B E T T E R L I V E S ,
B E T T E R C O M M U N I T I E S .
2 0 1 8 A N N U A L R E P O R T
W I L L I A M
H A Y E S
C H A I R M A N O F
T H E B O A R D ,
P R E S I D E N T A N D
C H I E F E X E C U T I V E
O F F I C E R
C O N T E N T S
1
Chairman’s Letter
to the Shareholders
4
Financial Highlights
5
Independent
Auditor’s Report
6
Financial Statements
11
Notes to Consolidated
Financial Statements
56 Board of Directors
and Officers
KISH CLIENTS ON THE COVER (LEFT
TO RIGHT): A. Christian Baum, Founder
of Co.Space and Giv Local; Doreen
Perks, Founder of Bob Perks Cancer
Assistance Fund; Sherren and Pastor
Harold McKenzie, Unity Church of Jesus
Christ; Angie Thompson, Co-Owner of
Thompson’s Candle Co.; and Luke Lake,
General Manager of Lake Auto.
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
At Kish, it is not about what we do, it is about why we do it.
the bulk of the more than $62 million expansion in the
That “why” is the focus of everything we do, and in 2018,
loan portfolio. The commercial lending team turned in
that focus produced results that speak louder than words.
another banner year of growth and business relation-
So, this letter will begin with the measures that capture
ship acquisition, while residential mortgage lending also
the headlines of Kish Bancorp’s financial performance
achieved another record year by originating more than
for 2018 and a reiteration of the cover of the prior year’s
$66 million in mortgage loans. The Bank’s capacity to
annual report: Clear Vision, Compelling Results.
remain competitive during the year was strengthened by
Net income for the year rose by 45.63% over the prior
year, or $1.89 million, to $6.03 million from $4.14 million
in 2017. When the accounting adjustments associated
the successful implementation of interest rate swap trans-
actions that enabled us to offer long-term fixed rates while
maintaining margins and balance sheet flexibility.
with the Tax Cuts and Jobs Act are eliminated from 2017
Sustained loan and asset growth quickly translated into
reported earnings, net income increased by 32.30%,
the need to identify and attract new sources of funding.
or $1.47 million, from $4.56 million. Earnings per share
The corresponding focus on growing core deposits was
growth, adjusted for October’s two-for-one stock split,
reflected in several new checking promotions, each of
reflected robust earnings expansion as well, increasing
which was accompanied by substantial retail deposit
41.90% over the prior year, to a fully diluted $2.37 per
growth. Overall, deposits grew by $28.7 million by year
share from $1.67 the prior year. By every measure and
end, although deposit growth was a carefully managed
from every perspective, 2018 was truly a record year. Now
area given the difficult challenges presented by Fed
let’s discuss the performances that built these results and
actions and a flattening yield curve. Deposit relationships
the “why” that drives this team to excel across the full
were also the focus of facilities enhancement and expan-
spectrum of what we do as a company.
sion projects, specifically in Bellefonte and Allensville.
The outstanding results achieved in 2018 can be tracked
through the excellent foundation built in recent years as
Both of these branch facilities now reflect the evolution of
a streamlined Expect More branch of the future.
well as the performance metrics of every Kish business
No discussion of 2018 operating results would be com-
unit and support function. This letter will try to do justice
plete without acknowledging the continuing growth of
to the diversity of team efforts that produced so many
the Bank’s affiliates. The addition of Benefit Management
stellar outcomes, but the discussion must begin and end
Group, now called Kish Benefits Consulting (KBC), was a
with the driver of 2018 results: the sustained growth of
major step forward that required broad organizational sup-
the core banking unit.
Following a strong 2017, Kish Bank began 2018 with a
full head of steam. As the year progressed, continued
loan growth, supported by a strengthening economy and
turmoil among Kish’s banking competitors, enabled the
Bank to sustain its efforts to expand the customer base,
especially in the growth market of Centre County. Perhaps
because business lending and mortgage lending are most
influenced by a relationship-focused approach, these
port and collaboration, but KBC responded by integrating
seamlessly and contributing to profitability in its first year
as part of the organization. Benefits management consult-
ing represents a significant addition to the offering of val-
ued solutions to our business clients. KBC’s performance,
combined with double-digit growth in profitability from the
wealth management unit, Kish Financial Solutions, and Kish
Insurance, as well as sustained positive results from Kish
Travel, added materially to our financial results in 2018.
areas of our business remained central to our efforts to
A major advancement for Kish shareholders occurred in
drive growth and attract new customers and contributed
2018’s fourth quarter when Kish Bancorp (KISB) shares
1
were upgraded to the OTCQX exchange from the less liq-
Finally, as I mentioned in the opening paragraph, a word
uid pink sheets and saw a corresponding improvement in
about the “why” of this extraordinary organization. 2018
price and trading execution. That up-listing was preceded
was so incredible because it witnessed great performances
by the announcement of a two-for-one stock split and a
by so many teams at Kish, working independently and as
split-adjusted dividend increase to $0.25 per share from
one, and it reaffirmed a simple truth that we have always
$0.23. As Kish Bancorp continues on its growth trajec-
known. It takes great people to build great companies, and
tory toward $1 billion in assets, the team is preparing for
we are building a great company that made tremendous
a major elevation in financial reporting and regulatory
strides during the year because of a singular focus on
reporting requirements.
As we look to the future, let me close by noting that
despite the strong performance in 2018, I am also awed by
the scope and complexity of the plans for the next several
years—plans that will fully position Kish to compete and
thrive in a rapidly evolving digital environment. It will be
an environment where client preferences for access to
our services will change dramatically, yet expectations
achieving sustained success through an unwavering focus
on performance for our customers. As a team, we believe
in our hearts that we can make the lives of our team
members, our clients, and our communities better by our
efforts. And, whether you are a customer, team member,
shareholder, or simply a member of the communities
served by Kish, we trust you have experienced and appre-
ciate that belief and commitment.
for highly personalized attention will be sustained and
Thank you for your interest and support. Kish Bancorp will
even elevated. That is why we are embarking upon two
continue to benefit from your engagement and recommen-
of the most significant initiatives in our long history of
dations to others.
innovation. The planning and construction of the Kish
Innovation Center will begin to take shape in 2019. This
facility, planned for completion in 2020, will enhance the
digital delivery of banking services in an environment
that is much lower cost and less dependent on physical
bricks and mortar. That facility will become reality on the
heels of our core system modernization initiative that will
be accomplished over the next fourteen months. Both
of these major initiatives will be designed to enhance
competitiveness and efficiency as part of a larger focus on
our Twin Rails strategy, which is the merger of our tradi-
tional relationship approach with new emerging digital
delivery channels, and the advancement of the Bank’s IT
infrastructure. We understand that it will be the effective
deployment of our shareholders’ capital that will be critical
to Kish’s drive to succeed and thrive in that environment.
Sincerely,
William P. Hayes
Chairman of the Board,
President and Chief Executive Officer
PICTURED OPPOSITE PAGE (CLOCKWISE FROM TOP), KISH
EMPLOYEES: Lucas Craig, AVP, Financial Advisor; Crystal Yoder, Per-
sonal Banker; Terry Horner, VP, Business Development Officer; Jackie
Confer, AVP, Business Development Officer; and Alta Corman-Wolf,
VP, Residential Lender.
W H Y ?
We believe that we can make
the lives of those around us, our
employees, our clients, and our
communities BETTER!
2
3
F I N A N C I A L H I G H L I G H T S
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
2018
2017
2016
2015
2014
Board of Directors and Stockholders
$
6,029,683
$
4,139,770
$
4,616,894
$
4,494,241
$
4,358,608
Kish Bancorp, Inc.
6,670,247
2,396,453
5,141,399
2,301,564
5,254,277
2,130,197
5,125,151
2,112,600
5,130,129
2,005,848
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
$
850,508
$
811,192
$
725,071
$
696,895
$
659,600
630,440
682,350
59,728
6,642
10
0.72%
10.71%
39.74%
92.39%
7.80%
11.95%
1.04%
0.00%
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%
488,588
561,928
53,593
6,011
271
0.65%
8.54%
46.14%
86.95%
8.22%
13.10%
1.22%
0.06%
445,425
542,629
51,281
5,752
492
0.66%
8.89%
47.01%
82.09%
8.18%
12.62%
1.27%
0.12%
414,061
508,616
48,853
6,009
219
0.67%
9.54%
46.02%
81.41%
8.32%
13.07%
1.43%
0.05%
$
2.41
2.37
0.94
23.41
26.01
$
1.69
1.67
0.92
22.50
24.77
$
1.90
1.89
0.86
21.63
24.06
$
1.87
1.84
0.86
20.89
23.23
$
1.82
1.80
0.82
19.98
22.44
We have audited the accompanying consolidated financial statements of Kish Bancorp, Inc. and subsidiaries, which
comprise the consolidated balance sheets as of December 31, 2018 and 2017; 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 accor-
dance with accounting principles generally accepted in the United States of America; this includes the design, implemen-
tation, 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 con-
ducted 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 consoli-
dated 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 consoli-
dated financial statements.
Average Shares Outstanding (#)
2,499,673
2,459,168
2,430,134
2,407,260
2,398,414
Net Income (in millions)
Earnings & Dividends (per share)**
Stock Valuation (per share)**
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 finan-
cial position of Kish Bancorp, Inc. and subsidiaries as of December 31, 2018 and 2017, 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.
*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.
**For comparability, per share data for the years 2014 through 2017 have been adjusted to reflect the two-for-one stock split in 2018.
S.R. Snodgrass, P.C. • 2009 Mackenzie Way, Suite 340 • Cranberry Township, Pennsylvania 16066 • Phone: 724-934-0344 • Fax: 724-934-0345
4
5
Cranberry Township, Pennsylvania
March 4, 2019
C O N S O L I D A T E D B A L A N C E S H E E T
KISH BANCORP, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
Cash and due from banks
Interest-bearing deposits with other institutions
Cash and cash equivalents
Certificates of deposit in other financial institutions
Investment Securities available for sale, at fair value
Equity Securities
Investment Securities held to maturity, fair value of $7,095,937
and $6,162,790
Loans held for sale
Loans
Less allowance for loan losses
Net loans
Premises and equipment, net
Goodwill
Regulatory stock
Bank-owned life insurance
Accrued interest and other assets
December 31,
2018
2017
$
10,146,566 $
22,622,212
32,768,778
7,964,222
35,923,762
43,887,984
3,119,532
124,731,597
3,450,017
3,492,344
135,995,777
4,051,862
7,000,000
156,565
6,000,000
1,279,431
637,082,546
6,642,410
630,440,136
574,708,035
5,697,810
569,010,225
14,182,308
2,143,699
6,110,700
15,422,560
10,983,033
12,996,668
2,143,699
6,149,000
15,437,997
10,746,897
TOTAL ASSETS
$
850,508,925 $
811,191,883
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
$
93,954,532 $
12,234,873
64,318,889
253,787,230
258,054,517
682,350,041
22,484,169
78,024,955
7,921,055
790,780,220
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
Preferred stock, $.50 par value; 500,000 shares authorized,
no shares issued and outstanding
Common stock, $.50 par value; 8,000,000 shares authorized,
2,697,500 and1,348,750 shares issued, at 2018 and 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock, at cost (130,609 and 171,584 shares in
2018 and 2017, respectively)
TOTAL STOCKHOLDERS' EQUITY
-
-
1,348,750
2,460,838
59,882,848
(1,301,777 )
(2,661,954 )
59,728,705
674,375
2,066,936
56,207,032
509,366
(3,118,978 )
56,338,731
C O N S O L I D A T E D S T A T E M E N T O F I N C O M E
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
2018
2017
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
$
27,894,432 $
1,193,287
2,582,358
1,065,457
592,171
636,019
33,963,724
5,764,414
35,536
2,406,694
8,206,644
25,757,080
955,000
22,855,386
1,336,603
2,655,876
1,332,272
345,042
602,245
29,127,424
3,864,807
22,677
2,138,665
6,026,149
23,101,275
600,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
24,802,080
22,501,275
NONINTEREST INCOME
Service fees on deposit accounts
Investment securities gains, net
Equity securities losses, net
Gain on sale of loans
Earnings on bank-owned life insurance
Insurance commissions
Travel agency commissions
Wealth management
Benefit 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
1,691,041
3,471
(181,665 )
858,426
421,086
1,225,075
311,250
1,516,089
473,720
1,121,147
7,439,640
15,556,450
2,982,508
2,293,683
243,482
265,547
390,700
615,828
3,223,275
25,571,473
1,614,103
101,117
-
866,798
429,766
1,128,094
377,295
1,399,589
-
607,702
6,423,346
14,633,030
2,878,318
2,089,133
315,071
252,065
237,000
598,948
2,880,774
23,884,340
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)
6,670,247
5,040,282
640,564
1,001,629
NET INCOME
EARNINGS PER SHARE
Basic
Diluted
$
6,029,683 $
4,038,653
$
$
2.41 $
2.37 $
1.69
1.67
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
850,508,925 $
811,191,883
See accompanying notes to the consolidated financial statements.
See accompanying notes to consolidated financial statements.
2
3
6
7
C O N S O L I D A T E D S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S T O C K H O L D E R S ’ E Q U I T Y
Net income
Other comprehensive income (loss)
Securities available for sale:
Year Ended December 31,
2017
4,139,770
2018
6,029,683 $
$
Change in unrealized holding (losses) 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 (loss) income
(1,323,406 )
277,918
(58,167 )
12,215
(3,471 )
729
(1,094,182 )
485,646
(165,120 )
93,989
(31,956 )
(101,117 )
34,380
315,822
Total comprehensive income
$
4,935,501 $
4,455,592
See accompanying notes to the consolidated financial statements.
4
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9
C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
N O T E S T O C O N S O L I D A T E D F I 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
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
6,029,683 $
4,139,770
A summary of the significant accounting and reporting policies applied in the presentation of the
accompanying consolidated financial statements follows:
Year Ended December 31,
2018
2017
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Provision for loan losses
Investment securities gains, net
Equity security losses
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
Gain on sale of other assets
Compensation expense
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Maturities of certificates of deposit
Acquisition of Benefit Management Group
Proceeds from Bank Owned Life Insurance
Investment securities available for sale:
Proceeds from sale of investments
Proceeds from repayments and maturities
Purchases
Investment held to maturity:
Purchases
Proceeds from sale of equity securities
Increase in loans, net
Purchase of regulatory stock
Redemption of regulatory stock
Purchase of premises and equipment
Proceeds from sale of other real estate owned
Net cash used for investing activities
FINANCING ACTIVITIES
Increase in deposits, net
Increase (decrease) 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.
955,000
(3,471 )
181,665
37,559,342
(35,578,050 )
(858,426 )
1,291,020
250,189
(170,155 )
197,152
(421,086 )
(14,910 )
465,486
1,143,565
11,027,004
373,000
-
428,241
-
14,475,505
(4,751,525 )
(1,000,000 )
420,180
(62,384,910 )
(1,250,200 )
1,288,500
(2,265,909 )
222,368
(54,444,750 )
28,662,988
13,553,459
6,867,416
(14,774,310 )
(517,561 )
1,089,212
(186,211 )
(2,396,453 )
32,298,541
(11,119,206 )
43,887,984
32,768,778 $
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
(1,858,280 )
4,230,066
-
(475,000 )
-
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
43,887,984
8,009,492 $
150,000
5,693,614
1,225,000
- $
308,000
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., Tri-Valley Properties, LLC, 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 significant 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. Debt 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, 2018 and 2017. Interest and dividends on investment securities is recognized as income
when earned.
7
10
11
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
Loans (Continued)
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.
Equity Securities
Equity securities are held at fair value. Holding gains and losses are recorded in income. Dividends are
recognized as income when earned.
Regulatory Stock
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 the 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.
12
13
8
9
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Income Taxes
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 the 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.
Real Estate Owned
Real estate acquired by foreclosure is included with other assets on the Consolidated Balance Sheet at the
lower of the recorded investment in the property or its fair value less estimated costs of sale. Prior to
foreclosure, the value of the underlying collateral is written down by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating
expenses of such properties, net of related income and losses on their disposition, are included in other
noninterest expense.
Treasury Stock
Treasury stock is carried at cost. Sales are determined by the first-in, first-out method.
Advertising Costs
Advertising costs are expensed as the costs are incurred.
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 Split
The Board of Directors declared a two-for-one stock split effected in the form of a stock dividend
payable October 11, 2018. All references to share and per share amounts in the consolidated financial
statements, except the Consolidated Balance Sheet, and accompanying notes to the consolidated financial
statements have been retroactively restated to reflect the stock split.
Stock Options
As of December 31, 2018 and 2017, the Company recorded compensation expense of $48,401 and
$31,922, respectively, related to share-based compensation awards. At December 31, 2018, there was
approximately $87,744 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
Expected
Dividend
Yield
Risk-Free
Interest Rate
Expected
Volatility
Expected
Life (in Years)
2018
2017
3.39 %
3.24 %
2.73 %
2.35 %
9.40 %
11.08 %
10.00
10.00
The weighted-average fair value of each stock option granted for 2018 and 2017 was $1.91 and $2.02,
respectively. Stock options exercised during the years ended December 31, 2018 and 2017 were 38,436
and 25,748, respectively.
14
15
10
11
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Servicing Rights (“MSRs”)
Derivatives and Hedging Activities (Continued)
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, 2018 and 2017, the Company recorded
gross servicing rights of $558,745 and $630,259, respectively, with a reserve for impairment of $169,523
and $214,725, 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.
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.
Revenue Recognition
The Company’s revenue is comprised of net interest income on financial assets and liabilities, which is
explicitly excluded from the scope of the new guidance, and noninterest income. Certain components of
noninterest income such as interest rate swap income, income from rabbi trust investments, trading
securities gains, gains on sales of mortgage loans, and gains on sales of securities available for sale are
accounted for under other U.S. GAAP standards, and are therefore out of scope of the ASC 606 revenue
standard. Insurance commissions, service charges on deposit accounts, debit card processing fees, and
trust and investment advisory fees are within the scope of the ASC 606 revenue standard. As such, the
Company is currently reviewing contracts related to these revenue streams and at this point does not
anticipate any material changes to revenue recognition upon adoption; however, the Company’s review
is still ongoing. The Company plans to adopt the revenue recognition guidance on January 1, 2019 and
anticipates using the modified retrospective transition method upon adoption.
16
17
12
13
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2. EARNINGS PER SHARE
Newly Adopted Accounting Standards
In January 2016, the FASB finalized ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. This accounting standard:
(a) requires separate presentation of equity instruments (except those accounted for under the equity
method of accounting or those that result in consolidation of the investee) on the balance sheet and
measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative
assessment to identify impairment; (c) eliminates the requirement to disclose the fair values of financials
instruments measured at amortized cost for entities that are not significant assumptions used to estimate
the fair value that is required to be disclosed for financial instruments measured at amortized cost on the
balance sheet; (d) requires public business entities to use the exit price notion when measuring the fair
value of financials instruments for disclosure purposes; (e) requires separate presentation of financial
assets and financial liabilities by measurement category and form of financial asset (that is, securities or
loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (f)
clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related
to available-for-sale securities in combination with the entity’s other deferred tax assets.
The adoption resulted in the Company recognizing a one-time cumulative effect adjustment of $716,961
between accumulated other comprehensive loss and retained earnings on the Consolidated Balance Sheet
for the fair value of equity securities included in accumulated other comprehensive loss as of the
beginning of the period. The adjustment had no impact on net income on any prior periods presented.
The Company has adopted this standard during the reporting period. On a prospective basis, the
Company implemented changes to the measurement of the fair value of financials instruments using an
exit price notion for disclosure purposes included in Note 17 to the financial statements. The December
31, 2017, fair value of each class of financial instruments disclosure did not utilize the exit price notion
when measuring fair value, and, therefore, may not be comparable to the December 31, 2018 disclosure.
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
2,697,500 2,697,500
2018
2017
Average treasury stock shares
(145,755 ) (193,032 )
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
(52,072 )
(45,300 )
2,499,673 2,459,168
747
224
48,853
29,866
2,549,273 2,489,258
Options to purchase 210,466 shares of common stock at a price of $12.75 to $29.63, as of December 31,
2018, and 48,974 shares of restricted stock ranging in price from $18.25 to $30.25 were not included in
the computation of diluted earnings per share. To include these shares would have been antidilutive.
Options to purchase 212,870 shares of common stock at a price of $12.75 to $27.00, as of December 31,
2017, and 50,392 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.
18
19
14
15
3.
INVESTMENT SECURITIES
3.
INVESTMENT SECURITIES (Continued)
The amortized cost, gross unrealized gains and losses, and fair value of investment securities are as
follows:
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, 2018 and 2017.
Gross
2018
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
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
$ 6,995,422 $
36,722,369
- $
-
(301,712 ) $ 6,693,710
(951,146 ) 35,771,223
46,044,802
236,722
(106,440 )
46,175,084
19,331,836
21,052
(294,807 ) 19,058,081
17,320,809
17,651
(304,961 )
17,033,499
Total Available for Sale
$ 126,415,238 $ 275,425 $ (1,959,066 ) $ 124,731,597
Held to Maturity:
Corporate Securities
$ 7,000,000 $
95,937 $
- $ 7,095,937
Gross
2017
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
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
$ 6,996,146 $
32,743,522
- $
-
(250,696 ) $ 6,745,450
(675,334 ) 32,068,188
51,262,205
667,103
(66,648 )
51,862,660
23,894,085 176,694
(122,423 ) 23,948,356
21,456,583
80,649
(166,109 )
21,371,123
Total Available for Sale
$ 136,352,541 $ 924,446 $ (1,281,210 ) $ 135,995,777
Held to Maturity:
Corporate Securities
$ 6,000,000 $ 162,790 $
- $ 6,162,790
Less than Twelve
Months
2018
Twelve Months or
Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
- $
-
- $ 6,693,710 $ (301,712 ) $ 6,693,710 $ (301,712 )
- 35,771,223 (951,146 ) 35,771,223 (951,146 )
5,043,758
6,964,881
(5,817 ) 12,264,334 (100,623 ) 17,308,092 (106,440 )
(42,206 ) 8,719,132 (252,601 ) 15,684,013 (294,807 )
817,977
$ 12,826,616 $
(1,151 ) 14,481,602 (303,810 ) 15,299,579 (304,961 )
(49,174 ) $ 77,930,001 $ (1,909,892 ) $ 90,756,617 $ (1,959,066 )
Less than Twelve
Months
2017
Twelve Months or
Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
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 )
697,451
(29,545 ) 7,571,993
(12,136 ) 6,785,294
(66,648 )
(92,877 ) 10,655,415 (122,423 )
15,075,655 (113,514 ) 2,460,569
(52,595 ) 17,536,224 (166,109 )
$ 36,639,595 $ (328,817 ) $ 37,150,976 $ (952,392 ) $ 73,790,571 $ (1,281,210 )
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
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
20
21
16
17
3.
INVESTMENT SECURITIES (Continued)
3.
INVESTMENT SECURITIES (Continued)
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, 2018.
U.S. government agency securities. The unrealized loss on 35 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, 2018.
Obligations of states and political subdivisions. The Company’s unrealized losses on 32 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, 2018.
Corporate securities. The Company had unrealized losses on investments in 26 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, 2018.
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, 2018.
The amortized cost and fair value of debt securities at December 31, 2018, 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.
Available for Sale
Held to Maturity
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Amortized
Cost
Fair
Value
Amortized Fair
Cost
Value
- $
-
-
$ 9,158,013 $ 9,138,559 $
-
72,283,428 71,468,860
36,032,633 35,382,650 7,000,000 7,095,937
-
8,941,164 8,741,528
-
Total
$ 126,415,238 $ 124,731,597 $ 7,000,000 $ 7,095,937
Investment securities with a carrying value of $112,773,196 and $130,015,638 at December 31, 2018
and 2017, respectively, were pledged to secure deposits and other purposes as required by law.
The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of
investment securities available for sale for the years ended December 31:
Proceeds from sales
Proceeds from calls
Gross gains
Gross losses
Equity Securities
2018
$
1,055,000
3,471
2017
- $ 9,508,717
-
28,806
- (404,908 )
At December 31, 2017, the Company had $4,051,862 in equity securities recorded at fair value. Prior to
January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a
separate component of accumulated other comprehensive income, net of tax. At December 31, 2017, net
unrealized gains of $716,961 had been recognized in accumulated other comprehensive income. On
January 1, 2018, these unrealized gains and losses were reclassified out of accumulated other
comprehensive income and into retained earnings with subsequent changes in fair value being recognized
in net equity securities gains (losses). The following summary of unrealized and realized gains and losses
recognized in net income on equity securities during the year ended December 31, 2018:
Net gains (losses) recognized in equity securities during the year
Less: Net gains (losses) realized on sale of equity securities during the year
Unrealized gains (losses) recognized in equity securities held at reporting date $
$
2017
2018
(181,665 ) $ 907,546
-
(242,430 ) $ 907,546
60,765
22
23
18
19
4. LOANS
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
2018
2017
$ 216,677,128 $ 190,488,417
102,347,634 98,104,822
29,875,122 27,793,961
39,747,975 38,247,171
8,256,192 9,644,462
240,178,495 210,429,202
637,082,546 574,708,035
6,642,410 5,697,810
Net loans
$ 630,440,136 $ 569,010,225
Mortgage loans serviced by the Company for others amounted to $55,853,584 and $63,196,825 at
December 31, 2018 and 2017, respectively.
Unearned fees included in loans receivable amounted to $14,400 and $15,662 at December 31, 2018 and
2017, respectively.
The Company grants residential, commercial, and consumer loans to customers throughout its trade area,
which is concentrated in central Pennsylvania. Such loans are subject to, at origination, credit risk
assessment by management following the Company’s lending policy. Although the Company has a
diversified loan portfolio at December 31, 2018 and 2017, 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, 2018 and 2017, is as follows:
Balance
Amounts Balance
Amounts Balance
2016
Additions Collected
2017
Additions Collected
2018
$ 13,199,731 $ 4,782,315 $ (1,280,296 ) $ 16,701,750 $ 2,077,750 $ (1,743,239 ) $ 17,036,261
5. ALLOWANCE FOR LOAN LOSSES
Management has an established methodology to determine the adequacy of the allowance for loan losses
that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the
allowance for loan losses, the Company has segmented certain loans in the portfolio by product type.
Loans are segmented into the following pools: commercial real estate loans, commercial and industrial
loans, agricultural loans, state and political subdivision loans, consumer loans, and residential real estate
loans. Historical loss percentages for each risk category are calculated and used as the basis for
calculating allowance allocations. These historical loss percentages are calculated over a 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
24
25
20
21
5. ALLOWANCE FOR LOAN LOSSES (Continued)
5. ALLOWANCE FOR LOAN LOSSES (Continued)
These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the
Bank’s operating environment. During 2018, management decreased the qualitative factors reserve
percentage for the commercial and industrial and commercial 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. The qualitative factor reserve percentage
for the commercial real estate pool of loans also decreased due to the downward trend of past due loans.
Management decreased qualitative factors on reserve percentages for commercial and industrial loan
participations transacted with the BancAlliance portfolio for related changes in the economic and
business conditions and in the competitive, legal, and regulatory environment of this sector. Management
increased the qualitative factors reserve percentage for commercial and industrial, commercial real
estate, and the residential pool of loans due to an increase in the volume of these loan portfolios. The
qualitative factors reserve for commercial Ag were increased due to changes in economic and business
conditions. Management decreased the qualitative factors reserve percentage for Lending Club due to
portfolio balances declining approximately one-third of where they were upon inception. 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 2018.
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.
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:
2018
State and
Commercial
Political
Real Estate Industrial Agricultural Subdivisions Consumer Real Estate Unallocated
Commercial
and
Residential
Total
Allowance
for loan
losses:
Beginning
balance
Charge-offs
Recoveries
Provision
$ 2,498,768 $ 1,230,243 $
(35,963 )
13,754
220,767
-
304,875
(144,384 )
266,516 $
(9,559 )
946
242,327
182,082 $ 134,224 $ 1,363,855 $
(184,719 )
-
427,441
- (121,164 )
21,430
-
62,047
6,579
22,122 $ 5,697,810
(351,405 )
341,005
955,000
-
-
140,223
Ending
balance
$ 2,659,259 $ 1,428,801 $
500,230 $
188,661 $
96,537 $ 1,606,577 $
162,345 $ 6,642,410
Ending
balance
individually
evaluated
for
impairment $
16,523 $
2,967 $
47,255 $
- $
- $
27,843 $
- $
94,588
Ending
balance
collectively
evaluated
for
impairment $ 2,642,736 $ 1,425,834 $
452,975 $
188,661 $
96,537 $ 1,578,734 $
162,345 $ 6,547,822
Loans:
Individually
evaluated
for
impairment $ 1,556,745 $
147,735 $
308,024 $
- $
- $
527,519
$ 2,540,023
Collectively
evaluated
for
impairment 215,120,383 102,199,899 29,567,098 39,747,975 8,256,192 239,650,976
634,542,523
Ending
balance
$ 216,677,128 $ 102,347,634 $ 29,875,122 $ 39,747,975 $ 8,256,192 $ 240,178,495
$ 637,082,546
26
27
22
23
5. ALLOWANCE FOR LOAN LOSSES (Continued)
5. ALLOWANCE FOR LOAN LOSSES (Continued)
Commercial
and
Commercial
Real Estate Industrial
2017
State and
Political
Residential
Agricultural Subdivisions Consumer Real Estate Unallocated
Total
Allowance
for loan
losses:
Beginning
balance
Charge-offs
Recoveries
Provision
Ending
balance
Ending balance
individually
evaluated for
impairment
Ending
balance
collectively
evaluated for
impairment
Loans:
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Ending
balance
$ 2,387,561 $ 1,086,099 $
(210,459 )
8,132
346,471
(550,350 )
7,677
653,880
215,719 $
-
900
49,897
204,977 $ 155,602 $ 1,383,750 $
(53,881 )
-
33,986
- (127,675 )
12,297
-
94,000
(22,895 )
577,461 $ 6,011,169
(942,365 )
29,006
600,000
-
-
(555,339 )
$ 2,498,768 $ 1,230,243 $
266,516 $
182,082 $ 134,224 $ 1,363,855 $
22,122 $ 5,697,810
$
2,796 $
12,286 $
31,341 $
- $
- $
28,059 $
- $
74,482
$ 2,495,972 $ 1,217,957 $
235,175 $
182,082 $ 134,224 $ 1,335,796 $
22,122 $ 5,623,328
$ 4,680,918 $
382,014 $
297,105 $
77,085 $
- $
470,589
$ 5,907,711
185,807,499 97,722,808 27,496,856 38,170,086 9,644,462 209,958,613
568,800,324
$ 190,488,417 $ 98,104,822 $ 27,793,961 $ 38,247,171 $ 9,644,462 $ 210,429,202
$ 574,708,035
From 2017 to 2018, the reserve requirement for commercial real estate loans increased by $160,491, for
residential real estate loans increased by $242,722, for agricultural loans increased by $233,714, and for
commercial and industrial loans increased by $198,558 during the same period. This was a result of
increases in outstanding balances in each loan category during 2018. In addition, agricultural loans
increased due to a large increase in substandard and commercial and industrial loans increased due to a
large increase in substandard and Special Mention. At December 31, 2018, total impaired and criticized
assets and classified assets for commercial real estate loans was $4.5 million. This is a $684,173 decrease
from December 31, 2017, or a decrease of 13.2%. This difference was due to a decrease in impaired and
criticized assets of $3.2 million, net an increase of $2.6 million in classified assets.
Credit Quality Information
The following tables represent the commercial credit exposures by internally-assigned grades for the
years ended December 31, 2018 and 2017, 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.
Credit Quality Information (Continued)
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
and
Commercial
Real Estate Industrial
2018
State and
Political
Agricultural Subdivisions
Total
Pass
Special Mention
Substandard
Doubtful
Total
Pass
Special Mention
Substandard
Doubtful
Total
$ 212,159,157 $ 90,408,028 $ 24,713,695 $ 39,747,975 $ 367,028,855
- 14,366,012
3,344,988 11,021,024
- 6,049,471
-
1,172,983
- 1,203,521
$ 216,677,128 $ 102,347,634 $ 29,875,122 $ 39,747,975 $ 388,647,859
-
918,582 5,130,889
30,538
-
2017
Commercial
and
State and
Political
Commercial
Real Estate Industrial Agricultural Subdivisions
Total
$ 185,286,273 $ 94,080,746 $ 27,222,926 $ 38,247,171 $ 344,837,116
- 4,381,674
960,585
-
-
4,422,711
- 4,454,996
$ 190,488,417 $ 98,104,821 $ 27,793,962 $ 38,247,171 $ 354,634,371
779,433 3,112,341
879,449
32,285
489,900
81,136
-
28
29
24
25
5. ALLOWANCE FOR LOAN LOSSES (Continued)
Credit Quality Information (Continued)
For consumer and residential real estate loans, the Company evaluates credit quality based on whether
the loan is considered performing or nonperforming. Nonperforming loans are those loans past due 90
days or more and loans on nonaccrual. The following tables present the balances of consumer and
residential real estate loans by classes of loan portfolio based on payment performance as of December
31:
2018
Residential
Real Estate
Total
Consumer
Performing
Nonperforming
Total
Performing
Nonperforming
Total
$ 8,256,192 $ 239,975,590 $ 248,231,782
202,905
$ 8,256,192 $ 240,178,495 $ 248,434,687
202,905
-
2017
Residential
Real Estate
Total
Consumer
$ 9,644,462 $ 210,212,909 $ 219,857,371
216,293
$ 9,644,462 $ 210,429,202 $ 220,073,664
216,293
-
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:
2018
30-59
Days
90 Days or
Greater
Past Due Past Due Past Due Past Due Current
60-89
Days
Total
Total
Loans
90 Days
and Accruing
5. ALLOWANCE FOR LOAN LOSSES (Continued)
Age Analysis of Past-Due Loans by Class (Continued)
2017
30-59
Days
90 Days or
Greater
Past Due Past Due Past Due Past Due Current
60-89
Days
Total
Total
Loans
90 Days
and Accruing
Commercial real estate
Commercial and
industrial
Agricultural
State and political
subdivisions
Consumer
Residential real estate
Total
$
- $
- $ 4,422,711 $ 4,422,711 $ 186,065,706 $ 190,488,417 $
-
6,334
32,285
47,177
-
-
38,619
47,177 27,746,784 27,793,961
98,104,822
98,066,203
-
2,407
687,599
$ 737,183 $
- 38,247,171 38,247,171
-
-
2,407 9,642,055 9,644,462
- 216,293 903,892 209,525,310 210,429,202
6,334 $ 4,671,289 $ 5,414,806 $ 569,293,229 $ 574,708,035 $
-
-
-
-
-
-
-
-
-
Consumer mortgage loans held by the Company in the process of foreclosure amounted to $308,895 as
of December 31, 2018.
Impaired Loans
Management considers commercial real estate loans, commercial and industrial loans, agricultural loans,
and state and political subdivision loans which are 90 days or more past due to be impaired. After
becoming 90 days or more past due, these categories of loans are measured for impairment. Any
consumer and residential real estate loans related to these delinquent loans are also considered to be
impaired. Troubled debt restructurings are measured for impairment at the time of restructuring. These
loans are analyzed to determine if it is probable that all amounts will not be collected according to the
contractual terms of the loan agreement. If management determines that the fair value of the impaired
loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or
costs, and unamortized premium or discount), impairment is recognized through a provision or through a
charge to the allowance for loan losses.
Commercial real estate
Commercial and
industrial
Agricultural
State and political
subdivisions
Consumer
Residential real estate
Total
$ 162,971 $
- $ 1,172,983 $ 1,335,954 $ 215,341,174 $ 216,677,128 $
-
-
-
-
102,347,634
102,347,634
78,222 10,000
30,538 118,760 29,756,362 29,875,122
-
- 39,747,975 39,747,975
5,029
5,029 8,251,163 8,256,192
1,476 202,905 496,085 239,682,410 240,178,495
291,704
$ 537,926 $ 11,476 $ 1,406,426 $ 1,955,828 $ 635,126,718 $ 637,082,546 $
-
-
-
-
-
-
-
-
-
-
-
30
31
26
27
5. ALLOWANCE FOR LOAN LOSSES (Continued)
5. ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired Loans (Continued)
Impaired Loans (Continued)
The following tables include the recorded investment and unpaid principal balances for impaired loans
with the associated allowance amount as of December 31:
2018
Unpaid
Recorded Principal Related
Investment Balance Allowance Investment Recognized
Average
Recorded
Interest
Income
$ 1,377,295 $ 1,377,295 $
- $ 2,797,828 $
10,874
-
-
42,895
42,895
-
-
175,644
57,604
-
-
324,290
-
-
324,290
-
-
-
6,390
-
259,406
-
2,900
-
-
4,290
1,744,480 1,744,480
- 3,296,872
18,064
179,449
179,449
16,523
179,626
11,794
147,735
265,129
147,735
265,129
2,967
47,255
25,189
239,601
9,819
13,996
-
-
203,230
-
-
203,230
-
-
27,843
-
4,292
192,642
-
-
10,152
795,543
795,543
94,588
641,350
45,761
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
Commercial real estate
Commercial and industrial
Agricultural
State and political
subdivisions
Consumer
Residential real estate
Unpaid
Recorded Principal Related
Investment Balance
Average
Recorded
Interest
Income
Allowance Investment Recognized
2017
With no related allowance
recorded:
$ 4,646,148 $ 4,646,148 $
203,505
94,659
203,505
94,659
- $ 5,834,297 $
243,207
-
101,588
-
11,811
10,859
5,490
77,085
77,085
-
290,815
-
290,815
-
-
-
80,931
-
579,843
3,715
-
5,489
5,312,212 5,312,212
- 6,839,866
37,364
With an allowance recorded:
Commercial real estate
Commercial and industrial
Agricultural
State and political
subdivisions
Consumer
Residential real estate
Total:
34,770
178,509
202,446
34,770
178,509
202,446
2,796
12,286
31,341
714,262
90,889
205,897
1,907
12,509
9,318
-
-
179,774
-
-
179,774
-
-
28,059
-
19,333
198,159
-
-
9,026
595,499
595,499
74,482 1,228,540
32,760
Commercial real estate
Commercial and industrial
Agricultural
State and political
subdivisions
Consumer
Residential real estate
4,680,918 4,680,918
382,014
297,105
382,014
297,105
2,796 6,548,559
334,096
12,286
307,485
31,341
77,085
77,085
-
470,589
-
470,589
-
-
28,059
80,931
19,333
778,002
13,718
23,368
14,808
3,715
-
14,515
1,556,745 1,556,744
16,523 2,977,454
22,668
Total
$ 5,907,711 $ 5,907,711 $
74,482 $ 8,068,406 $
70,124
147,735
308,024
147,735
308,024
2,967
47,255
200,833
297,205
9,819
16,896
-
-
527,519
-
-
527,520
-
-
27,843
6,390
4,292
452,048
-
-
14,442
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 $600,000 in 2018 and $1.2 million in 2017.
Total
$ 2,540,023 $ 2,540,023 $
94,588 $ 3,938,222 $
63,825
32
33
28
29
5. ALLOWANCE FOR LOAN LOSSES (Continued)
6.
PREMISES AND EQUIPMENT
Nonaccrual Loans (Continued)
Major classifications of premises and equipment are summarized as follows:
The following table includes the loan balances on nonaccrual status as of December 31:
Commercial real estate
Commercial and industrial
Agricultural
Residential real estate
Total
Troubled Debt Restructuring (TDRs)
2018
2017
$ 1,172,983 $ 4,422,711
32,285
-
-
30,538
202,905 216,293
$ 1,406,426 $ 4,671,289
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, 2018, a specific reserve allocation of $94,588
has been established against the troubled debt restructurings and no charge-offs for the troubled debt
restructurings were required.
The restructuring of the below loan was due to an extension of the maturity date. No modifications
involved any changes in principal balance for 2018 or 2017. There were no loans modified in a troubled
debt restructuring from January 1, 2016 through December 31, 2017, that subsequently defaulted (i.e., 90
days or more past due following a modification) during the years ended December 31, 2018 and 2017,
respectively. There were no loan modifications that were 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, 2018 were as follows:
2018
Pre-Modification
Post-Modification
Number of Outstanding Recorded Outstanding Recorded
Contracts
Investment
Investment
Land and land improvements
Building and leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Total
2018
2017
$ 2,200,547 $ 1,307,103
18,496,846 17,762,296
7,242,320 6,840,866
27,939,713 25,910,265
13,757,405 12,913,597
$ 14,182,308 $ 12,996,668
Depreciation charged to operations was $1,074,414 in 2018 and $1,016,345 in 2017.
7. GOODWILL
As of the years ended December 31, 2018 and 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. 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, 2018 and 2017.
8. DEPOSITS
The scheduled maturities of time deposits approximate the following:
Year Ending
December 31,
2019
2020
2021
2022
2023
Thereafter
$
$
Amount
132,592,762
74,426,994
25,907,659
18,120,019
5,748,166
1,258,916
258,054,517
The aggregate of all time deposit accounts of $250,000 or more amounted to $65,257,519 and
$93,941,525 at December 31, 2018 and 2017, respectively. The total amount of Brokered Deposits
included above for each of the years ended December 31, 2018 and 2017 were $2,800,000 and
$5,662,000, respectively. Depositors with over 5% of total deposits include one depositor at $14.9
million as of December 31, 2018.
Troubled debt restructurings:
Commercial and industrial
1 $
17,577 $
17,577
34
35
30
31
9.
SHORT-TERM BORROWINGS
10. OTHER BORROWINGS (Continued)
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, 2018 and
2017, 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
2018
2017
$ 22,484,169 $ 8,930,710
19,831,315 5,333,368
23,647,311 10,018,072
2.52 %
0.35 %
1.34 %
0.58 %
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, 2018 and
2017, is presented in the following table.
Remaining Contractual Maturity
Overnight and Continuous
December 31,
2018
December 31,
2017
Securities of U.S Government Agencies, U.S Treasuries and
obligations of state and political subdivisions pledged, fair value
Repurchase agreements
$
7,465,235 $
2,104,169
3,600,854
2,550,710
10. OTHER BORROWINGS
The following table sets forth information concerning other borrowings:
Maturity Range
Weighted- Stated Interest
Average
Rate Range
At December 31,
Description
From
To
Interest
Rate
Fixed rate
05/03/19 08/04/26 2.05
Fixed rate amortizing 02/04/19 07/15/24 1.72
Mid-term repos
01/29/19 01/29/19 1.30
Subordinated capital
notes
Note payable
03/24/24 03/03/26 5.07
03/17/35 11/23/35 4.47
From To
2018
2017
%
1.04 %
1.08
1.30
4.00 % $ 50,621,498 $ 50,297,498
1.96 10,097,457 13,328,352
1.30 1,000,000 6,000,000
4.75
4.15
5.25 10,120,000 10,120,000
4.79 6,186,000 6,186,000
$ 78,024,955 $ 85,931,850
Maturities of other borrowings at December 31, 2018, are summarized as follows:
Year Ending
December 31,
2019
2020
2021
2022
2023
2024 and after
$
Amount
2,267,495
14,890,735
11,854,060
12,916,000
11,653,167
24,443,498
$
78,024,955
Weighted-
Average Rate
1.17 %
1.70
2.05
2.18
1.98
4.01
2.58 %
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, 2018, the Bank’s maximum borrowing capacity with the
FHLB was approximately $292.8 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, 2018 is approximately
$7.1 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, 2018.
In 2014, 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.
In 2015, 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.
In 2014, 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.
36
37
32
33
10. OTHER BORROWINGS (Continued)
11. DERIVATIVE FINANICAL INSTRUMENTS (Continued)
In 2015, 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.
In 2015, 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.
The Company has contracted with a third party to engage pay-fixed interest rate swap contracts and the
outstanding as of December 31, 2018, is being utilized to hedge $20.0 million in floating rate debt. At
December 31, 2018 and 2017, the information pertaining to outstanding interest rate swap agreements is
as follows:
2018
2017
Notional amount
Weighted-average pay rate
$ 20,000,000
$
2.50 %
6,000,000
1.99 %
Receive rate
Weighted-average maturity in years
Unrealized gain relating to interest rate swaps
3-Month
Libor
7.4
40,384
3-Month
Libor
7.0
93,989
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,
2018.
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,
2018, the Company had three interest rate swaps with a notional amount of $20.0 million associated with
the Company’s cash outflows, which are associated with various floating-rate amounts.
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, 2018, the fair value of derivatives in a net asset position, which includes accrued
interest and any credit valuation adjustments related to these agreements, was $40,384. At December 31,
2018, the Company had required cash collateral with certain of its derivative counterparties in the
amount of $1,410,000 and was holding cash collateral of certain derivative counterparties in the amount
of $260,000. If the Company had breached any of the above provisions at December 31, 2018, 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.
38
39
34
35
11. DERIVATIVE FINANICAL INSTRUMENTS (Continued)
12.
INCOME TAXES
Fair Values of Derivative Instruments on the Balance Sheet
The provision for federal income taxes consists of:
The following table presents the fair values of derivative instruments in the balance sheet:
Assets
Liabilities
Balance Sheet Fair
Value
Location
Balance Sheet Fair
Value
Location
Other assets
$
40,384 Other liabilities $
-
Other assets
$
93,989 Other liabilities $
(3,511 )
December 31, 2018
Interest rate derivatives
December 31, 2017
Interest rate derivatives
Derivative Instruments
The Company enters into interest rate swaps that allow its 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, 2018, 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,
Interest
2018
2017
Rate Paid
Third Party interest
rate swap
Maturing in 2024
Maturing in 2025
Maturing in 2026
$ 6,000,000 $ 6,000,000 Fixed
$ 6,000,000 $
- Fixed
$ 8,000,000 $
- Fixed
Interest
Rate
Received
3-Month
Libor
3-Month
Libor
3-Month
Libor
Fair Value
December 31,
2018
2017
$ 172,609 $ 90,478
$ (48,386 ) $
$ (83,839 ) $
-
-
$ 20,000,000 $ 6,000,000
$ 40,384 $ 90,478
Current
Deferred
Change in corporate tax rate
Total provision
2018
2017
$ 390,375 $ 718,003
250,189 (133,226 )
- 416,852
$ 640,564 $ 1,001,629
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, 2018 and 2017 are as follows:
2018
2017
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
Unrealized loss on available-for-sale securities
Other
Deferred tax assets
Deferred tax liabilities:
Premises and equipment
Goodwill
Deferred loan fees
Partnerships
Other
Unrealized gain on available-for-sale securities
Unrealized gain on swaps - balance sheet hedge
Fair value adjustment - equity securities
Deferred tax liabilities
Net deferred tax assets
76,185
17,159
$ 1,394,906 $ 1,196,540
230,860 230,166
15,060
- 927,273
92,342
316,275 278,459
125,256 248,405
-
353,116
1,235
3,174
2,516,931 2,989,480
68,532
677,740 484,726
342,831 340,247
61,970
177,933 170,142
3,346
- 115,664
19,737
7,523
141,849
-
1,419,754 1,195,832
3,346
$ 1,097,177 $ 1,793,648
No valuation allowance was established at December 31, 2018 and 2017, 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.
40
41
36
37
12.
INCOME TAXES (Continued)
The reconciliation between the federal statutory rate and the Company’s effective consolidated income
tax rate is as follows:
Provision at statutory rate
Tax-exempt interest
Life insurance income
Change in corporate tax rate
Other
Actual tax expense and
effective rate
2018
% of
2017
% of
Amount Pretax Income Amount Pretax Income
34.0 %
$ 1,400,752
(17.6 )
(474,336 )
(0.9 )
(74,099 )
(8.1 )
-
12.1
(211,753 )
21.0 % $ 1,748,076
(7.1 ) (907,417 )
(46,308 )
(1.1 )
- (416,852 )
(3.2 ) 624,130
$ 640,564
9.6 % $ 1,001,629
19.5 %
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 effective December 31, 2017.
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 2014 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 $404,238 and $355,319 for the years ended December 31, 2018 and 2017,
respectively. The fair value of plan assets includes $2,536,411 and $1,882,945 pertaining to the value of
the Company’s common stock that is held by the plan as of December 31, 2018 and 2017, respectively.
Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan that allows directors and senior executives
to defer fees and salaries. Outstanding balances under this arrangement for 2018 and 2017 were
$1,099,333 and $1,096,030, respectively, and are reported as “Other liabilities” on the Consolidated
Balance Sheet. Expenses related to this plan were a loss of $88,572 and a gain of $160,022 for December
31, 2018 and 2017, 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 60,000 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 $379,583 and $316,662 for the years ended December 31, 2018 and 2017, respectively.
The following is a summary of the status of the Company’s restricted stock as of December 31, 2018,
and changes therein during the year then ended:
Nonvested at January 1, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Number of Weighted-
Shares of Average
Restricted
Stock
Grant Date
Fair Value
42,364 $
24,184
(15,580 )
(576 )
50,392 $
15,286
(15,853 )
(865 )
20.05
27.27
20.02
22.04
23.50
29.63
22.33
22.71
Nonvested at December 31, 2018
48,960 $
25.80
42
43
38
39
13. EMPLOYEE BENEFITS (Continued)
Stock Option Plan
13. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
The Company has a fixed director and employee stock-based compensation plan. The plan has total
options available to grant of 760,000 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, 2017
Granted
Exercised
Forfeited/Expired
Outstanding, December 31, 2017
Granted
Exercised
Forfeited/Expired
Weighted-
Average
Exercise
Price
Number of
Options
214,282 $
31,356
(25,748 )
(7,020 )
212,870 $
37,640
(38,436 )
(1,608 )
18.23
27.00
16.96
21.46
19.57
29.63
17.74
27.69
Outstanding, December 31, 2018
210,466 $
21.64
Exercisable at year-end
139,348 $
18.71
The following table summarizes the characteristics of stock options at December 31, 2018:
Exercise
Outstanding
Exercisable
Contractual Average
Average Exercise
Average
Exercise
Grant Date Price
Shares
Life
Price
Shares Price
03/26/09
04/01/10
04/28/11
04/02/12
04/01/13
04/01/14
09/22/14
04/01/15
04/01/16
10/31/16
12/12/16
04/03/17
04/02/18
$
$
$
$
$
$
$
$
$
$
$
$
$
12.75
6,400
17.06 14,400
14.88 10,600
15.00 12,200
16.63 18,760
18.25 11,008
19.75
1,000
19.48 29,300
22.00 35,648
2,000
22.40
22.38
2,000
27.00 30,710
29.63 36,440
0.23 $
1.24 $
2.32 $
3.25 $
4.25 $
5.25 $
5.72 $
6.25 $
7.25 $
7.83 $
7.95 $
8.25 $
9.25 $
12.75
6,400 $
17.06 14,400 $
14.88 10,600 $
15.00 12,200 $
16.63 18,760 $
18.25 11,008 $
19.75
1,000 $
19.48 29,300 $
22.00 23,084 $
1,320 $
22.40
1,320 $
22.38
9,956 $
27.00
- $
29.63
12.75
17.06
14.88
15.00
16.63
18.25
19.75
19.48
22.00
22.40
22.38
27.00
29.63
210,466
139,348
44
45
40
41
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
2018
2017
$ 149,468,932 $ 157,013,677
4,996,216 5,308,908
$ 154,465,148 $ 162,322,585
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, 2018, are as follows:
2019
2020
2021
2022
2023
Thereafter
Minimum
Lease Payment
$
396,969
377,181
336,934
331,897
333,915
3,934,757
Total
$
5,711,653
Rent expense under leases for each of the years ended December 31, 2018 and 2017, was $379,674 and
$358,994, respectively.
14. COMMITMENTS (Continued)
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.
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, 2018 and 2017 was $3,150,000 and $2,399,000, 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, 2018, 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, 2018 and 2017, 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.
46
47
42
43
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:
2018
2017
Amount
Ratio Amount
Ratio
2018
2017
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
$ 81,649,007 11.95 % $ 75,941,873 11.65 %
54,674,300
8.00
68,342,875 10.00 65,202,302 10.00
8.00 52,161,842
$ 58,785,380
30,754,294
44,422,869
8.60 % $ 53,675,439
4.50 29,341,036
6.50 42,381,496
8.23 %
4.50
6.50
$ 64,693,336
41,005,725
54,674,300
9.47 % $ 59,490,667
6.00 39,121,381
8.00 52,161,842
9.12 %
6.00
8.00
$ 64,693,336
33,756,857
42,196,071
7.67 % $ 59,490,667
4.00 32,364,684
5.00 40,455,855
7.35 %
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
$ 78,784,431 11.47 % $ 73,198,801 11.25 %
54,946,308
8.00
68,682,885 10.00 65,087,718 10.00
8.00 52,070,175
$ 71,948,760 10.48 % $ 66,939,931 10.28 %
4.50
30,907,298
6.50
44,643,875
4.50 29,289,473
6.50 42,307,017
$ 71,948,760 10.48 % $ 66,939,931 10.28 %
6.00
41,209,731
8.00
54,946,308
6.00 39,052,631
8.00 52,070,175
$ 71,948,760
27,473,154
34,341,443
8.55 % $ 66,939,931
4.00 26,035,087
5.00 32,543,859
8.29 %
4.00
5.00
17. FAIR VALUE MEASUREMENTS
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:
Level II:
Quoted prices are available in active markets for identical assets or liabilities as of the
reported date.
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.
48
49
44
45
17. FAIR VALUE MEASUREMENTS (Continued)
17. FAIR VALUE MEASUREMENTS (Continued)
The following tables present the assets reported on the Consolidated Balance Sheet at their fair value on
a recurring basis as of December 31, 2018 and 2017, by level within the fair value hierarchy. Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to
the fair value measurement.
Assets:
U.S. treasury securities
U.S. government agency securities
Obligations of states and
political subdivisions
Corporate securities
Mortgage-backed securities in
government-sponsored entities
Equity securities
December 31, 2018
Level
III
Level I Level II
Total
$
- $ 6,693,710 $
- 35,771,223
- $ 6,693,710
- 35,771,223
-
46,175,084
- 19,058,081
-
46,175,084
- 19,058,081
-
17,033,499
3,450,017
-
-
17,033,499
- 3,450,017
Total
$ 3,450,017 $ 124,731,597 $
- $ 128,181,614
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
December 31, 2017
Level
III
Level I Level II
Total
$
- $ 6,745,450 $
- 32,068,188
- $ 6,745,450
- 32,068,188
-
51,862,660
- 23,948,356
-
51,862,660
- 23,948,356
-
21,371,123
4,051,862
-
21,371,123
-
- 4,051,862
Total
$ 4,051,862 $ 135,995,777 $
- $ 140,047,639
Investment Securities
The fair market value of investment securities is equal to the available quoted market price. If no quoted
market price is available, fair value is estimated using the quoted market price for similar securities. Fair
value for certain held-to-maturity securities were determined utilizing discounted cash flow models, due
to the absence of a current market to provide reliable market quotes for the instruments.
Impaired Loans
The Company has measured impairment on loans generally based on the fair value of the loan’s
collateral. Fair value is generally determined based upon independent third-party appraisals of the
properties. In some cases, management may adjust the appraised value due to the age of the appraisal,
changes in market conditions, or observable deterioration of the property since the appraisal was
completed. Additionally, management makes estimates about expected costs to sell the property which
are also included in the net realizable value. If the fair value of the collateral dependent loan is less than
the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses,
or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs)
and the loan is included in the table above as a Level III measurement.
Other Real Estate Owned (OREO)
OREO is carried at the lower of the recorded investment in the property or its fair value less estimated
costs of sale. In some cases, management may adjust the appraised value due to age of the appraisal,
changes in market conditions, or observable deterioration of the property since the appraisal was
completed. The fair value of OREO is based on the appraised value of the property, which is generally
unadjusted by management and is based on comparable sales for similar properties in the same
geographic region as the subject property, and is included as a Level II measurement. In this case, the
property is categorized as Level III measurement, because the adjustment is considered to be an
“unobservable” input. Income and expenses from operations and further declines in the fair value of the
collateral subsequent to foreclosure are included in net expenses from OREO.
Mortgage Servicing Rights
Mortgage servicing rights are accounted for under the amortization method and are adjusted to the lower
of aggregate cost or estimated fair value as appropriate. Fair value is estimated by projecting and
discounting future cash flows. Various assumptions including future cash flows, market discount rates,
expected prepayment rates, servicing costs, and other factors are used in the valuation of mortgage
servicing rights.
50
51
46
47
17. FAIR VALUE MEASUREMENTS (Continued)
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, 2018 and 2017, 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
Mortgage servicing rights
Assets:
Impaired loans
Other real estate owned
Mortgage servicing rights
December 31, 2018
Level I Level II Level III Total
$
- $
-
- $ 2,351,777 $ 2,351,777
- 389,223 389,223
December 31, 2017
Level I Level II Level III Total
$
- $
-
-
- $ 5,833,229 $ 5,833,229
- 255,000 255,000
- 415,533 415,533
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, 2018 and 2017.
Valuation
December 31, 2018
Impaired loans
Fair Value Techniques Unobservable Inputs
$ 1,793,513
Discount Rate
Discounted
Cash Flows
Range
4.00% - 6.75% discount
Weighted Average
(5.40%)
Impaired loans
$
558,265
Property
appraisals
Management discount for
property type and recent
market volatility
15.00% discount
Weighted Average
(15.00%)
Mortgage servicing rights
$
389,223
Discounted
cash flows
Discount rate
Prepayment speeds
Valuation
December 31, 2017
Impaired loans
Fair Value Techniques Unobservable Inputs
$ 2,064,013
Discount Rate
Discounted
Cash Flows
3.81 - 4.42% discount
Weighted Average
(4.12%)
1.09 - 2.20 prepayment
factor
Weighted Average
(1.25%)
Range
4.23% - 6.75% discount
Weighted Average
(5.40%)
Impaired loans
$ 3,769,216
Property
appraisals
Management discount for
property type and recent
market volatility
15% - 24.4% discount
Weighted Average
(22.87%)
Other real estate owned
$
255,000
Property
appraisals
Management discount for
property type and recent
market volatility
0% - 50% discount
Weighted Average
(12.07%)
Mortgage servicing rights
$
415,533
Discounted
cash flows
Discount rate
Prepayment speeds
2.89 - 3.48% discount
Weighted Average
(3.185%)
1.32 - 2.76 prepayment
factor
Weighted Average
(1.53%)
52
53
48
49
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
19. ACCUMULATED OTHER COMPREHENSIVE INCOME
The estimated fair values of the Company’s financial instruments not required to be measured or reported
at fair value at December 31 are as follows:
The following table presents the changes in accumulated other comprehensive income (loss) by
component net of tax for the year ended December 31, 2018 and 2017:
Carrying
Value
Fair
Value
2018
Level
I
Level
II
Level
III
Financial assets:
Net Unrealized
Gains on
Investment
Securities
Cash Flow
Hedges
Total
Investment securities held
to maturity
Net loans
Hedges
7,000,000 7,095,937
630,440,136 601,794,275
40,384
40,384
- 7,095,937
-
-
-
- 601,794,275
-
40,384
Financial liabilities:
Deposits
Other borrowings
$ 682,350,041 $ 680,258,979 $ 424,295,482 $
-
78,024,955 76,510,385
- $ 255,963,497
- 76,510,385
For cash and cash equivalents, certificates of deposits, loans held for sale, regulatory stock, bank-owned life
insurance, accrued interest receivable, short-term borrowings, and accrued interest payable, the carrying value
is a reasonable estimate of fair value.
Carrying
Value
Fair
Value
2017
Level
I
Level
II
Level
III
Financial assets:
Investment securities held
to maturity
Net loans
Hedges
6,000,000 6,162,790
569,010,225 551,495,272
93,989
93,989
- 6,162,790
-
-
-
- 551,495,272
-
93,989
Financial liabilities:
Deposits
Other borrowings
$ 653,687,053 $ 652,211,264 $ 395,260,633 $
-
85,931,850 84,682,347
- $ 256,940,459
- 84,682,347
For cash and cash equivalents, certificates of deposits, loans held for sale, regulatory stock, bank-owned life
insurance, accrued interest receivable, short-term borrowings, and accrued interest payable, the carrying value
is a reasonable estimate of fair value.
Accumulated other comprehensive income,
January 1, 2017
Other comprehensive income before
reclassification
Amounts reclassified from accumulated
other comprehensive loss
Reclassification of certain income tax
effects from AOCI
Accumulated other comprehensive income,
December 31, 2017
Other comprehensive loss before
reclassification
Amounts reclassified from accumulated
other comprehensive loss
Reclassification of certain income tax
effects from AOCI
Accumulated other comprehensive income,
December 31, 2018
$
109,725
-
109,725
320,526
62,033
382,559
(66,737 )
-
(66,737 )
83,819
-
83,819
$
447,333 $
62,033 $
509,366
(1,045,488 )
(45,952 )
(1,091,440 )
(2,742 )
-
(2,742 )
(716,961 )
-
(716,961 )
$
(1,317,858 ) $
16,081 $
(1,301,777 )
The following table presents significant amounts reclassified out of each component of accumulated
other comprehensive income (loss) for the year ended December 31, 2018 and 2017:
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, 2018
$
3,471 Investment securities gains, net
(729 ) Income taxes
2,742
Unrealized gains on investment $
securities, December 31, 2017
$
101,117 Investment securities gains, net
(34,380 ) Income taxes
66,737
20. SUBSEQUENT EVENTS
Management has reviewed events occurring through March 4, 2019, the date the financial statements
were issued, and no subsequent events occurred requiring accrual or disclosure.
54
55
50
51
B O A R D O F D I R E C T O R S A N D O F F I C E R S
BOARD OF DIRECTORS OF KISH BANCORP, INC.
William P. Hayes, Chairman
James J. Lakso, Vice Chairman
Eric J. Barron, Member
William L. Dancy, Member
Spyros A. Degleris, Member
Edward A. Friedman, Member
Paul G. Howes, Member
William S. Lake, Member
Kathleen L. Rhine, 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, Member
Spyros A. Degleris, Member
Edward A. Friedman, Member
Gregory T. Hayes, Member
Paul G. Howes, Member
William S. Lake, Member
Kathleen L. Rhine, Member
Paul H. Silvis, Member
Francis V. Vaughn, Member
George V. Woskob, Member
CENTRE COUNTY REGIONAL BOARD
A. Christian Baum, Member
Spyros A. Degleris, Member
Adam R. Fernsler, Member
Edward A. Friedman, Member
H. Amos Goodall, Jr., Member
Alan G. Hawbaker, Member
Paul G. Howes, Member
Oscar W. Johnston, Member
Michael J. Krentzman, Member
Kathleen L. Rhine, 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
Pamela F. Prosser, Member
Burgess A. Smith, Member
Delmont R. Sunderland, Member
Angela D. Thompson, Member
James A. Troha, Member
Frances V. Vaughn, Member
MIFFLIN COUNTY REGIONAL BOARD
Christina Calkins-Mazur, Member
Susan L. Cannon, Member
William L. Dancy, Member
James W. Felmlee, Member
Melinda K. Kenepp, Member
William S. Lake, Member
Harvard K. McCardle, Member
56
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, Chief Lending Officer
James L. Shilling, Jr., Executive Vice President, Chief Business Services
Officer
KISH BANK SENIOR OFFICERS
Douglas C. Baxter, Senior Vice President, Accounting and Controls
Manager
Kimberly A. Bubb, Senior Vice President, Director of Digital Technology
Innovation
Wade E. Curry, LUTCF, Senior Vice President, Investment Services
Terra L. Decker, Senior Vice President, Information Security and
Compliance Risk Director
Kimberly M. Dove, Senior Vice President, Director of Operations
Thomas Minichiello, III, Senior Vice President, Head of Retail Banking
Amy M. Muchler, Senior Vice President, Educational Outreach and Service
Quality Manager
Debra K. Weikel, Senior Vice President, Retail Credit Officer
Suzanne M. White, Senior Vice President, Human Resources and
Organizational Development Director
Stanley N. Ayers, Vice President, Special Assets Manager
Kathleen M. Boop, Vice President, Personal Lines Insurance Manager
Larry E. Burger, Vice President, Commercial Relationship Manager
David A. Coble, Vice President, Branch Manager
Alta Corman-Wolf, Vice President, Residential Lender
John P. Cunningham, II, Vice President, Regional Market Manager
Jeffrey A. Gum, Vice President, Managing Director of Kish Benefits
Consulting
Ann K. Guss, Vice President, Residential Lender
Allana L. Hartung, Vice President, Commercial Relationship Manager
Jeffrey T. Hayes, Vice President, Financial Advisor
Terry P. Horner, Vice President, Business Development Officer
Brad L. Huyck, Vice President, Information Technology Manager
Garen M. Jenco, Vice President, Market Research and Analytics Manager
Holly A. Johnson, Vice President, Market Manager
Marsha K. Kuhns, Vice President, 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
Peter K. Ort, Vice President, Branch Manager
Denise F. Quinn, Vice President, Commercial Relationship Manager
Kevin D. Rimmey, 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 and Security Officer
Wendy S. Strohecker, Vice President, Bank Operations Manager
N. Robert Sunday, III, Vice President, Compliance Officer
Kayelene G. Sunderland, Vice President, Wealth Management and Trust
Administrator
Jeffrey D. Wilson, Vice President, CEO, Kish Agency
4255 East Main Street, Belleville, PA 17004 | 1-888-554-4748 | www.KishBank.com