COMMUNITY FIRST BANCORP, INC. REYNOLDSVILLE, PENNSYLVANIA AUDIT REPORT

Transcription

1 COMMUNITY FIRST BANCORP, INC. REYNOLDSVILLE, PENNSYLVANIA AUDIT REPORT DECEMBER 31, 2014

2 COMMUNITY FIRST BANCORP, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2014 Independent Auditor s Report 1 Financial Statements Page Number Consolidated Balance Sheet 2 Consolidated Statement of Income 3 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Changes in Stockholders Equity 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7-28

3 INDEPENDENT AUDITOR S REPORT Board of Directors and Stockholders Community First Bancorp, Inc. Reynoldsville, Pennsylvania Report on the Financial Statements We have audited the accompanying consolidated financial statements of Community First Bancorp, Inc. and subsidiary which comprise the consolidated balance sheet as of December 31, 2014 and 2013; the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community First Bancorp, Inc. and subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Wexford, Pennsylvania March 6, 2015 S.R. Snodgrass, P.C. * 2100 Corporate Drive, Suite 400 * Wexford, Pennsylvania * Phone: (724) * Facsimile: (724)

4 COMMUNITY FIRST BANCORP, INC. CONSOLIDATED BALANCE SHEET December 31, ASSETS Cash and due from banks $ 1,191,016 $ 958,876 Interest-bearing deposit 3,719,115 1,355,657 Cash and cash equivalents 4,910,131 2,314,533 Investment securities available for sale, at fair value 6,944,165 7,891,368 Loans 92,970,123 83,935,444 Less allowance for loan losses 1,084,921 1,013,804 Net loans 91,885,202 82,921,640 Premises and equipment, net 1,596,304 1,681,362 Bank-owned life insurance 2,541,676 2,464,653 Accrued interest and other assets 1,330,023 1,242,471 TOTAL ASSETS $ 109,207,501 $ 98,516,027 LIABILITIES Deposits: Noninterest-bearing demand $ 15,999,419 $ 13,429,598 Interest-bearing demand 10,334,276 8,414,465 Money market 7,888,993 8,291,684 Savings 10,232,301 9,409,028 Time 46,600,003 40,288,882 Total deposits 91,054,992 79,833,657 Short-term borrowings 1,201, ,400 Other borrowings 6,000,000 7,000,000 Accrued interest and other liabilities 283, ,450 TOTAL LIABILITIES 98,540,787 87,971,507 STOCKHOLDERS' EQUITY Common stock, par value $.50; 2,000,000 shares authorized; 374,983 shares issued; 367,132 shares outstanding 187, ,492 Capital surplus 5,081,738 5,081,738 Retained earnings 5,044,545 4,915,600 Accumulated other comprehensive income 260, ,578 Treasury stock, at cost (7,851 shares) (194,776) (194,776) TOTAL COMMON EQUITY 10,379,826 10,257,632 Noncontrolling interest in subsidiary 286, ,888 TOTAL STOCKHOLDERS' EQUITY 10,666,714 10,544,520 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 109,207,501 $ 98,516,027 The accompanying notes are an integral part of the consolidated financial statements. 2

5 COMMUNITY FIRST BANCORP, INC. CONSOLIDATED STATEMENT OF INCOME Year Ended December 31, INTEREST AND DIVIDEND INCOME Loans, including fees $ 4,216,084 $ 4,161,554 Interest-bearing deposits 4,807 8,397 Investment securities 184, ,296 Total interest and dividend income 4,404,990 4,373,247 INTEREST EXPENSE Deposits 401, ,974 Short-term borrowings 2,906 3,431 Other borrowings 323, ,383 Total interest expense 728, ,788 NET INTEREST INCOME 3,676,841 3,526,459 Provision for loan losses 152, ,000 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,524,841 3,354,459 OTHER OPERATING INCOME Service fees on deposit accounts 167, ,858 Investment securities gains, net 29,610 4 Earnings on bank-owned life insurance 77,023 84,199 ATM fees 101,356 91,381 Investment division income 83,166 84,843 Other 26,567 55,655 Total other operating income 485, ,940 OTHER OPERATING EXPENSE Salaries and employee benefits 1,835,744 1,749,205 Occupancy, furniture, and equipment 414, ,504 Federal Deposit Insurance Corporation ("FDIC") expense 79,555 78,450 Professional fees 188, ,901 Stationery and supplies 63,782 66,473 Pennsylvania shares tax 80,397 80,528 Data processing 115,214 87,151 ATM expenses 86,421 72,554 Internet banking 55,582 46,164 Telephone 58,596 60,213 Other 437, ,688 Total other operating expense 3,415,764 3,213,831 Income before income tax expense 594, ,568 Income tax expense 159, ,151 NET INCOME 434, ,417 Less: Net income attributable to the noncontrolling interest 114, ,754 NET INCOME AVAILABLE TO COMMUNITY FIRST BANCORP, INC. $ 319,855 $ 353,663 EARNINGS PER SHARE $ 0.87 $ 0.96 AVERAGE SHARES OUTSTANDING 367, ,132 The accompanying notes are an integral part of the consolidated financial statements. 3

6 COMMUNITY FIRST BANCORP, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year Ended December 31, Net income $ 434,609 $ 468,417 Other comprehensive loss: Unrealized gains (losses) arising during the period 19,382 (97,881) Income tax effect (6,590) 33,279 Reclassification adjustment for gains on availablefor-sale securities included in net income (29,610) (4) Income tax effect 10,067 1 Other comprehensive loss (6,751) (64,605) Total comprehensive income before noncontrolling interest 427, ,812 Less: net income attributable to noncontrolling interest 114, ,754 Total comprehensive income attributable to Community First Bancorp, Inc. $ 313,104 $ 289,058 The accompanying notes are an integral part of the consolidated financial statements. 4

7 COMMUNITY FIRST BANCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Accumulated Other Noncontrolling Total Common Capital Retained Comprehensive Treasury Interest Stockholders' Stock Surplus Earnings Income Stock in Subsidiary Equity Balance, December 31, 2012 $ 187,492 $ 5,081,738 $ 4,749,250 $ 332,183 $ (194,776) $ 286,888 $ 10,442,775 Net income 353, , ,417 Other comprehensive loss (64,605) (64,605) Cash dividends to noncontrolling interest (114,754) (114,754) Cash dividends to common stockholders ($.51 per share) (187,313) (187,313) Balance, December 31, ,492 5,081,738 4,915, ,578 (194,776) 286,888 10,544,520 Net income 319, , ,609 Other comprehensive loss (6,751) (6,751) Cash dividends to noncontrolling interest (114,754) (114,754) Cash dividends to common stockholders ($.52 per share) (190,910) (190,910) Balance, December 31, 2014 $ 187,492 $ 5,081,738 $ 5,044,545 $ 260,827 $ (194,776) $ 286,888 $ 10,666,714 The accompanying notes are an integral part of the consolidated financial statements. 5

8 COMMUNITY FIRST BANCORP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, OPERATING ACTIVITIES Net income $ 434,609 $ 468,417 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and accretion 153, ,961 Provision for loan losses 152, ,000 Investment securities gains (29,610) (4) Loss (gain) on sale of real estate owned 13,033 (13,201) Deferred income taxes (24,580) (422) Decrease in FDIC prepaid insurance - 86,492 Increase in accrued interest receivable (5,014) (3,138) Decrease in accrued interest payable 2,878 (8,130) Earnings on bank-owned life insurance (77,023) (84,199) Other, net (65,359) (213,803) Net cash provided by operating activities 554, ,973 INVESTING ACTIVITIES Investment securities available for sale: Proceeds from maturities and principal repayments 966,924 1,310,565 Proceeds from sales 68,143 4 Purchases (68,883) (13,559) Increase in loans, net (9,303,451) (6,727,519) Purchase of premises and equipment (90,895) (92,903) Purchase of regulatory stock (328,900) (143,300) Redemption of regulatory stock 531,300 63,600 Proceeds from sale of real estate owned 42,952 90,658 Net cash used for investing activities (8,182,810) (5,512,454) FINANCING ACTIVITIES Increase in deposits, net 11,221,335 12,752 Increase in short-term borrowings, net 308, ,552 Increase in other borrowings - 2,000,000 Repayment of other borrowings (1,000,000) - Cash dividends to noncontrolling interest (114,754) (114,754) Cash dividends to common stockholders (190,910) (187,313) Net cash provided by financing activities 10,224,147 1,998,237 Increase (decrease) in cash and cash equivalents 2,595,598 (2,961,244) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,314,533 5,275,777 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,910,131 $ 2,314,533 Cash paid during the year for: Interest expense $ 725,271 $ 854,918 Income taxes 117, ,500 Noncash investing activities: Transfer of loans to real estate owned 210,862 18,672 The accompanying notes are an integral part of the consolidated financial statements. 6

9 COMMUNITY FIRST BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Basis of Presentation Community First Bancorp, Inc. (the Company ) is a Pennsylvania corporation organized to become the holding company of Community First Bank (the Bank ). The Company s principal sources of revenue come from dividends received from the Bank and an investment securities portfolio. The Bank is a state banking association with branch offices located in Reynoldsville, Sykesville, Punxsutawney, and Clarion, Pennsylvania. Its principal sources of revenue are derived from its commercial, commercial real estate, residential real estate, and consumer installment loans and investment portfolio as well as a variety of deposit account services. The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany transactions have been eliminated in consolidation. The accounting policies followed by the Company and the Bank and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. Investment Securities Investments in debt and equity securities are classified as held to maturity, available for sale, or trading. Securities classified as held to maturity are those that management has the positive intent and ability to hold to maturity. Securities classified as available for sale are those that could be sold for liquidity, investment management, or similar reasons, even though management has no present intentions to do so. Securities classified as trading are those that management has bought principally for the purpose of selling in the near term. The Company currently has no securities classified as held to maturity or trading. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of shareholders equity, net of tax. Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. Interest income includes amortization of purchase premium or discount and is amortized on the level-yield method without anticipating payments, except for U.S. government mortgage-backed and related securities where 12 months of historical prepayments are taken into consideration. Trading securities are carried at fair value with valuation adjustments included in other noninterest income. Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. For debt securities, management considers whether the present value of cash flow expected to be collected are less than the security s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline, and the Company s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the investor does not intend to sell the security, and it is more likely than not that it will not be required to sell the security, before recovery of the security s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the noncredit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. 7

10 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted Stock The Bank is a member of the Federal Home Loan Bank ( FHLB ) of Pittsburgh 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 for impairment as necessary. 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 to 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. Management considered that the FHLB maintains regulatory capital ratios in excess of all regulatory capital requirements, liquidity appears adequate, new shares of FHLB stock continue to change hands at the $100 par value, and the payment of dividends. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their principal amount. Interest on all loans is recognized as income when earned on the accrual method. The Company s general policy is to stop accruing interest on loans when it is determined that reasonable doubt exists as to the collectability of additional interest. Payments received on nonaccrual loans are recorded as income or applied against principal according to management s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan s yield based on the interest method. The Company is amortizing these amounts over the contractual life of the related loans. Allowance for Loan Losses The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. 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 that is charged to operations. The provision is based on management s evaluation of the adequacy of the allowance for loan losses which encompasses the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, 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 significant changes 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 individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of impaired loans is not the same as the definition of nonaccrual loans, although the two categories overlap. The Company may choose to place a loan on impaired status due to payment delinquency or uncertain collectability while not classifying the loan as nonaccrual. Factors considered by management in determining impairment include payment status and collateral 8

11 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses (Continued) 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 smallerbalance homogeneous loans and are typically measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified. 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. Management establishes the allowance for loan losses based upon its evaluation of the pertinent factors underlying the types and quality of loans in the portfolio. Commercial loans and commercial real estate loans are reviewed on a regular basis with a focus on larger loans along with loans which have experienced past payment or financial deficiencies. Larger commercial loans and commercial real estate loans which are 90 days or more past due are selected for impairment testing in accordance with U.S. generally accepted accounting principles ( GAAP ). These loans are analyzed to determine if they are impaired, which means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. All commercial loans that are delinquent 90 days and residential mortgage loans that are 120 days delinquent and are placed on nonaccrual status are classified on an individual basis. The remaining loans are evaluated and classified as groups of loans with similar risk characteristics. The Company allocates allowances based on the factors described below, which conform to the Company s asset classification policy. In reviewing risk within the Bank s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) the residential real estate loan portfolio; (ii) the commercial real estate loan portfolio; (iii) the commercial loan portfolio; (iv) the consumer installment loan portfolio; and (v) the other loan portfolios. Factors considered in this process included general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are then added to the historical allocation percentage to get the total factor to be applied to nonclassified loans. The following qualitative factors are analyzed: Levels of and trends in delinquencies Trends in volume and terms Trends in credit quality ratings Changes in management and lending staff Economic trends Concentrations of credit The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 20 years for furniture, fixtures, and equipment and 3 to 39 years for buildings. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. 9

12 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Real Estate Owned Real estate owned acquired in settlement of foreclosed loans is carried as a component of other assets at the lower of cost or fair value minus estimated cost to sell. Valuation allowances for estimated losses are provided when the carrying value of the real estate acquired exceeds the fair value. Direct costs incurred in the foreclosure process and subsequent holding costs incurred on such properties are recorded as expenses of current operations. 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. Income Taxes 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 currently maintains a simple capital structure; thus, there are no dilutive effects on earnings per share. Earnings per share are calculated by dividing net income by the weighted-average number of shares outstanding for the periods. Treasury shares are not deemed outstanding for earnings per share calculations. Advertising Costs Advertising costs are expensed as the costs are incurred. Advertising expenses amounted to $91,226 and $76,455 in 2014 and 2013, respectively. Noncontrolling Interest in Subsidiary In 2011, the Bank commenced an offering of Series A Preferred Non-Cumulative Stock. Proceeds from the 2011 sale of preferred stock were $1,267,030 reduced by $54,072 of issuance costs for net proceeds of $1,212,958. An additional offering of the Series A Preferred Non-Cumulative Stock commenced in Proceeds from the 2012 sale of preferred stock were $1,601,850 reduced by $17,979 of issuance costs for net proceeds of $1,583,871. The preferred stock has dividend rights senior to the common shares which are wholly owned by the Company. The stated annual dividend rate is 4.00 percent simple interest for the first five years, 4.50 percent simple interest for years six to ten, and variable thereafter on a semi-annual basis at 2.00 percent above the five-year treasury yield, with a minimum interest rate of 5.00 percent and a maximum interest rate not to exceed 8.00 percent. All dividend payments are subject to approval by the Board of Directors out of funds legally available for dividends. Comprehensive Income The Company is required to present comprehensive income and its components in a full set of general-purpose financial statements for all periods presented. Other comprehensive income exclusively comprises unrealized holding gains (losses) on the available-for-sale securities portfolio. 10

13 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash Flow Information Management has defined cash equivalents as Cash and due from banks and Interest-bearing deposit with original maturities of 90 days or less. Reclassification Certain items in the prior-year financial statements have been reclassified to conform to the current-year presentation. Such reclassifications did not affect net income or stockholders equity. 2. INVESTMENT SECURITIES The amortized cost and fair values of investment securities available for sale as of December 31 are summarized as follows: 2014 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government agency $ 1,500,000 $ - $ (13,455) $ 1,486,545 Obligations of state and political subdivisions 1,031,353 - (6,585) 1,024,768 Mortgage-backed securities - government-sponsored enterprises 2,935, ,380-3,060,899 Total debt securities 5,466, ,380 (20,040) 5,572,212 Equity securities - financial services 1,082, ,575 (723) 1,371,953 Total $ 6,548,973 $ 415,955 $ (20,763) $ 6,944, Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. government agency $ 1,500,000 $ - $ (33,870) $ 1,466,130 Obligations of state and political subdivisions 1,031,837 - (49,583) 982,254 Mortgage-backed securities - government-sponsored enterprises 3,902, ,035-4,077,394 Total debt securities 6,434, ,035 (83,453) 6,525,778 Equity securities - financial services 1,051, ,293 (455) 1,365,590 Total $ 7,485,948 $ 489,328 $ (83,908) $ 7,891,368 11

14 2. 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: 2014 Less than Twelve Months Twelve Months or Greater Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses U.S. government agency $ - $ - $ 1,486,545 $ (13,455) $ 1,486,545 $ (13,455) Obligations of state and political subdivisions - - 1,024,768 (6,585) 1,024,768 (6,585) Total debt securities - - 2,511,313 (20,040) 2,511,313 (20,040) Equity securities - financial services 78,170 (468) 6,000 (255) 84,170 (723) Total temporarily impaired securities $ 78,170 $ (468) $ 2,517,313 $ (20,295) $ 2,595,483 $ (20,763) 2013 Less than Twelve Months Twelve Months or Greater Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses U.S. government agency $ 1,466,130 $ (33,870) $ - $ - $ 1,466,130 $ (33,870) Obligations of state and political subdivisions ,253 (49,583) 982,253 (49,583) Total debt securities 1,466,130 (33,870) 982,253 (49,583) 2,448,383 (83,453) Equity securities - financial services - - 5,800 (455) 5,800 (455) Total temporarily impaired securities $ 1,466,130 $ (33,870) $ 988,053 $ (50,038) $ 2,454,183 $ (83,908) There are no positions that are other-than-temporarily impaired at December 31, The Company reviews its position quarterly and has asserted that at December 31, 2014, the declines outlined in the above table represent temporary declines. The Company does not intend to sell these securities, and it is not more likely than not the Company will be required to sell these securities before recovery of its cost basis, which may be maturity. There were six positions that were temporarily impaired at December 31, The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of general economic conditions. The amortized cost and fair value of debt securities at December 31, 2014, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value Due after one year through five years $ 1,500,000 $ 1,486,546 Due after five years through ten years 1,031,353 1,024,768 Due after ten years 2,935,519 3,060,898 Total $ 5,466,872 $ 5,572,212 12

15 2. INVESTMENT SECURITIES (Continued) Investment securities with a fair value of $ $3,094,405 at December 31, 2014, and $2,448,840 at December 31, 2013, were pledged to secure public deposits and other purposes required by law. The following is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment securities available for sale as of December 31: Proceeds from sales $ 68,143 $ 4 Gross gains 29,610 4 Gross losses LOANS Major classifications of loans are summarized as follows as of December 31: Real estate: One-to-four family $ 45,453,127 $ 39,813,105 Commercial 28,269,925 26,501,376 Commercial 15,080,909 12,976,399 Consumer installment 3,810,508 4,282,499 92,614,469 83,573,379 Net deferred loan fees 355, ,065 Less allowance for loan losses 1,084,921 1,013,804 Net loans $ 91,885,202 $ 82,921,640 The Company s primary business activity is with customers located within its local trade area that is concentrated in Jefferson, Clearfield, and Clarion counties, Pennsylvania. Commercial, residential, and consumer loans are granted. Although the Company has a diversified loan portfolio at December 31, 2014 and 2013, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area. As of December 31, 2014, aggregate loans of $60,000 or more extended to directors, executive officers, and their affiliates were $447,209. A summary of loan activity during the year is as follows: 2013 New Loans Repayments 2014 $ 947,466 $ 130,111 $ 630,368 $ 447, ALLOWANCE FOR LOAN LOSSES Qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio. During 2014, the qualitative factors for trends in delinquencies and nonaccruals decreased while the trends in volume and terms of loans; experience, ability, and depth of management; national and local economic trends; external factors; and concentrations of credit increased. All other factors remained the same as in the prior year. Overall the qualitative factors for commercial real estate, commercial, residential real estate, consumer installment loans, and other loans remained stable. 13

16 4. ALLOWANCE FOR LOAN LOSSES (Continued) The total allowance reflects management s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses adequate to cover loan losses inherent in the loan portfolio at December 31, The following tables present by portfolio segment the recorded investment in loans for the years ended December 31: 2014 One-to-Four Family Real Commercial Consumer Estate Real Estate Commercial Installment Unallocated Total Allowance for loan losses: Beginning balance $ 298,953 $ 397,150 $ 162,415 $ 72,577 $ 82,709 $ 1,013,804 Charge-offs - (32,841) (27,717) (31,882) - (92,440) Recoveries - 2,061 7,884 1,612-11,557 Provision (credit) 80,510 78,813 35,879 26,667 (69,869) 152,000 Ending balance $ 379,463 $ 445,183 $ 178,461 $ 68,974 $ 12,840 $ 1,084,921 Ending balance: individually evaluated for impairment $ 6,723 $ 23,838 $ - $ - $ - $ 30,561 Ending balance: collectively evaluated for impairment $ 372,740 $ 421,345 $ 178,461 $ 68,974 $ 12,840 $ 1,054,360 Loans: Ending balance: individually evaluated for impairment $ 273,763 $ 1,055,398 $ 978,614 $ - $ 2,307,775 Ending balance: collectively evaluated for impairment 45,179,364 27,214,527 14,102,295 3,810,508 90,306,694 Ending balance $ 45,453,127 $ 28,269,925 $ 15,080,909 $ 3,810,508 $ 92,614, One-to-Four Family Real Commercial Consumer Estate Real Estate Commercial Installment Unallocated Total Allowance for loan losses: Beginning balance $ 301,182 $ 260,070 $ 141,849 $ 81,009 $ 95,172 $ 879,282 Charge-offs (11,442) (19,694) (9,919) (12,993) - (54,048) Recoveries 1,500 2,266 5,500 7,304-16,570 Provision (credit) 7, ,508 24,985 (2,743) (12,463) 172,000 Ending balance $ 298,953 $ 397,150 $ 162,415 $ 72,577 $ 82,709 $ 1,013,804 Ending balance: individually evaluated for impairment $ - $ - $ - $ - $ - $ - Ending balance: collectively evaluated for impairment $ 298,953 $ 397,150 $ 162,415 $ 72,577 $ 82,709 $ 1,013,804 Loans: Ending balance: individually evaluated for impairment $ 217,334 $ 180,212 $ 88,542 $ - $ 486,088 Ending balance: collectively evaluated for impairment 39,595,771 26,321,164 12,887,857 4,282,499 83,087,291 Ending balance $ 39,813,105 $ 26,501,376 $ 12,976,399 $ 4,282,499 $ 83,573,379 14

17 4. ALLOWANCE FOR LOAN LOSSES (Continued) Credit Quality Information The following tables represent credit exposures by internally assigned grades for years ended December 31, 2014 and The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company s internal credit risk grading system is based on experiences with similarly graded loans. The Company s internally assigned grades are as follows: Pass loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are three sub-grades within the Pass category to further distinguish the loan. Special Mention loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Substandard loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful loans classified as Doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. Loss loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted Commercial Real Estate Commercial Pass $ 22,290,281 $ 12,491,479 Special Mention 4,057,132 1,765,150 Substandard 1,922, ,280 Doubtful - - $ 28,269,925 $ 15,080, Commercial Real Estate Commercial Pass $ 19,315,360 $ 10,774,663 Special Mention 5,065,154 1,533,096 Substandard 2,120, ,640 Doubtful - - $ 26,501,376 $ 12,976,399 15

18 4. ALLOWANCE FOR LOAN LOSSES (Continued) Credit Quality Information (Continued) The following tables present performing and nonperforming residential real estate and consumer loans based on payment activity for the years ended December 31, 2014 and Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due One-to-Four Family Real Consumer Estate Installment Performing $ 45,179,364 $ 3,802,412 Nonperforming 273,763 8,096 $ 45,453,127 $ 3,810, One-to-Four Family Real Consumer Estate Installment Performing $ 39,523,494 $ 4,267,483 Nonperforming 289,611 15,016 $ 39,813,105 $ 4,282,499 Following are tables which include an aging analysis of the recorded investment of past-due loans as of December 31: Days or Greater Total Past Total Days Days Past Due and Due and Loans Past Due Past Due Still Accruing Nonaccrual Nonaccrual Current Receivable One-to-four family real estate $ 43,659 $ - $ - $ - $ 43,659 $ 45,409,468 $ 45,453,127 Commercial real estate 1,418, , ,845 55,723 2,312,366 25,957,559 28,269,925 Commercial 755,571 20,980-58, ,720 14,246,189 15,080,909 Consumer installment 61,971 37,489 8, ,556 3,702,952 3,810,508 Total $ 2,279,232 $ 450,236 $ 454,941 $ 113,892 $ 3,298,301 $ 89,316,168 $ 92,614,469 16

19 4. ALLOWANCE FOR LOAN LOSSES (Continued) Credit Quality Information (Continued) Days or Greater Total Past Total Days Days Past Due and Due and Loans Past Due Past Due Still Accruing Nonaccrual Nonaccrual Current Receivable One-to-four family real estate $ 690,707 $ 110,107 $ 289,611 $ - $ 1,090,425 $ 38,722,680 $ 39,813,105 Commercial real estate 709, , ,212 1,088,510 25,412,866 26,501,376 Commercial 420,647-44,413 88, ,602 12,422,797 12,976,399 Consumer installment 111, , ,566 4,154,933 4,282,499 Total $ 1,932,234 $ 111,048 $ 548,067 $ 268,754 $ 2,860,103 $ 80,713,276 $ 83,573,379 Commercial loans are considered for nonaccrual status upon 90 days delinquency and residential and consumer loans are considered for nonaccrual status after 120 days. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income. Interest income on nonaccrual loans not recognized during 2014 and 2013 was $15,115 and $20,582, respectively. Impaired Loans The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of December 31: 2014 Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized With no related allowance recorded: One-to-four family real estate $ 267,675 $ 267,675 $ - $ 285,215 $ 19,864 Commercial real estate 234, , ,423 16,018 Commercial 978, , ,687 22,927 With an allowance recorded: One-to-four family real estate 6,088 6,088 6,723 1, Commercial real estate 820, ,557 23, ,676 23,283 Total $ 2,307,775 $ 2,307,775 $ 30,561 $ 1,656,920 $ 82, Unpaid Average Interest Recorded Principal Related Recorded Income Investment Balance Allowance Investment Recognized With no related allowance recorded: One-to-four family real estate $ 217,334 $ 217,334 $ - $ 224,351 $ - Commercial real estate 180, , ,714 2,231 Commercial 88,542 88, ,156 - Total $ 486,088 $ 486,088 $ - $ 513,221 $ 2,231 17

20 4. ALLOWANCE FOR LOAN LOSSES (Continued) Troubled Debt Restructurings In situations where, for economic or legal reasons related to a borrower s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a troubled debt restructuring. Management strives to identify borrowers in financial difficulty early and work with them to modify more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. Upon identification as a troubled debt restructuring, these loans are classified as impaired. During the year ending December 31, 2014, the Company identified seven new troubled debt restructurings with an outstanding balance of $818,727, for which it extended the term of the loans. In 2013, the Company had one loan identified as a troubled debt restructuring. Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded December 31, 2014 Loans Investment Investment Commercial 7 $ 818,727 $ 818,727 December 31, 2013 Commercial 1 26,560 26,560 During the years ending December 31, 2014 and 2013, there were no troubled debt restructurings identified in the prior 12 month period that subsequently defaulted. 5. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows as of December 31: Land $ 392,302 $ 392,302 Building 2,216,243 2,173,337 Furniture, fixtures, and equipment 1,169,402 1,126,814 Construction in process 3,624-3,781,571 3,692,453 Less accumulated depreciation 2,185,267 2,011,091 Total $ 1,596,304 $ 1,681,362 Depreciation expense charged to operations was $175,899 in 2014 and $172,959 in

21 6. DEPOSITS At December 31, 2014, stated maturities of time deposits were as follows: Year Ending Amount 2015 $ 34,052, ,009, ,211, ,580, ,745,596 $ 46,600,003 The aggregate of all time deposit accounts in denominations that meet or exceed the Federal Deposit Insurance Corporation insurance limit of $250,000 amounted to $13,408,554 and $6,166,497 at December 31, 2014 and 2013, respectively. 7. BORROWED FUNDS The Bank maintains a credit arrangement with the FHLB. This credit arrangement includes a revolving line of credit option (short-term borrowings), with borrowing terms of up to one year, and the ability to borrow additional funds on a longer-term basis. The FHLB borrowings are secured by a blanket security agreement on qualifying residential mortgage loans, certain securities, and the Bank s investment in FHLB stock. This credit line is subject to annual renewal, incurs no service charge, and has a variable interest rate that may be reset daily at the FHLB s discretion. The Bank s maximum available borrowing limit with the FHLB was approximately $46.8 million during Short-Term Borrowings The outstanding balances and related activity of the short-term borrowings consist of overnight repurchase agreements and are summarized as follows for the years ended December 31: Balance at year-end $ 1,201,876 $ 893,400 Maximum amount outstanding at any month-end 1,255,417 1,063,514 Average balance outstanding during the year 688, ,943 Weighted-average interest rate: As of year-end 0.38% 0.38% Paid during the year 0.42% 0.50% Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance. Other Borrowings FHLB advances consist of convertible, term, and revolving long-term advances. The following table presents information regarding such advances as of December 31: Maturity Type Interest Rate April 1, 2014 Revolving 0.25 % $ - $ 1,000,000 November 17, 2015 Convertible ,000,000 5,000,000 July 5, 2016 Midterm ,000,000 1,000,000 $ 6,000,000 $ 7,000,000

22 8. INCOME TAXES The provision for income taxes is summarized as follows as of December 31: Current $ 184,494 $ 175,573 Deferred (24,580) (422) Total provision for income taxes $ 159,914 $ 175,151 The components of the net deferred tax assets are as follows at December 31: Deferred tax assets: Allowance for loan losses $ 340,644 $ 316,464 Nonaccrual interest 5,259 6,865 Other 5,780 5,780 Total deferred tax assets 351, ,109 Deferred tax liabilities: Net unrealized gain on securities 134, ,842 Premises and equipment 34,496 36,502 Investment securities 10,421 10,421 Gross deferred tax liabilities 179, ,765 Net deferred tax assets $ 172,401 $ 144,344 The reconciliation between the federal statutory rate and the Company s effective income tax rate is as follows: % of % of Pretax Pretax Amount Income Amount Income Provision at statutory rate $ 202, % $ 218, % Effect of tax-exempt income (18,531) (3.1) (14,988) (2.3) Nondeductible interest 1, , Bank-owned life insurance (22,188) (3.7) (12,278) (1.9) Other, net (2,603) (0.5) (17,479) (2.8) Total provision and effective rate $ 159, % $ 175, % U.S. generally accepted accounting principles prescribe 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. 20

23 8. INCOME TAXES (Continued) 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. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before EMPLOYEE BENEFITS 401(k) Plan The Bank maintains a defined contribution 401(k) salary reduction plan for all employees who meet certain eligibility requirements. The Bank makes matching contributions based on 60 percent of voluntary contributions, up to 5 percent of the individual s compensation. Employee contributions are vested at all times, and the Bank contributions are fully vested after six years. Bank contributions for 2014 and 2013 amounted to $33,868 and $32,850, respectively. 10. COMMITMENTS In the normal course of business, management makes various commitments that are not reflected in the accompanying consolidated financial statements. The Company offers products to enable its customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The Company s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments is represented by the contractual amounts. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval, review procedures, and collateral requirements as deemed necessary. The off-balance sheet commitments consist of the following at December 31: Commitments to extend credit $ 13,798,417 $ 15,673,539 Stand-by letters of credit 597, ,070 Total $ 14,396,064 $ 16,003,609 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments consist primarily of available commercial and personal lines of credit and loans approved but not yet funded. The Company uses the same credit policies in making loan commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, as deemed necessary, is based upon management s credit evaluation in compliance with the Company s lending policy guidelines. Stand-by letters of credit obligate the Company to disburse funds to a third party if the Company s customer fails to perform under the terms of the agreement with the beneficiary. 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 at the expiration of the coverage period. The Company holds collateral for these instruments as deemed necessary. 21