of definitions, allow us to simply state
that 2017 was a year where vision, strategy, execution, culture, and external
events all came together to produce powerful and compelling results. These
results affirm the strategic decisions of Kish’s leadership team over time, and
they also form the foundation upon which we will confidently build a long-term
future at Kish.
Many of the 2017 outcomes can be measured in dollars, and we will discuss the
numbers throughout this letter. But, we also like to speak in terms of stories at Kish:
human stories, client experiences, community impact, and the people side of our business.
We all understand and appreciate the important discipline of producing financial results, and we
pride ourselves on the consistency of those results for Kish, but it is the human side of what we do
that drives us and binds us together as a team. So this letter incorporates stories that reflect the
culture at Kish and validate the core belief that it is Kish’s focus on people which delivers shareholder
value and creates long-term sustainability for the Corporation.
For many years, Kish has differentiated itself through a business model based upon the simple
philosophy that satisfied and motivated teams who care about their customers and are supported
by their coworkers will consistently deliver great service. Great service will in turn build customer
satisfaction and loyalty. Satisfied customers will then do more with Kish across all business units,
recommend us to their friends and neighbors, and the cycle will be renewed. While this business
model has been validated many times, at no time in Kish’s history has it delivered more compelling
results than in 2017.
2017 was a year in which many new individual and business customers came to Kish Bank because
of the reputation of Kish’s bankers for delivering great service and customer support. By contrast,
often those customers were experiencing declining or unresponsive service from their former banks,
many of which were undergoing mergers or acquisitions. The resounding refrain throughout the past
few years from many new clients has been: “If I had known I would be treated this well, I would have
switched to Kish a long time ago!”
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William P. hayes
chairman of the Board,
President and
chief executive officer
Contents
chairman’s letter to the shareholders ........................ 1
Financial highlights ............................................................. 8
independent auditor’s report ......................................... 9
Financial statements .......................................................... 10
notes to consolidated statements ............................... 15
Board of directors and officers ..................................... 53
Those were the words of one new customer at the Bank’s
South Atherton branch in State College who had moved her
relationship to Kish several years ago. Eileen Leibowitz came to
Kish because she was no longer recognized at the bank where
she had done business for decades. Whenever I encountered
Eileen, she always remarked, “You have the most wonderful
people at Kish. They always know me and call me by name. I
come inside just to say hello, even though I could easily go to
the drive-thru, which I never do! Whatever you’re doing, please
don’t change a thing.” And we always assure her, “It will not
change. Hospitality is the culture at Kish. People matter to
us. You matter to us.” Fortunately, Eileen’s story was repeated
many times over during 2017 as our client numbers and retail
deposits expanded dramatically.
In addition to the referrals of satisfied Bank customers, it was
often the referral of clients from other business units that
led to new banking relationships. Of particular note was the
performance of our travel services subsidiary. The team at Kish
Travel had an exceptional year from several perspectives. First,
they grew net revenues by just under 40%, with most of that
growth coming from clients who were new to Kish Travel. One
satisfied client commented, “We came to Kish Travel because
we wanted professional help planning the trip of a lifetime for
us and our family. They delivered an experience beyond our
expectations that we will never forget!” Another couple and
new client of Kish Travel expressed gratitude
for being able to reach out to their Travel
Specialist when they experienced a
medical emergency while traveling
outside the U.S. “We called Sandy
on her cell phone and before we
sandy Berardis
Kish travel specialist
knew it, she had arranged a flight back to the states where I
made a full recovery. We are now 100% satisfied Kish Travel
customers and will travel again with them soon.” Both of these
couples now have banking relationships with Kish Bank as
well, and the number of satisfied Kish Travel clients with broad
banking, insurance, and wealth management relationships with
Kish continues to grow. Not only has Kish Travel dramatically
expanded its own revenues and profitability, it has added
materially to the relationship-building efforts and financial
results of the entire Kish organization.
This leads us to the next compelling element of Kish’s results
in 2017: the performance of Kish Bank’s investment advisory,
brokerage, and wealth management unit, Kish Financial
Solutions. Wade Curry and his team of licensed advisors and
support staff were addressing changes to Department of Labor
regulations while fulfilling the needs of their more than 3,500
client relationships. At the same time, they were reorganizing the
practice around a heightened emphasis on tailoring solutions
to specific client objectives. Despite these distractions, Kish
Financial Solutions achieved
another stellar year of
growth and financial
results, with
Behind every dollar
in new business
was a human
connection that
was established
one client at a time.
assets under management rising to more than $300 million
and net operating revenue increasing by 9.4%. In addition, they
collaborated with the sales teams in every market to share
relationship expansion opportunities and participate in new
client development efforts.
Another important part of the Kish story in 2017 was the
expansion of residential mortgage lending activity. While many
of the residential mortgages Kish Bank originates go directly
to the secondary market and therefore don’t show up in
outstanding loan totals, mortgage loan originations reached a
new high of more than $64 million in 2017. Results were strong
in all of our markets, but it was especially gratifying to witness
the expansion of activity in Centre County following the addition
of a new mortgage origination team in Alta Corman-Wolf and
Justine Lilja. Alta remarked, “It’s amazing that in my first full
year of production at Kish, I far exceeded
any annual results I had achieved in
the past. I was also able to
deliver non-conforming
mortgage solutions
that would not
have been possible
at other banks.
Those clients
are now Kish
customers for life.”
Also noteworthy
was Kish’s mortgage
lending team’s success in
referring over 50% of
WinthroP Watson
President, Federal home loan
Bank of Pittsburgh
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alta corman-WolF
VP, residential lender
their new clients to Kish Insurance
for their homeowners and auto
insurance. As a consequence of the
strong collaboration between the
Residential Lenders and Personal Lines
Specialists, along with the rest of the Bank’s
retail services team, Personal Lines Specialists
at Kish Insurance were able to expand revenues
by 10% in 2017. This enabled Kish Insurance to
maintain a stable revenue contribution level despite
challenging market conditions for commercial insurance lines
in 2017.
For its success in delivering mortgages to first-time home
buyers, Kish Bank was honored with the prestigious Pillars of
the Community Award by the Federal Home Loan Bank of
Pittsburgh for our level of participation in their First Front Door
program. First Front Door is designed to provide first-time
homeowner financing to families and single parents who might
not otherwise qualify for a home mortgage. The Pillars of the
Community Award also recognized Kish Bank’s commitment to
community revitalization. FHLB President and CEO Winthrop
Watson, who attended the Kish Celebrates Community event
in Mifflin County to present the award, stated, “Kish Bank is
wholly committed to helping communities become better places
to live and work, as witnessed by its support of first-time home
buyer programs, FHLB’s downtown revitalization program, and
neighborhoods that need a boost.”
It wasn’t just retail clients who were seeking out a relationship-
oriented bank during 2017. Businesses frequently were
motivated to find a client-focused institution as well. Again,
JeFF Gum
VP, managing director of
Benefit management Group
it was the reputation of our
Commercial Relationship
Managers, combined with the
inattention these businesses were
receiving from their former banks,
that motivated them to move their more
complex banking relationships to Kish. And
whether it was a dairy operation seeking financing
to install an automated system for its 700-head
dairy herd, an international company that sought to
acquire a manufacturing facility in Huntingdon while keeping
jobs and financing local, a machining company in Centre County
that wanted to double its size through a leveraged acquisition, a
State College commercial real estate development firm seeking
to expand a diversified portfolio, or an established Mifflin
County construction firm experiencing renewed growth, all these
businesses shared a common experience. When they came
to Kish, they didn’t just find a bank with a “take it or leave it”
attitude—they found professionals who were motivated to listen
and think creatively about their specific situation. They found
the resources necessary to make the right long-term decisions
for their companies. They found access to a team of experienced
bankers who care about their clients’ aspirations and are
dedicated to helping them succeed.
As the year came to an end, we were very pleased to announce
an expansion to our services available to meet the needs of
our business clients. The addition of the Benefit Management
Group practice was an important addition that will provide
employee benefits consulting services to new and existing
medium-sized business clients. We are very pleased to welcome
Jeff Gum, VP and Managing Director, and his team to Kish.
So, the number of clients who established new relationships
with Kish soared during 2017, and the numbers reflected that
powerful trend in almost every way. By year end, the cumulative
surge in new relationships impacted the Corporation’s total
assets, which ended the period at $811 million, an increase of
$86.1 million, or 11.88%, compared to total assets of $725
million as of December 31, 2016. When compared to the prior
year, total deposits grew by $91.8 million to $654 million,
an increase of 16.33% from $562 million the year before.
Total loans grew by 16.20%, or $80.1 million, to $575 million
from $495 million at the end of December 2016. While the
expansion in the commercial loan portfolio was spread across
all counties in Kish’s market area, it was especially gratifying
to see much of the growth occur in Centre County, where we
have invested heavily over the past decade to establish a visible
market presence and build strong market share, despite the
heavy concentration of banks in the Centre Region.
Unprecedented growth in the Bank’s balance sheet,
accompanied by strong results from Kish’s non-bank affiliates,
produced record earnings in 2017. Before year-end adjustments
precipitated by the Tax Cuts and Jobs Act, net income of $5.06
million represented a 9.65% increase over 2016 net income
of $4.6 million. The key factor contributing to this result was
a $2.2 million expansion in net interest income, which was up
10.70% to $23.1 million from $20.9 million the prior year. This
expansion was more than sufficient to offset a 7.69% rise in
noninterest expense to $23.88 million from $22.18 million
the prior year. The increase in salary and benefits related to
a continued expansion in the sales force. There was also an
increase in data processing expense necessary to support
significantly higher customer volumes.
The passage of the Tax Cuts and Jobs Act in late December
triggered several unanticipated non-cash charges to earnings
that reduced reported net income for 2017. Enactment of the
Act required a GAAP-related adjustment for accumulated
net deferred tax assets of over $400 thousand. Tax-related
losses from securities sales further reduced reported net
income by more than $500 thousand for 2017. Compared
with the prior year, gains from securities sales declined by $672
thousand. When the total impact of the accounting changes
and related charges are taken into account, reported net income
for 2017 was $4.140 million, a decline from $4.617 million
in 2016. As stated previously, this compares to core earnings
before the passage of the Act of $5.06 million. It is important
to note that almost every bank in the country was subject to
financial statement reporting adjustments as a consequence of
tax reform.
The downward adjustments to 2017 results should not obscure
the enormous benefit of the enactment of the Tax Cuts and
Jobs Act to Kish’s customers, communities, and shareholders.
The enactment of the first meaningful tax reform in more than
30 years meant that Kish Bancorp experienced an immediate
reduction in its corporate income tax rate from 34% to 21%.
This reduction will free up considerable resources for investment
in initiatives that will support the Corporation’s growth and
the economic health of the region. Because of the improved
outlook for Kish and the region’s economy, we immediately
sought to identify opportunities to express that positive outlook
to our team and communities by announcing a number of key
economic stimulus initiatives. These included an expanded
2018 budget for support of community and charitable
organizations; payment of an immediate, one-time bonus to
all team members; and a commitment to evaluate the starting
hourly wage and salary ranges for all non-exempt employees.
To support continued rapid expansion in the business, Kish
announced plans to construct a Technology and Operations
Facility next to the Reedsville branch in Mifflin County,
accompanied by elevated capital equipment expenditures and
hiring activity. Finally, the Board announced the reauthorization
of a stock repurchase plan in the amount of $2 million for
2018. The public announcement of these actions was
distributed in a mid-January release and is available on Kish
Bancorp’s investor website.
Needless to say, the Tax Cuts and Jobs Act, along with a sea
change in the regulatory environment in which banks operate,
should prove to be enormously positive for Kish Bancorp
and the region we serve. Stronger earnings will enable us to
build capital at a faster rate. Higher capital levels will support
continued lending growth and further expansion in the metrics
that drive shareholder returns.
With growth reaching historic levels in 2017, it is important
to remember that behind every dollar in new business was a
human connection that was established one client at a time
by relationship managers
who cared about the
quality and
Unprecedented
growth
produced
record earnings
in 2017.
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responsiveness of their service. Most of those managers were
longstanding Kish team members who have helped to build
the Kish culture over time. But there were also others that
joined Kish more recently and brought relationship focus and
many of their valued clients with them. They came to Kish
because they were looking for a place that shared their values
and client focus—a place they could call home. While there are
many stories, let us tell one more that illustrates the power of a
dynamic relationship manager who joined the supportive client-
focused culture at Kish and had an immediate impact.
Terry Horner joined Kish in mid-2016 with over 40 years of
banking experience, primarily in the Bellefonte market. After
Terry had retired from his previous institution, he agreed to
consider a limited business development position with Kish.
He had reservations, but agreed to “get back in the harness.”
At a reception welcoming Terry to Kish Bank, his friends and
previous clients showed up in droves, all with stories to share
about Terry. It was clear why Terry had been so successful in the
Bellefonte market. He has a warm, personal relationship with
each of his clients. Since his arrival and through the end of 2017,
working with the Bellefonte team, Terry has been responsible for
establishing more than 90 consumer and 59 small
business relationships. When you ask Terry how
he’s doing today, he breaks out in a big grin, and
says, “Just fabulous! I only wish I had known how
good things would be at Kish years ago. I
may never retire!”
Those are just a sampling of the
many human stories which form
terry horner
VP, Business
development officer
the backdrop to the incredible progress the team achieved in
2017. Hopefully, these examples fully demonstrate the power
of the core philosophy and business model at Kish. It is a
philosophy reflected in the oft repeated sentiment, “People
might forget what you said, and people might forget what you
did, but they will never forget how you made them feel.” The
people of Kish have built a caring and responsive culture that
can be translated into financial performance because clients
value how they are treated at Kish.
As at all successful institutions, enduring cultures would not
be possible without the steadfast leadership and long-term
perspectives of a great board. Kish has been blessed with such
a visionary board that has been thoughtful, independent,
and fully engaged in establishing the long-term goals of the
organization. During the year, we were sorry to lose the services
of Phyllis Palm, who reached mandatory retirement after
25 years of extraordinary board leadership. However, we are
reassured that the tradition of great board leadership will be
sustained with the appointment of new community leaders to
the Kish Bancorp and Bank Boards. To that end, we announced
the appointment of Francis Vaughn of Huntingdon and George
Woskob of State College during the year. Each of them has
become fully engaged in the governance responsibilities of
Kish. We were further pleased to very recently announce the
appointment of Dr. Eric J. Barron, President of Penn State
University, to the Kish Bancorp Board. Fran, George, and
Eric have all engaged enthusiastically in charting the future of
the Corporation and providing their unique and very valuable
perspectives to the governance function at Kish. The full board
listings are in the back of this report.
We were also pleased to announce the recent appointment of
Gregory T. Hayes to the Kish Bank Board. Greg’s appointment
was in conjunction with his promotion to the leadership position
of President and Chief Operating Officer of the Bank. The public
announcement of his promotion and appointment was shared
earlier and is available on Kish Bancorp’s investor website. This is
an auspicious moment in the history of Kish Bank as we plan for
leadership succession and the future of the Bank and Corporation.
Since Kish’s founding in 1900, Greg represents the fourth generation
of the Hayes family to continuously engage in a leadership capacity at the
Bank. Let’s simply call it a watershed moment within a watershed year.
For many years, the vision for the future of Kish has been to be a major and visible force in banking
and financial services across the entire region that Kish serves. We know we are achieving that
position by being passionately focused on fulfilling client needs and elevating the quality of life in our
communities. We understand that sustaining our vision and viability as an independent institution
requires that we deliver strong financial performance and that our shareholder returns earn the
loyalty and long-term support of our investors. As Kish’s exceptional growth and compelling results
for 2017 have made a strong statement about the sustainability of the Kish franchise, so too has
the performance of Kish Bancorp stock continued to validate our sense of long-term optimism. We
believe that the outlook for the future of Kish has never been brighter and trust that the Kish story
of success will be told for many years to come. We thank you for your support and encourage you to
engage with and recommend Kish whenever opportunities arise.
GreGory t. hayes
President and
chief operating officer
Sincerely,
William P. Hayes
Chairman of the Board, President and
Chief Executive Officer
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Fi n a n c i a l h iGh l iGh t s
in d ePe n d e n t au d i t o r ’ s rePo r t
2017
$4,139,770
5,141,399
2,301,565
2016
$4,616,894
5,254,277
2,130,197
2015
$4,494,241
5,125,151
2,112,600
2014
$4,358,608
5,130,129
2,005,848
2013
$4,216,873
4,980,589
1,971,992
Board of Directors and Stockholders
Kish Bancorp, Inc.
report on the Financial statements
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
$811,192
569,010
653,687
56,339
5,698
913
0.54%
7.45%
55.60%
87.05%
7.65%
11.65%
0.99%
0.17%
$3.37
3.33
1.84
44.99
49.54
$725,071
488,588
561,928
53,593
6,011
271
$696,895
445,425
542,629
51,281
5,752
492
$659,600
414,061
508,616
48,853
6,009
219
$630,132
381,261
494,374
40,681
5,928
34
0.65%
8.54%
46.14%
86.95%
8.22%
13.10%
1.22%
0.06%
$3.80
3.77
1.72
43.27
48.12
0.66%
8.89%
47.01%
82.09%
8.18%
12.62%
1.27%
0.12%
$3.73
3.69
1.72
41.78
46.46
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
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
Average Shares Outstanding (#)
1,229,584
1,215,067
1,203,630
1,199,207
1,192,755
*Due to fluctuations in the mark to market valuation for investment securities, these are not included in the totals for average assets and average equity.
net income (in millions)
earnings & dividends (per share)
stock Valuation (per share)
We have audited the accompanying consolidated financial statements of Kish Bancorp, Inc. and subsidiaries which comprise the
consolidated balance sheet as of December 31, 2017 and 2016; 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, 2017 and 2016, 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.
Cranberry Township, Pennsylvania
March 1, 2018
S.R. Snodgrass, P.C. • 2009 Mackenzie Way, Suite 340 • Cranberry Township, Pennsylvania 16066 • Phone: 724-934-0344 • Fax: 724-934-0345
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co n s o l i d a t e d B a l a n c e sh e e t
co n s o l i d a t e d st a t e m e n t oF in c o m e
KISH BANCORP, INC.
CONSOLIDATED BALANCE SHEET
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
ASSETS
Cash and due from banks
Interest-bearing deposits with other institutions
Cash and cash equivalents
Certificates of deposit in other financial institutions
Securities available for sale, at fair value
Securities held to maturity, fair value of
$6,162,790 and $6,123,118
Loans held for sale
Loans
Less allowance for loan losses
Net loans
Premises and equipment
Goodwill
Regulatory stock
Bank-owned life insurance
Accrued interest and other assets
TOTAL ASSETS
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing demand
Savings
Money market
Time
Total deposits
Short-term borrowings
Other borrowings
Accrued interest and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY
December 31,
2017
2016
$
$
7,964,222
35,923,762
43,887,984
3,492,344
140,047,639
6,000,000
8,334,193
12,070,309
20,404,502
3,492,330
161,270,378
6,000,000
1,279,431
1,006,096
574,708,035
5,697,810
569,010,225
12,996,668
2,143,699
6,149,000
15,437,997
10,746,897
494,599,165
6,011,169
488,587,996
12,761,615
1,668,699
6,519,400
15,010,555
8,349,874
$
811,191,883
$
725,071,445
$
$
85,526,265
11,986,932
63,773,855
233,973,580
258,426,421
653,687,053
8,930,710
85,931,850
6,303,539
754,853,152
73,448,103
8,662,868
63,630,053
209,252,147
206,934,437
561,927,608
14,782,918
89,348,878
5,418,662
671,478,066
Preferred stock, $.50 par value; 500,000 shares authorized,
no shares issued and outstanding
Common stock, $.50 par value; 2,000,000 shares authorized,
1,348,750 shares issued
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost (98,864 and 106,324 shares in 2017
and 2016, respectively)
TOTAL STOCKHOLDERS' EQUITY
-
-
674,375
2,066,936
56,207,032
509,366
674,375
2,273,684
54,452,646
109,725
(3,118,978)
56,338,731
(3,917,051)
53,593,379
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
811,191,883
$
725,071,445
See accompanying notes to consolidated financial statements.
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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
Gain on sale of loans
Earnings on bank-owned life insurance
Insurance commissions
Travel agency commissions
Wealth Management
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 (includes revaluation of net deferred tax asset due to
tax reform in the amount of $416,852 for the year ended 2017)
NET INCOME
EARNINGS PER SHARE
Basic
Diluted
See accompanying notes to the consolidated financial statements.
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Year Ended December 31,
2017
2016
$
22,855,386
1,336,603
$
19,371,566
1,442,942
2,655,876
1,332,272
345,042
602,245
29,127,424
3,864,807
22,677
2,138,665
6,026,149
3,044,915
1,415,615
152,151
610,665
26,037,854
3,236,122
29,892
1,903,929
5,169,943
23,101,275
600,000
20,867,911
530,000
22,501,275
20,337,911
1,614,103
101,117
866,798
429,766
1,128,094
377,295
1,399,589
607,702
6,524,463
14,633,030
2,878,318
2,089,133
315,071
252,065
237,000
598,948
2,880,774
23,884,340
1,672,615
773,237
963,681
444,154
1,124,080
273,064
1,278,978
566,019
7,095,827
13,477,290
2,744,267
1,943,146
420,802
303,862
351,927
497,282
2,440,885
22,179,461
5,141,399
5,254,277
1,001,629
637,383
4,139,770
$
4,616,894
3.37
3.33
$
$
3.80
3.77
$
$
$
co n s o l i d a t e d st a t e m e n t oF co mPr e h e n s iVe in c o m e
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
co n s o l i d a t e d st a t e m e n t oF ch a nGe s i n st o cKh o l d e r s ’ eq u i t y
Net income
Other comprehensive income (loss)
Securities available for sale:
Year Ended December 31,
2017
2016
$
4,139,770
$
4,616,894
Change in unrealized holding gains on
available-for-sale securities
Tax effect
Change in comprehensive income related to cash flow hedges
Tax effect
Reclassification adjustment for net gains
realized in net income
Tax effect
Total other comprehensive income (loss)
485,646
(165,120)
93,989
(31,956)
(101,117)
34,380
315,822
292,357
(99,402)
-
-
(773,237)
262,901
(317,381)
Total comprehensive income
$
4,455,592
$
4,299,513
See accompanying notes to the consolidated financial statements.
4
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co n s o l i d a t e d st a t e m e n t oF ca s h F l oWs
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
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 in accrued interest payable
Earnings on bank-owned life insurance
Loss on sale of other assets
Compesation expense
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchase of certificates of deposit
Acquisition of Benefit Management Group
Investment securities available for sale:
Proceeds from sale of investments
Proceeds from repayments and maturities
Purchases
Investment held to maturity:
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
(Decrease) 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 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
See accompanying notes to consolidated financial statements.
14
14
6
Year Ended December 31,
2016
2017
$
4,139,770
$
4,616,894
600,000
(101,117)
32,239,960
(31,646,497)
(866,798)
1,339,186
(283,626)
(147,625)
329,023
(429,766)
-
348,584
(1,291,028)
4,230,066
530,000
(773,237)
30,894,716
(29,664,291)
(963,681)
1,348,301
(372,623)
(131,214)
22,395
(444,154)
(25,165)
344,554
76,235
5,458,730
-
(475,000)
(490,000)
-
11,101,516
10,284,013
-
-
(81,330,229)
(1,493,400)
1,863,800
(1,246,667)
117,996
(61,177,971)
91,759,445
(5,852,208)
6,565,000
(9,982,027)
(179,637)
537,394
(115,016)
(2,301,564)
80,431,387
23,483,482
20,404,502
15,233,731
52,362,440
(44,987,447)
(2,750,000)
(43,693,002)
(1,353,900)
1,343,900
(858,109)
127,687
(25,064,700)
19,298,913
4,770,553
26,524,468
(25,307,545)
(570,367)
599,025
(229,898)
(2,130,197)
22,954,952
3,348,982
17,055,520
$
$
$
43,887,984
$
20,404,502
5,693,614
1,225,000
$
5,147,548
840,000
308,000
$
-
n o t e s t o c o n s o l i d a t e d Fi n a n c i a l s t a t e m e n t s
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 as of December
31, 2017 and 2016. Interest and dividends on investment securities are recognized as income when earned.
Securities are evaluated at least on 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 fair 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
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.
7
15
15
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
Allowance for Loan Losses (Continued)
Common stock of the Federal Home Loan Bank (“FHLB”) of Pittsburgh represents ownership in an institution that
is 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 that management has the intent and ability to hold for the foreseeable future or until maturity or payoff
generally 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.
Allowance for Loan Losses
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 homogeneous 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. Leasehold improvements
are depreciated over shorter of the term of the lease or useful life. Expenditures for maintenance and repairs are
charged against income as incurred. Costs of major additions and improvements are capitalized.
Goodwill
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.
16
16
8
17
17
9
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
Mortgage Servicing Rights (“MSRs”)
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.
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. Treasury shares are not deemed outstanding for earnings per
share calculations.
Stock Options
As of December 31, 2017 and 2016, the Company recorded compensation expense of $31,922 and $20,112,
respectively, related to share-based compensation awards. At December 31, 2017, there was approximately
$49,142 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
2017
2016
Expected
Dividend
Yield
3.24
3.90
%
%
Risk-Free
Interest Rate
2.35
1.81
%
%
Expected
Volatility
11.08
9.76
Expected
Life (in Years)
10.00
10.00
%
%
The weighted-average fair value of each stock option granted for 2017 and 2016 was $4.03 and $1.51, respectively.
Stock options exercised during the years ended December 31, 2017 and 2016 were 12,874 and 25,204,
respectively.
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, 2017 and 2016, the Company recorded gross
servicing rights of $630,259 and $678,338, respectively, with a reserve for impairment of $214,725 and $225,053,
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.
Derivatives and Hedging Activities
The Company engages in a number of business activities that are vulnerable to interest rate risk. The associated
variability in cash flows related to interest rate risk may impact the results of operations of the Company. The
Company’s hedging objective is to reduce, to the extent possible, unpredictable cash flows associated with interest
rate risk, via approved hedging strategies, related to business strategies and business objectives.
All derivatives are recorded on the Consolidated Balance Sheet at fair value. The accounting for changes in the fair
value of derivatives depends on whether the Company has elected to designate a derivative in a hedging
relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair
value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in
expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge
accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument
with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the
hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
18
18
10
11
19
19
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.
INVESTMENT SECURITIES
Derivatives and Hedging Activities (Continued)
The amortized cost, gross unrealized gains and losses and fair value of investment securities are as follows:
Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings, together and in the
same income statement line item with changes in the fair value of the related hedged item. Changes in the fair
value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive loss and are
reclassified into the line item in the income statement in which the hedged item is recorded and in the same period
in which the hedged item affects earnings. Hedge ineffectiveness and gains and losses on the excluded component
of a derivative in assessing hedge effectiveness are recorded in earnings.
2. EARNINGS PER SHARE
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 issued
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
2017
1,348,750
(96,516)
2016
1,348,750
(110,048)
(22,650)
(23,635)
1,229,584
1,215,067
112
348
14,933
9,968
1,244,629
1,225,383
Options to purchase 106,435 shares of common stock at a price of $25.50 to $54.00, as of December 31, 2017, and
25,196 shares of restricted stock ranging in price from $30.00 to $55.13 were not included in the computation of
diluted earnings per share. To include these shares would have been antidilutive.
Available for Sale:
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 - financial
institutions
2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
$
$
6,996,146
32,743,522
51,262,205
$
-
-
667,103
$
(250,696)
(675,334)
(66,648)
6,745,450
32,068,188
51,862,660
23,894,085
176,694
(122,423)
23,948,356
21,456,583
136,352,541
3,144,316
80,649
924,446
908,622
(166,109)
(1,281,210)
21,371,123
135,995,777
(1,076)
4,051,862
Total Available for Sale
$
139,496,857
$
1,833,068
$
(1,282,286)
$
140,047,639
Held to Maturity:
Corporate Securities
Available for Sale:
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 - financial
institutions
$
6,000,000
$
162,790
$
-
$
6,162,790
2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
$
$
9,005,324
33,773,609
64,594,328
$
-
140
862,051
$
(419,234)
(813,696)
(635,253)
8,586,090
32,960,053
64,821,126
25,078,709
170,318
(208,684)
25,040,343
24,392,260
156,844,230
102,495
1,135,004
(261,743)
(2,338,610)
24,233,012
155,640,624
4,259,894
1,373,731
(3,871)
5,629,754
Total Available for Sale
$
161,104,124
$
2,508,735
$
(2,342,481)
$
161,270,378
Options to purchase 107,141 shares of common stock at a price of $25.50 to $45.00, as of December 31, 2016, and
21,182 shares of restricted stock ranging in price from $30.00 to $45.00 were not included in the computation of
diluted earnings per share. To include these shares would have been antidilutive.
Held to Maturity:
Corporate Securities
$
6,000,000
$
123,118
$
-
$
6,123,118
12
20
20
13
21
21
3.
INVESTMENT SECURITIES (Continued)
3.
INVESTMENT SECURITIES (Continued)
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, 2017 and 2016.
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
2017
Twelve Months or Greater
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
$
975,350
$
(10,735)
$
5,770,100
$
(239,961)
$
6,745,450
$
(250,696)
11,417,325
(120,511)
20,650,863
(554,823)
32,068,188
(675,334)
6,087,843
3,083,422
(54,512)
(29,545)
697,451
7,571,993
(12,136)
(92,877)
6,785,294
10,655,415
(66,648)
(122,423)
15,075,655
(113,514)
2,460,569
(52,595)
17,536,224
(166,109)
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 -
financial institutions
Total
$
36,639,595
$
-
-
(328,817)
$
148,853
37,299,829
$
(1,076)
(953,468)
$
148,853
73,939,424
$
(1,076)
(1,282,286)
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
2016
Twelve Months or Greater
Gross
Unrealized
Losses
Fair
Value
Total
Fair
Value
Gross
Unrealized
Losses
$
8,586,090
$
(419,234)
$
31,959,914
(813,696)
29,327,606
9,003,340
(635,253)
(159,629)
$
-
-
-
4,358,910
-
-
$
8,586,090
$
(419,234)
31,959,914
(813,696)
-
(49,055)
29,327,606
13,362,250
(635,253)
(208,684)
18,128,683
(261,743)
-
-
18,128,683
(261,743)
223,368
97,229,001
$
(1,122)
(2,290,677)
$
$
147,180
4,506,090
$
(2,749)
(51,804)
$
370,548
101,735,091
$
(3,871)
(2,342,481)
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 -
financial institutions
Total
U.S. treasury securities. The unrealized loss on 4 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, 2017.
U.S. government agency securities. The unrealized loss on 31 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, 2017.
Obligations of states and political subdivisions. The Company’s unrealized losses on 14 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, 2017.
Corporate securities. The Company had unrealized losses on investments in 21 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, 2017.
Mortgage-backed securities in government-sponsored entities. The unrealized losses on 18 of the Company’s
investments in mortgage-backed securities were caused by interest rate increases. The Company purchased 0 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, 2017.
Equity securities - financial institutions. The Company had unrealized losses on investments in 1 equity security.
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 this security and it is not
more likely than not that the Company will be required to sell the investment before recovery of the book value, it
does not consider this investment to be other-than-temporarily impaired at December 31, 2017.
14
22
22
15
23
23
3.
INVESTMENT SECURITIES (Continued)
4.
LOANS (Continued)
The amortized cost and fair value of debt securities at December 31, 2017, 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
$
Available for Sale
Held to Maturity
Amortized
Cost
6,101,545
53,208,702
64,579,473
12,462,821
$
Fair
Value
6,100,355
53,085,819
64,468,312
12,341,291
Amortized
Cost
$
$
-
-
Fair
Value
-
-
6,000,000
6,162,790
-
-
Total
$
136,352,541
$
135,995,777
$
6,000,000
$
6,162,790
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, 2017 and 2016, 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, 2017 and 2016, is as follows:
Balance
2015
Additions
Amounts
Collected
Balance
2016
Additions
Amounts
Collected
Balance
2017
$
13,822,227
$
1,680,816
$
2,303,312
$
13,199,731
$
4,782,315
$
1,280,296
$
16,701,750
Investment securities with a carrying value of $130,015,638 and $63,339,054 at December 31, 2017 and 2016,
respectively, were pledged to secure deposits and other purposes as required by law.
5.
ALLOWANCE FOR LOAN LOSSES
The following is a summary of proceeds received, gross gains and gross losses realized on the sale of investment
securities available for sale for the years ended December 31:
Proceeds from sales
Gross gains
Gross losses
4.
LOANS
2017
2016
$
$
11,101,516
506,026
(404,909)
15,233,731
803,269
(30,032)
Major classifications of loans are summarized as follows:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivisions
Consumer
Residential real estate
Less allowance for loan losses
Net loans
$
2017
2016
$
190,488,417
98,104,822
27,793,961
38,247,171
9,644,462
210,429,202
574,708,035
5,697,810
151,335,017
81,326,419
21,025,621
40,682,476
11,714,706
188,514,926
494,599,165
6,011,169
$
569,010,225
$
488,587,996
Mortgage loans serviced by the Company for others amounted to $63,196,825 and $68,051,957 at December 31,
2017 and 2016, respectively.
Unearned fees included in loans receivable amounted to $15,662 and $21,547 at December 31, 2017 and 2016,
respectively.
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 five-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.
The following qualitative factors are analyzed to determine allocations for non-classified loans for each portfolio
segment:
Changes in lending policies and procedures
Changes in economic and business conditions
Changes in nature and volume of the loan portfolio
Changes in lending staff experience and ability
Changes in past-due loans, nonaccrual loans, and classified loans
Changes in loan review
Changes in underlying value of collateral-dependent loans
Levels of credit concentrations
Effects of external factors, such as legal and regulatory requirements
These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the Bank’s
operating environment. During 2017, management decreased the qualitative factors reserve percentage for
commercial and industrial, commercial real estate, and residential real estate pool of loans because of improving
economic conditions both locally and nationally. Further reductions in the commercial and industrial and
commercial real estate qualitative factors reserve percentages were made due to the consistent and experienced
loan and credit staff in these areas. Management increased qualitative factors on reserve percentages for
commercial and industrial loan participations transacted with the BancAlliance portfolio for related changes in
volume and severity of past dues in this sector. A decrease in the residential real estate qualitative factors reserve
percentages was done in conjunction with the increase in underlying values of these collateral dependent loans.
Strong asset quality supported by low levels of past-due, non-accrual and classified loans and a diversified
portfolio with minimal levels of concentration support management’s decision to have the remaining qualitative
factor reserve percentages unchanged in 2017.
16
24
24
17
25
25
5.
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
ALLOWANCE FOR LOAN LOSSES (Continued)
5.
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
ALLOWANCE FOR LOAN LOSSES (Continued)
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.
We consider commercial real estate loans, commercial and industrial loans, agricultural loans, and consumer loans
to be riskier than one-to-four family residential mortgage loans. Commercial real estate loans entail significant
additional credit risks compared to one-to-four family residential mortgage loans, as they involve large loan
balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience
on loans secured by income-producing properties typically depends on the successful operation of the related real
estate project and/or business operation of the borrower who is also the primary occupant, and thus may be subject
to a greater extent to adverse conditions in the real estate market and in the general economy. Commercial and
industrial loans, along with agricultural loans, involve a higher risk of default than residential mortgage loans of
like duration since their repayment is generally dependent on the successful operation of the borrower’s business
and the sufficiency of collateral, if any. The repayment of agricultural loans can also be impacted by commodity
prices going up and down. Although a customer’s ability to repay for both one-to-four family residential mortgage
loans and consumer loans is highly dependent on the local economy, especially employment levels, consumer
loans as a group generally present a higher degree of risk because of the nature of collateral, if any.
State and political subdivision loans carry 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.
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:
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
Real Estate
Commercial
Commercial
and
and
Industrial
Industrial
Agricultural
Agricultural
2017
2017
State and
State and
Political
Political
Subdivisions
Subdivisions
Consumer
Consumer
Residential
Real Estate
Residential
Real Estate
Unallocated
Unallocated
Total
Total
Commercial
Real Estate
Commercial
Real Estate
Commercial
Commercial
and
and
Industrial
Industrial
Agricultural
Agricultural
2016
2016
State and
State and
Political
Political
Subdivisions
Subdivisions
Consumer
Consumer
Residential
Real Estate
Residential
Real Estate
Unallocated
Unallocated
Total
Total
Allowance for loan
losses:
Allowance for loan
losses:
Beginning balance $
Beginning balance $
Charge-offs
Charge-offs
Recoveries
Recoveries
Provision
Provision
Ending balance
Ending balance
$
$
$
2,436,871
2,436,871
(250,000)
(250,000)
24,640
24,640
176,050
176,050
$
2,387,561
2,387,561
$
$
928,323
$
928,323
(24,946)
(24,946)
3,329
3,329
179,393
179,393
$
1,086,099
1,086,099
$
178,568
178,568
$
-
-
-
-
37,151
37,151
$
215,719
215,719
$
$
217,608
217,608
$
-
-
-
-
(12,631)
(12,631)
$
204,977
204,977
$
$
$
72,002
$
72,002
(44,734)
(44,734)
3,817
3,817
124,517
124,517
$
155,602
155,602
$
1,253,900
1,253,900
$
-
-
17,017
17,017
112,833
112,833
$
1,383,750
1,383,750
$
$
664,774
664,774
$
-
-
-
-
(87,313)
(87,313)
$
577,461
577,461
$
$
$
5,752,046
5,752,046
(319,680)
(319,680)
48,803
48,803
530,000
530,000
6,011,169
6,011,169
Ending balance
Ending balance
individually evaluated
individually evaluated
for impairment
for impairment
$
$
Ending balance
Ending balance
collectively evaluated
collectively evaluated
for impairment
for impairment
$
$
254,889
$
254,889
$
5,000
$
5,000
$
36,511
36,511
$ -
$ -
$ -
$ -
$
$
42,298
42,298
$ - $
$ - $
338,698
338,698
2,132,672
$
2,132,672
$
1,081,099
$
1,081,099
$
179,208
$
179,208
$
204,977
$
204,977
$
155,602
$
155,602
$
1,341,452
$
1,341,452
$
577,461
$
577,461
$
5,672,471
5,672,471
Loans:
Loans:
Individually evaluated
Individually evaluated
$
for impairment
for impairment
$
Collectively evaluated
Collectively evaluated
for impairment
for impairment
5,406,335
$
5,406,335
$
399,468
$
399,468
$
319,864
$
319,864
$
85,971
85,971
$ -
$ -
$
$
766,092
766,092
$
$
6,977,730
6,977,730
145,928,682
145,928,682
80,926,951
80,926,951
20,705,757
20,705,757
40,596,505
40,596,505
11,714,706
11,714,706
187,748,834
187,748,834
487,621,435
487,621,435
Allowance for loan
losses:
Allowance for loan
losses:
Beginning balance $
Beginning balance $
Charge-offs
Charge-offs
Recoveries
Recoveries
Provision
Provision
Ending balance
Ending balance
$
$
Ending balance
Ending balance
individually evaluated
individually evaluated
for impairment
for impairment
$
$
Ending balance
Ending balance
collectively evaluated
collectively evaluated
for impairment
$
for impairment
$
2,387,561
$
2,387,561
(550,350)
(550,350)
7,677
7,677
653,880
653,880
$
2,498,768
2,498,768
$
$
1,086,099
$
1,086,099
(210,459)
(210,459)
8,132
8,132
346,471
346,471
$
1,230,243
1,230,243
$
$
215,719
215,719
-
-
900
900
49,897
49,897
$
266,516
266,516
$
$
$
204,977
204,977
-
-
-
-
(22,895)
(22,895)
$
182,082
182,082
$
$
$
155,602
$
155,602
(127,675)
(127,675)
12,297
12,297
94,000
94,000
$
134,224
134,224
$
1,383,750
$
1,383,750
(53,881)
(53,881)
-
-
33,986
33,986
$
1,363,855
1,363,855
$
Ending balance
Ending balance
$
$
151,335,017
$
151,335,017
$
81,326,419
$
81,326,419
$
21,025,621
$
21,025,621
$
40,682,476
$
40,682,476
$
11,714,706
$
11,714,706
$
188,514,926
188,514,926
$
$
494,599,165
494,599,165
$
$
577,461
577,461
-
-
-
-
(555,339)
(555,339)
$
22,122
22,122
$
$
$
6,011,169
6,011,169
(942,365)
(942,365)
29,006
29,006
600,000
600,000
5,697,810
5,697,810
The reserve requirement for commercial real estate loans increased by $111,207 from 2016 to 2017, and for
commercial and industrial loans increased by $144,144 during the same period. This was a result of increases in
outstanding balances in commercial real estate and commercial and industrial loans during 2017. A decrease in
impaired and criticized assets of $701 thousand net an increase of $285 thousand in classified assets for
commercial real estate loans, which at $5.202 million at December 31, 2017, indicates a 9.49 percent or $546
thousand net decrease from December 31, 2016.
The reserve requirement for commercial real estate loans increased by $111,207 from 2016 to 2017, and for
commercial and industrial loans increased by $144,144 during the same period. This was a result of increases in
outstanding balances in commercial real estate and commercial and industrial loans during 2017. A decrease in
impaired and criticized assets of $701 thousand net an increase of $285 thousand in classified assets for
commercial real estate loans, which at $5.202 million at December 31, 2017, indicates a 9.49 percent or $546
thousand net decrease from December 31, 2016.
2,796
$
2,796
$
12,286
$
12,286
$
31,341
$
31,341
$
-
-
$
$
-
-
$
$
28,059
$
28,059
$
-
-
$
$
74,482
74,482
2,495,972
$
2,495,972
$
1,217,957
$
1,217,957
$
235,175
$
235,175
$
182,082
$
182,082
$
134,224
$
134,224
$
1,335,796
$
1,335,796
$
22,122
$
22,122
$
5,623,328
5,623,328
Loans:
Loans:
Individually evaluated
Individually evaluated
$
for impairment
for impairment
$
Collectively evaluated
Collectively evaluated
for impairment
for impairment
4,680,918
$
4,680,918
$
382,014
$
382,014
$
297,105
$
297,105
$
77,085
77,085
$ -
$ -
$
$
470,589
470,589
$
$
5,907,711
5,907,711
185,807,499
185,807,499
97,722,808
97,722,808
27,496,856
27,496,856
38,170,086
38,170,086
9,644,462
9,644,462
209,958,613
209,958,613
568,800,324
568,800,324
Ending balance
Ending balance
$
$
190,488,417
$
190,488,417
$
98,104,822
$
98,104,822
$
27,793,961
$
27,793,961
$
38,247,171
$
38,247,171
$
9,644,462
$
9,644,462
$
210,429,202
210,429,202
$
$
574,708,035
574,708,035
18
18
26
26
27
27
19
19
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
5.
5.
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
ALLOWANCE FOR LOAN LOSSES (Continued)
ALLOWANCE FOR LOAN LOSSES (Continued)
Credit Quality Information
The following tables represent the commercial credit exposures by internally-assigned grades for the years ended
December 31, 2017 and 2016, 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
185,286,273
779,433
-
4,422,711
190,488,417
Commercial
Real Estate
145,587,287
494,158
129,662
5,123,910
151,335,017
$
$
$
$
$
$
$
$
Commercial
and
Industrial
94,080,746
3,112,341
879,449
32,285
98,104,821
Commercial
and
Industrial
79,783,282
534,815
975,351
32,971
81,326,419
$
$
$
$
2017
Agricultural
27,222,926
489,900
81,136
-
State and
Political
Subdivisions
$
38,247,171
$
-
-
-
27,793,962
$
38,247,171
$
2016
Agricultural
20,466,665
379,066
179,890
-
State and
Political
Subdivisions
$
40,682,476
$
-
-
-
21,025,621
$
40,682,476
$
Pass
Special Mention
Substandard
Doubtful
Total
Pass
Special Mention
Substandard
Doubtful
Total
Total
344,837,116
4,381,674
960,585
4,454,996
354,634,371
Total
286,519,710
1,408,039
1,284,903
5,156,881
294,369,533
For consumer and residential real estate loans, the Company evaluates credit quality based on whether the loan is
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
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
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:
of loan portfolio based on payment performance as of December 31:
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:
2017
2017
2017
Residential
Residential
Residential
Real Estate
Real Estate
Real Estate
Total
Total
Total
Consumer
Consumer
Consumer
$
$
9,644,462
$
9,644,462
9,644,462
$
-
-
-
$
9,644,462
9,644,462
9,644,462
$
210,212,909
$
210,212,909
$
$
210,212,909
216,293
216,293
216,293
$
210,429,202
210,429,202
$
$
210,429,202
219,857,371
219,857,371
$
219,857,371
216,293
216,293
216,293
220,073,664
$
220,073,664
220,073,664
2016
2016
2016
Residential
Residential
Residential
Real Estate
Real Estate
Real Estate
Total
Total
Total
Consumer
Consumer
Consumer
11,714,706
$
11,714,706
$
$
11,714,706
-
-
-
$
11,714,706
11,714,706
$
$
11,714,706
188,017,594
$
188,017,594
$
$
188,017,594
497,332
497,332
497,332
$
188,514,926
188,514,926
$
$
188,514,926
199,732,300
199,732,300
$
199,732,300
497,332
497,332
497,332
200,229,632
$
200,229,632
200,229,632
$
$
$
$
$
$
$
$
Performing
Performing
Performing
Nonperforming
Nonperforming
Nonperforming
Total
Total
Total
Performing
Performing
Performing
Nonperforming
Nonperforming
Nonperforming
Total
Total
Total
Age Analysis of Past-Due Loans by Class
Age Analysis of Past-Due Loans by Class
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:
The following are tables which show the aging analysis of past-due loans as of December 31:
The following are tables which show the aging analysis of past-due loans as of December 31:
30-59 Days
30-59 Days
Past Due
Past Due
30-59 Days
Past Due
60-89 Days
60-89 Days
Past Due
Past Due
60-89 Days
Past Due
90 Days or
90 Days or
Greater
Greater
Past Due
Past Due
90 Days or
Greater
Past Due
2017
2017
2017
Total
Total
Past Due
Past Due
Total
Past Due
Current
Current
Current
Total
Total
Loans
Loans
Total
Loans
Recorded
Recorded
Investment
Investment
90 Days
90 Days
and Accruing
and Accruing
Recorded
Investment
90 Days
and Accruing
$
$
$
Commercial real estate
Commercial real estate
Commercial real estate
Commercial and industrial
Commercial and industrial
Commercial and industrial
Agricultural
Agricultural
Agricultural
State and political
State and political
State and political
subdivisions
subdivisions
subdivisions
Consumer
Consumer
Consumer
Residential real estate
Residential real estate
Residential real estate
$
Total
$
Total
Total
-
-
-
-
47,177
47,177
$
-
$
-
47,177
-
-
2,407
2,407
687,599
687,599
737,183
$
737,183
-
2,407
687,599
$
$
737,183
-
-
$
6,334
6,334
-
-
$
-
$
6,334
-
4,422,711
4,422,711
$
32,285
32,285
-
-
$
$
4,422,711
32,285
-
$
4,422,711
4,422,711
38,619
38,619
47,177
47,177
$
$
4,422,711
38,619
47,177
$
$
186,065,706
186,065,706
$
98,066,203
98,066,203
27,746,784
27,746,784
186,065,706
98,066,203
27,746,784
$
$
190,488,417
190,488,417
$
98,104,822
98,104,822
27,793,961
27,793,961
190,488,417
98,104,822
27,793,961
-
-
-
-
-
-
6,334
$
6,334
-
-
-
$
$
6,334
-
-
-
-
216,293
216,293
4,671,289
$
4,671,289
-
-
216,293
$
$
4,671,289
-
-
2,407
2,407
903,892
903,892
5,414,806
$
5,414,806
-
2,407
903,892
$
$
5,414,806
38,247,171
38,247,171
9,642,055
9,642,055
209,525,310
209,525,310
569,293,229
569,293,229
38,247,171
9,642,055
209,525,310
569,293,229
$
$
$
38,247,171
38,247,171
9,644,462
9,644,462
210,429,202
210,429,202
574,708,035
574,708,035
38,247,171
9,644,462
210,429,202
574,708,035
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30-59 Days
30-59 Days
Past Due
Past Due
30-59 Days
Past Due
60-89 Days
60-89 Days
Past Due
Past Due
60-89 Days
Past Due
90 Days or
90 Days or
Greater
Greater
Past Due
Past Due
90 Days or
Greater
Past Due
2016
2016
2016
Total
Total
Past Due
Past Due
Total
Past Due
Current
Current
Current
Total
Total
Loans
Loans
Total
Loans
Recorded
Recorded
Investment
Investment
90 Days
90 Days
and Accruing
and Accruing
Recorded
Investment
90 Days
and Accruing
$
$
$
Commercial real estate
Commercial real estate
Commercial real estate
Commercial and industrial
Commercial and industrial
Commercial and industrial
Agricultural
Agricultural
Agricultural
State and political
State and political
State and political
subdivisions
subdivisions
subdivisions
Consumer
Consumer
Consumer
Residential real estate
Residential real estate
Residential real estate
$
Total
$
Total
Total
-
-
9,763
9,763
-
-
$
-
$
9,763
-
$
-
-
-
-
-
-
$
-
$
-
-
$
5,123,910
5,123,910
32,971
32,971
-
-
$
$
5,123,910
32,971
-
$
5,123,910
5,123,910
42,734
42,734
-
-
$
$
5,123,910
42,734
-
$
$
$
146,211,107
146,211,107
81,283,685
81,283,685
21,025,621
21,025,621
146,211,107
81,283,685
21,025,621
$
$
$
151,335,017
151,335,017
81,326,419
81,326,419
21,025,621
21,025,621
151,335,017
81,326,419
21,025,621
-
-
25,406
25,406
370,717
370,717
405,886
$
405,886
-
25,406
370,717
$
$
405,886
-
-
1,461
1,461
164,894
164,894
166,355
166,355
-
1,461
164,894
$
$
166,355
$
-
-
-
-
497,332
497,332
5,654,213
$
5,654,213
-
-
497,332
$
$
5,654,213
-
-
26,867
26,867
1,032,943
1,032,943
6,226,454
6,226,454
-
26,867
1,032,943
6,226,454
$
$
$
40,682,476
40,682,476
11,687,839
11,687,839
187,481,983
187,481,983
488,372,711
488,372,711
40,682,476
11,687,839
187,481,983
488,372,711
$
$
$
40,682,476
40,682,476
11,714,706
11,714,706
188,514,926
188,514,926
494,599,165
494,599,165
40,682,476
11,714,706
188,514,926
494,599,165
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
28
28
20
29
29
21
21
21
Consumer mortgage loans held by the Company in the process of foreclosure amounted to $537,545 as of
Consumer mortgage loans held by the Company in the process of foreclosure amounted to $537,545 as of
December 31, 2017.
December 31, 2017.
Consumer mortgage loans held by the Company in the process of foreclosure amounted to $537,545 as of
December 31, 2017.
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired Loans
Impaired Loans (Continued)
Management considers commercial real estate loans, commercial and industrial loans, agricultural loans, and state
and political subdivision loans which are 90 days or more past due to be impaired. After becoming 90 days or
more past due, these categories of loans are measured for impairment. Any consumer and residential real estate
loans related to these delinquent loans are also considered to be impaired. Troubled debt restructurings are
measured for impairment at the time of restructuring. These loans are analyzed to determine if it is probable that
all amounts will not be collected according to the contractual terms of the loan agreement. If management
determines that the fair value of the impaired loan is less than the recorded investment in the loan (net of previous
charge-offs, deferred loan fees or costs, and unamortized premium or discount), impairment is recognized through
a provision or through a charge to the allowance for loan losses.
The following tables include the recorded investment and unpaid principal balances for impaired loans with the
associated allowance amount as of December 31:
Recorded
Investment
Unpaid
Principal
Balance
2017
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
With no related allowance recorded:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivisions
Consumer
Residential real estate
With an allowance recorded:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivisions
Consumer
Residential real estate
Total:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivisions
Consumer
Residential real estate
Total
$
4,646,148
203,505
94,659
77,085
-
290,815
5,312,212
$
4,646,148
203,505
94,659
77,085
-
290,815
5,312,212
34,770
178,509
202,446
-
-
179,774
595,499
34,770
178,509
202,446
-
-
179,774
595,499
4,680,918
382,014
297,105
77,085
-
470,589
5,907,711
$
4,680,918
382,014
297,105
77,085
-
470,589
5,907,711
$
$
$
-
-
-
-
-
-
-
2,796
12,286
31,341
-
-
28,059
74,482
2,796
12,286
31,341
-
-
28,059
74,482
$
5,834,297
243,207
101,588
80,931
-
579,843
6,839,866
714,262
90,889
205,897
-
19,333
198,159
1,228,540
6,548,559
334,096
307,485
80,931
19,333
778,002
8,068,406
$
$
11,811
10,859
5,490
3,715
-
5,489
37,364
1,907
12,509
9,318
-
-
9,026
32,760
13,718
23,368
14,808
3,715
-
14,515
70,124
Recorded
Investment
Unpaid
Principal
Balance
2016
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
4,743,197
215,144
109,652
85,971
-
558,255
5,712,219
$
4,743,197
215,144
109,652
85,971
-
558,255
5,712,219
663,138
184,324
210,212
-
-
207,837
913,138
184,324
210,212
-
-
207,837
1,265,511
1,515,511
5,406,335
399,468
319,864
85,971
-
766,092
6,977,730
$
5,656,335
399,468
319,864
85,971
-
766,092
7,227,730
$
$
$
-
-
-
-
-
-
-
254,889
5,000
36,511
-
-
42,298
338,698
254,889
5,000
36,511
-
-
42,298
338,698
$
6,195,946
490,835
312,351
88,847
366
612,421
7,700,766
895,988
96,019
18,545
-
1,437
283,663
1,295,652
7,091,934
586,854
330,896
88,847
1,803
896,084
8,996,418
$
$
13,509
13,306
5,935
4,079
-
17,012
53,841
2,013
12,753
8,830
-
-
1,519
25,115
15,522
26,059
14,765
4,079
-
18,531
78,956
$
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
Total
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. Interest income that
would have been recorded on nonaccrual loans in accordance with their original terms totaled approximately $1.2
million in 2017 and $1.1 million in 2016.
The following table includes the loan balances on nonaccrual status as of December 31:
Commercial real estate
Commercial and industrial
Residential real estate
Total
$
2017
4,422,711
32,285
216,293
$
2016
5,123,910
32,971
497,332
$
4,671,289
$
5,654,213
30
30
22
31
31
23
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
7.
GOODWILL
Troubled Debt Restructuring (TDR’s)
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. 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, either through a charge-off to the allowance or
a specific reserve. Segment and class status are determined by the loan’s classification at origination. As of
December 31, 2017, a specific reserve allocation of $74,482 has been established against the troubled debt
restructurings. Also, as of December 31, 2017, no charge-offs for the troubled debt restructurings were required.
The restructuring of the loan was due to an extension of the maturity date. No modifications involved any changes
in principal balance for 2017 or 2016. There were no loans modified in a troubled debt restructuring from January
1, 2015 through December 31, 2016, that subsequently defaulted (i.e., 90 days or more past due following a
modification) during the years ended December 31, 2017 and 2016, respectively. There were no loan modifications
that are considered troubled debt restructurings for the year ended December 31, 2017.
Loan modifications that are considered troubled debt restructurings completed during the year ended December 31,
2016 were as follows:
2016
Pre-Modification
Number of Outstanding Recorded
Contracts
Investment
Post-Modification
Outstanding Recorded
Investment
Troubled debt restructurings:
Commercial and industrial
1
$
5,829
$
5,829
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
Land and land improvements
Building and leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Total
2017
2016
$
$
1,307,103
17,762,296
6,840,866
25,910,265
12,913,597
805,852
17,184,727
6,673,019
24,663,598
11,901,983
$
12,996,668
$
12,761,615
Depreciation charged to operations was $1,016,345 in 2017 and $1,028,830 in 2016.
As of the year ended December 31, 2017, goodwill had a gross carrying amount of $2,757,712 and accumulated
amortization of $614,013 for a net carrying value of $2,143,699. As of the year ended December 31, 2016,
goodwill had a gross carrying amount of $2,282,712 and accumulated amortization of $614,013 for a net carrying
value of $1,668,699. The carrying amount of goodwill was tested for impairment in the fourth quarter, after the
annual forecasting process. There was no impairment for the years ended December 31, 2017 and 2016,
respectively.
Changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016, are as follows:
Balance as of December 31, 2016
Additions
Balance as of December 31, 2017
Total
1,668,699
475,000
2,143,699
$
$
8.
DEPOSITS
The scheduled maturities of time deposits approximate the following:
Year Ending
December 31,
2018
2019
2020
2021
2022
Thereafter
Amount
124,057,272
72,086,486
20,340,561
22,786,359
16,276,833
2,878,910
258,426,421
$
$
The aggregate of all time deposit accounts of $250,000 or more amounted to $93,941,525 and $44,645,266 at
December 31, 2017 and 2016, respectively. Total amount of Brokered Deposits included above for each of the
years ended December 31, 2017 and 2016 were $5,662,000 and $7,450,000, respectively. Depositors with over 5%
of total deposits include State College Area School District at $37.5 million and Altoona Area School District at
$14.7 million as of December 31, 2017.
32
32
24
33
33
25
9.
SHORT-TERM BORROWINGS
10. OTHER BORROWINGS
Short-term borrowings include overnight repurchase agreements through the FHLB, federal funds purchased, and
repurchase agreements with customers. Short-term borrowings also include funds from a $5,000,000 unsecured
line of credit with a commercial bank for the years ended December 31, 2017 and 2016, 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
$
2017
2016
$
8,930,710
5,333,368
10,018,072
1.34%
0.58%
14,782,918
5,173,755
14,782,918
0.70%
0.79%
The collateral pledged on the repurchase agreements by the remaining contractual maturity of the repurchase
agreements in the Consolidated Balance Sheets as of years ended December 31, 2017 and 2016, is presented in the
following table.
Securities of U.S Government Agencies, U.S Treasuries and obligations
of state and political subdivisions pledged, fair value
Repurchase agreements
Remaining Contractual Maturity
Overnight and Continuous
December 31,
2017
December 31,
2016
$
3,600,854
2,550,710
$
6,368,218
4,029,918
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
08/04/26
02/08/18
07/15/24
06/26/18
01/29/19
01/29/18
03/03/26
03/24/24
11/23/35
03/17/35
Weighted-
Average
Interest Rate
1.84
1.70
1.14
5.07
3.28
Stated Interest
Rate Range
To
From
1.08
1.07
4.75
2.95
6.53
1.30
5.25
3.60
% 0.93 % 4.00 % $
At December 31,
$
2017
50,297,498
13,328,352
6,000,000
10,120,000
6,186,000
2016
49,266,349
16,776,529
7,000,000
10,120,000
6,186,000
Maturities of other borrowings at December 31, 2017, are summarized as follows:
$
85,931,850
$
89,348,878
$
Year Ending
December 31,
2018
2019
2020
2021
2022
2023 and after
Amount
11,559,598
3,293,637
14,890,735
9,118,311
9,193,000
37,876,570
$
85,931,851
Weighted-
Average Rate
1.15 %
1.18
1.70
1.80
1.97
3.09
2.13 %
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, 2017, the Bank’s maximum borrowing capacity with the FHLB was approximately $266.7 million.
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, 2017 is approximately $8.4 million.
The Bank also maintains a $10.0 million, $10.0, million and a $5.0 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, 2017.
34
34
26
27
35
35
10. OTHER BORROWINGS (Continued)
11. DERIVATIVE FINANICAL INSTRUMENTS (Continued)
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 had a fixed rate of 6.11 percent until
November 23, 2015, at which time the rate converted to floating, 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 Company
issued $3,620,000 of fixed rate subordinated capital notes 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 $6,500,000 of fixed rate subordinated capital notes with stated maturities of September 22,
2025 through March 3, 2026. The fixed securities bear an annual rate of 5.25 percent. The Company may redeem
them, in whole or in part, at face value on or after September 22, 2020. These borrowings are included in the
liabilities section of the Company’s Consolidated Balance Sheet.
The Company issued $650,000 of fixed rate senior debt with stated maturities of September 2020 through
November 2020. The fixed rate securities bear an annual rate of 4.00 percent. These borrowings are included in
the liabilities section of the Company’s Consolidated Balance Sheet.
11. DERIVATIVE FINANICAL INSTRUMENTS
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The
Company principally manages its exposures to a wide variety of business and operational risks through
management of its core business activities. The Company manages economic risks, including interest rate,
liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and
through the use of derivative financial instruments. Specifically, the Company enters into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt or payment of future
known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative
financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known
or expected cash receipts and its known or expected cash payments principally related to certain variable rate
borrowings. The Company also has interest rate derivatives that result from a service provided to certain
qualifying customers and, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.
The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk
exposure resulting from such transactions.
28
36
36
The Company has contracted with a third party to engage pay-fixed interest rate swap contracts and the outstanding
as of December 31, 2017, is being utilized to hedge $6.0 million in floating rate debt. Below is a summary of the
interest rate swap agreements and the terms as of the year ended December 31, 2017:
Notional
Amount
Pay
Rate
2017
Receive
Rate
Maturity
Date
Unrealized
Gain/(Loss)
Interest rate swap contract
$
6,000,000
1.99% 3-Month Libor
5/22/24 $
93,989
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and
to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into
interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as
cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the
Company making fixed interest payments. As of December 31, 2017, the Company had one interest rate swap
with a notional of $6.0 million associated with the Company’s cash outflows associated with various floating-rate
liabilities.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is
initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to
earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of
the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging
relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash
flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in
earnings during the period ended December 31, 2017.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest
expense as interest payments are made on the Company’s variable-rate liabilities. During the next twelve months,
the Company estimates that $0 will be reclassified as an increase in interest expense.
Credit-Risk-Related Contingent Features
The Company has agreements with certain of its derivative counterparties that contain the following provisions:
• if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has
not been accelerated by the lender, then the Company could also be declared in default on its derivative
obligations;
• if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty
could terminate the derivative positions, and the Company would be required to settle its obligations under the
agreements;
• if the Company fails to maintain a specified minimum leverage ratio, then the Company could be declared in
default on its derivative obligations.
At December 31, 2017, the fair value of derivatives in a net asset position, which includes accrued interest and any
credit valuation adjustments related to these agreements, was $90,478. At December 31, 2017, the Company had
no required cash collateral with certain of its derivative counterparties. If the Company had breached any of the
above provisions at December 31, 2017, it would have been required to settle its obligations under the agreements
at termination value and would have been required to pay any additional amounts due in excess of amounts
previously posted as collateral with the respective counterparty.
37
37
29
11. DERIVATIVE FINANICAL INSTRUMENTS (Continued)
12.
INCOME TAXES (Continued)
Fair Values of Derivative Instruments on the Balance Sheet
The following table presents the fair values of derivative instruments in the balance sheet:
Assets
Liabilities
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Other assets
$
93,989
Other liabilities
$
(3,511)
December 31, 2017
Interest rate derivatives
12.
INCOME TAXES
The provision for federal income taxes consists of:
Current
Deferred
Change in corporate tax rate
Total provision
2017
718,003
(133,226)
416,852
$
2016
1,010,006
(372,623)
-
1,001,629
$
637,383
$
$
The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities at December 31, 2017 and 2016 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
Other
Deferred tax assets
Deferred tax liabilities:
Premises and equipment
Goodwill
Deferred loan fees
Partnerships
Other
Unrealized gain on available-for-sale securities
Unrealized gain on swaps - balance sheet hedge
Low income housing
Deferred tax liabilities
Net deferred tax assets
2017
2016
$
$
1,196,540
230,166
15,060
927,273
92,342
278,459
248,405
1,235
2,989,480
484,726
340,247
61,970
147,908
3,346
115,664
19,737
22,234
1,195,832
1,793,648
$
2,043,797
300,077
24,382
927,273
154,919
391,699
385,776
2,000
4,229,923
878,295
550,876
96,533
259,804
5,417
56,526
-
-
1,847,451
2,382,472
$
No valuation allowance was established at December 31, 2017 and 2016, 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
Change in corporate tax rate
Other
Actual tax expense and
effective rate
2017
$
Amount
1,748,076
(907,417)
(46,308)
(416,852)
624,130
% of
Pretax Income
% $
34.0
(17.6)
(0.9)
(8.1)
12.1
Amount
1,786,454
(971,909)
(122,447)
-
(54,715)
2016
% of
Pretax Income
%
34.0
(18.5)
(2.3)
-
(1.0)
$
1,001,629
19.5 % $
637,383
12.2 %
The Tax Cuts and Jobs Act, enacted on December 22, 2017, lowered the federal corporate income tax rate from
35% to 21% effective January 1, 2018. As a result, the carrying value of net deferred tax assets was reduced which
increased income tax expense by $416,852.
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 2013 have been closed for purposes of examination by the Internal Revenue Service and the
Pennsylvania Department of Revenue.
13. 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 $355,319 and $332,136 for the years ended December 31, 2017 and 2016, respectively. The fair
value of plan assets includes $1,882,945 and $1,432,583 pertaining to the value of the Company’s common stock
that is held by the plan as of December 31, 2017 and 2016, respectively.
38
38
30
39
39
31
13. EMPLOYEE BENEFITS (Continued)
Deferred Compensation Plan
13. EMPLOYEE BENEFITS (Continued)
Stock Option 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 2017 and 2016 were $1,096,030 and $882,578,
respectively, and are reported as “Other liabilities” on the Consolidated Balance Sheet. Expenses related to this
plan were $160,022 and $80,522 for December 31, 2017 and 2016, respectively.
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 30,000 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 $316,662 and $324,442 for the years ended December 31, 2017 and
2016, respectively.
The following is a summary of the status of the Company’s restricted stock as of December 31, 2017, and changes
therein during the year then ended:
Nonvested at January 1, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Number of
Shares of
Restricted Stock
19,292
11,590
(7,591)
(2,109)
21,182
12,092
(7,790)
(288)
25,196
Weighted-
Average
Grant Date
Fair Value
$ 36.33
44.12
37.03
38.87
$
$
40.09
54.53
40.03
44.08
47.00
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, 2016
Granted
Exercised
Forfeited/Expired
Outstanding, December 31, 2016
Granted
Exercised
Forfeited/Expired
Outstanding, December 31, 2017
Exercisable at year-end
Number of
Options
112,849
24,116
(25,204)
(4,620)
107,141
15,678
(12,874)
(3,510)
106,435
71,665
Weighted-
Average
Exercise
Price
33.77
44.05
30.84
41.28
36.45
54.00
33.92
42.91
39.13
34.98
$
$
$
$
The following table summarizes the characteristics of stock options at December 31, 2017:
Grant Date
01/31/08
03/26/09
04/01/10
04/28/11
04/02/12
04/01/13
09/12/13
04/01/14
09/22/14
04/01/15
04/01/16
10/31/16
12/12/16
04/03/17
Exercise
Price
38.18
25.50
34.13
29.75
30.00
33.25
35.00
36.50
39.50
38.95
44.00
44.80
44.75
54.00
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Shares
6,100
4,500
9,000
5,700
7,200
12,880
300
8,164
500
15,876
18,737
1,000
1,000
15,478
106,435
Outstanding
Contractual
Average
Life
Average
Exercise
Price
0.08
1.23
2.24
3.32
4.25
5.25
5.70
6.25
6.72
7.25
8.25
8.83
8.95
9.25
$
$
$
$
$
$
$
$
$
$
$
$
$
$
38.18
25.50
34.13
29.75
30.00
33.25
35.00
36.50
39.50
38.95
44.00
44.80
44.75
54.00
Exercisable
Average
Exercise
Price
38.18
25.50
34.13
29.75
30.00
33.25
35.00
36.50
39.50
38.95
44.00
44.80
44.75
54.00
Shares
6,100
4,500
9,000
5,700
7,200
12,880
300
8,164
500
10,478
6,183
330
330
-
71,665
$
$
$
$
$
$
$
$
$
$
$
$
$
$
40
40
32
41
41
33
15. 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, 2017 and 2016 was $2,399,000 and $2,009,000, 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,
2017, the Bank had a capital surplus of $5,723,535 which was not available for distribution to the Company as
dividends.
16. 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 2015, BASEL III was implemented that required the Bank to
maintain an additional Common Equity Tier 1 capital ratio.
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, 2017 and 2016, 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, Common Equity Tier I, Tier I risk-based, and Tier I leverage capital ratios must be at least 10
percent, 6.50 percent, 6 percent, and 5 percent, respectively.
14. COMMITMENTS
In the normal course of business, there are outstanding commitments and contingent liabilities such as
commitments to extend credit, financial guarantees, and letters of credit that are not reflected in the accompanying
consolidated financial statements. The Company does not anticipate any losses as a result of these transactions.
These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount
recognized in the Consolidated Balance Sheet.
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
2017
2016
$
$
157,013,677
5,308,908
$
121,375,912
5,239,555
162,322,585
$
126,615,467
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, 2017, are as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Minimum
Lease Payment
396,297
382,857
356,013
315,765
315,765
3,984,842
5,751,540
$
$
Rent expense under leases for each of the years ended December 31, 2017 and 2016, was $358,994 and $355,500,
respectively.
Contingent Liabilities
The Company from time to time may be a party in various legal actions from the normal course of business
activities. Management believes the liability, if any, arising from such actions will not have a material adverse
effect on the Company’s financial position.
42
42
34
43
43
35
16. REGULATORY CAPITAL (Continued)
16. REGULATORY CAPITAL (Continued)
The Company’s actual capital ratios are presented in the following table that shows the Company met all
regulatory capital requirements:
The Bank’s actual capital ratios are presented in the following table which shows the Bank met all regulatory
capital requirements:
2017
2016
Amount
Ratio
Amount
Ratio
2017
2016
Amount
Ratio
Amount
Ratio
Total capital
(to risk-weighted assets)
Actual
For capital adequacy purposes
To be well capitalized
Common Equity Tier I
(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
$
$
$
$
75,941,873
52,161,842
65,202,302
% $
11.65
8.00
10.00
74,507,455
45,508,255
56,885,318
53,675,439
29,341,036
42,381,496
59,490,667
39,121,381
52,161,842
59,490,667
32,364,684
40,455,855
8.23
4.50
6.50
9.12
6.00
8.00
7.35
4.00
5.00
% $
51,873,835
25,598,393
36,975,457
% $
57,534,849
34,131,191
45,508,255
% $
57,534,849
28,747,338
35,934,173
%
13.10
8.00
10.00
9.12 %
4.50
6.50
%
10.11
6.00
8.00
%
8.01
4.00
5.00
Total capital
(to risk-weighted assets)
Actual
For capital adequacy purposes
To be well capitalized
Common Equity Tier I
(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
$
$
$
$
73,198,801
52,070,175
65,087,718
% $
11.25
8.00
10.00
72,160,102
45,519,158
56,898,947
66,939,931
29,289,473
42,307,017
66,939,931
39,052,631
52,070,175
66,939,931
26,035,087
32,543,859
% $
10.28
4.50
6.50
65,350,966
25,604,526
36,984,316
% $
10.28
6.00
8.00
65,350,966
34,139,368
45,519,158
% $
8.29
4.00
5.00
65,350,966
28,674,897
35,843,622
%
12.68
8.00
10.00
11.49 %
4.50
6.50
%
11.49
6.00
8.00
%
9.12
4.00
5.00
44
44
36
45
45
37
17. FAIR VALUE MEASUREMENTS
17. FAIR VALUE MEASUREMENTS (Continued)
The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at
their fair value as of December 31, 2017 and 2016, by level within the fair value hierarchy. Impaired loans that are
collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used
to value the collateral that secure the impaired loans include: quoted market prices for identical assets classified as
Level I inputs and observable inputs employed by certified appraisers for similar assets classified as Level II
inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and
assumptions developed by management based on the best information available under each circumstance, the asset
valuation is classified as Level III input. Other real estate owned is measured at fair value, less cost to sell at the
date of foreclosure. Valuations are periodically performed by management and the assets are carried at the lower
of carrying amount, or fair value less cost to sell. The fair value for mortgage servicing rights is estimated by
discounting contractual 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
Mortgage servicing rights
Level I
Level II
Level III
Total
December 31, 2017
$
$
-
-
-
Level I
-
-
$
$
$
-
-
-
$
5,833,229
255,000
415,533
5,833,229
255,000
415,533
December 31, 2016
Level II
Level III
Total
$
-
-
6,639,032
453,285
$
6,639,032
453,285
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 on a recurring
basis as of December 31, 2017 and 2016, 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, 2017
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
Equity securities
$
-
-
-
-
-
4,051,862
$
6,745,450
32,068,188
$
51,862,660
23,948,356
21,371,123
-
Total
$
4,051,862
$
135,995,777
$
-
-
-
-
-
-
-
$
6,745,450
32,068,188
51,862,660
23,948,356
21,371,123
4,051,862
$
140,047,639
December 31, 2016
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
Equity securities
$
-
-
-
-
-
5,629,754
$
8,586,090
32,960,053
$
64,821,126
25,040,343
24,233,012
-
Total
$
5,629,754
$
155,640,624
$
-
-
-
-
-
-
-
$
8,586,090
32,960,053
64,821,126
25,040,343
24,233,012
5,629,754
$
161,270,378
46
46
38
47
47
39
17. FAIR VALUE MEASUREMENTS (Continued)
18. 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, 2017 and 2016.
The estimated fair values of the Company’s financial instruments at December 31 are as follows:
December 31, 2017
Impaired loans
Impaired loans
Fair Value
2,064,013
3,769,216
$
$
Other real estate owned
$
255,000
Mortage servicing rights
$
415,533
Valuation
Techniques
Discounted
Cash Flows
Property
appraisals
Property
appraisals
Discounted
cash flows
Valuation
Techniques
Discounted
Cash Flows
Unobservable Inputs
Discount Rate
Management discount for
property type and recent
market volatility
Management discount for
property type and recent
market volatility
Discount rate
Prepayment speeds
Unobservable Inputs
Management discount for
property type and recent
market volatility
Management discount for
property type and recent
market volatility
Range
4.23% - 6.75% discount
Weighted Average (5.40%)
15% - 24.4% discount
Weighted Average (22.87%)
0% - 50% discount
Weighted Average (12.07%)
2.89 - 3.48% discount
Weighted Average (3.185%)
1.32 - 2.76 prepayment factor
Weighted Average (1.53%)
Range
4.23% - 6.00% discount
Weighted Average (5.42%)
10% - 24.4% discount
Weighted Average (22.01%)
2.76 - 3.57% discount
Weighted Average (3.17%)
1.22 - 2.81 prepayment factor
Weighted Average (1.60%)
Fair Value
2,368,763
December 31, 2016
Impaired loans
Impaired loans
$
$
4,270,269
Property
appraisals
Mortage servicing rights
$
453,285
Discounted
cash flows
Discount rate
Prepayment speeds
Carrying
Value
Fair
Value
2017
Level
I
Level
II
Level
III
$
43,887,984
3,492,344
$
43,887,984
3,492,344
$
43,887,984
3,492,344
$
$
-
-
140,047,639
140,047,639
4,051,862
135,995,777
6,000,000
1,279,431
569,010,225
6,149,000
15,437,997
93,989
2,477,312
415,533
6,162,790
1,279,431
551,495,272
6,149,000
15,437,997
93,989
2,477,312
415,533
-
1,279,431
-
6,149,000
15,437,997
-
2,477,312
-
6,162,790
-
-
-
-
93,989
-
-
Financial assets:
Cash and cash equivalents
Certificates of deposit
Investment securities
available for sale
Investment securities
held to maturity
Loans held for sale
Net loans
Regulatory stock
Bank-owned life insurance
Hedges
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
$
$
653,687,053
8,930,710
85,931,850
1,138,006
652,211,264
8,930,710
84,682,347
1,138,006
$
395,260,633
8,930,710
$
-
1,138,006
Carrying
Value
Fair
Value
2016
Level
I
Level
II
$
20,404,502
3,492,330
$
20,404,502
3,492,330
$
20,404,502
3,492,330
$
161,270,378
161,270,378
5,629,754
155,640,624
-
6,123,118
6,000,000
1,006,096
488,587,996
6,519,400
15,010,555
2,329,267
453,285
6,123,118
1,006,096
478,290,715
6,519,400
15,010,555
2,329,267
453,285
1,006,096
-
6,519,400
15,010,555
2,329,267
-
Financial assets:
Cash and cash equivalents
Certificates of deposit
Investment securities
available for sale
Investment securities
held to maturity
Loans held for sale
Net loans
Regulatory stock
Bank-owned life insurance
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
-
-
-
-
-
551,495,272
-
-
-
-
415,533
$
256,940,459
-
84,682,347
Level
III
$
-
-
-
-
-
-
478,290,715
-
-
-
453,285
$
206,967,058
-
88,318,530
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
$
$
561,927,608
14,782,918
89,348,878
805,471
561,960,230
14,782,918
88,318,530
805,471
$
354,993,172
14,782,918
$
-
805,471
48
48
40
49
49
41
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
Derivative Instruments
Investment Securities (Continued)
The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a
variable-rate commercial loan agreement to a fixed-rate loan agreement. Under these agreements, the Company
enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which
serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a swap
agreement with a third party in order to economically hedge its exposure through the customer agreement.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within
Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives may use Level 3
inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its
counterparties. However, at December 31, 2017, the Company has assessed the significance of the impact of the
credit valuation adjustments on the overall valuation of its derivative positions and has determined they are not
significant. As a result, the Company has determined that its derivative valuations in their entirety are classified in
Level 2 of the fair value hierarchy.
Notional Amount
December 31,
2017
2016
Interest
Rate Paid
Interest
Rate Received
Fair Value
December 31,
2017
2016
Third Party interest rate swap
Maturing in 2024
$
6,000,000
$
-
Fixed
3-Month Libor $
90,478
$
-
Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates
an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction
between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial
instrument, the estimated fair value would be calculated based upon the market price per trading unit of the
instrument.
If no readily available market exists, the fair value estimates for financial instruments should be based upon
management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future
estimated losses, and other factors as determined through various option pricing formulas or simulation modeling.
As many of these assumptions result from judgments made by management based upon estimates, which are
inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of
a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based
may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments,
the estimated fair value of financial instruments would not represent the full value of the Company.
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.
Cash Flow Hedges
The fair values of interest rate swaps are determined using models that use readily observable market inputs and a
market standard methodology applied to the contractual terms of the derivatives, including the period to maturity
and interest rate indices.
The methodology nets the discounted future fixed cash receipts (or payments) and the discounted expected variable
cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest
rates derived from observable market interest rate curves. The Company incorporates credit valuation adjustments
to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in
the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance
risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral
postings and thresholds, mutual settlements, and guarantees.
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.
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:
Other Borrowings
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
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.
50
50
42
Fair values for other borrowings are estimated using a discounted cash flow calculation that applies contractual
costs currently being offered for similar borrowings.
Commitments to Extend Credit
These financial instruments are generally not subject to sale, and estimated fair values are not readily available.
The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of
credit, and the fair value, determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with similar credit risk, are not
considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are
presented in Note 14.
51
51
43
19. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the changes in accumulated other comprehensive income by component net of tax for
the year ended December 31, 2017 and 2016:
Net Unrealized
Gains on
Investment Securities
Cash Flow
Hedges
Total
Accumulated other comprehensive
loss, January 1, 2016
Other comprehensive income before
reclassification
Amounts reclassified from accumulated
other comprehensive loss
Accumulated other comprehensive
income, December 31, 2016
Other comprehensive income before
reclassification
Amounts reclassified from accumulated
other comprehensive income
Reclassification of certain income tax
effects from AOCI
Accumulated other comprehensive
income, December 31, 2017
$
$
$
427,106 $
192,955
(510,336)
109,725 $
320,526
(66,737)
83,819
$
$
-
-
-
-
-
62,033
-
427,106
192,955
(510,336)
109,725
320,526
(4,704)
83,819
447,333 $
62,033 $
509,366
The following table presents significant amounts reclassified out of each component of accumulated other
comprehensive income (loss) for the year ended December 31, 2017, and 2016:
Amount Reclassified
from Accumulated
Other Comprehensive
Income
Affected Line Item
in the Consolidated
Statement of Income where
Net Income is Presented
Unrealized gains on investment
securities December 31, 2017
Unrealized gains on investment
securities December 31, 2016
$
$
$
$
101,117
(34,380)
66,737
773,237
(262,901)
510,336
Investment securities gains, net
Income taxes
Investment securities gains, net
Income taxes
20. SUBSEQUENT EVENTS
Management has reviewed events occurring through March 1, 2018, the date the financial statements were issued,
and no subsequent events occurred requiring accrual or disclosure.
Bo a r d oF d i r e c t o r s a n d oF Fi c e r s
Board of directors of
Kish Bancorp, inc.
William P. Hayes, Chairman
James J. Lakso, Vice Chairman
William L. Dancy, Secretary
Eric J. Barron, Member
Spyros A. Degleris, Member
Edward A. Friedman, Member
Paul G. Howes, Member
William S. Lake, Member
Paul H. Silvis, Member
Francis V. Vaughn, Member
George V. Woskob, 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
Gregory T. Hayes, Member
Paul G. Howes, Member
William S. Lake, Member
Paul H. Silvis, Member
Francis V. Vaughn, Member
George V. Woskob, 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
George V. Woskob, 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 F. Prosser, Member
Burgess A. Smith, Member
Delmont R. Sunderland, Member
James A. Troha, Member
Frances V. Vaughn, Member
mifflin county
regional Board
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
Kish Bank
executive officers
William P. Hayes, Chairman and
Chief Executive Officer
Gregory T. Hayes, President and
Chief Operating Officer
Peter D. Collins, Executive Vice
President, Chief Credit Officer
Mark J. Cvrkel, Executive Vice
President, Chief Financial Officer
Robert S. McMinn, Executive Vice
President, General Counsel
Richard A. Sarfert, Executive Vice
President, Senior Lending Officer
James L. Shilling, Jr., Executive
Vice President, Chief Business
Banking Officer
Kish Bank senior officers
Douglas C. Baxter, Senior Vice
President, Accounting and
Controls Manager
Carol M. Herrmann, Senior Vice
President, CEO, Kish Travel
Thomas Minichiello, III, Senior
Vice President, Head of Retail
Banking
Amy M. Muchler, Senior Vice
Marsha K. Kuhns, Vice President,
President, Educational Outreach
and Service Quality Manager
Debra K. Weikel, Senior Vice
President, Loan Administration
Director
Suzanne M. White, Senior Vice
President, Human Resources
and Organization Development
Director
Residential Lender
John Q. Massie, Vice President,
Commercial Relationship
Manager
Virginia A. McAdoo, Vice President,
Lending Services Manager
Kristie R. McKnight, Vice President,
Commercial Relationship
Manager
Stanley N. Ayers, Vice President,
Peter K. Ort, Vice President,
Special Assets Manager
Branch Manager
Kathleen M. Boop, Vice President,
Personal Lines Insurance
Manager
Kimberly A. Bubb, Vice President,
Client Solutions and Operations
Director
Larry E. Burger, Vice President,
Commercial Relationship
Manager
Cynthia L. Chase, Vice President,
Loan Review Manager
Denise F. Quinn, Vice President,
Commercial Relationship
Manager
Melissa K. Royer, Vice President,
Client Solutions Technical
Advisor
Cheryl E. Shope, Vice President,
Residential Lender
Glenn E. Snyder, Vice President,
Facilities Manager/Security
Officer
David A. Coble, Vice President,
N. Robert Sunday, III, Vice
Branch Manager
President, Compliance Officer
Alta Corman-Wolf, Vice President,
Kayelene G. Sunderland, Vice
President, Wealth Management
and Trust Administrator
Jeffrey D. Wilson, Vice President,
CEO, Kish Agency
William W. Yaudes, Vice President,
Business Development Officer
Residential Lender
John P. Cunningham, II, Vice
President, Regional Market
Manager
Wade E. Curry, LUTCF, Vice
President, Investment Services
Terra L. Decker, Vice President,
Information Security and
Compliance Risk Director
Jeffrey A. Gum, Vice President,
Managing Director of Benefit
Management Group
Ann K. Guss, Vice President,
Residential Lender
Jeffrey T. Hayes, Vice President,
Financial Advisor
Allana L. Hartung, Vice President,
Commercial Relationship
Manager
Terry P. Horner, Vice President,
Business Development Officer
5252
44
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4255 East Main Street, Belleville, PA 17004 | 1-888-554-4748 | www.KishBank.com