DO
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“2019 was a very
successful year and a
fitting capstone to a
decade of powerful
growth and expansion
for Kish Bancorp.”
William P. Hayes
Chairman of the Board and
Chief Executive Officer
CONTENTS
Chairman’s Letter to the Shareholders
Financial Highlights
Independent Auditor’s Report
Financial Statements
Notes to Consolidated Financial
Statements
1
6
7
8
13
57
Board of Directors and Officers
FROM
THE
CHAIRMAN
On behalf of the entire Kish team, I am pleased to report on a very successful year and
a fitting capstone to a decade of powerful growth and expansion for Kish Bancorp. We
will highlight the financial results of an extraordinary year of achievement in its own
right, but also place 2019 in the context of the decade of the 2010s, a time period of
great progress for Kish.
Kish Bank and each of its affiliates achieved dramatic expansion in market share in a
ten-year span. Reflecting back, it is surprising to recall that Kish began the decade as
a relative newcomer to Centre County during a dark economic period for the country
and for banking. In stark contrast, Kish would end the period as a high-performing
and fast-growing community bank holding company with a dominant market share
among community banks in our region. We recognize that Kish’s growth does not
come without community growth. Our support of strong local businesses has aided in
the recovery of our local economies—like our support of Kish customer, Metzler Forest
Products, who has also seen tremendous growth over the decade.
Despite a challenging beginning to the decade created by a deep recession, a slow
recovery, and the associated regulatory headwinds that disrupted banks of all sizes,
we stayed steadily focused on sustaining and expanding our client-centric culture.
With that commitment to customers and a deep confidence in the team’s capacity
to compete and thrive, the second half of the decade for Kish was marked by
unprecedented growth and the attainment of powerful performance metrics that
culminated in our 2019 financial results. Over the decade, these results were reflected
in earnings growth, capital formation, rising returns on equity and assets, growth
in customer numbers, rising
client satisfaction, expanding
market share in all counties,
and investment in talent and
infrastructure. Kish shareholders,
clients, team members, and
communities all benefited from
the progress of the franchise
during this period of growth and
profitability.
Earnings more than doubled during
the decade, rising to just over $7
million in 2019 from $3.2 million
ten years ago and up 16.22% over
the prior year. Strong asset quality
remained a hallmark throughout
the ten-year period despite
the challenging economic and
regulatory environment through
the first half of the decade. Net
loan losses, which consistently
compared favorably to peers
during the decade, were actually a positive number in 2019 as recoveries exceeded
charge-offs during the year after being near zero the previous year.
Jill and Alan Metzler, Owners, Metzler Forest
Products—a widely recognized forest products
company based in the heart of Big Valley.
During the past decade, Kish Bancorp, Inc. stock doubled in value. Liquidity in Kish
Bancorp shares was assisted by two splits during the decade, rising dividends, and
an up-listing to the OTCQX exchange. We are confident that sustained financial
performance, together with strategic investment for the future, will command investor
attention going forward.
The main driver of performance over the decade was net interest income, which grew
to $27.5 million from less than $15 million ten years before. This number reflected a $1.8
million increase over 2018 as well. Growth in net interest income was driven directly by
Kish Bancorp 2019 Annual Report
1
“This acquisition will roughly double
the revenue of Kish Insurance.”
the expansion of net loans outstanding, which ended 2019 at $679 million after starting
the decade at $368 million. When compared to 2018, net loans outstanding grew by
$49.1 million. The margin was further aided by a beneficial change in the deposit mix,
which saw a movement to core deposits during the year from higher-cost municipal
deposits. At year end 2019, total deposits stood at $710 million versus $682.4 million
the prior year and $407.7 million the decade before.
While net interest income expansion represented the main driver
of earnings growth during the year and over the decade, the
generation of noninterest income by the bank and non-bank
affiliates also demonstrated impressive growth, reflecting the
power and diversification of the Kish business model. Rising to $8.5
million in 2019 from $7.44 million the prior year and from just over
$5 million a decade ago, the percentage of noninterest income
to net operating income (after provision), while falling during the
decade from approximately 34.6% to 30.9%, still ranks Kish Bank
very highly among community bank peers for noninterest total
revenue. The generation of fee-based income not only strengthens
the performance of the Kish franchise, but is especially valuable
in periods of less robust economic conditions. Most importantly,
the greater number of services utilized by clients, the more deeply
connected we are to those relationships.
There were some truly outstanding performances by the business
units that drove fee income expansion in 2019. Gains on the sale of
mortgage loans of just under $1.2 million was driven by over $100
million in mortgage originations during 2019 and represented a
36.5% rise over the prior year. The mortgage banking unit produced
residential mortgage volumes that more than quadrupled during
the decade.
Wealth advisory and fiduciary services continued to deliver
financial planning services to a growing client base and registered
another strong year on top of a truly extraordinary decade. Assets
under management now exceed $350 million, while total revenue
from the unit exceeded $1.64 million in 2019, up from $1.52 million
the prior year. This compares with $102 million in assets under
management and $420 thousand in revenue at the period ten years
earlier. Among Kish Financial Solutions clients planning for their
financial future, Pam Prosser of Seven Points Marina and Ed and
Nancy Lerch of Lerch RV have, in turn, found success helping their
employees and clients fulfill and enjoy their dreams.
Kish Insurance, the Bank’s property and casualty insurance
subsidiary, has grown steadily as a contributor to Kish’s financial
results since 1997, when Kish became the first bank in Pennsylvania
Top: Pam Prosser, Owner, Seven Points Marina
at Raystown Lake. Bottom: Ed and Nancy Lerch,
Owners, Lerch RV, Milroy.
to acquire an independent agency. In 2019, the agency grew personal and business
line commissions by 10%, although a decline in contingency income led to modest
total revenue growth for the unit year over year. When compared to the decade earlier,
agency revenue has grown to $1.25 million compared to $821 thousand.
Most recently, we were pleased to announce the acquisition of the Sausman Agency in
Juniata County. Premiums for the combined agencies will be just under $20 million with
total revenue projected to be approximately $2.5 million. We are
pleased to welcome the Sausman Agency’s owner and principal,
Tim Burris, and his team, to the Kish family. This acquisition will
roughly double the revenue of Kish Insurance and establish
Kish’s physical presence in Juniata County, expanding our ability
to provide a full range of services to clients in that market—like
Rosewood Kitchens, Inc., which utilizes Kish solutions for employee
health benefits and 401(k) planning.
With the overall focus on serving the critical business segment with
lending and other financial services, employee benefit solutions
has been an important addition to Kish’s product mix that holds
great promise for the future. Kish Benefits Consulting, which
provides group health insurance and employee benefits consulting
services to small and medium-sized businesses, grew revenue by
over 23% in 2019 in only its second full year within the Kish family
of services. Total revenue for Kish Benefits Consulting in 2019 was
$585 thousand, allowing the unit to add experienced healthcare
consulting professionals.
Kish Travel, with revenue up over 19%, continues to expand
dramatically in Centre County while maintaining a strong market
position in Kish’s traditional markets. Kish Travel contributed $371
thousand in total revenue in 2019, up from $203 thousand the
decade before.
Year over year, noninterest expense increased by $2.2 million in
2019, or 8.67%, to $27.7 million as of December 31, 2019, compared
to $25.5 million the prior year. Most increases in noninterest
expense categories were well controlled and close to budget,
but overall noninterest expenses were impacted by one-time
core processing conversion costs of $429 thousand. While the
strong financial performance of 2019 was achieved despite these
additional expenses, they are part of an investment in innovation
that will result in a significant reduction in ongoing technology
and data processing expenses for many years. Stated simply, we
recognize that our ability to commit financial resources to vital
strategic priorities is reliant on sustained financial performance.
As a company, our willingness to continue to innovate, adapt, and
invest is balanced with the discipline to deliver excellent financial
results that are sustained over time. Much like the founders of
Sensor Networks, who started an innovative ultrasonic sensor
company with the assistance of Kish Bank’s business lending team, Kish is innovating to
evolve and remain competitive as a means to continue to serve customers and improve
lives. We would point to the record of the past decade as one which demonstrates our
capacity to achieve that balance and to move into the future with confidence.
Top: Brandon Rowles, General Manager, second
generation leadership at Rosewood Kitchens,
Inc., Mifflintown. Bottom: Jim Barshinger
and Jeff Anderson, Co-Founders of Sensor
Networks, Inc. in State College, along with Bruce
Pellegrino (missing from photo).
In prior shareholder communications, we have discussed our vision for “Kish 2020”
that is positioning Kish to compete in a rapidly evolving digital environment, while
creating long-term sustainability through strategic investment in scalable infrastructure
and technology. Through a series of initiatives under the Kish Innovation focus, we
are transforming our IT infrastructure to a modern, cloud-based architecture that
2
3
Kish Bancorp 2019 Annual Report “Kish Innovation: an unwavering
commitment to elevate the community
banking experience and improve lives.”
extraordinary lengths to be informed and knowledgeable about the requirements for
a core transformation to a digital platform that fully preserves and elevates the Kish
experience. We have also fully evaluated the financial impact of these transformational
steps and are confident that our investment in Kish Innovation will improve efficiency
and financial results. And finally, we are confident that undertaking these steps will
elevate our value to our clients, thereby dramatically enhancing the sustainability,
relevance, and viability of the Kish Bancorp franchise for many more decades to come.
Successful completion of the important and evolutionary initiatives in front of us
will be reliant on the power of the team to perform and execute, but before I close
this letter, we must speak to the critical role of our Board of Directors in charting
the course for the future. We would simply not have been able to embark on the
transformational challenges inherent in “Kish 2020” without the leadership, vision,
and active engagement of our Board. Their deliberations over the years were integral
to the development of Kish’s long term strategies to adapt and change. The Board’s
appreciation for the fast and unrelenting pace of change was foundational to creating
a vision that incorporated a sense of urgency in adopting innovative solutions balanced
by the perspective of significant investors in the Corporation and its future. It is
their vision that gives us confidence in our capacity to address the challenges and
opportunities that face Kish as a regional,
community-focused, and client-centric
institution.
We thank you for your support and welcome
your inquiries.
Sincerely,
A 3-D rendering of the Kish Innovation Center, now under construction on Kish’s Reedsville campus. The new 38,000-square-foot
technology and operations hub will enhance employees’ capacity to serve customers.
increases our speed and access to information. This also creates the foundation for
digital client engagement and the branch of the future. We are concurrently advancing
our information security program to provide real-time monitoring of cyber threats that
better protects our data. We are also transforming Kish Bank’s core banking platform
from an outdated and inflexible legacy core system—one that presented obstacles
to the adoption of emerging digital technologies—to an open
solution that can integrate new fintech solutions for an elevated
client experience and innovative product design. The conversion
of our core processing system on May 15, 2020 will be followed
this fall by the completion and occupancy of the Kish Innovation
Center, which is presently under construction on the recently
expanded Kish Reedsville campus. The Innovation Center will
enable a more interactive and collaborative environment for a
team-based approach to support evolving clients’ needs through
digital, yet personal, engagement. To view a live webcam of
the construction of the Innovation Center, simply go to this link:
kishbank.com/webcam.
“Not only will
our customers
expect more,
they will actually
do more
through Kish.”
We have defined Kish Innovation as an unwavering commitment
to elevate the community banking-based customer experience
while sustaining our focus on improving the lives of our
customers, team members, and communities. As we execute on
this focus, we will be innovative in the adoption of technologies
William P. Hayes
Chairman of the Board and
Chief Executive Officer
that improve the customer experience and committed to the changing needs and
expectations of our customers. Not only will our customers expect more, they will
actually do more through Kish. We will know we have been successful when we see that
aspirations are becoming actions. Customers will know when we have been successful
because access to their data will be fast, secure, and straightforward; our knowledge
of their individual situation and needs will be fully informed when they need solutions;
and our responsiveness will be faster and more trustworthy than anything they might
experience elsewhere.
As customers, investors, and community members, we want you to understand
that while these transformational initiatives are exciting for all of us at Kish, we
fully appreciate the importance of these undertakings. Our team has gone to
The Board of Directors of Kish Bancorp, Inc. Front row: Kathleen Rhine,
Bill Hayes, Greg Hayes, and Fran Vaughn. Back row: Eric Barron, Bill
Lake, George Woskob, Paul Howes, Bill Dancy, Jim Lakso, Paul Silvis, and
Spyros Degleris. Not pictured: Ed Friedman.
4
5
Kish Bancorp 2019 Annual Report FINANCIAL HIGHLIGHTS
INDEPENDENT AUDITOR’S REPORT
2017
4,139,770
5,141,399
2,301,564
2016
2015
$
4,616,894
5,254,277
2,130,197
$
4,494,241
5,125,151
2,112,600
Board of Directors and Stockholders
Kish Bancorp, Inc.
REPORT ON THE FINANCIAL STATEMENTS
FOR THE YEAR
Net Income
Net Income Before Taxes
Total Dividends Declared
AT YEAR END (in $000s)
Total Assets
Total Loans (Net)
Total Deposits
Stockholders’ Equity
Loan Loss Reserve
Net Loan Losses (Recoveries)
RATIO ANALYSIS
Return on Average Assets*
Return on Average Equity*
Dividend Declared/Net Income
Loans/Deposits
Primary Capital/Total Assets
Total Capital/Risk Weighted Assets
Loan Loss Reserve/Loans
Net Loan Losses to Total Loans (Net)
PER SHARE DATA**
Basic Earnings
Fully Diluted Earnings
Dividends Paid
Equity (Book Value)
Equity Plus Loan Loss Reserve
2019
2018
$
7,006,914
7,903,452
2,585,445
$
6,029,683
6,670,247
2,396,453
$
918,309
679,519
710,226
64,352
7,499
(467)
$
850,508
630,440
682,350
59,728
6,642
10
0.79%
11.56%
36.90%
95.68%
7.84%
11.86%
1.09%
(0.07%)
0.72%
10.71%
39.74%
92.39%
7.80%
11.95%
1.04%
0.00%
$
$
2.80
2.70
1.00
24.90
27.80
2.44
2.35
0.94
23.41
26.01
$
$
$
811,192
569,010
653,687
56,339
5,698
913
$
725,071
488,588
561,928
53,593
6,011
271
$
696,895
445,425
542,629
51,281
5,752
492
0.54%
7.45%
55.60%
87.05%
7.65%
11.65%
0.99%
0.17%
0.65%
8.54%
46.14%
86.95%
8.22%
13.10%
1.22%
0.06%
0.66%
8.89%
47.01%
82.09%
8.18%
12.62%
1.27%
0.12%
$
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
Average Shares Outstanding (#)
2,499,536
2,499,673
2,459,168
2,430,134
2,407,260
Net Income (in millions)
Earnings & Dividends (per share)**
Stock Valuation (per share)**
We have audited the accompanying consolidated financial statements of Kish Bancorp, Inc. and subsidiaries, which
comprise the consolidated balance sheets as of December 31, 2019 and 2018; the related consolidated statements of
income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the
related notes to the consolidated financial statements.
MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these consolidated financial statements, in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
OPINION
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Kish Bancorp, Inc. and subsidiaries as of December 31, 2019 and 2018, and the results of their
operations and their cash flows for the years then ended, in accordance with accounting principles generally accepted
in the United States of America.
Cranberry Township, Pennsylvania
March 3, 2020
*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 2015 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
6
7
Kish Bancorp 2019 Annual Report
CONSOLIDATED BALANCE SHEET
KISH BANCORP, INC.
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME
ASSETS
Cash and due from banks
Interest-bearing deposits with other institutions
Cash and cash equivalents
Certificates of deposit in other financial institutions
Investment Securities available for sale, at fair value
Equity Securities
Investment Securities held to maturity, fair value of $7,378,098
and $7,095,937
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
TOTAL ASSETS
LIABILITIES
Deposits:
Noninterest-bearing
Interest-bearing demand
Savings
Money market
Time
Total deposits
Short-term borrowings
Other borrowings
Accrued interest and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY
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 shares issued as of December 31, 2019 and 2018
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost (114,206 and 130,609 shares at December 31,
2019 and 2018, respectively)
TOTAL STOCKHOLDERS' EQUITY
December 31,
2019
2018
$
6,878,336 $
29,331,755
36,210,091
10,146,566
22,622,212
32,768,778
$
$
1,474,000
131,180,513
1,695,342
3,119,532
124,731,597
3,450,017
7,250,000
3,464,876
7,000,000
156,565
687,018,196
7,499,402
679,518,794
15,635,486
1,843,699
6,915,000
15,830,426
17,290,797
918,309,024 $
637,082,546
6,642,410
630,440,136
14,182,308
2,143,699
6,110,700
15,422,560
10,983,033
850,508,925
99,838,645 $
13,496,720
69,073,873
248,203,646
279,612,736
710,225,620
46,740,021
80,029,248
16,961,740
853,956,629
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
-
-
1,348,750
2,494,671
64,304,317
(1,014,506 )
(2,780,837 )
64,352,395
1,348,750
2,460,838
59,882,848
(1,301,777 )
(2,661,954 )
59,728,705
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
918,309,024 $
850,508,925
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
Year Ended December 31,
2018
2019
$
32,146,548 $
1,230,229
27,894,432
1,193,287
2,605,465
824,667
645,350
644,456
38,096,715
7,480,980
68,749
3,009,361
10,559,090
27,537,625
390,000
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
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
27,147,625
24,802,080
NONINTEREST INCOME
Service fees on deposit accounts
Investment securities gains, net
Equity securities gains (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
Income before income taxes
Income tax expense
NET INCOME
EARNINGS PER SHARE
Basic
Diluted
1,678,651
161,638
232,874
1,171,428
473,054
1,253,906
371,349
1,642,592
584,926
931,434
8,501,852
16,533,267
3,112,385
2,519,299
523,490
263,780
207,871
627,977
3,957,956
27,746,025
7,903,452
896,538
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
6,670,247
640,564
$
7,006,914 $
6,029,683
$
$
2.80 $
2.70 $
2.44
2.35
See accompanying notes to consolidated financial statements.
See accompanying notes to the consolidated financial statements.
8
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9
Kish Bancorp 2019 Annual Report
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss)
Securities available for sale:
Change in unrealized holding gains (losses) on
available for sale securities
Tax effect
Change in cash flow hedges
Tax effect
Reclassification adjustment for net gains
realized in net income
Tax effect
Total other comprehensive income (loss)
Year Ended December 31,
2018
2019
6,029,683
7,006,914 $
$
2,150,086
(451,520 )
(1,624,812 )
341,211
(161,638 )
33,944
287,271
(1,323,406 )
277,918
(58,167 )
12,215
(3,471 )
729
(1,094,182 )
Total comprehensive income
$
7,294,185 $
4,935,501
See accompanying notes to the consolidated financial statements.
10
4
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
-
-
-
-
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B
Kish Bancorp 2019 Annual Report
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KISH BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
7,006,914 $
6,029,683
Year Ended December 31,
2019
2018
Provision for loan losses
Investment securities gains, net
Equity security (gains) 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
Decrease (increase) in accrued interest receivable
Increase in accrued interest payable
Earnings on bank-owned life insurance
Gain on sale of other assets
Compensation expense - non-cash
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Maturities of certificates of deposit
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 in short-term borrowings, net
Proceeds from other borrowings
Repayments of other borrowings
Purchases of treasury stock
Proceeds from sale of treasury stock
Exercise of stock options
Cash dividends
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
$
390,000
(161,638 )
(232,874 )
44,070,616
(46,207,499 )
(1,171,428 )
1,210,994
(314,366 )
51,779
247,948
(473,054 )
(6,335 )
393,071
1,411,654
6,215,782
1,646,000
-
9,694,054
30,612,964
(44,731,980 )
(250,000 )
1,987,549
(49,504,658 )
(1,404,700 )
600,400
(2,532,174 )
35,918
(53,846,627 )
27,875,579
24,255,852
6,589,000
(4,584,707 )
(853,543 )
709,265
(333,843 )
(2,585,445 )
51,072,158
3,441,313
32,768,778
36,210,091 $
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 )
32,298,540
(11,119,206 )
43,887,984
32,768,778
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
Right of use assets and lease liability
See accompanying notes to consolidated financial statements.
$
10,311,142 $
-
8,009,492
150,000
$
36,000 $
4,989,184
-
-
KISH BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
Kish Bancorp, Inc. (the “Company”) is a diversified financial services organization whose principal
activity is the ownership and management of its subsidiaries, Kish Bank (the “Bank”), Kish Travel
Services, Inc., and the Bank’s subsidiaries, Tri-Valley Properties, LLC, Kish Agency, Inc., and Kish
Equities, LLC. The Company generates commercial and industrial, agricultural, commercial mortgage,
residential real estate, and consumer loans and deposit services to its customers located primarily in central
Pennsylvania and the surrounding areas. The Bank operates under a 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. Kish Equities, LLC is a subsidiary established to hold investments in equity
securities.
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, 2019
and 2018. Interest and dividends on investment securities is recognized as income when earned.
12
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Kish Bancorp 2019 Annual Report
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 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.
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8
9
15
Kish Bancorp 2019 Annual Report
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 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 and restricted stock awards 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, 2019 and 2018, the Company recorded compensation expense of $68,983 and $48,401,
respectively, related to stock option compensation awards. At December 31, 2019, there was $100,005 in
unrecognized compensation cost related to unvested stock option awards, with a weighted average
remaining amortization period of 1.9 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
2019
2018
Expected
Dividend
Yield
3.04 %
3.39 %
Risk-Free
Interest Rate
Expected
Volatility
Expected
Life (in Years)
2.50 %
2.73 %
9.47 %
9.40 %
10.0
10.0
The weighted-average fair value of each stock option granted for 2019 and 2018 was $2.24 and $1.91,
respectively. Stock options exercised during the years ended December 31, 2019 and 2018 were 39,547
and 38,436, respectively.
16
10
11
17
Kish Bancorp 2019 Annual Report
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, 2019 and 2018, the Company recorded gross servicing rights of
$485,562 and $558,745, respectively, with a reserve for impairment of $187,634 and $169,523,
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.
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 income (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
reviewed contracts related to these revenue streams and there were not any material changes to revenue
recognition upon adoption.
Cash Flow Information
Newly Adopted Accounting Standards
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.
In February 2016, the FASB issued ASU 2016-02 “Leases.” From the lessee’s perspective, the new
standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease
liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as
either finance or operating, with classification affecting the pattern of expense recognition in the income
statement for a lessee. From the lessor’s perspective, the new standard requires a lessor to classify leases
as either sales-type, finance, or operating. A lease will be treated as a sale if it transfers all of the risks and
rewards, as well as control of the underlying asset to the lessee. If risks and rewards are conveyed without
the transfer of control, the lease is treated as a financing lease. If the lessor does not convey the risks and
rewards or control of the underlying asset, an operating lease results.
For the Company, the provisions of this ASU were effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. The Company adopted this ASU effective
January 1, 2019, utilizing the optional transition method as provided by ASU 2018-11. Under the optional
transition method, only the most recent period presented reflected the adoption with a cumulative-effect
adjustment to the opening balance of retained earnings and the comparative prior periods will be presented
under the previous guidance of Topic 840. ASU 2016-02 provides a number of optional transition-related
practical expedients. The Company elected to apply the practical expedients that relate to the identification
and classification of leases that commenced before January 1, 2019 and the initial direct costs of those
leases. The election of these practical expedients allows the Company to continue to account for those
leases that commenced before January 1, 2019 in accordance with previous U.S. GAAP. All of the
Company’s leases that commenced before January 1, 2019 were operating leases. Lease expense will
continue to be recognized based on the terms of the leases. A ROU asset and related lease liability was
recognized for each operating lease at January 1, 2019 based on the present value of the remaining
minimum lease payments.
18
12
13
19
Kish Bancorp 2019 Annual Report
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
3.
INVESTMENT SECURITIES
Newly Adopted Accounting Standards (Continued)
The amortized cost, gross unrealized gains and losses, and fair value of investment securities are as follows:
At January 1, 2019, the Company had six leases for real property, including five leases for bank branch
and corporate office locations, and leased office space for Kish Benefits Consulting operations. Each lease
provides one or more options for the Company to extend the lease term. The Company leases the land
underlying the corporate office location, and owns the leasehold improvements constructed on the leased
property.
Company assumed that it would exercise the next lease extension for the majority of the real estate leases
in order to have use of the properties for at least a 5 to 10 year future period. The Company adopted this
ASU effective January 1, 2019 and recognized an aggregate lease liability of $4,989,194 and combined
ROU assets of $4,989,194.
2. EARNINGS PER SHARE
There are no convertible securities that would affect the numerator in calculating basic and diluted earnings
per share; therefore, net income as presented on the Consolidated Statement of Income will be used as the
numerator. The following table sets forth the composition of the weighted-average common shares
(denominator) used in the basic and diluted earnings per share computation.
2019
2018
Weighted-average common shares issued
2,697,500 2,697,500
Weighted-average treasury stock shares
(112,861 )
(145,755 )
Weighted-average unvested restricted stock awards
(85,103 )
(80,441 )
Basic weighted-average shares outstanding
2,499,536 2,471,304
Dilutive effect of outstanding restricted stock awards
44,138
39,013
Dilutive effect of outstanding stock options
49,605
52,555
Diluted weighted-average shares outstanding
2,593,279 2,562,872
For the year ended December 31, 2019, the Company has excluded from the computation of diluted
weighted-average shares the impact of 41,058 options to purchase shares of the Company’s common stock,
as the effect would have been anti-dilutive.
For the year ended December 31, 2018, the Company has excluded from the computation of diluted
weighted-average shares the impact of 36,440 options to purchase shares of the Company’s common stock,
as the effect would have been anti-dilutive.
Gross
2019
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$ 2,011,276 $
Available for Sale:
U.S. treasury securities
- $
U.S. government agency securities 45,750,235 173,682
Obligations of states and political
subdivisions
Corporate securities
Mortgage-backed securities in
government-sponsored entities
196,940
15,381,522 212,511
31,878,494
(3,936 ) $ 2,007,340
(64,705 ) 45,859,212
(92,845 ) 31,982,589
(39,887 ) 15,554,146
Total Available for Sale
Held to Maturity:
Corporate Securities
35,854,180
172,080 (249,034 ) 35,777,226
$ 130,875,707 $ 755,213 $ (450,407 ) $ 131,180,513
$ 7,250,000 $ 128,098 $
- $ 7,378,098
Gross
2018
Gross
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
Available for Sale:
U.S. treasury securities
$ 6,995,422 $
U.S. government agency securities 36,722,369
Obligations of states and political
subdivisions
Corporate securities
Mortgage-backed securities in
government-sponsored entities
19,331,836
Total Available for Sale
Held to Maturity:
Corporate Securities
46,044,802 236,722 (106,440 ) 46,175,084
21,052 (294,807 ) 19,058,081
17,320,809
17,033,499
$ 126,415,238 $ 275,425 $ (1,959,066 ) $ 124,731,597
(304,961 )
17,651
$ 7,000,000 $
95,937 $
- $ 7,095,937
- $ (301,712 ) $ 6,693,710
- (951,146 ) 35,771,223
20
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Kish Bancorp 2019 Annual Report
3.
INVESTMENT SECURITIES (Continued)
3.
INVESTMENT SECURITIES (Continued)
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment
category and length of time that the individual securities have been in a continuous unrealized loss position,
at December 31, 2019 and 2018.
The amortized cost and fair value of debt securities at December 31, 2019, 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.
Less than Twelve
Months
2019
Twelve Months or
Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$ 2,007,340 $
(3,936 ) $
- $
- $ 2,007,340 $
(3,936 )
12,300,685
(55,361 ) 4,491,030
(9,344 ) 16,791,715
(64,705 )
5,198,142
525,295
(91,999 ) 459,319
(14,384 ) 2,201,645
(846 ) 5,657,461
(25,503 ) 2,726,940
(92,845 )
(39,887 )
Available for Sale
Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
$ 13,324,552 $ 13,333,239 $
-
-
7,378,098
-
$ 130,875,707 $ 131,180,513 $ 7,250,000 $ 7,378,098
- $
-
7,250,000
-
64,453,729
28,884,338
24,509,207
63,945,280
28,997,234
24,608,641
Investment securities with a carrying value of $110,586,946 and $112,773,196 at December 31, 2019 and
2018, respectively, were pledged to secure deposits and other purposes as required by law.
16,984,833 (245,244 ) 836,110
$ 37,016,295 $ (410,924 ) $ 7,988,104 $
(3,790 ) 17,820,943 (249,034 )
(39,483 ) $ 45,004,399 $ (450,407 )
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:
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
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 )
The Company had 42 investment securities, consisting of 1 U.S. treasury note, 14 U.S. government
obligations and direct obligations of U.S. government agencies, 13 municipal bonds, 5 different debt
securities, and 9 mortgage-backed securities that were in unrealized loss positions at December 31, 2019.
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 their amortized cost basis or par value,
which may be maturity, the Company does not consider those investments to be other-than-temporarily
impaired at December 31, 2019.
Proceeds from sales
Proceeds from calls
Gross gains
Gross losses
2018
2019
$ 9,694,054 $
6,607,143
162,275
(637 )
-
1,055,000
3,471
-
Equity Securities
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 years ended December 31, 2019 and December
31, 2018:
Net gains (losses) recognized in equity securities during the year
Less: Net gains realized on sale of equity securities during the year
Unrealized gains (losses) recognized in equity securities
2018
2019
$ 232,874 $ (181,665 )
230,053
60,765
2,821 $ (242,430 )
$
22
16
17
23
Kish Bancorp 2019 Annual Report
4. LOANS
Major classifications of loans are summarized as follows:
5. ALLOWANCE FOR LOAN LOSSES (Continued)
The following qualitative factors are analyzed to determine allocations for non-classified loans for each
portfolio segment:
Commercial real estate
Commercial and industrial
Agricultural
State and political subdivisions
Consumer
Residential real estate
Less allowance for loan losses
Net loans
2019
2018
$ 249,990,170 $ 216,677,128
102,347,634
100,376,943
29,875,122
30,829,832
39,747,975
36,726,830
8,256,192
6,909,273
240,178,495
262,185,148
637,082,546
687,018,196
7,499,402
6,642,410
$ 679,518,794 $ 630,440,136
Mortgage loans serviced by the Company for others amounted to $49,164,176 and $55,853,584 at
December 31, 2019 and 2018, respectively.
Unearned fees included in loans receivable amounted to $13,794 and $14,400 at December 31, 2019 and
2018, 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, 2019 and 2018, 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 years ended December 31, 2019 and 2018, is as follows:
Balance
Amounts Balance
Amounts Balance
2017
Additions Collected
2018
Additions Collected
2019
$ 16,701,750 $ 2,077,750 $ (1,743,239 ) $ 17,036,261 $ 7,790,420 $ (6,129,819 ) $ 18,696,862
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.
• 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 credit risk management
• Changes in underlying value of collateral-dependent loans
• Levels of credit concentrations
• Effects of external factors, such as legal and regulatory requirements
These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the
Bank’s operating environment. During 2019, management decreased the qualitative factors reserve
percentage for the commercial real estate pool of loans because of a decrease in the volume and severity
of past dues, nonaccruals, and classifieds. Further reductions in the residential real estate and commercial
real estate qualitative factors reserve percentages were made due to an increase in the underlying value of
collateral dependent loans. Management decreased qualitative factors on reserve percentages for
commercial and industrial loan participations transacted with the BancAlliance portfolio for related
changes in the credit concentration levels in relation to the entire loan portfolio. The qualitative factors
reserve for agriculture loans was increased due to an increase in the volume and severity of past dues,
nonaccruals, and classifieds. Management decreased the qualitative factors reserve percentage for Lending
Club, included in the consumer category, due to portfolio balances continuing to decline. Strong asset
quality supported by low levels of past-due, non-accrual, and classified loans; no changes to the lending
policy, risk management, or legal/competitive environment; and a diversified portfolio with minimal levels
of concentration support management’s decision to have the remaining qualitative factor reserve
percentages unchanged in 2019.
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.
24
18
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Kish Bancorp 2019 Annual Report
5. ALLOWANCE FOR LOAN LOSSES (Continued)
5. ALLOWANCE FOR LOAN LOSSES (Continued)
2019
State and
Political
Residential
Allowance for
loan losses:
The following tables present, by portfolio segment, the changes in the allowance for loan losses and the
recorded investment in loans as of and for the years ended December 31:
Commercial
and
Commercial
Real Estate Industrial
Agricultural Subdivisions Consumer Real Estate Unallocated Total
Allowance for
loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
$ 2,659,259 $ 1,428,801 $
-
-
7,175
526,930
(1,836 )
(432,837 )
500,230 $
-
-
17,293
188,661 $ 96,537 $ 1,606,577 $
(5,333 )
1,685
82,011
- (71,764 )
8,299
-
(21,553 ) 38,286
162,345 $ 6,642,410
(77,097 )
544,089
390,000
-
-
708,636
Ending balance
$ 2,753,352 $ 1,434,140 $
517,523 $
167,108 $ 71,358 $ 1,684,940 $
870,981 $ 7,499,402
Ending balance
individually
evaluated for
impairment
Ending balance
collectively
evaluated for
impairment
Loans:
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Ending balance
$
31,593 $
14,823 $
59,233 $
- $
- $
29,221 $
- $
134,870
2,721,759 1,419,317
458,290
167,108 71,358 1,655,719
870,981 7,364,532
$ 2,753,352 $ 1,434,140 $
517,523 $
167,108 $ 71,358 $ 1,684,940 $
870,981 $ 7,499,402
$
332,244 $
20,414 $
298,703 $
- $
- $
470,146
$ 1,121,507
249,657,926 100,356,529 30,531,129 36,726,830 6,909,273 261,715,002
$ 249,990,170 $ 100,376,943 $ 30,829,832 $ 36,726,830 $ 6,909,273 $ 262,185,148
685,896,689
$ 687,018,196
Commercial
and
Commercial
Real Estate Industrial
2018
State and
Political
Residential
Agricultural Subdivisions Consumer Real Estate Unallocated Total
Beginning balance
Charge-offs
Recoveries
Provision
$ 2,498,768 $ 1,230,243 $
(35,963 )
-
13,754
304,875
220,767
(144,384 )
266,516 $
(9,559 )
946
242,327
182,082 $ 134,224 $ 1,363,855 $
(184,719 )
-
427,441
- (121,164 )
- 21,430
6,579 62,047
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
Ending balance
collectively
evaluated for
impairment
Loans:
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Ending balance
$
16,523 $
2,967 $
47,255 $
- $
- $
27,843 $
- $
94,588
2,642,736 1,425,834
452,975
188,661 96,537 1,578,734
162,345 6,547,822
$ 2,659,259 $ 1,428,801 $
500,230 $
188,661 $ 96,537 $ 1,606,577 $
162,345 $ 6,642,410
$ 1,556,745 $
147,735 $
308,024 $
- $
- $
527,519
$ 2,540,023
215,120,383 102,199,899 29,567,098 39,747,975 8,256,192 239,650,976
$ 216,677,128 $ 102,347,634 $ 29,875,122 $ 39,747,975 $ 8,256,192 $ 240,178,495
634,542,523
$ 637,082,546
From 2018 to 2019, the reserve requirement for commercial real estate loans increased by $94,093, for
residential real estate loans increased by $78,363, for agricultural loans increased by $17,293, and for
commercial and industrial loans increased by $5,339 during the same period. This was a result of increases
in outstanding balances in each loan category during 2019, offset by significant recoveries of previous loan
charge-offs. At December 31, 2019, total impaired and criticized assets and classified assets for
commercial real estate loans was $5.5 million. This represents an increase of $952,173 from December 31,
2018, or 21.1%. This difference was due to a decrease in impaired and criticized assets of $1.2 million and
an increase of $2.1 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, 2019 and 2018, 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.
26
20
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27
Kish Bancorp 2019 Annual Report
5. ALLOWANCE FOR LOAN LOSSES (Continued)
5. ALLOWANCE FOR LOAN LOSSES (Continued)
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.
2019
Commercial
and
State and
Political
Commercial
Real Estate Industrial Agricultural Subdivisions
Total
$ 244,520,026 $ 88,229,710 $ 26,121,832 $ 36,726,830 $ 395,598,398
- 14,582,988
5,470,144 9,112,844
- 7,655,212
87,177
-
$ 249,990,170 $ 100,376,943 $ 30,829,832 $ 36,726,830 $ 417,923,775
-
- 3,019,566 4,635,646
72,354
-
14,823
2018
Commercial
and
State and
Political
Commercial
Real Estate Industrial Agricultural Subdivisions
Pass
Special Mention
Substandard
Doubtful
Total
Pass
Special Mention
Substandard
Doubtful
Total
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:
Consumer
2019
Residential
Real Estate
Total
Performing
Nonperforming
Total
$
$
6,903,682 $ 261,962,106 $ 268,865,788
228,633
6,909,273 $ 262,185,148 $ 269,094,421
223,042
5,591
Consumer
2018
Residential
Real Estate
Total
Performing
Nonperforming
Total
$
$
Age Analysis of Past Due Loans by Class
8,256,192 $ 239,975,590 $ 248,231,782
202,905
8,256,192 $ 240,178,495 $ 248,434,687
202,905
-
Total
The following are tables which show the aging analysis of past due loans as of December 31:
$ 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
-
Commercial real estate
Commercial and
industrial
Agricultural
State and political
subdivisions
Consumer
Residential real estate
Total
30-59
Days
Past Due Past Due Past Due Past Due Current
90 Days or
Greater
60-89
Days
Total
Total
Loans
90 Days
and
Accruing
2019
$
- $
6,058 $
- $
6,058 $ 249,984,112 $ 249,990,170 $
836
369,245
349,276
-
14,823
72,354 421,630 30,408,202 30,829,832
99,992,039
100,376,943
384,904
-
11,434
- 36,726,830 36,726,830
17,025 6,892,248 6,909,273
701,037 11,907 223,042 935,986 261,249,162 262,185,148
$ 1,062,583 $ 387,210 $ 315,810 $ 1,765,603 $ 685,252,593 $ 687,018,196 $
-
5,591
-
-
-
-
-
-
-
-
-
28
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23
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Kish Bancorp 2019 Annual Report
5. ALLOWANCE FOR LOAN LOSSES (Continued)
Age Analysis of Past Due Loans by Class (Continued)
2018
30-59
Days
Past Due Past Due Past Due Past Due Current
90 Days or
Greater
60-89
Days
Total
5. ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired Loans (Continued)
Total
Loans
90 Days
and
Accruing
The following tables include the recorded investment and unpaid principal balances for impaired loans
with the associated allowance amount as of December 31:
2019
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 8,251,163 8,256,192
5,029
291,704
1,476 202,905 496,085 239,682,410 240,178,495
$ 537,926 $ 11,476 $ 1,406,426 $ 1,955,828 $ 635,126,718 $ 637,082,546 $
-
-
-
-
-
-
-
-
-
-
-
Consumer mortgage loans held by the Company in the process of foreclosure amounted to $328,680 as of
December 31, 2019.
With no related allowance
recorded:
Commercial real estate
Commercial and
industrial
Agricultural
State and political
subdivisions
Consumer
Residential real estate
Impaired Loans
With an allowance recorded:
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:
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
$
- $
- $
- $
432,900 $
-
5,591
35,432
5,591
35,432
-
-
32,230
44,622
-
-
296,741
-
-
296,741
-
-
-
-
466
259,129
-
2,475
-
-
4,164
337,764
337,764
-
769,347
6,639
332,244
332,244
31,593
243,942
21,159
14,823
263,271
14,823
263,271
14,823
59,233
6,984
258,393
-
14,620
-
-
173,405
-
-
173,405
-
-
29,221
-
793
188,320
-
-
10,024
783,743
783,743
134,870
698,432
45,803
332,244
332,244
31,593
676,842
21,159
20,414
298,703
20,414
298,703
14,823
59,233
39,214
303,015
-
17,095
-
-
470,146
-
-
470,146
-
-
29,221
-
1,259
447,449
-
-
14,188
Total
$ 1,121,507 $ 1,121,507 $
134,870 $ 1,467,779 $
52,442
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Kish Bancorp 2019 Annual Report
5. ALLOWANCE FOR LOAN LOSSES (Continued)
5. ALLOWANCE FOR LOAN LOSSES (Continued)
Impaired Loans (Continued)
Nonaccrual Loans
With no related allowance
recorded:
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
2018
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 $23,000 in 2019 and $600,000 in 2018.
$ 1,377,295 $ 1,377,295 $
- $ 2,797,828 $
10,874
The following table includes the loan balances on nonaccrual status as of December 31:
-
-
42,895
42,895
-
-
175,644
57,605
-
-
324,290
-
-
324,290
-
-
-
6,390
-
259,406
-
2,900
-
-
4,290
1,744,480 1,744,480
- 3,296,872
18,064
Commercial real estate
Commercial and industrial
Agricultural
Consumer
Residential real estate
Total
$
2019
2018
- $ 1,172,983
-
30,538
-
223,042 202,905
$ 315,810 $ 1,406,426
14,823
72,354
5,591
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
179,449
179,449
16,282
179,626
11,794
147,735
265,129
147,735
265,129
2,967
47,254
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
1,556,745 1,556,744
16,523 2,977,454
22,668
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
Total
$ 2,540,023 $ 2,540,023 $
94,588 $ 3,938,222 $
63,825
Troubled Debt Restructuring (TDR’s)
The Company’s loan portfolio also includes certain loans that have been modified in a troubled debt
restructuring, where economic concessions have been granted to borrowers who have experienced or are
expected to experience financial difficulties. These concessions typically result from the Company’s loss
mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of
principal, forbearance, or other actions.
When the Company modifies a loan, management evaluates any possible impairment based on the present
value of expected future cash flows, discounted at the contractual interest rate of the original loan
agreement. If management determines that the value of the modified loan is less than the recorded
investment in the loan, impairment is recognized either through a charge-off to the allowance or a specific
reserve. As of December 31, 2019 and 2018, specific reserve allocations of $83,124 and $94,588,
respectively, had been established against the troubled debt restructurings and no charge-offs for the
troubled debt restructurings were required.
There were no loans modified in a troubled debt restructuring from January 1, 2017 through December 31,
2018, that subsequently defaulted (i.e., 90 days or more past due following a modification) during the years
ended December 31, 2019 and 2018, respectively. There were no loan modifications that were considered
troubled debt restructurings for the year ended December 31, 2019.
Loan modifications considered troubled debt restructurings completed during the year ended December
31, 2018 consist of a single commercial loan. The Company’s outstanding recorded investment in the loan
was $17,577 at the time of the restructuring. The Company’s outstanding recorded investment amount
was not changed by the TDR modifications.
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Kish Bancorp 2019 Annual Report
6.
PREMISES AND EQUIPMENT
9.
SHORT-TERM BORROWINGS
Major classifications of premises and equipment are summarized as follows:
Land and land improvements
Building and leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Total
2019
2018
$ 2,394,918 $ 2,200,547
20,293,423 18,496,846
7,741,252 7,242,320
30,429,593 27,939,713
14,794,107 13,757,405
$ 15,635,486 $ 14,182,308
Depreciation charged to operations was $1,085,331 in 2019 and $1,074,414 in 2018.
7. GOODWILL
As of December 31, 2019 and 2018, goodwill had a gross carrying amount of $2,457,712 and $2,757,712,
respectively, and accumulated amortization of $614,013 for a net carrying value of $1,843,699 and
$2,143,699, respectively. The carrying amount of goodwill was reduced by $300,000 during 2019 to offset
and eliminate a related liability balance of $262,498, which was included in Accrued Interest and Other
Liabilities at December 31, 2018, and increased 2019 non-cash compensation expense by $37,502. The
reclasses reflect an amendment drafted during 2019 to clarify the terms of a restricted stock award issued
in conjunction with the acquisition of Benefit Management Group in December 2017, and include the
award with all other outstanding restricted stock awards representing incentive compensation awards
issued by the Company for future employee services during the period the awards are subject to restriction.
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, 2019 and 2018.
8. DEPOSITS
The scheduled maturities of time deposits approximate the following:
Year Ending
December 31,
2020
2021
2022
2023
2024
Thereafter
Amount
147,341,322
95,779,946
21,154,395
9,769,375
4,412,735
1,154,963
279,612,736
$
$
The aggregate of all time deposit accounts of $250,000 or more amounted to $71,658,616 and $65,257,519
at December 31, 2019 and 2018, respectively. Brokered Deposits included above as of December 31, 2019
was $2,800,000. Depositors with over 5% of total deposits includes one depositor of $20.5 million as of
December 31, 2019.
Short-term borrowings include overnight repurchase agreements through the FHLB, federal funds
purchased, and repurchase agreements with customers. 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
2019
2018
$ 46,740,021 $ 22,484,169
41,837,265 19,831,315
47,937,322 23,647,311
1.95 %
0.25 %
2.52 %
0.35 %
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, 2019 and 2018,
is presented in the following table.
Remaining
Contractual Maturity
Overnight and Continuous
December 31, December 31,
2019
2018
Securities of U.S. Government Agencies, U.S. Treasuries, and
obligations of state and political subdivisions pledged, fair value $
Repurchase agreements
5,310,216 $
1,060,022
7,465,235
2,104,169
10. OTHER BORROWINGS
The following table sets forth information concerning other borrowings:
Description
Fixed rate
Fixed rate amortizing
Mid-term repos
Subordinated capital
notes
Note payable
Maturity Range
To
From
Weighted-
Average
Interest
Rate
Stated Interest
Rate Range
To
From
At December 31,
2018
2019
01/06/20 08/04/26
02/03/21 07/15/24
05/10/18 05/10/21
2.07 %
1.70
2.75
1.24 %
1.33
2.75
4.00 % $ 53,075,499 $ 50,621,498
10,097,457
1.96
1,000,000
2.75
7,612,749
3,135,000
03/24/24 03/03/26
03/17/35 11/23/35
5.07
3.65
4.75
3.41
5.25
3.90
10,020,000
6,186,000
10,120,000
6,186,000
$ 80,029,248 $ 78,024,955
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Kish Bancorp 2019 Annual Report
10. OTHER BORROWINGS (Continued)
10. OTHER BORROWINGS (Continued)
Maturities of other borrowings at December 31, 2019, are summarized as follows:
Year Ending
December 31,
2020
2021
2022
2023
2024
2025 and after
$
$
Amount
14,890,735
11,447,476
12,916,000
13,075,780
6,360,493
21,338,764
80,029,248
Weighted-
Average Rate
1.70 %
2.06
1.69
2.05
2.28
4.06
2.48
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, 2019, the Bank’s maximum borrowing capacity with the FHLB was
approximately $338.6 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, 2019 is approximately $7.9 million.
The Bank also maintains a $10.0 million, $10.0 million, and $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, 2019.
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.
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, with a current balance of $6,400,000, 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 FINANCIAL 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, 2019, is being utilized to hedge $44.0 million in floating rate debt. At
December 31, 2019 and 2018, the information pertaining to outstanding interest rate swap agreements is
as follows:
Notional amount
Weighted-average pay rate
Receive rate
Weighted-average maturity in years
Unrealized (loss) gain relating to interest rate swaps
Cash Flow Hedges of Interest Rate Risk
2019
2018
$ 44,000,000
$ 20,000,000
2.36 %
2.50 %
3-Month
Libor
7.2
(1,588,991 )
3-Month
Libor
7.4
40,384
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, 2019, the
Company had six interest rate swaps with a notional of $44.0 million associated with the Company’s cash
outflows associated with various floating-rate amounts.
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Kish Bancorp 2019 Annual Report
11. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
11. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
Cash Flow Hedges of Interest Rate Risk (Continued)
Derivative Instruments
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,
2019. 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, 2019, the fair value of derivatives in a net liability position, which includes accrued
interest and any credit valuation adjustments related to these agreements, was $1,588,991. At
December 31, 2019, the Company had required cash collateral with certain of its derivative counterparties
in the amount of $3,620,000 and was not holding cash collateral of certain derivative counterparties. If the
Company had breached any of the above provisions at December 31, 2019, 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.
Fair Values of Derivative Instruments on the Balance Sheet
The following table presents the fair values of derivative instruments in the balance sheet:
December 31, 2019
Interest rate derivatives
December 31, 2018
Interest rate derivatives
Assets
Liabilities
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Other assets
$
- Other liabilities $
(1,588,991 )
Other assets
$
40,384 Other liabilities $
-
The Company enters into interest rate swaps that allow our commercial loan customers to effectively
convert a variable-rate commercial loan agreement to a fixed-rate loan agreement. Under these agreements,
the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap
agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company
then enters into a swap agreement with a third party in order to economically hedge its exposure through
the customer agreement.
Although the Company has determined that the majority of the inputs used to value its derivatives fall
within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives
may use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by
itself and its counterparties. However, at December 31, 2019, 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,
2019
2018
Interest
Rate
Paid
Interest
Rate
Received
Fair Value
December 31,
2019
2018
Third Party
interest rate swap
Maturing in 2024
Maturing in 2025
Maturing in 2026
Maturing in 2027
$ 6,000,000 $ 6,000,000 Fixed
6,000,000 Fixed
8,000,000 Fixed
- Fixed
14,000,000
14,000,000
10,000,000
3-Month Libor $
3-Month Libor
3-Month Libor
3-Month Libor
(79,454 ) $ 172,609
(48,386 )
(83,839 )
-
(508,940 )
(694,322 )
(306,275 )
$ 44,000,000 $ 20,000,000
$ (1,588,991 ) $
40,384
12.
INCOME TAXES
The provision for federal income taxes consists of:
Current
Deferred
$
2019
1,210,904 $
(314,366 )
2018
390,375
250,189
Total provision
$
896,538 $
640,564
38
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Kish Bancorp 2019 Annual Report
12.
INCOME TAXES (Continued)
12.
INCOME TAXES (Continued)
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, 2019 and 2018 are as follows:
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Core deposit intangible assets
Asset valuation allowances
Employee compensation accruals
Nonaccrual interest receivable
Unrealized loss on available for sale securities
Unrealized loss on swaps - balance sheet hedge
Lease liability
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 gain - intercompany transaction
Right of use asset
Deferred tax liabilities
Net deferred tax assets
2019
2018
$ 1,574,874 $ 1,394,906
230,860
17,159
76,185
316,275
125,256
353,116
-
-
3,174
3,628,014 2,516,931
300,076
17,159
79,988
317,360
4,842
-
333,688
998,852
1,175
528,015
345,281
80,448
135,423
3,346
64,010
-
42,977
99,465
993,421
677,740
342,831
68,532
177,933
3,346
-
7,523
141,849
-
-
2,292,386 1,419,754
$ 1,335,628 $ 1,097,177
No valuation allowance was established at December 31, 2019 and 2018, in view of the Company’s ability
to carryback taxes paid in previous years and certain tax strategies, coupled with the anticipated future
taxable income as evidenced by the Company’s earnings potential.
The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax
rate is as follows:
Provision at statutory rate
Tax-exempt interest
Life insurance income
Other
Income tax expense and
effective rate
2019
% of
Pretax
2018
% of
Pretax
Amount
$ 1,659,725
(431,528 )
(72,566 )
(259,093 )
Income
21.0 %
(5.5 )
(0.9 )
(3.3 )
Amount
$ 1,400,752
(474,336 )
(74,099 )
(211,753 )
Income
21.0 %
(7.1 )
(1.1 )
(3.2 )
$ 896,538
11.3 %
$ 640,564
9.6 %
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 2015 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 $409,077 and $404,238 for the years ended December 31, 2019 and 2018,
respectively. The fair value of plan assets includes $2,373,014 and $2,536,411 pertaining to the value of
the Company’s common stock that is held by the plan as of December 31, 2019 and 2018, 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 as of December 31, 2019 and 2018
were $1,428,933 and $1,099,333, respectively, and are reported as “Other liabilities” on the Consolidated
Balance Sheet. Expenses related to this plan were a loss of $244,630 and a gain of $88,572 for the years
ended December 31, 2019 and 2018, 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. Since inception of
the Plan in 1988, the Company has authorized a share pool of 240,000 shares of the Company’s common
stock to the plan. The Plan has a remaining available share pool of 4,808 shares and 19,299 shares as of
December 31, 2019 and 2018, respectively. 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.
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Kish Bancorp 2019 Annual Report
13. EMPLOYEE BENEFITS (Continued)
Restricted Stock Plan (Continued)
Compensation expense recognized related to restricted stock awards was $361,590 and $379,583 for the
years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, unrecognized
compensation cost related to restricted stock awards was $1,168,030, which is expected to be recognized
over a weighted average life of 3.08 years.
The following is a summary of the status of the Company’s outstanding restricted stock awards as of
December 31, 2019 and 2018, and changes therein during the years then ended:
Shares of
Restricted
Stock
Outstanding
Weighted-
Average
Grant Date
Fair Value
Outstanding at December 31, 2017
Granted
Released from Restrictions
Forfeited
Outstanding at December 31, 2018
Granted
Released from Restrictions
Forfeited
Outstanding at December 31, 2019
84,228 $
15,286
(14,238 )
(1,018 )
84,258
15,805
(16,829 )
(1,314 )
81,920 $
21.89
29.63
17.51
22.40
24.03
31.57
20.79
24.95
26.13
Stock Option Plan
The Company has a stock option plan available for granting stock-based compensation awards to
employees and board members. The Company authorized a share pool of 760,000 shares of the Company’s
common stock for granting incentive stock options and non-qualified stock option awards. The stock
option plan has a remaining available share pool of 224,913 and 261,180 shares as of December 31, 2019
and 2018, respectively. 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. Compensation expense recognized related to
stock option awards was $68,983 and $48,401 for the years ended December 31, 2019 and 2018,
respectively. As of December 31, 2019, unrecognized compensation cost related to stock option awards
was $86,167, which is expected to be recognized over a weighted-average life of 1.91 years.
13. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
The following table presents share data related to the outstanding option awards:
Incentive Stock Options
Weighted-
Average
Exercise
Price
Options
Outstanding
104,652 $
34,900
(21,804 )
(1,404 )
116,344
36,250
(19,651 )
(4,174 )
19.36
29.63
17.75
28.52
22.63
31.62
17.19
28.93
Outstanding, January 1, 2018
Granted
Exercised
Forfeited/Expired
Outstanding, December 31, 2018
Granted
Exercised
Forfeited/Expired
Non-Qualified Stock
Options
Weighted-
Average
Exercise
Price
19.73
29.63
17.70
22.00
20.38
31.60
17.86
26.27
Options
Outstanding
107,026 $
2,740
(16,632 )
(204 )
92,930
5,580
(19,896 )
(1,389 )
Outstanding, December 31, 2019
128,769 $
25.79
77,225 $
21.73
Exercisable at December 31, 2019
68,797 $
21.56
65,275 $
20.30
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Kish Bancorp 2019 Annual Report
13. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
Option awards outstanding and exercisable as of December 31, 2019:
Incentive Stock Options
Expiration
Date
Exercise
Price
Share
Awards
Outstanding
Share
Awards
Exercisable
Remaining
Contractual
Life (years)
$
04/01/20
04/28/21
04/02/22
04/01/23
04/01/24
09/22/24
04/01/25
03/30/26
10/31/26
12/12/26
04/03/27
04/02/28
03/01/29
04/01/29
17.06
14.88
15.00
16.63
18.25
19.75
19.48
22.00
22.40
22.38
27.00
29.63
32.00
31.60
3,800
1,800
5,200
8,180
4,582
500
9,568
14,100
1,000
1,000
12,023
31,766
1,500
33,750
128,769
3,800
1,800
5,200
8,180
4,582
500
9,568
14,100
1,000
1,000
8,381
10,686
-
-
68,797
0.25
1.33
2.25
3.25
4.25
4.73
5.25
6.25
6.83
6.95
7.26
8.26
9.17
9.25
Non-Qualified Stock Options
Expiration
Date
Exercise
Price
Share
Awards
Outstanding
Share
Awards
Exercisable
Remaining
Contractual
Life (years)
$
04/01/20
04/28/21
04/02/22
04/01/23
04/01/24
09/22/24
04/01/25
03/30/26
10/31/26
12/12/26
04/03/27
04/02/28
04/01/29
17.06
14.88
15.00
16.63
18.25
19.75
19.48
22.00
22.40
22.38
27.00
29.63
31.60
3,800
1,800
6,200
8,180
5,182
500
11,004
15,906
1,000
1,000
14,445
2,628
5,580
77,225
3,800
1,800
6,200
8,180
5,182
500
11,004
15,906
1,000
1,000
9,905
798
-
65,275
0.25
1.33
2.25
3.25
4.25
4.73
5.25
6.25
6.83
6.95
7.26
8.26
9.25
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
2019
2018
$ 172,809,626 $ 149,468,932
4,996,216
5,408,070
$ 178,217,696 $ 154,465,148
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.
Lease Commitments
The Company leases office space and real estate for its bank branches with terms ranging from two years
to eighteen years. The Company’s leases are classified as operating leases, and, therefore, were not
recognized on the Company’s consolidated balance sheet prior to the adoption of the revised lease standard,
ASC 842. With the adoption of ASC 842, operating lease agreements are required to be recognized on the
consolidated balance sheet as a right-of-use (ROU) asset and a corresponding lease liability. As of
December 31, 2019, a combined ROU asset balance of $4,730,575 related to these operating leases is
included Accrued Interest and Other Assets on the consolidated balance sheet, and a combined lease
liability of $4,756,436 related to these operating leases is included in Accrued Interest and Other Liabilities
on the consolidated balance sheet.
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Kish Bancorp 2019 Annual Report
14. COMMITMENTS (Continued)
Lease Commitments (Continued)
15. REGULATORY RESTRICTIONS
Restriction on Cash and Due from Banks
Maturities of our lease liabilities for all operating leases for each of the next five years and thereafter are
as follows:
The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The
required reserve at December 31, 2019 and 2018 was $2,832,000 and $3,150,000, respectively.
$
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: imputed interest
Present value of lease liabilities $
Operating Lease
Payments
402,876
394,780
387,724
396,799
405,874
4,398,061
6,386,114
1,629,678
4,756,436
The calculated amount of the lease liability in the preceding table is impacted by the length of the lease
term and the discount rate used to present value the minimum lease payments. The Company’s lease
agreement includes one or more options to renew at the Company’s discretion. If at lease inception the
Company considers the exercising of a renewal option to be reasonably certain, the Company will include
the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic
842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As most of
our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate,
commensurate with the lease terms based on the information available at the lease commencement date in
determining the present value of the lease payments.
As of December 31, 2019, our combined operating leases have a weighted-average discount rate of 3.63%,
and a weighted-average remaining lease term of 16.2 years.
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.
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. There were no such borrowings by the Company during 2019 and 2018.
Dividends
The Pennsylvania Banking Code restricts the availability of capital surplus for dividend purposes. At
December 31, 2019, 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 Tier I and
Common Equity Tier 1 capital to risk-weighted assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act
(“FDICIA”) established five capital categories ranging from “well capitalized” to “critically
undercapitalized.” Should any institution fail to meet the requirements to be considered “adequately
capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.
As of December 31, 2019 and 2018, 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, 8 percent, and 5 percent, respectively.
46
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Kish Bancorp 2019 Annual Report
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:
2019
2018
Amount
Ratio
Amount
Ratio
2019
2018
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
$ 86,899,041 11.86 %
58,626,829 8.00
73,283,536 10.00
$ 81,649,007 11.95 %
54,674,300 8.00
68,342,875 10.00
$ 63,910,378 8.72 %
32,977,591 4.50
47,634,299 6.50
$ 58,785,380 8.60 %
30,754,294 4.50
44,422,869 6.50
$ 69,910,378 9.54 %
43,970,122 6.00
58,626,829 8.00
$ 64,693,336 9.47 %
41,005,725 6.00
54,674,300 8.00
$ 69,910,378 7.64 %
36,607,111 4.00
45,758,888 5.00
$ 64,693,336 7.67 %
33,756,857 4.00
42,196,071 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
$ 86,800,059 11.80 %
58,853,023 8.00
73,566,278 10.00
$ 78,784,431 11.47 %
54,946,308 8.00
68,682,885 10.00
$ 79,107,396 10.75 %
33,104,825 4.50
47,818,081 6.50
$ 71,948,760 10.48 %
30,907,298 4.50
44,643,875 6.50
$ 79,107,396 10.75 %
44,139,767 6.00
58,853,023 8.00
$ 71,948,760 10.48 %
41,209,731 6.00
54,946,308 8.00
$ 79,107,396 8.66 %
36,526,539 4.00
45,658,174 5.00
$ 71,948,760 8.55 %
27,473,154 4.00
34,341,443 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.
48
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Kish Bancorp 2019 Annual Report
17. FAIR VALUE MEASUREMENTS (Continued)
17. FAIR VALUE MEASUREMENTS (Continued)
This hierarchy requires the use of observable market data when available.
Impaired Loans
The following tables present the assets and liabilities reported on the Consolidated Balance Sheet at their
fair value on a recurring basis as of December 31, 2019 and 2018, 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
Total
Liabilities:
Derivatives
Total
Assets:
U.S. treasury securities
U.S. government agency securities
Obligations of states and
political subdivisions
Corporate securities
Mortgage-backed securities in
government-sponsored entities
Equity securities
Derivatives
Level I
Level II
Level III
Total
December 31, 2019
$
- $ 2,007,340 $
- 45,859,212
- $ 2,007,340
- 45,859,212
31,982,589
-
- 15,554,146
31,982,589
-
- 15,554,146
-
35,777,226
1,695,342
-
-
35,777,226
- 1,695,342
$ 1,695,342 $ 131,180,513 $
- $ 132,875,855
$
$
- $ 1,586,179 $
- $ 1,586,179
- $ 1,586,179 $
- $ 1,586,179
Level I
Level II
Level III
Total
December 31, 2018
$
- $ 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
-
-
40,384
17,033,499
-
- 3,450,017
40,384
-
Total
$ 3,450,017 $ 124,771,981 $
- $ 128,221,998
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.
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.
Derivatives
Derivative instruments are recorded at fair value based upon commercially reasonable industry and market
practices for valuing similar financial instruments. Certain inputs to the credit valuation models may be
based on assumptions and best estimates that are not readily observable in the marketplace. Valuations do
not reflect trading costs or counterparty charges that could apply if positions are terminated.
Other Real Estate Owned
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
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Kish Bancorp 2019 Annual Report
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, 2019 and 2018, 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
Mortgage servicing rights
Level I
Level II
Level III
Total
December 31, 2019
$
- $
-
- $
-
986,637 $
297,928
986,637
297,928
Level I
Level II
Level III
Total
December 31, 2018
$
- $
-
- $ 2,445,435 $ 2,445,435
389,222
-
389,222
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, 2019 and 2018.
December 31, 2019
Valuation
Impaired loans
Fair Value Techniques Unobservable Inputs
$ 722,573
Discount Rate
Discounted
Cash Flows
Impaired loans
$ 264,065
Property
appraisals
Management discount
for property type and
recent market volatility
Mortgage servicing
rights
$ 297,928
Discounted
cash flows
Discount rate
Prepayment speeds
December 31, 2018
Valuation
Impaired loans
Fair Value Techniques Unobservable Inputs
$ 1,793,513
Discount Rate
Discounted
Cash Flows
Range
4.00% - 8.50%
discount
Weighted Average
(5.18%)
15.00% - 100.00%
discount
Weighted Average
(28.93%)
2.68 - 3.28% discount
Weighted Average
(2.98%)
1.47 - 2.99
prepayment factor
Weighted Average
(1.83%)
Range
4.00% - 6.75%
discount
Weighted Average
(5.40%)
Impaired loans
$ 651,922
Property
appraisals
Management discount
for property type and
recent market volatility
15.00% discount
Weighted Average
(15.00%)
Mortgage servicing
rights
$ 389,222
Discounted
cash flows
Discount rate
Prepayment speeds
3.81 - 4.42% discount
Weighted Average
(4.12%)
1.09 - 2.20
prepayment factor
Weighted Average
(1.25%)
52
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Kish Bancorp 2019 Annual Report
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, 2019 and 2018 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, 2019 and 2018:
Carrying
Value
Fair
Value
2019
Level
I
Level
II
Level
III
Financial assets:
Investment securities
held to maturity
Net loans
Financial liabilities:
Deposits
Other borrowings
7,250,000 $
$
679,518,794
7,378,098 $
682,935,106
- $
-
7,378,098 $
-
682,935,106
-
$ 710,225,620 $ 711,098,065 $ 430,612,859 $
80,029,248
80,242,399
-
- $ 280,485,206
80,242,399
-
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
2018
Level
I
Level
II
Level
III
Financial assets:
Investment securities
held to maturity
Net loans
Financial liabilities:
Deposits
Other borrowings
7,000,000 $
$
630,440,136
7,095,937 $
601,794,275
- $
-
7,095,937 $
-
601,794,275
-
$ 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.
Net Unrealized
Gains
on Investment
Securities
Cash Flow
Hedges
Total
Accumulated other comprehensive
income, January 1, 2018
Other comprehensive loss before
reclassification
Amounts reclassified from
accumulated other comprehensive loss
Reclassification of certain income
tax effects from AOCI
Accumulated other comprehensive
income (loss), December 31, 2018
Other comprehensive income before
reclassification
Amounts reclassified from
accumulated other comprehensive loss
Amounts from change to AOCI
related to cash flow hedges
Accumulated other comprehensive
income (loss), December 31, 2019
$
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 )
1,698,566
-
1,698,566
(127,694 )
-
(127,694 )
-
(1,283,601 )
(1,283,601 )
$
253,014 $
(1,267,520 ) $
(1,014,506 )
The following table presents significant amounts reclassified out of each component of accumulated other
comprehensive income (loss) for the year ended December 31, 2019 and 2018:
Amount Reclassified
from Accumulated
Other Comprehensive
Income
Affected Line Item
in the Consolidated
Statement of Income where
Net Income is Presented
$
$
$
$
161,638
(33,944 )
Investment securities gains, net
Income tax expense
127,694
3,471
(729 )
Investment securities gains, net
Income tax expense
2,742
Unrealized gains on investment
securities, December 31, 2019
Unrealized gains on investment
securities, December 31, 2018
54
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Kish Bancorp 2019 Annual Report
BOARD OF DIRECTORS AND OFFICERS
20. SUBSEQUENT EVENTS
BOARD OF DIRECTORS OF KISH BANCORP, INC.
On Friday, February 7, 2020, Kish Agency Inc., a wholly-owned subsidiary of Kish Bank, entered into a
definitive agreement to acquire the assets of a local property and casualty insurance agency located in
Juniata County. The sale includes the current book of business and fixed assets of the agency. In an
associated transaction, Kish Bank has agreed to purchase the real estate where the agency office is located.
Management has reviewed events occurring through March 3, 2020, the date the financial statements were
issued, and no additional subsequent events occurred requiring accrual or disclosure.
56
50
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
Gregory T. Hayes, Member
Paul G. Howes, Member
William S. Lake, Member
Kathleen L. Rhine, Member
Paul H. Silvis, Member
Frances 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
Frances 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
Michael K. Halloran, Member
Melinda K. Kenepp, Member
William S. Lake, Member
Harvard K. McCardle, Member
Alan J. Metzler, Member
Gary L. Oden, Member
Phyllis L. Palm, Member
John Pannizzo, Member
James L. Shilling, Jr., 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
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, Risk Officer
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
Allan F. Bills, Vice President, Finance Reporting and Analytics Manager
Larry E. Burger, Vice President, Commercial Relationship Manager
Tina M. Collins, Vice President, Controller
Alta Corman-Wolf, Vice President, Residential Lender
Roxanne R. Greising, Vice President, Loan Review and Special Assets
Manager
Jeffrey A. Gum, Vice President, Managing Director of Kish Benefits
Consulting
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, Client Experience
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
Jeffrey D. Wilson, Vice President, CEO of Kish Agency
Penny L. Zesiger, Vice President, Residential Lender
Christina L. Bagrosky, Assistant Vice President, Private Client
Relationship Manager/CEO of Kish Travel
57
Kish Bancorp 2019 Annual Report
4255 East Main Street
Belleville, PA 17004
1-800-981-5474
www.KishBank.com