**Exhibit 13**

** **

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

 

GRATZ, PENNSYLVANIA

 

AUDIT REPORT

 

DECEMBER 31, 2014

 

----

 

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

AUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 
| ** **                                                | **Page**                                                         |
|-----------------------------------------------------------|------------------------------------------------------------------|
| ** **                                                | **Number**                                                       |
|                                                      |                                                             |
| Report   of Independent Registered Public Accounting Firm | 1                                                                |
|                                                      |                                                             |
| Financial   Statements                                    |                                                             |
|                                                      |                                                             |
|                                                      | 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 - 7 |
|                                                      |                                                             |
| Notes   to the Consolidated Financial Statements          | 8 - 48                                                           |

 

----

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

GNB Financial Services, Inc.

 

We have audited the accompanying consolidated balance sheet of GNB Financial Services, Inc. and subsidiary as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of GNB Financial Services, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  GNB Financial Services, Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of GNB Financial Services, Inc.’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GNB Financial Services, 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 conformity with U.S. generally accepted accounting principles.

 
| /s/   S.R. Snodgrass, P.C. |   |
|----------------------------|--------|
|                       |   |
| Wexford,   Pennsylvania    |   |
| March 24,   2015      |   |

 

S.R. Snodgrass, P.C. * 2100 Corporate Drive, Suite 400 * Wexford, Pennsylvania  15090-8399 * Phone: (724) 934-0344 * Facsimile: (724) 934-0345

 

----

 

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

 
| ** **                                                                                                         | ** ** | **December 31,** | ** **  |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                                                         | ** ** | **2014**              | ** **  | **2013** | ** ** |
| ASSETS                                                                                                             |       |                  |        |   |   |
| Cash and due from banks                                                                                            |       | $                     | 3,701,754   |   | $ | 3,294,356 |   |
| Interest-bearing deposits with other institutions                                                                  |       | 15,655,042            |        | 2,701,164 |   |
| Federal funds sold                                                                                                 |       | 870,000               |        | 2,214,000 |   |
| Cash and cash equivalents                                                                                          |       | 20,226,796            |        | 8,209,520 |   |
|                                                                                                               |       |                  |        |   |   |
| Certificates of deposit with other banks                                                                           |       | 7,107,000             |        | 11,609,136 |   |
| Investment securities available for sale                                                                           |       | 20,825,203            |        | 18,112,284 |   |
| Investment securities held to maturity (fair value   of $9,314,317 and $14,399,659)                                |       | 9,267,387             |        | 14,356,610 |   |
| Loans, net                                                                                                         |       | 143,059,048           |        | 121,750,534 |   |
| Less: Allowance for loan losses                                                                                    |       | 1,158,260             |        | 1,416,060 |   |
| Net loans                                                                                                          |       | 141,900,788           |        | 120,334,474 |   |
|                                                                                                               |       |                  |        |   |   |
| Accrued interest receivable                                                                                        |       | 514,048               |        | 568,280 |   |
| Restricted investments in bank stock                                                                               |       | 523,700               |        | 598,500 |   |
| Premises and equipment, net                                                                                        |       | 3,276,777             |        | 3,203,980 |   |
| Cash surrender value of life insurance                                                                             |       | 6,149,768             |        | 5,978,318 |   |
| Goodwill                                                                                                           |       | 132,849               |        | — |   |
| Intangible assets                                                                                                  |       | 95,218                |        | 58,303 |   |
| Other real estate owned                                                                                            |       | —                |        | 72,000 |   |
| Other assets                                                                                                       |       | 889,800               |        | 571,008 |   |
|                                                                                                               |       |                  |        |   |   |
| TOTAL ASSETS                                                                                                       |       | $                     | 210,909,334 |   | $ | 183,672,413 |   |
|                                                                                                               |       |                  |        |   |   |
| LIABILITIES                                                                                                        |       |                  |        |   |   |
| Noninterest-bearing deposits                                                                                       |       | $                     | 29,282,228  |   | $ | 21,843,415 |   |
| Interest-bearing deposits                                                                                          |       | 153,037,280           |        | 133,140,982 |   |
| Total deposits                                                                                                     |       | 182,319,508           |        | 154,984,397 |   |
|                                                                                                               |       |                  |        |   |   |
| FHLB advances - long-term                                                                                          |       | 437,875               |        | 1,472,630 |   |
| Accrued interest payable                                                                                           |       | 131,924               |        | 152,865 |   |
| Other liabilities                                                                                                  |       | 1,831,160             |        | 1,655,752 |   |
|                                                                                                               |       |                  |        |   |   |
| TOTAL LIABILITIES                                                                                                  |       | 184,720,467           |        | 158,265,644 |   |
|                                                                                                               |       |                  |        |   |   |
| STOCKHOLDERS’ EQUITY                                                                                          |       |                  |        |   |   |
| Common stock ($5 par value; 2,000,000 shares   authorized; 511,277 shares issued: 505,399 and 505,361 outstanding) |       | 2,556,385             |        | 2,556,385 |   |
| Additional paid-in capital                                                                                         |       | 3,970,201             |        | 3,970,017 |   |
| Retained earnings                                                                                                  |       | 20,082,567            |        | 19,324,666 |   |
| Accumulated other comprehensive loss                                                                               |       | (74,233               | )           | (96,302 | ) |
| Treasury stock (5,878 and 5,916 shares)                                                                            |       | (346,053              | )           | (347,997 | ) |
|                                                                                                               |       |                  |        |   |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                    |       | 26,188,867            |        | 25,406,769 |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                    |       | $                     | 210,909,334 |   | $ | 183,672,413 |   |

 

See accompanying notes to the consolidated financial statements.

 

2

----

 

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

 
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                      | ** ** | **2014**                                   | ** ** | **2013** | ** ** |
| INTEREST AND DIVIDEND INCOME                                    |       |                                       |       |   |   |
| Loans, including fees                                           |       | $                                          | 7,176,940  |   | $ | 6,343,193 |   |
| Investment securities                                           |       |                                       |       |   |   |
| Taxable                                                         |       | 250,902                                    |       | 320,563 |   |
| Exempt from federal income tax                                  |       | 244,502                                    |       | 255,121 |   |
| Certificates of deposit in other banks                          |       | 242,073                                    |       | 312,386 |   |
| Other interest and dividend income                              |       | 49,849                                     |       | 21,317 |   |
| Total interest and dividend income                              |       | 7,964,266                                  |       | 7,252,580 |   |
|                                                            |       |                                       |       |   |   |
| INTEREST EXPENSE                                                |       |                                       |       |   |   |
| Deposits                                                        |       | 928,540                                    |       | 932,512 |   |
| Short-term borrowings                                           |       | 1,183                                      |       | — |   |
| FHLB advances - long-term                                       |       | 22,460                                     |       | 43,561 |   |
| Total interest expense                                          |       | 952,183                                    |       | 976,073 |   |
|                                                            |       |                                       |       |   |   |
| NET INTEREST INCOME BEFORE (CREDIT) PROVISION FOR LOAN   LOSSES |       | 7,012,083                                  |       | 6,276,507 |   |
| (Credit) provision for loan losses                              |       | (230,416                                   | )          | 55,325 |   |
|                                                            |       |                                       |       |   |   |
| NET INTEREST INCOME AFTER (CREDIT) PROVISION FOR LOAN   LOSSES  |       | 7,242,499                                  |       | 6,221,182 |   |
|                                                            |       |                                       |       |   |   |
| NONINTEREST INCOME                                              |       |                                       |       |   |   |
| Service charges on deposit accounts                             |       | 649,858                                    |       | 541,862 |   |
| Earnings on bank-owned life insurance                           |       | 171,449                                    |       | 167,609 |   |
| Investment securities gains                                     |       | 107,596                                    |       | — |   |
| Other                                                           |       | 70,513                                     |       | 15,811 |   |
| Total noninterest income                                        |       | 999,416                                    |       | 725,282 |   |
|                                                            |       |                                       |       |   |   |
| NONINTEREST EXPENSE                                             |       |                                       |       |   |   |
| Compensation and employee benefits                              |       | 2,484,327                                  |       | 2,060,156 |   |
| Occupancy                                                       |       | 305,331                                    |       | 187,470 |   |
| Furniture and fixtures                                          |       | 167,120                                    |       | 113,902 |   |
| Data processing                                                 |       | 549,942                                    |       | 301,805 |   |
| Professional fees                                               |       | 1,160,453                                  |       | 314,760 |   |
| Shares tax                                                      |       | 281,637                                    |       | 270,000 |   |
| Other                                                           |       | 879,011                                    |       | 624,913 |   |
| Total noninterest expense                                       |       | 5,827,821                                  |       | 3,873,006 |   |
|                                                            |       |                                       |       |   |   |
| Income before income tax expense                                |       | 2,414,094                                  |       | 3,073,458 |   |
| Income tax expense                                              |       | 973,904                                    |       | 922,712 |   |
|                                                            |       |                                       |       |   |   |
| NET INCOME                                                      |       | $                                          | 1,440,190  |   | $ | 2,150,746 |   |
|                                                            |       |                                       |       |   |   |
| EARNINGS PER SHARE, BASIC AND DILUTED                           |       | $                                          | 2.85       |   | $ | 4.26 |   |
|                                                            |       |                                       |       |   |   |
| WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING, BASIC   AND DILUTED |       | 505,395                                    |       | 505,402 |   |

 

See accompanying notes to the consolidated financial statements.

 

3

----

 

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2014**                                   | ** ** | **2013** | ** ** |
|                                                                                 |       |                                       |       |   |   |
| Net income                                                                           |       | $                                          | 1,440,190  |   | $ | 2,150,746 |   |
|                                                                                 |       |                                       |       |   |   |
| Components of other comprehensive income (loss):                                     |       |                                       |       |   |   |
|                                                                                 |       |                                       |       |   |   |
| Unrealized gain (loss) on available-for-sale   securities                            |       | 141,034                                    |       | (578,780 | ) |
| Tax effect                                                                           |       | (47,952                                    | )          | 196,786 |   |
|                                                                                 |       |                                       |       |   |   |
| Reclassification adjustment for investment   securities gains realized in net income |       | (107,596                                   | )          | — |   |
| Tax effect                                                                           |       | 36,583                                     |       | — |   |
|                                                                                 |       |                                       |       |   |   |
| Total other comprehensive income (loss)                                              |       | 22,069                                     |       | (381,994 | ) |
|                                                                                 |       |                                       |       |   |   |
| Total comprehensive income                                                           |       | $                                          | 1,462,259  |   | $ | 1,768,752 |   |

 

See accompanying notes to the consolidated financial statements. 

 

4

----

 

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY 

 
| ** **                                | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | **Treasury**           | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income (Loss)** | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
|                                      |       |                  |       |        |       |           |       |              |       |                   |       |       |       |       |       |
| Balance, December 31, 2012           |       | 511,277               |       | $           | 2,556,385  |           | $          | 3,970,017         |       | $                      | 17,851,104 |       | $          | 285,692    |       | $ | (46,797 | ) | $ | 24,616,401 |   |
|                                      |       |                  |       |        |       |           |       |              |       |                   |       |       |       |       |       |
| Net income                                |       |                  |       |        |       |           |       | 2,150,746         |       |                   |       |       |       | 2,150,746  |       |
| Other comprehensive loss                  |       |                  |       |        |       |           |       |              |       | (381,994               | )          |       |       | (381,994   | )          |
| Purchase of treasury stock (5,020 shares) |       |                  |       |        |       |           |       |              |       |                   |       | (301,200   | )          | (301,200   | )          |
| Dividends declared ($1.34 per share)      |       |                  |       |        |       |           |       | (677,184          | )          |                   |       |       |       | (677,184   | )          |
|                                      |       |                  |       |        |       |           |       |              |       |                   |       |       |       |       |       |
| Balance, December 31, 2013           |       | 511,277               |       | 2,556,385   |       | 3,970,017      |       | 19,324,666        |       | (96,302                | )          | (347,997   | )          | 25,406,769 |       |
|                                      |       |                  |       |        |       |           |       |              |       |                   |       |       |       |       |       |
| Net income                                |       |                  |       |        |       |           |       | 1,440,190         |       |                   |       |       |       | 1,440,190  |       |
| Other comprehensive income                |       |                  |       |        |       |           |       |              |       | 22,069                 |       |       |       | 22,069     |       |
| Sale of treasury stock (38 shares)        |       |                  |       |        |       | 184            |       |              |       |                   |       | 1,944      |       | 2,128      |       |
| Dividends declared ($1.35 per share)      |       |                  |       |        |       |           |       | (682,289          | )          |                   |       |       |       | (682,289   | )          |
|                                      |       |                  |       |        |       |           |       |              |       |                   |       |       |       |       |       |
| Balance, December 31, 2014           |       | 511,277               |       | $           | 2,556,385  |           | $          | 3,970,201         |       | $                      | 20,082,567 |       | $          | (74,233    | )          | $ | (346,053 | ) | $ | 26,188,867 |   |

 

See accompanying notes to the consolidated financial statements.

 

5

----

 

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

 
| ** **                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **2014**                                   | ** ** | **2013** | ** ** |
| OPERATING ACTIVITIES                                                                |       |                                       |       |   |   |
| Net income                                                                          |       | $                                          | 1,440,190  |   | $ | 2,150,746 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities: |       |                                       |       |   |   |
| (Credit) provision for loan losses                                                  |       | (230,416                                   | )          | 55,325 |   |
| Depreciation                                                                        |       | 253,437                                    |       | 183,397 |   |
| Amortization of intangible assets                                                   |       | 24,748                                     |       | 15,320 |   |
| Deferred income taxes                                                               |       | (255,014                                   | )          | (4,555 | ) |
| Net amortization of premiums and discounts                                          |       | 225,075                                    |       | 196,135 |   |
| Earnings on bank-owned life insurance                                               |       | (171,449                                   | )          | (167,609 | ) |
| Net realized gain on sales of securities                                            |       | 107,596                                    |       | — |   |
| Gain on sale of other real estate owned                                             |       | (12,302                                    | )          | 8,959 |   |
| Increase (decrease) in accrued interest receivable                                  |       | 106,829                                    |       | (13,689 | ) |
| Decrease in accrued interest payable                                                |       | (27,970                                    | )          | (25,659 | ) |
| Increase in accrued deferred compensation                                           |       | 21,422                                     |       | 109,614 |   |
| Other, net                                                                          |       | 435,571                                    |       | 222,792 |   |
| Net cash provided by operating activities                                           |       | 1,917,717                                  |       | 2,730,776 |   |
|                                                                                |       |                                       |       |   |   |
| INVESTING ACTIVITIES                                                                |       |                                       |       |   |   |
| Investment securities available for sale:                                           |       |                                       |       |   |   |
| Proceeds from sales                                                                 |       | 6,532,404                                  |       | — |   |
| Proceeds from calls and maturities                                                  |       | 3,000,000                                  |       | 3,960,000 |   |
| Purchases                                                                           |       | (9,522,014                                 | )          | (3,809,497 | ) |
| Investment securities held to maturity:                                             |       |                                       |       |   |   |
| Proceeds from calls and maturities                                                  |       | 5,685,000                                  |       | 2,445,225 |   |
| Purchases                                                                           |       | (696,385                                   | )          | (4,340,177 | ) |
| Purchases of certificates of deposit with other   banks                             |       | (498,000                                   | )          | (2,284,000 | ) |
| Proceeds from maturities of certificates of   deposit with other banks              |       | 2,083,000                                  |       | 3,972,000 |   |
| Increase in loans, net                                                              |       | (5,462,485                                 | )          | (7,409,576 | ) |
| Purchase of restricted investments in bank stock                                    |       | (418,100                                   | )          | (330,800 | ) |
| Redemptions of restricted investments in bank   stock                               |       | 822,800                                    |       | 407,300 |   |
| Purchase of premises and equipment                                                  |       | (107,482                                   | )          | (1,190,905 | ) |
| Proceeds from the sale of premises and equipment                                    |       | —                                     |       | 33,608 |   |
| Proceeds from the sale of other real estate owned                                   |       | 252,009                                    |       | 14,719 |   |
| Acquisition of Liberty Centre Bancorp, Inc., net   of cash acquired            |       | 2,839,696                                  |       | — |   |
| Net cash provided by (used for) investing   activities                              |       | 4,510,443                                  |       | (8,532,103 | ) |
|                                                                                |       |                                       |       |   |   |
| FINANCING ACTIVITIES                                                                |       |                                       |       |   |   |
| Increase in deposits, net                                                           |       | 7,304,032                                  |       | 1,100,181 |   |
| Repayment of FHLB advances - long-term                                              |       | (1,034,755                                 | )          | (1,012,360 | ) |
| Purchase of treasury stock                                                          |       | —                                     |       | (301,200 | ) |
| Sale of treasury stock                                                              |       | 2,128                                      |       | — |   |
| Cash dividends paid                                                                 |       | (682,289                                   | )          | (677,184 | ) |
| Net cash provided by (used for) financing   activities                              |       | 5,589,116                                  |       | (890,563 | ) |
|                                                                                |       |                                       |       |   |   |
| Increase (decrease) in   cash and cash equivalents                                  |       | 12,017,276                                 |       | (6,691,890 | ) |
|                                                                                |       |                                       |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    |       | 8,209,520                                  |       | 14,901,410 |   |
|                                                                                |       |                                       |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                          |       | $                                          | 20,226,796 |   | $ | 8,209,520 |   |
|                                                                                |       |                                       |       |   |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURES                                                  |       |                                       |       |   |   |
| Cash paid during the period for:                                                    |       |                                       |       |   |   |
| Interest                                                                            |       | $                                          | 973,124    |   | $ | 1,001,732 |   |
| Income taxes                                                                        |       | 851,000                                    |       | 961,000 |   |
|                                                                                |       |                                       |       |   |   |
| Noncash activity:                                                                   |       |                                       |       |   |   |
| Loans transferred to other real estate owned                                        |       | $                                          | 167,707    |   | $ | 95,678 |   |

 

See accompanying notes to the consolidated financial statements.

 

6

----

 

GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 
| ** **                                        | ** ** | **Year Ended**             | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **December 31, 2014** | ** ** |
| SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued)    |       |                            |       |
| Acquisition of Liberty Centre Bancorp, Inc.: |       |                            |       |
| Noncash assets acquired:                          |       | $                               |       |   |
| Investment securities available for sale          |       | 4,798                           |       |
| Loans                                             |       | 16,041,120                      |       |
| Restricted investments in bank stock              |       | 329,900                         |       |
| Accrued interest receivable                       |       | 52,597                          |       |
| Premises and equipment, net                       |       | 218,751                         |       |
| Intangible assets                                 |       | 61,664                          |       |
| Deferred tax assets                               |       | 388,865                         |       |
| Other assets                                      |       | 72,591                          |       |
| Goodwill                                          |       | 132,849                         |       |
|                                              |       | 17,303,135                      |       |
|                                              |       |                            |       |
| Liabilities assumed:                              |       |                            |       |
| Time deposits                                     |       | 9,582,419                       |       |
| Deposits, other than time deposits                |       | 10,448,660                      |       |
| Accrued interest payable                          |       | 7,029                           |       |
| Other liabilities                                 |       | 104,723                         |       |
|                                              |       | 20,142,831                      |       |
|                                              |       |                            |       |
| Net noncash assets acquired                       |       | 2,839,696                       |       |
|                                              |       |                            |       |
| Cash and cash equivalents acquired                |       | $                               | 3,575,466  |   |

 

See accompanying notes to the consolidated financial statements.

 

7

----

 

**GNB FINANCIAL SERVICES, INC. AND SUBSIDIARY**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

A summary of significant accounting and reporting policies applied in the presentation of the accompanying consolidated financial statements follows:

 

**Nature of Operations and Basis of Presentation**

 

GNB Financial Services, Inc. (the “Company”) is a bank holding company for its wholly owned subsidiary, The Gratz Bank (the “Bank”).  The Bank is a full-service state chartered commercial bank.  In 2012, the Bank converted from a federal charter to a state charter.  The Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking.

 

The Bank provides a variety of financial services to individual and commercial customers throughout Dauphin County, Pennsylvania, and other contiguous counties, through its main office located in Gratz, Pennsylvania, and its branch offices in Valley View, Herndon, and Pottsville, Pennsylvania.  The Bank’s primary deposit products are interest and noninterest-bearing checking accounts, savings accounts, and certificates of deposit.  Its primary lending products are residential real estate, consumer, agriculture, and commercial and commercial real estate loans.

 

**Principles of Consolidation**

 

The consolidated financial statements include the accounts of the Company and the Bank.  All significant intercompany amounts have been eliminated in the consolidation.  GNB Financial Services, Inc. transacts no other material business.

 

**Estimates**

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the evaluation of securities for other-than-temporary impairment and the fair value of financial instruments.

 

**Presentation of Cash Flows**

 

For purposes  of reporting cash flows, cash and cash equivalents includes cash and due from banks (including cash items in process of clearing) and interest-bearing deposits with other institutions with an original maturity of 90 days or less, and federal funds sold.  Generally, federal funds are sold for one-day periods.

 

8

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

**Investment Securities**

 

Debt securities which management has the positive intent and ability to hold until maturity are classified as held to maturity.  Held-to-maturity securities are stated at cost, adjusted for amortization of premium, and accretion of discount computed on a level yield basis.  Securities not classified as held to maturity or trading are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported, net of tax, in accumulated other comprehensive income. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings.

 

The Bank periodically evaluates its investments for other-than-temporary impairment.  Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses and a new cost basis is established.  Factors considered in determining whether declines in fair value are other than temporary include the significance of the decline, the duration of the decline, current economic conditions, and whether management intends to sell the security; if it is more likely than not that management will be required to sell the security before recovery; or if management does not expect to recover the entire amortized cost basis.  A decline that is considered to be other than temporary is recorded as a loss within noninterest income on the Consolidated Statement of Income.

 

**Loans Receivable**

 

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees and costs.  Interest income is accrued on the unpaid principal balance.

 

The accrual of interest is generally discontinued when the contractual payment of principal  or interest has become 90 days past due or management  has significant doubts about further collectability of principal or interest, even though the loan may be currently  performing.  A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured.  When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses.  Interest received on nonaccrual loans is generally either applied against principal or reported as interest income, 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.

 

9

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

**Loans Receivable****(Continued)**

 

Loan origination and commitment fees, as well as certain direct origination costs, are to be deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.  Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.  At this time, management has determined that this statement is not material to the Bank and the Bank does not defer loan fees and costs in accordance with ASC 310-20.

 

**Allowance for Loan Losses**

 

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 for loan losses.

 

The allowance for loan losses is maintained at a level considered adequate to provide for probable losses inherent in the loan portfolio.  Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

The allowance for loan losses consists of specific, general, and unallocated components.   The specific component relates to loans that are classified as Doubtful, Substandard, or Special Mention.   For such loans that are also classified as impaired, an allowance for loan losses is established when the present value of expected cash flows discounted at the loan’s effective interest rate, the fair value of the collateral if the loan is collateral dependent less costs to sell, or observable market price of the impaired loan is lower than its carrying value.  The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance for loan losses reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.   Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, commercial real estate, agriculture, and municipal loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market price, or the fair value of the collateral if the loan is collateral dependent less costs to sell.

 

When foreclosure is probable, impairment is measured based on the fair value of the collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred, generally when foreclosure proceedings have begun, and the fair value of the collateral exceeds the recorded investment in the loan.

 

Large groups of smaller-balance homogenous loans are collectively evaluated for impairment.  Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

 

10

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

**Loans Acquired**

 

Loans acquired, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance.  In determining the fair value of purchased loans, management considers a number of factors including, among other things, the remaining life of the acquired loans, estimated repayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, and net present value of cash flows expected to be received. Purchased credit-impaired loans are accounted for in accordance with guidance for certain loans or debt securities acquired in a transfer when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. For evidence of credit deterioration since origination, the Company considered loans on a loan-by-loan basis by primarily focusing on past-due status, frequency of late payments, internal loan classification, as well as interviews with current loan officers and collection employees for other evidence that may be indicative of deterioration of credit quality. Once these loans were segregated, the Company evaluated each of these loans on a loan-by-loan basis to determine the probability of collecting all contractually required payments.

 

The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition.

 

For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

 

**Loan Charge-Off Policies**

 

Consumer loans are generally charged down to the fair value of collateral securing the asset when the loan is 120 days past due. Loans secured by real estate are generally charged down to the fair value of real estate securing the asset when the loan is 180 days past due. All other loans are generally charged down to the net realizable value when the loan is 90 days past due.

 

11

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 (“TDR”). Management strives to identify borrowers in financial difficulty early and work with them to modify to 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. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans.

 

**Premises and Equipment**

 

Land is carried at cost. Buildings and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on both the straight-line and accelerated methods over the estimated useful lives of the related assets, which range from 3 to 15 years for furniture, fixtures, and equipment and 5 to 50 years for building and improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

 

**Restricted Investments in Bank Stock**

 

Restricted investments in bank stock, which represent required investments in the common stock of correspondent banks, are carried at cost, and consist of common stock in the Federal Home Loan Bank (“FHLB”) of Pittsburgh and Atlantic Community Bankers Bank (“ACBB”).

 

Management evaluates the restricted stock for impairment.  Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability  of their cost is influenced by criteria such as (1) the significance  of the decline in net assets of the FHLB as compared to the capital stock amounts for the FHLB and the length of time this situation  has persisted, (2) commitments  by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative  and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

 

Management believes no impairment charge is necessarily related to the FHLB and ACBB restricted stock as of December 31, 2014 and 2013.

 

**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. No impairment of goodwill was recognized in any of the periods presented.

 

12

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

**Business Combinations**

 

At the date of acquisition, the Company records the net assets of acquired companies on the Consolidated Balance Sheet at their estimated fair value, and goodwill is recognized for the excess of the estimated fair value over the purchase price of the acquired net assets.  The results of operations for acquired companies are included in the Company’s Consolidated Statement of Income beginning at the acquisition date.  Expenses arising from acquisition activities are recorded in the Consolidated Statement of Income during the period incurred.

 

**Intangible Assets**

 

Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to expense over a 10-year life using the sum of the years’ digits method. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

 

**Other Real Estate Owned**

 

Other real estate owned is comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure and loans classified as in-substance foreclosure.   A loan is classified as in-substance foreclosure when the Bank has taken possession of the collateral regardless of whether formal foreclosure proceedings take place.  Other real estate owned is initially recorded at fair value, net of estimated selling costs, at the date of foreclosure, establishing a new cost basis.  After foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell.  Revenues and expenses from operations and changes in the valuation allowance are included in other expenses.

 

**Bank-Owned Life Insurance**

 

The Company owns insurance on the lives of a certain group of employees and directors.  The cash surrender value of these policies is included as an asset on the Consolidated Balance Sheet, and any increases in the cash surrender value are recorded as noninterest income on the Consolidated Statement of Income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as noninterest income.

 

**Employee Benefits**

 

Salaries and employee benefit expenses include contributions to a 401(k) plan covering eligible employees of the Company and a deferred compensation plan for the benefit of members of the Board of Directors and certain officers.

 

**Income Taxes**

 

The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When necessary, valuation allowances are established to reduce deferred tax assets to the amount expected to be realized.  Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.  The Company files consolidated federal income tax returns with its subsidiary.

 

13

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

**Earnings Per Share**

 

The Company currently maintains a simple capital structure; therefore, there are no dilutive effects on earnings per share. As such, earnings per share computations are based upon the weighted number of shares outstanding for each of the reported periods. Treasury shares are not deemed outstanding for earnings per share calculations.

 

**Comprehensive Income**

 

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale.

 

**Advertising Costs**

 

The Company expenses advertising costs as incurred. Advertising costs for the years ended December 31, 2014 and 2013 were $10,150 and $25,394, respectively.

 

**Off-Balance-Sheet Financial Instruments**

 

In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the Consolidated Balance Sheet when they are funded.

 

**Recent Accounting Pronouncements**

 

In June 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-08, *Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements.* The amendments in this Update affect the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. The amendments do all of the following: (1) change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment company; (2) require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting; and (3) require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in this Update are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. This Update became effective for the Company on January 1, 2014, and did not have a significant impact on the Company’s financial statements.

 

In July 2013, the FASB issued ASU 2013-11, *Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.* This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows.  To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the

 

14

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

**Recent Accounting Pronouncements****(Continued)**

 

entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.  The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.  This Update became effective for the Company on January 1, 2014, and did not have a significant impact on the Company’s financial statements.

 

In January 2014, the FASB issued ASU 2014-01, *Investments — Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.* The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).  The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014.  Early adoption is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In January 2014, the FASB issued ASU 2014-04, *Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.*The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction*.* The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method.  This Update is not expected to have a significant impact on the Company’s financial statements.

 

In May 2014, the FASB issued ASU 2014-09, *Revenue from Contracts with Customers* (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

 

15

----

 

**1.****                                     ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

**Recent Accounting Pronouncements****(Continued)**

 

In June 2014, the FASB issued ASU 2014-11, *Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures*.  The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.  For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.  The amendments also require enhanced disclosures.  The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014.  An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited.  The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date.  This Update is not expected to have a significant impact on the Company’s financial statements.

 

In June 2014, the FASB issued ASU 2014-12, *Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period*.  The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost.  This Update is not expected to have a significant impact on the Company’s financial statements.

 

**Reclassifications**

 

Certain previously reported items have been reclassified to conform to the current year’s classifications. The reclassifications have no effect on total assets, total liabilities, and stockholders’ equity.

 

16

----

 

**2.****                                     ****INVESTMENT SECURITIES**

 

The amortized cost and fair value of investment securities available for sale and held to maturity are summarized as follows:

 
| ** **                                      | ** ** | **December 31, 2014** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | ** **                      | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Amortized**                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                      | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **Available for Sale:**                         |       |                            |       |   |   |   |   |   |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Negotiable certificates of deposit              |       | $                               | 6,338,404  |   | $ | 10,936 |   | $ | (53,770 | ) | $ | 6,295,570 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| U.S. government agency securities               |       | 14,599,274                      |       | 43,128 |   | (112,769 | ) | 14,529,633 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Total available-for-sale securities             |       | $                               | 20,937,678 |   | $ | 54,064 |   | $ | (166,539 | ) | $ | 20,825,203 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| **Held to Maturity:**                           |       |                            |       |   |   |   |   |   |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Obligations of state and political subdivisions |       | $                               | 9,267,387  |   | $ | 79,542 |   | $ | (32,612 | ) | $ | 9,314,317 |   |

 
| ** **                                      | ** ** | **December 31, 2013** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | ** **                      | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Amortized**                   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair** | ** ** |
| ** **                                      | ** ** | **Cost**                        | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **Available for Sale:**                         |       |                            |       |   |   |   |   |   |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| U.S. government agency securities               |       | $                               | 18,258,197 |   | $ | 199,674 |   | $ | (345,587 | ) | $ | 18,112,284 |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| **Held to Maturity:**                           |       |                            |       |   |   |   |   |   |   |
|                                            |       |                            |       |   |   |   |   |   |   |
| Obligations of state and political subdivisions |       | $                               | 14,356,610 |   | $ | 135,938 |   | $ | (92,889 | ) | $ | 14,399,659 |   |

 

17

----

 

**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.

 
| ** **                                      | ** ** | **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** | ** ** |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Negotiable certificates of deposit              |       | $                                          | 4,700,634  |   | $ | (53,770 | ) | $ | — |   | $ | — |   | $ | 4,700,634 |   | $ | (53,770 | ) |
| U.S. government agency securities               |       | 3,967,049                                  |       | (26,289 | ) | 6,035,676 |   | (86,480 | ) | 10,002,725 |   | (112,769 | ) |
| Obligations of state and political subdivisions |       | 1,156,728                                  |       | (5,757 | ) | 1,611,324 |   | (26,855 | ) | 2,768,052 |   | (32,612 | ) |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Total                                           |       | $                                          | 9,824,411  |   | $ | (85,816 | ) | $ | 7,647,000 |   | $ | (113,335 | ) | $ | 17,471,411 |   | $ | (199,151 | ) |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                      | ** ** | **December 31, 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 securities               |       | $                                          | 8,525,567  |   | $ | (289,594 | ) | $ | 2,171,074 |   | $ | (55,993 | ) | $ | 10,696,641 |   | $ | (345,587 | ) |
| Obligations of state and political subdivisions |       | 3,045,691                                  |       | (72,238 | ) | 542,561 |   | (20,651 | ) | 3,588,252 |   | (92,889 | ) |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Total                                           |       | $                                          | 11,571,258 |   | $ | (361,832 | ) | $ | 2,713,635 |   | $ | (76,644 | ) | $ | 14,284,893 |   | $ | (438,476 | ) |

 

The Company reviews its position quarterly and has asserted that as of December 31, 2014 and 2013, the declines outlined in the above tables represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.  There were 61 positions that were temporarily impaired at December 31, 2014.  The Company has concluded that the unrealized losses disclosed above are not other than temporary but are the result of interest rate changes that are not expected to result in the noncollection of principal and interest during the period.

 

18

----

 

**2.****                         ****INVESTMENT SECURITIES (Continued)**

 

The amortized cost and fair value of debt securities at December 31, 2014 and 2013, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
| ** **                             | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **Amortized**                    | ** ** | **Fair**                       | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **December 31, 2014**        | ** ** | **Cost**                         | ** ** | **Value**                      | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                   |       |                             |       |                           |       |   |   |   |   |
| Due within one year                    |       | $                                | 1,010,304  |                           | $          | 1,013,182 |   | $ | 1,501,898 |   | $ | 1,512,941 |   |
| Due after one year through five years  |       | 15,233,571                       |       | 15,141,219                     |       | 4,415,553 |   | 4,438,772 |   |
| Due after five years through ten years |       | 4,693,803                        |       | 4,670,802                      |       | 3,349,936 |   | 3,362,604 |   |
| Due after ten years                    |       | —                           |       | —                         |       | — |   | — |   |
|                                   |       |                             |       |                           |       |   |   |   |   |
| Total                                  |       | $                                | 20,937,678 |                           | $          | 20,825,203 |   | $ | 9,267,387 |   | $ | 9,314,317 |   |
|                                   |       |                             |       |                           |       |   |   |   |   |
| ** **                             | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
| ** **                             | ** ** | **Amortized**                    | ** ** | **Fair**                       | ** ** | **Amortized** | ** ** | **Fair** | ** ** |
| **December 31, 2013**        | ** ** | **Cost**                         | ** ** | **Value**                      | ** ** | **Cost** | ** ** | **Value** | ** ** |
|                                   |       |                             |       |                           |       |   |   |   |   |
| Due within one year                    |       | $                                | 770,879    |                           | $          | 776,429 |   | $ | 4,050,172 |   | $ | 4,082,884 |   |
| Due after one year through five years  |       | 9,657,677                        |       | 9,774,513                      |       | 6,563,239 |   | 6,643,578 |   |
| Due after five years through ten years |       | 7,829,641                        |       | 7,561,342                      |       | 3,628,710 |   | 3,558,177 |   |
| Due after ten years                    |       | —                           |       | —                         |       | 114,489 |   | 115,020 |   |
|                                   |       |                             |       |                           |       |   |   |   |   |
| Total                                  |       | $                                | 18,258,197 |                           | $          | 18,112,284 |   | $ | 14,356,610 |   | $ | 14,399,659 |   |

 

During the year ended December 31, 2014, proceeds from the sale of securities were $6,532,404 resulting in gross gains of $107,596. There were no sales of securities during the year ended December 31, 2013.

 

The Company had pledged investment securities with a carrying value of $4,152,786 and $4,210,586 to secure public monies as of December 31, 2014 and 2013, respectively.

 

19

----

 

**3.****                         ****LOANS RECEIVABLE**

 

Loans receivable consist of the following:

 
| ** **                    | ** ** | **December 31,** | ** **  |
|-------------------------------|------------|-----------------------|-------------|
| ** **                    | ** ** | **2014**              | ** **  | **2013** | ** ** |
|                          |       |                  |        |   |   |
| Agriculture loans             |       | $                     | 19,568,947  |   | $ | 20,176,283 |   |
| Commercial loans              |       | 17,263,298            |        | 19,019,528 |   |
| Commercial real estate loans  |       | 2,620,947             |        | 3,457,713 |   |
| Residential real estate loans |       | 98,769,777            |        | 75,016,809 |   |
| Consumer loans                |       | 1,207,910             |        | 1,135,831 |   |
| Municipal loans               |       | 3,628,169             |        | 2,944,370 |   |
|                          |       | 143,059,048           |        | 121,750,534 |   |
| Less:                         |       |                  |        |   |   |
| Allowance for loan losses     |       | 1,158,260             |        | 1,416,060 |   |
| Total                         |       | $                     | 141,900,788 |   | $ | 120,334,474 |   |

 

Purchased loans acquired are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

 

For each acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, *Receivables —Loans and Debt Securities Acquired with Deteriorated Credit Quality*.  Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between the acquisition dates and December 31, 2014 and 2013.  The fair value of purchased credit-impaired loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral.  The carrying value of purchased loans acquired with deteriorated credit quality was $488,257 at December 31, 2014.  There were no loans remaining at December 31, 2013, with deteriorated credit quality.

 

On the acquisition date in the Liberty Centre Bancorp, Inc. acquisition, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired was $830,035 and the estimated fair value of the loans was $681,568. Total contractually required payments on these loans, including interest, at the acquisition date, was $1,574,827. However, the Company’s preliminary estimate of expected cash flows was $759,835. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $814,992 relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $78,267 on the acquisition date relating to these impaired loans.

 

20

----

 

**3.****                         ****LOANS RECEIVABLE (Continued)**

 

The carrying value of the loans acquired with specific evidence of deterioration in credit quality was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Liberty Centre Bancorp, Inc. acquisition as of March 28, 2014:

 
| ** **               | ** ** | **March 28,** | ** ** |
|--------------------------|------------|--------------------|------------|
| ** **               | ** ** | **2014**           | ** ** |
|                     |       |               |       |
| Unpaid principal balance |       | $                  | 830,035    |   |
| Interest                 |       | 744,792            |       |
| Contractual cash flows   |       | 1,574,827          |       |
| Non-accretable discount  |       | (814,992           | )          |
| Expected cash flows      |       | 759,835            |       |
| Accretable discount      |       | (78,267            | )          |
| Estimated fair value     |       | $                  | 681,568    |   |

 

Changes in the amortizable yield for purchased credit-impaired loans were as follows for the year ended December 31, 2014:

 
| ** **                     | ** ** | **Liberty**            | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **Centre**             | ** ** |
| ** **                     | ** ** | **Bancorp, Inc.** | ** ** |
|                           |       |                   |       |
| Balance at March 28, 2014 |       | $                      | 78,267     |   |
| Accretion and other            |       | (50,035                | )          |
|                           |       |                   |       |
| Balance at the end of the year |       | $                      | 28,232     |   |

 

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality:

 
| ** **          | ** ** | **December 31,** | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2014**              | ** ** |
|                |       |                  |       |
| Outstanding balance |       | $                     | 544,789    |   |
| Carrying amount     |       | 488,257               |       |
|                     |            |                       |            |  |

 

The Company’s loan portfolio consists predominantly of one-to-four family first mortgage loans throughout Dauphin County, Pennsylvania, and other contiguous counties.  These loans are typically secured by first lien positions on the respective real estate properties and are subject to the Bank’s loan underwriting policies.  In general, the Company’s loan portfolio performance is dependent upon the local economic conditions.

 

21

----

 

**3.****                         ****LOANS RECEIVABLE (Continued)**

 

In the normal course of business, loans are extended to officers, directors, and corporations in which they are beneficially interested as stockholders, officers, or directors.  A summary of loan activity for those officers and directors for the years ended December 31, 2014 and 2013, is as follows:

 
| **December 31,** | ** ** | ** **    | ** ** | **Amounts**   | ** ** | **December 31,** | ** ** |
|-----------------------|------------|---------------|------------|---------------|------------|-----------------------|------------|
| **2013**              | ** ** | **Additions** | ** ** | **Collected** | ** ** | **2014**              | ** ** |
|                  |       |          |       |          |       |                  |       |
| $                     | 845,690    |          | $          | 2,521,989     |       | $                     | (2,667,812 | ) | $ | 699,867 |   |
|                  |       |          |       |          |       |                  |       |
| **December 31,** | ** ** | ** **    | ** ** | **Amounts**   | ** ** | **December 31,** | ** ** |
| **2012**              | ** ** | **Additions** | ** ** | **Collected** | ** ** | **2013**              | ** ** |
|                  |       |          |       |          |       |                  |       |
| $                     | 1,772,058  |          | $          | 1,847,791     |       | $                     | (2,774,159 | ) | $ | 845,690 |   |

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES**

 

The segments of the Company’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The loan segments used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio and therefore, no further disaggregation is considered necessary. The Company’s loan portfolio consists primarily of one-to-four family residential real estate loans, and to a lesser extent, agricultural loans, commercial real estate loans, commercial loans, consumer loans including home equity loans, and municipal loans.

 

The Company’s primary lending activity is the origination of residential real estate loans to enable borrowers to purchase or refinance existing homes. The Company also originates agricultural loans to local farmers and agricultural businesses that are generally secured by farmland and equipment as well as commercial loans extended to small to mid-sized commercial and industrial entities. The Company’s commercial real estate loans consist of mortgage loans secured by income producing multi-family and nonresidential real estate, such as by apartment buildings, small office buildings, and owner-occupied properties.  The consumer loan portfolio consists of lending in the form of home equity loans secured by financed property and personal consumer loans, which may be secured or unsecured, and the municipal loans portfolio consists of loans to qualified local municipalities, which are generally supported by the taxing authority of the borrowing municipality, and is frequently secured by collateral.

 

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: agriculture loans, commercial real estate loans, commercial loans, residential real estate loans, consumer loans, and municipal 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 two-year period for all portfolio segments.

 

22

----

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES (Continued)**

 

Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor to be applied to nonclassified loans. The following qualitative factors are analyzed for each portfolio segment:

 

·                  Levels of and trends in delinquencies

·                  Trends in volume and terms

·                  Changes in collateral

·                  Changes in management and lending staff

·                  Economic trends

·                  Concentrations of credit

·                  Changes in lending policies

·                  External factors

·                  Changes in underwriting process

·                  Trends in credit quality ratings

 

These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio.

 

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the Consolidated Balance Sheet date. The Company considers the allowance for loan losses adequate to cover loan losses inherent in the loan portfolio at December 31, 2014 and 2013.

 

The following tables present balances in the allowance for loan losses and recorded investment in loans by portfolio segment and based on impairment method as of and for the years ended December 31, 2014 and 2013:

 
| ** **                                        | ** ** | **December 31, 2014** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | ** **                      | ** ** | ** ** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Agriculture**                 | ** ** | **Commercial** | ** ** | **Real Estate** | ** ** | **Real Estate** | ** ** | **Consumer** | ** ** | **Municipal** | ** ** | **Unallocated** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Loans**                       | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Total** | ** ** |
| **Allowance for loan losses:**                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Individually   evaluated for impairment           |       | $                               | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Collectively   evaluated for impairment           |       | 165,366                         |       | 187,810 |   | 20,076 |   | 621,785 |   | 13,919 |   | 9,070 |   | 140,234 |   | 1,158,260 |   |
| Total                                             |       | $                               | 165,366    |   | $ | 187,810 |   | $ | 20,076 |   | $ | 621,785 |   | $ | 13,919 |   | $ | 9,070 |   | $ | 140,234 |   | $ | 1,158,260 |   |
|                                              |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Loans:**                                        |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Individually   evaluated for impairment           |       | $                               | 240,900    |   | $ | 60,439 |   | $ | — |   | $ | 742,466 |   | $ | — |   | $ | — |   |   |   | $ | 1,043,805 |   |
| Loans   acquired with deteriorated credit quality |       | —                          |       | — |   | — |   | 488,257 |   | — |   | — |   |   |   | 488,257 |   |
| Collectively   evaluated for impairment           |       | 19,328,047                      |       | 17,202,859 |   | 2,620,947 |   | 97,539,054 |   | 1,207,910 |   | 3,628,169 |   |   |   | 141,526,986 |   |
| Total                                             |       | $                               | 19,568,947 |   | $ | 17,263,298 |   | $ | 2,620,947 |   | $ | 98,769,777 |   | $ | 1,207,910 |   | $ | 3,628,169 |   |   |   | $ | 143,059,048 |   |

 

23

----

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES (Continued)**

 
| ** **                              | ** ** | **December 31, 2013** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | ** **                      | ** ** | ** ** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Agriculture**                 | ** ** | **Commercial** | ** ** | **Real Estate** | ** ** | **Real Estate** | ** ** | **Consumer** | ** ** | **Municipal** | ** ** | **Unallocated** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Loans**                       | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Loans** | ** ** | **Total** | ** ** |
| **Allowance for loan losses:**          |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Individually   evaluated for impairment |       | $                               | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Collectively   evaluated for impairment |       | 236,254                         |       | 276,606 |   | 42,848 |   | 765,972 |   | 16,193 |   | 6,875 |   | 71,312 |   | 1,416,060 |   |
| Total                                   |       | $                               | 236,254    |   | $ | 276,606 |   | $ | 42,848 |   | $ | 765,972 |   | $ | 16,193 |   | $ | 6,875 |   | $ | 71,312 |   | $ | 1,416,060 |   |
|                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Loans:**                              |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Individually   evaluated for impairment |       | $                               | 275,409    |   | $ | — |   | $ | — |   | $ | 118,346 |   | $ | — |   | $ | — |   |   |   | $ | 393,755 |   |
| Collectively   evaluated for impairment |       | 19,900,874                      |       | 19,019,528 |   | 3,457,713 |   | 74,898,463 |   | 1,135,831 |   | 2,944,370 |   |   |   | 121,356,779 |   |
| Total                                   |       | $                               | 20,176,283 |   | $ | 19,019,528 |   | $ | 3,457,713 |   | $ | 75,016,809 |   | $ | 1,135,831 |   | $ | 2,944,370 |   |   |   | $ | 121,750,534 |   |

 

The following tables present the activity in the allowance for loan losses by portfolio segment during the years ended December 31, 2014 and 2013, respectively.

 
| ** **            | ** ** | **For the Year Ended December 31, 2014** | ** ** |
|-----------------------|------------|------------------------------------------------------------------------|------------|
| ** **            | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Agriculture**                                                        | ** ** | **Commercial** | ** ** | **Real Estate** | ** ** | **Real Estate** | ** ** | **Consumer** | ** ** | **Municipal** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
| ** **            |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Beginning balance** |       | $                                                                      | 236,254    |   | $ | 276,606 |   | $ | 42,848 |   | $ | 765,972 |   | $ | 16,193 |   | $ | 6,875 |   | $ | 71,312 |   | $ | 1,416,060 |   |
| Charge-offs           |       | (4,830                                                                 | )          | (76,170 | ) | — |   | (78,832 | ) | (12,688 | ) | — |   | — |   | (172,520 | ) |
| Recoveries            |       | 10,505                                                                 |       | 20,086 |   | — |   | 111,445 |   | 3,100 |   | — |   | — |   | 145,136 |   |
| Provision   (credit)  |       | (76,563                                                                | )          | (32,712 | ) | (22,772 | ) | (176,800 | ) | 7,314 |   | 2,195 |   | 68,922 |   | (230,416 | ) |
| **Ending balance**    |       | $                                                                      | 165,366    |   | $ | 187,810 |   | $ | 20,076 |   | $ | 621,785 |   | $ | 13,919 |   | $ | 9,070 |   | $ | 140,234 |   | $ | 1,158,260 |   |
|                  |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **            | ** ** | **For the Year Ended December 31, 2013** | ** ** |
| ** **            | ** ** | ** **                                                             | ** ** | ** ** | ** ** | **Commercial** | ** ** | **Residential** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Agriculture**                                                        | ** ** | **Commercial** | ** ** | **Real Estate** | ** ** | **Real Estate** | ** ** | **Consumer** | ** ** | **Municipal** | ** ** | **Unallocated** | ** ** | **Total** | ** ** |
| ** **            |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Beginning balance** |       | $                                                                      | 235,184    |   | $ | 278,639 |   | $ | 51,589 |   | $ | 719,371 |   | $ | 16,439 |   | $ | 2,974 |   | $ | 70,871 |   | $ | 1,375,067 |   |
| Charge-offs           |       | —                                                                 |       | (1,411 | ) | — |   | (45,040 | ) | (9,625 | ) | — |   | — |   | (56,076 | ) |
| Recoveries            |       | —                                                                 |       | 17,760 |   | — |   | 13,546 |   | 10,438 |   | — |   | — |   | 41,744 |   |
| Provision   (credit)  |       | 1,070                                                                  |       | (18,382 | ) | (8,741 | ) | 78,095 |   | (1,059 | ) | 3,901 |   | 441 |   | 55,325 |   |
| **Ending balance**    |       | $                                                                      | 236,254    |   | $ | 276,606 |   | $ | 42,848 |   | $ | 765,972 |   | $ | 16,193 |   | $ | 6,875 |   | $ | 71,312 |   | $ | 1,416,060 |   |

 

As the historical charge-off ratio remained steady and the overall economic condition and underwriting practices of the Company remain strong, the qualitative factors were reduced, related to the allowance for loan loss.  The Company allocated decreased allowance for loan loss provisions to the agriculture, commercial, and residential real estate segments due to the reduction of qualitative factors.

 

24

----

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES (Continued)**

 

**Credit Quality Information**

 

The following tables represent credit exposures by internally assigned grades as of December 31, 2014 and 2013. 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.

 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful, and Loss within the internal risk rating system as of December 31, 2014 and 2013:

 
| ** **                                      | ** ** | ** ** | ** ** | **Special** | ** ** | ** **      | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------|------------|-----------------|------------|--------------|------------|------------|------------|
| **As of December 31, 2014** | ** ** | **Pass**   | ** ** | **Mention** | ** ** | **Substandard** | ** ** | **Doubtful** | ** ** | **Total**  | ** ** |
|                                            |       |       |       |        |       |            |       |         |       |       |       |
| Agriculture loans                               |       | $          | 18,832,996 |        | $          | 22,099          |       | $            | 713,852    |       | $          | — |   | $ | 19,568,947 |   |
| Commercial loans                                |       | 16,957,485 |       | —      |       | 305,813         |       | —       |       | 17,263,298 |       |
| Commercial real estate loans                    |       | 2,620,947  |       | —      |       | —          |       | —       |       | 2,620,947  |       |
| Municipal loans                                 |       | 3,628,169  |       | —      |       | —          |       | —       |       | 3,628,169  |       |
| Total                                           |       | $          | 42,039,597 |        | $          | 22,099          |       | $            | 1,019,665  |       | $          | — |   | $ | 43,081,361 |   |
|                                            |       |       |       |        |       |            |       |         |       |       |       |
| ** **                                      | ** ** | ** ** | ** ** | **Special** | ** ** | ** **      | ** ** | ** **   | ** ** | ** ** | ** ** |
| **As of December 31, 2013** | ** ** | **Pass**   | ** ** | **Mention** | ** ** | **Substandard** | ** ** | **Doubtful** | ** ** | **Total**  | ** ** |
|                                            |       |       |       |        |       |            |       |         |       |       |       |
| Agriculture loans                               |       | $          | 18,735,521 |        | $          | 30,972          |       | $            | 1,409,790  |       | $          | — |   | $ | 20,176,283 |   |
| Commercial loans                                |       | 17,512,750 |       | 340,018     |       | 1,166,760       |       | —       |       | 19,019,528 |       |
| Commercial real estate loans                    |       | 3,457,713  |       | —      |       | —          |       | —       |       | 3,457,713  |       |
| Municipal loans                                 |       | 2,944,370  |       | —      |       | —          |       | —       |       | 2,944,370  |       |
| Total                                           |       | $          | 42,650,354 |        | $          | 370,990         |       | $            | 2,576,550  |       | $          | — |   | $ | 45,597,894 |   |

 

25

----

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES (Continued)**

 

**Credit Quality Information****(Continued)**

 

For all other loans, the Company evaluates credit quality based on whether the loan is considered performing or nonperforming.  The following tables present the balances of loans by classes of loan portfolio based on payment performance as of December 31, 2014 and 2013:

 
| ** **    | ** ** | **December 31, 2014** | ** ** |
|---------------|------------|---------------------------------|------------|
| ** **    | ** ** | **Residential**                 | ** ** | **Consumer** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Loans**                       | ** ** | **Loans** | ** ** | **Total** | ** ** |
| Performing    |       | $                               | 98,082,058 |   | $ | 1,205,829 |   | $ | 99,287,887 |   |
| Nonperforming |       | 687,719                         |       | 2,081 |   | 689,800 |   |
|          |       |                            |       |   |   |   |   |
| Total         |       | $                               | 98,769,777 |   | $ | 1,207,910 |   | $ | 99,977,687 |   |
|          |       |                            |       |   |   |   |   |
| ** **    | ** ** | **December 31, 2013** | ** ** |
| ** **    | ** ** | **Residential**                 | ** ** | **Consumer** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Loans**                       | ** ** | **Loans** | ** ** | **Total** | ** ** |
| Performing    |       | $                               | 74,883,437 |   | $ | 1,135,831 |   | $ | 76,019,268 |   |
| Nonperforming |       | 133,372                         |       | — |   | 133,372 |   |
|          |       |                            |       |   |   |   |   |
| Total         |       | $                               | 75,016,809 |   | $ | 1,135,831 |   | $ | 76,152,640 |   |

 

The following tables present an aging analysis of the recorded investment of past-due loans.

 
| ** **                      | ** ** | **December 31, 2014** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total >** | ** ** |
| ** **                      | ** ** | **30-59 Days**             | ** ** | **60-89 Days** | ** ** | **90 Days** | ** ** | **Total Past** | ** ** | ** ** | ** ** | **Total** | ** ** | **90 Days and** | ** ** |
| ** **                      | ** ** | **Past Due**               | ** ** | **Past Due** | ** ** | **or Greater** | ** ** | **Due** | ** ** | **Current** | ** ** | **Loans** | ** ** | **Accruing** | ** ** |
|                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture   loans             |       | $                               | 266,730    |   | $ | — |   | $ | — |   | $ | 266,730 |   | $ | 19,302,217 |   | $ | 19,568,947 |   | $ | — |   |
| Commercial   loans              |       | 58,610                          |       | — |   | 60,840 |   | 119,450 |   | 17,143,446 |   | 17,263,298 |   | 402 |   |
| Commercial   real estate loans  |       | —                          |       | — |   | — |   | — |   | 2,620,947 |   | 2,620,947 |   | — |   |
| Residential   real estate loans |       | 1,407,496                       |       | 162,983 |   | 565,955 |   | 2,136,434 |   | 96,633,343 |   | 98,769,777 |   | — |   |
| Consumer   loans                |       | 11,136                          |       | — |   | 2,081 |   | 13,217 |   | 1,194,693 |   | 1,207,910 |   | — |   |
| Municipal   loans               |       | —                          |       | — |   | — |   | — |   | 3,628,169 |   | 3,628,169 |   | — |   |
| Total                           |       | $                               | 1,743,972  |   | $ | 162,983 |   | $ | 628,876 |   | $ | 2,535,831 |   | $ | 140,522,815 |   | $ | 143,059,048 |   | $ | 402 |   |
|                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                      | ** ** | **December 31, 2013** | ** ** |
| ** **                      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Total >** | ** ** |
| ** **                      | ** ** | **30-59 Days**             | ** ** | **60-89 Days** | ** ** | **90 Days** | ** ** | **Total Past** | ** ** | ** ** | ** ** | **Total** | ** ** | **90 Days and** | ** ** |
| ** **                      | ** ** | **Past Due**               | ** ** | **Past Due** | ** ** | **or Greater** | ** ** | **Due** | ** ** | **Current** | ** ** | **Loans** | ** ** | **Accruing** | ** ** |
|                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture   loans             |       | $                               | 396,412    |   | $ | — |   | $ | — |   | $ | 396,412 |   | $ | 19,779,871 |   | $ | 20,176,283 |   | $ | — |   |
| Commercial   loans              |       | 33,322                          |       | 84,378 |   | — |   | 117,700 |   | 18,901,828 |   | 19,019,528 |   | — |   |
| Commercial   real estate loans  |       | —                          |       | — |   | — |   | — |   | 3,457,713 |   | 3,457,713 |   | — |   |
| Residential   real estate loans |       | 386,993                         |       | 415,451 |   | — |   | 802,444 |   | 74,214,365 |   | 75,016,809 |   | — |   |
| Consumer   loans                |       | 14,286                          |       | — |   | — |   | 14,286 |   | 1,121,545 |   | 1,135,831 |   | — |   |
| Municipal   loans               |       | —                          |       | — |   | — |   | — |   | 2,944,370 |   | 2,944,370 |   | — |   |
| Total                           |       | $                               | 831,013    |   | $ | 499,829 |   | $ | — |   | $ | 1,330,842 |   | $ | 120,419,692 |   | $ | 121,750,534 |   | $ | — |   |

 

26

----

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES (Continued)**

 

**Nonaccrual Loans**

 

Loans are generally considered for nonaccrual status upon 90 days delinquency.  When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

 

The following table presents the loans on nonaccrual status as of December 31, 2014 and 2013. The balances are presented by class of loans.

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2014**              | ** ** | **2013** | ** ** |
|                          |       |                  |       |   |   |
| Agriculture loans             |       | $                     | 240,900    |   | $ | 260,113 |   |
| Commercial loans              |       | 60,439                |       | — |   |
| Commercial real estate loans  |       | —                |       | — |   |
| Residential real estate loans |       | 687,719               |       | 133,372 |   |
| Consumer loans                |       | 2,081                 |       | — |   |
| Municipal loans               |       | —                |       | — |   |
|                          |       | $                     | 991,139    |   | $ | 393,485 |   |

 

Interest income on loans would have increased by approximately $45,822 and $24,807 during the years ended December 31, 2014 and 2013, respectively, if these loans had performed in accordance with their original terms.

 

**Impaired Loans**

 

The following tables present the recorded investment and unpaid principal balances for impaired loans and related allowance, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

 

27

----

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES (Continued)**

 

**Impaired Loans****(Continued)**

 
| ** **                            | ** ** | **December 31, 2014** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | ** **                      | ** ** | **Unpaid** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Recorded**                    | ** ** | **Principal** | ** ** | **Related** | ** ** | **Recorded** | ** ** | **Interest** | ** ** |
| ** **                            | ** ** | **Investment**                  | ** ** | **Balance** | ** ** | **Allowance** | ** ** | **Investment** | ** ** | **Recognized** | ** ** |
| With   no related allowance recorded: |       |                            |       |   |   |   |   |   |   |   |   |
| Agriculture loans                     |       | $                               | 240,900    |   | $ | 309,592 |   | $ | — |   | $ | 249,423 |   | $ | 35,157 |   |
| Commercial loans                      |       | 60,439                          |       | 64,021 |   | — |   | 41,904 |   | — |   |
| Commercial real estate loans          |       | —                          |       | — |   | — |   | — |   | — |   |
| Residential real estate loans         |       | 742,466                         |       | 814,516 |   | — |   | 753,157 |   | 1,132 |   |
| Consumer loans                        |       | —                          |       | — |   | — |   | — |   | — |   |
| Municipal loans                       |       | —                          |       | — |   | — |   | — |   | — |   |
| With an allowance recorded:           |       |                            |       |   |   |   |   |   |   |   |   |
| Agriculture loans                     |       | $                               | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Commercial loans                      |       | —                          |       | — |   | — |   | — |   | — |   |
| Commercial real estate loans          |       | —                          |       | — |   | — |   | — |   | — |   |
| Residential real estate loans         |       | —                          |       | — |   | — |   | — |   | — |   |
| Consumer loans                        |       | —                          |       | — |   | — |   | — |   | — |   |
| Municipal loans                       |       | —                          |       | — |   | — |   | — |   | — |   |
| Total                                 |       |                            |       |   |   |   |   |   |   |   |   |
| Agriculture loans                     |       | $                               | 240,900    |   | $ | 309,592 |   | $ | — |   | $ | 249,423 |   | $ | 35,157 |   |
| Commercial loans                      |       | 60,439                          |       | 64,021 |   | — |   | 41,904 |   | — |   |
| Commercial real estate loans          |       | —                          |       | — |   | — |   | — |   | — |   |
| Residential real estate loans         |       | 742,466                         |       | 814,516 |   | — |   | 753,157 |   | 1,132 |   |
| Consumer loans                        |       | —                          |       | — |   | — |   | — |   | — |   |
| Municipal loans                       |       | —                          |       | — |   | — |   | — |   | — |   |
|                                  |       |                            |       |   |   |   |   |   |   |   |   |
| ** **                            | ** ** | **December 31, 2013** | ** ** |
| ** **                            | ** ** | ** **                      | ** ** | **Unpaid** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Recorded**                    | ** ** | **Principal** | ** ** | **Related** | ** ** | **Recorded** | ** ** | **Interest** | ** ** |
| ** **                            | ** ** | **Investment**                  | ** ** | **Balance** | ** ** | **Allowance** | ** ** | **Investment** | ** ** | **Recognized** | ** ** |
| With no related allowance recorded:   |       |                            |       |   |   |   |   |   |   |   |   |
| Agriculture loans                     |       | $                               | 275,409    |   | $ | 313,726 |   | $ | — |   | $ | 277,390 |   | $ | — |   |
| Commercial loans                      |       | —                          |       | — |   | — |   | — |   | — |   |
| Commercial real estate loans          |       | —                          |       | — |   | — |   | — |   | — |   |
| Residential real estate loans         |       | 118,346                         |       | 195,712 |   | — |   | 118,629 |   | — |   |
| Consumer loans                        |       | —                          |       | — |   | — |   | — |   | — |   |
| Municipal loans                       |       | —                          |       | — |   | — |   | — |   | — |   |
| With an allowance recorded:           |       |                            |       |   |   |   |   |   |   |   |   |
| Agriculture loans                     |       | $                               | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Commercial loans                      |       | —                          |       | — |   | — |   | — |   | — |   |
| Commercial real estate loans          |       | —                          |       | — |   | — |   | — |   | — |   |
| Residential real estate loans         |       | —                          |       | — |   | — |   | — |   | — |   |
| Consumer loans                        |       | —                          |       | — |   | — |   | — |   | — |   |
| Municipal loans                       |       | —                          |       | — |   | — |   | — |   | — |   |
| Total                                 |       |                            |       |   |   |   |   |   |   |   |   |
| Agriculture loans                     |       | $                               | 275,409    |   | $ | 313,726 |   | $ | — |   | $ | 277,390 |   | $ | — |   |
| Commercial loans                      |       | —                          |       | — |   | — |   | — |   | — |   |
| Commercial real estate loans          |       | —                          |       | — |   | — |   | — |   | — |   |
| Residential real estate loans         |       | 118,346                         |       | 195,712 |   | — |   | 118,629 |   | — |   |
| Consumer loans                        |       | —                          |       | — |   | — |   | — |   | — |   |
| Municipal loans                       |       | —                          |       | — |   | — |   | — |   | — |   |

 

28

----

 

**4.****                         ****ALLOWANCE FOR LOAN LOSSES (Continued)**

 

**Loan Modifications and Troubled Debt Restructurings**

 

A loan is considered to be a troubled debt restructuring loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.

 

Loan modifications considered troubled debt restructurings completed during the year ended December 31, 2014 were as follows:

 
| ** **                      | ** ** | **December 31, 2014** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | ** **                      | ** ** | **Pre-Modification** | ** ** | **Post-Modification** | ** ** |
| ** **                      | ** ** | **Number of**              | ** ** | **Outstanding Recorded** | ** ** | **Outstanding Recorded** | ** ** |
| ** **                      | ** ** | **Contracts**                   | ** ** | **Investment** | ** ** | **Investment** | ** ** |
|                            |       |                            |       |   |   |   |   |
| Residential   real estate loans |       | 1                               |       | $ | 175,598 |   | $ | 122,742 |   |
|                                 |            |                                 |            |  |  |  |  |  |  |

 

There were no loan modifications considered troubled debt restructurings during the year ended December 31, 2013.

 

There were no troubled debt restructurings modified during the years ended December 31, 2014 and 2013 that subsequently defaulted during the years ended December 31, 2014 and 2013, respectively.

 

29

----

 

**5.****             ****GOODWILL AND INTANGIBLE ASSETS**

 

Goodwill totaled $132,849 at the year ended December 31, 2014. The Company recorded goodwill of $132,849 due to the Liberty Centre Bancorp, Inc. acquisition during the year ended December 31, 2014.  Core deposit intangible gross carrying amounts were $95,218 and $58,303 at the years ended December 31, 2014 and 2013.  The Company recorded additions of intangible assets of $61,664 due to the Liberty Centre Bancorp, Inc. acquisition during the year ended December 31, 2014.  There were no intangible asset additions recorded during the year ended December 31, 2013.

 

Core deposit intangible assets are amortized using the sum-of-the-years-digits method over their estimated lives of ten years. Amortization expense totaled $24,749 and $15,320 for the years ended December 31, 2014 and 2013, respectively.  The estimated aggregate future amortization expense for core deposit intangible assets as of December 31, 2014 is as follows:

 
| 2015                |   | $      | 22,027 |   |
|---------------------|--------|--------|--------|--------|
| 2016                |   | 19,121 |   |
| 2017                |   | 16,215 |   |
| 2018                |   | 13,309 |   |
| 2019                |   | 10,403 |   |
| 2020 and thereafter |   | 14,143 |   |
| Total               |   | $      | 95,218 |   |

 

30

----

 

**6.****             ****PREMISES AND EQUIPMENT**

 

Premises and equipment consist of the following:

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2014**              | ** ** | **2013** | ** ** |
|                               |       |                  |       |   |   |
| Land                               |       | $                     | 601,017    |   | $ | 601,017 |   |
| Buildings and improvements         |       | 3,145,609             |       | 2,970,970 |   |
| Furniture, fixtures, and equipment |       | 1,033,488             |       | 1,852,563 |   |
|                               |       | 4,780,114             |       | 5,424,550 |   |
| Less accumulated depreciation      |       | 1,503,337             |       | 2,220,570 |   |
|                               |       |                  |       |   |   |
| Total                              |       | $                     | 3,276,777  |   | $ | 3,203,980 |   |

 

Depreciation expense amounted to $253,437 and $183,397 for the years ended December 31, 2014 and 2013, respectively.

 

**7.****             ****DEPOSITS**

 

Deposit accounts are summarized as follows:

 
| ** **                       | ** ** | **December 31,** | ** **  |
|----------------------------------|------------|-----------------------|-------------|
| ** **                       | ** ** | **2014**              | ** **  | **2013** | ** ** |
| ** **                       | ** ** | **Amount**            | ** **  | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Demand, noninterest-bearing      |       | $                     | 29,282,228  |   | 16.1 | % | $ | 21,843,415 |   | 14.1 | % |
| Demand, interest-bearing         |       | 46,959,817            |        | 25.7 |   | 39,719,104 |   | 25.6 |   |
| Savings                          |       | 46,378,855            |        | 25.4 |   | 38,691,655 |   | 25.0 |   |
| Time deposits, $100,000 and over |       | 20,215,734            |        | 11.1 |   | 16,950,176 |   | 10.9 |   |
| Time deposits, other             |       | 39,482,874            |        | 21.7 |   | 37,780,047 |   | 24.4 |   |
|                             |       | $                     | 182,319,508 |   | 100.0 | % | $ | 154,984,397 |   | 100.0 | % |

 

The scheduled maturities of time deposits are as follows:

 
| ** **                          | ** ** | **December 31, 2014** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| One year or less                    |       | $                               | 34,028,817 |   |
| More than one year to two years     |       | 11,230,099                      |       |
| More than two years to three years  |       | 5,859,735                       |       |
| More than three years to four years |       | 5,626,112                       |       |
| More than four years to five years  |       | 1,945,469                       |       |
| More than five years                |       | 1,008,376                       |       |
| Total                               |       | $                               | 59,698,608 |   |

 

Time deposits include those in denominations of $250,000 or more.  Such deposits aggregated $6,398,404 at December 31, 2014.

 

31

----

 

**8.****             ****BORROWINGS**

 

The outstanding balances and related information of short-term borrowings represent federal funds purchased and are summarized as follows:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2014**              | ** ** |
| Balance at year-end                   |       | $                     | —     |   |
| Average balance outstanding           |       | 216,556               |       |
| Maximum month-end balance             |       | 1,807,000             |       |
| Weighted-average rate at year-end     |       | —                | %          |
| Weighted-average rate during the year |       | 0.55                  | %          |
|                                       |            |                       |            |  |

 

Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.

 

The Company maintained a credit line for $5 million with the FHLB, which closed in 2013.  The Bank had no outstanding advances under the credit line as of December 31, 2013.  The Company had irrevocable standby letters of credit with the FHLB that totaled $7,900,000 and $5,850,000 at December 31, 2014 and 2013, respectively. Additionally, the Company had an unsecured borrowing agreement with Atlantic Community Bankers Bank for $3 million during 2013.  The borrowing agreement was increased to $5 million during 2014.  The borrowing agreement was not drawn upon during the years ended December 31, 2014 and 2013.  At December 31, 2014 and 2013, the Company had outstanding FHLB fixed term advances totaling $437,875 and $1,472,630, respectively, at a fixed rate of 2.19 percent maturing in May of 2015.

 

The following are the maturities of FHLB advances as of December 31, 2014:

 
| 2015 |   | $ | 437,875 |   |
|------|--------|---|---------|--------|

 

All borrowings from the FHLB are secured by a blanket lien on qualified collateral, defined principally as investment securities and mortgage loans which are owned by the Company free and clear of any liens or encumbrances.  In addition, the Company had a maximum borrowing capacity of $84.2 million with the FHLB at December 31, 2014.

 

32

----

 

**9.****                         ****INCOME TAXES**

 

The provision for income taxes consists of:

 
| ** **          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2014**                                   | ** ** | **2013** | ** ** |
| Current tax expense |       | $                                          | 1,228,918  |   | $ | 927,267 |   |
| Deferred taxes      |       | (255,014                                   | )          | (4,555 | ) |
|                |       |                                       |       |   |   |
| Total               |       | $                                          | 973,904    |   | $ | 922,712 |   |

 

The tax effects of deductible and taxable temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities, respectively, are as follows:

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2014**              | ** ** | **2013** | ** ** |
|                                 |       |                  |       |   |   |
| Deferred tax assets:                 |       |                  |       |   |   |
| Allowance for loan losses            |       | $                     | 390,907    |   | $ | 457,795 |   |
| Deferred compensation                |       | 208,255               |       | 208,255 |   |
| Capital loss carryforward            |       | 3,011                 |       | 3,011 |   |
| Net unrealized loss on securities    |       | 38,242                |       | 49,610 |   |
| Purchase accounting adjustments      |       | 158,593               |       | — |   |
| Net operating loss                   |       | 161,112               |       | — |   |
| Other                                |       | 35,700                |       | 11,331 |   |
| Total gross deferred tax assets      |       | 995,820               |       | 730,002 |   |
| Valuation allowance                  |       | (3,011                | )          | (3,011 | ) |
| Total net deferred tax assets        |       | 992,809               |       | 726,991 |   |
|                                 |       |                  |       |   |   |
| Deferred tax liabilities:            |       |                  |       |   |   |
| Premises and equipment               |       | 202,041               |       | 148,953 |   |
| Deferred loan fees                   |       | 86,496                |       | 86,496 |   |
| Purchase accounting adjustments      |       | —                |       | 30,916 |   |
| Total gross deferred tax liabilities |       | 288,537               |       | 266,365 |   |
|                                 |       |                  |       |   |   |
| Net deferred tax assets              |       | $                     | 704,272    |   | $ | 460,626 |   |

 

As of December 31, 2014 and 2013, the Company had federal capital loss carryforwards of $8,855, respectively, that expire in 2018.  Management does not believe that the capital loss carryforwards will be utilized prior to their expiration, as the Company has limited capital gain opportunities to offset the losses and, as such, a valuation allowance has been established.  The Company also has a $473,860 net operating loss carryforward at December 31, 2014, that will begin to expire in 2027.  The Company had no other valuation allowance against its deferred tax assets in view of the Company’s ability to carry back taxes paid in previous years and certain tax strategies and anticipated future taxable income as evidenced by the Company’s earnings potential.

 

33

----

 

**9.****                         ****INCOME TAXES (Continued)**

 

The reconciliation of the federal statutory rate and the Company’s effective income tax rate is as follows:

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2014 **                             | ** ** | **2013** | ** ** |
| ** **                                 | ** ** | ** **                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                                 | ** ** | ** **                                 | ** ** | **Pretax** | ** ** | ** ** | ** ** | **Pretax** | ** ** |
| ** **                                 | ** ** | **Amount**                                 | ** ** | **Income** | ** ** | **Amount** | ** ** | **Income** | ** ** |
| Provision at statutory rate                |       | $                                          | 820,792    |   | 34.0 | % | $ | 1,044,976 |   | 34.0 | % |
| Tax-exempt income on investment securities |       | (109,342                                   | )          | (4.5 | ) | (122,196 | ) | (4.0 | ) |
| Bank-owned life insurance                  |       | (58,293                                    | )          | (2.4 | ) | (56,987 | ) | (1.9 | ) |
| Nondeductible mercer costs                 |       | 263,211                                    |       | 10.9 |   |   |   |   |   |
| Other                                      |       | 57,536                                     |       | 2.3 |   | 56,919 |   | 1.9 |   |
| Actual tax expense and effective rate      |       | $                                          | 973,904    |   | 40.3 | % | $ | 922,712 |   | 30.0 | % |

 

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.

 

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 2010.

 

34

----

 

**10.****                  ****COMMITMENTS AND CONTINGENT LIABILITIES**

 

**Commitments**

 

In the normal course of business, management makes various commitments that are not reflected in the accompanying consolidated financial statements.  These commitments represent financial instruments with off-balance-sheet risk.  The contract or notional amounts of those instruments comprise the following:

 
| ** **                   | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2014**              | ** ** | **2013** | ** ** |
| Commitments to extend credit |       | $                     | 23,990,416 |   | $ | 18,730,023 |   |
| Letters of credit            |       | 807,568               |       | 878,326 |   |
|                              |            |                       |            |  |  |  |  |

 

The same credit policies are used in making commitments and conditional obligations as for on-balance-sheet instruments.  Generally, collateral is required to support financial instruments with credit risk.  The terms are typically for a one-year period with an annual renewal option subject to prior approval by management.

 

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, unfunded construction loans, and loans approved but not yet funded.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet.

 

Standby letters of credit and financial guarantees represent conditional commitments issued to guarantee the performance of a customer to a third party.  Fees earned from the issuance of these letters are recognized over the coverage period.  For secured letters of credit, the collateral is typically real estate or Company deposit instruments.

 

**Contingent Liabilities**

 

The Company is involved 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.

 

**11.****                  ****EMPLOYEE BENEFITS**

 

**Retirement Plan**

 

The Company maintains a defined contribution 401(k) retirement plan that covers eligible employees.  Eligible employees can contribute up to 100 percent of their compensation. The Bank makes a 3 percent non-elective contribution to all eligible participants as of the end of the plan year based on W-2 income for the same period.  Contributions to the plan for the years ended December 31, 2014 and 2013, amounted to $38,976 and $36,061, respectively.

 

**Director-Deferred Compensation Plan**

 

The Bank has a deferred compensation plan for the benefit of members of the Board of Directors and certain officers. The plan provides all directors and certain officers with the ability to defer receipt of some or all of their director fees and bonuses. The deferrals, along with accumulated earnings, are payable at retirement. The Bank has purchased life insurance policies on each director and officer that are actuarially designed to offset the annual expenses associated with the plan. The Bank is the sole owner and beneficiary of all policies. The Bank accrues the estimated annual costs of the deferred amounts that will be payable at retirement.  At December 31, 2014 and 2013, the accumulated liability was $1,188,440 and $1,208,367, respectively.

 

35

----

 

**11.****                  ****EMPLOYEE BENEFITS (Continued)**

 

**Director-Deferred Compensation Plan****(Continued)**

 

The components of net periodic pension cost for the director-deferred compensation plan that were recognized in noninterest expense on the Consolidated Statement of Income are as follows:

 
| ** **                              | ** ** | **For the Year Ended** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **December 31,**                 | ** ** |
| ** **                              | ** ** | **2014**                              | ** ** | **2013** | ** ** |
| Components of net periodic pension cost |       |                                  |       |   |   |
| Service cost                            |       | $                                     | 80,975     |   | $ | 85,933 |   |
| Interest cost                           |       | 43,315                                |       | 33,217 |   |
|                                    |       |                                  |       |   |   |
| Total net periodic pension cost         |       | $                                     | 124,290    |   | $ | 119,150 |   |

 

**Supplemental Executive Retirement Plan**

 

In 2012, the Company entered into a supplemental executive retirement plan (“SERP”) agreement with the Chief Executive Officer.  The plan was targeted to provide him with an annual retirement benefit commencing at age 65.  At December 31, 2014 and 2013, the accumulated liability was $118,234 and $69,239, respectively. The expense for the years ended December 31, 2014 and 2013, was $48,995 and $46,610, respectively.

 

**12.****                  ****REGULATORY RESTRICTIONS**

 

**Federal Reserve Cash Requirements**

 

The Bank is required to maintain average cash reserve balance in vault cash or with the Federal Reserve Bank.  The required minimum balance was $424,000 and $376,000 at December 31, 2014 and 2013, respectively.

 

**Loans**

 

Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific collateral.  Further, such secured loans are limited in amount to 10 percent of the Bank’s common stock and capital surplus.

 

**Dividends**

 

The Pennsylvania Banking Code restricts the availability of capital surplus for dividend purposes.  At December 31, 2014 and 2013, the Bank had a capital surplus of $9,188,672 and $8,551,053, respectively, which was not available for distribution to the Company as dividends.

 

**Capital Requirements**

 

Federal regulations require the Company and the Bank to maintain minimum amounts of capital.  Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average total assets.

 

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from “well capitalized” to “critically undercapitalized.”  Should any institution fail to meet the requirements to be considered “adequately capitalized,” it would become subject to a series of increasingly restrictive regulatory actions.

 

36

----

 

**12.****                  ****REGULATORY RESTRICTIONS (Continued)**

 

**Capital Requirements****(Continued)**

 

As of December 31, 2014 and 2013, the Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be classified as a well-capitalized financial institution, Total risk-based, Tier I risk-based, and Tier I leverage capital ratios must be at least 10 percent, 6 percent, and 5 percent, respectively.

 

The Bank’s actual capital ratios are presented in the following table that shows the Bank met all regulatory capital requirements.  The capital position of the Company does not differ significantly from the Bank’s capital position.

 
| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2014**              | ** ** | **2013** | ** ** |
| ** **                    | ** ** | **Amount**            | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Total capital                 |       |                  |       |   |   |   |   |   |   |
| (to risk-weighted assets)     |       |                  |       |   |   |   |   |   |   |
|                          |       |                  |       |   |   |   |   |   |   |
| Actual                        |       | $                     | 24,844,202 |   | 19.70 | % | $ | 26,890,901 |   | 24.10 | % |
| For capital adequacy purposes |       | 10,090,240            |       | 8.00 |   | 8,925,748 |   | 8.00 |   |
| To be well capitalized        |       | 12,612,800            |       | 10.00 |   | 11,157,185 |   | 10.00 |   |
|                          |       |                  |       |   |   |   |   |   |   |
| Tier I capital                |       |                  |       |   |   |   |   |   |   |
| (to risk-weighted assets)     |       |                  |       |   |   |   |   |   |   |
|                          |       |                  |       |   |   |   |   |   |   |
| Actual                        |       | $                     | 23,670,430 |   | 18.77 | % | $ | 25,495,988 |   | 22.85 | % |
| For capital adequacy purposes |       | 5,045,120             |       | 4.00 |   | 4,462,874 |   | 4.00 |   |
| To be well capitalized        |       | 7,567,680             |       | 6.00 |   | 6,694,311 |   | 6.00 |   |
|                          |       |                  |       |   |   |   |   |   |   |
| Tier I capital                |       |                  |       |   |   |   |   |   |   |
| (to average assets)           |       |                  |       |   |   |   |   |   |   |
|                          |       |                  |       |   |   |   |   |   |   |
| Actual                        |       | $                     | 23,670,430 |   | 11.26 | % | $ | 25,495,988 |   | 13.65 | % |
| For capital adequacy purposes |       | 8,409,957             |       | 4.00 |   | 7,468,840 |   | 4.00 |   |
| To be well capitalized        |       | 10,512,447            |       | 5.00 |   | 9,336,050 |   | 5.00 |   |

 

37

----

 

**13.****                  ****FAIR VALUE MEASUREMENTS**

 

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.  The three broad levels of pricing are as follows:

 

Level I:                                          Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

Level II:                                     Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

 

Level III:                                Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

This hierarchy requires the use of observable market data when available.

 

The following tables present the assets reported on the Consolidated Balance Sheet at their fair value as of December 31, 2014 and 2013, by level within the fair value hierarchy.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 
| ** **                         | ** ** | **December 31, 2014** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
| Assets:                            |       |                            |       |   |   |   |   |   |   |
| Negotiable certificates of deposit |       | $                               | —     |   | $ | 6,295,570 |   | $ | — |   | $ | 6,295,570 |   |
| U.S. government agency securities  |       | —                          |       | 14,529,633 |   | — |   | 14,529,633 |   |
|                                    |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **December 31, 2013** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
| Assets:                           |       |                            |       |   |   |   |   |   |   |
| U.S. government agency securities |       | $                               | —     |   | $ | 18,112,284 |   | $ | — |   | $ | 18,112,284 |   |
|                                   |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value as of December 31, 2014 and 2013, by level within the fair value hierarchy. Impaired loans that are collateral-dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan 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 inputs.

 

38

----

 

**13.****                  ****FAIR VALUE MEASUREMENTS (Continued)**

 

Other real estate owned (“OREO”) is measured at fair value, less cost to sell at the date of foreclosure, establishing a new cost basis.  Subsequent to 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.

 
| ** **     | ** ** | **December 31, 2014** | ** ** |
|----------------|------------|---------------------------------|------------|
| ** **     | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Impaired loans |       | $                               | —     |   | $ | — |   | $ | 1,043,805 |   | $ | 1,043,805 |   |

 
| ** **              | ** ** | **December 31, 2013** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Level I**                | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
| ** **              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Impaired loans          |       | $                               | —     |   | $ | — |   | $ | 393,755 |   | $ | 393,755 |   |
| Other real estate owned |       | —                          |       | — |   | 72,000 |   | 72,000 |   |
|                         |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

The following tables provide information describing the valuation processes used to determine nonrecurring fair value measurements categorized within Level III of the fair value hierarchy:

 
| ** **     | ** ** | **December 31, 2014**                                                                         | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Quantitative Information About Level III Fair Value Measurements** | ** ** |
| ** **     | ** ** | ** **                                                                                              | ** ** | **Valuation** | ** ** | **Unobservable** | ** ** | **Range (Weighted** | ** ** |
| ** **     | ** ** | **Fair Value**                                                                                     | ** ** | **Techniques** | ** ** | **Input** | ** ** | **Average)** | ** ** |
| ** **     | ** ** | ** **                                                                                              |       | Appraisal of |   | Appraisal |   | 7 | % |
| Impaired loans |       | $                                                                                                       | 1,043,805  |   | collateral (1) |   | adjustments (2) |   | (7 | )% |
|                |            |                                                                                                         |            |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **December 31, 2013**                                                                         | ** ** |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Quantitative Information About Level III Fair Value Measurements** | ** ** |
| ** **              | ** ** | ** **                                                                                              | ** ** | **Valuation** | ** ** | **Unobservable** | ** ** | **Range (Weighted** | ** ** |
| ** **              | ** ** | **Fair Value**                                                                                     | ** ** | **Techniques** | ** ** | **Input** | ** ** | **Average)** | ** ** |
|                    |       |                                                                                                    |       | Appraisal of |   | Appraisal |   | 7 | % |
| Impaired loans          |       | $                                                                                                       | 393,755    |   | collateral (1) |   | adjustments (2) |   | (7 | )% |
|                    |       |                                                                                                    |       |   |   |   |   |   |   |
|                    |       |                                                                                                    |       | Appraisal of |   |   |   |   |   |
| Other real estate owned |       | 72,000                                                                                                  |       | collateral (1), (3) |   |   |   |   |   |
|                         |            |                                                                                                         |            |  |  |  |  |  |  |  |

 

----

(1)         Fair value is generally determined through independent appraisals of the underlying collateral, which include various Level III inputs which are not identifiable.

(2)         Appraisals may be adjusted by management for qualitative factors such as economic conditions, aging, and/or estimated liquidation expenses incurred when selling the collateral.  The range and weighted average of appraisal adjustments and liquidation expenses are presented as a percentage of the appraisal.

(3)         Includes qualitative adjustments by management and estimate liquidation expenses.

 

39

----

 

**13.****                  ****FAIR VALUE MEASUREMENTS (Continued)**

 

The estimated fair values of the Company’s financial instruments are as follows:

 
| ** **                               | ** ** | **December 31, 2014** | ** **  |
|------------------------------------------|------------|---------------------------------|-------------|
| ** **                               | ** ** | **Carrying**                    | ** **  | **Fair** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Value**                       | ** **  | **Value** | ** ** | **Level I** | ** ** | **Level II** | ** ** | **Level III** | ** ** |
| Financial assets:                        |       |                            |        |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                |       | $                               | 20,226,796  |   | $ | 20,226,796 |   | $ | 20,226,796 |   | $ | — |   | $ | — |   |
| Certificates of deposit with other banks |       | 7,107,000                       |        | 7,191,000 |   | — |   | — |   | 7,191,000 |   |
| Investment securities:                   |       |                            |        |   |   |   |   |   |   |   |   |
| Available for sale                       |       | 20,825,203                      |        | 20,825,203 |   | — |   | 20,825,203 |   | — |   |
| Held to maturity                         |       | 9,267,387                       |        | 9,314,317 |   | — |   | 9,314,317 |   | — |   |
| Net loans                                |       | 141,900,788                     |        | 143,937,788 |   | — |   | — |   | 143,937,788 |   |
| Accrued interest receivable              |       | 514,048                         |        | 514,048 |   | 514,048 |   | — |   | — |   |
| Restricted investments in bank stock     |       | 523,700                         |        | 523,700 |   | 523,700 |   | — |   | — |   |
| Cash surrender value of life insurance   |       | 6,149,768                       |        | 6,149,768 |   | 6,149,768 |   | — |   | — |   |
|                                     |       |                            |        |   |   |   |   |   |   |   |   |
| Financial liabilities:                   |       |                            |        |   |   |   |   |   |   |   |   |
| Deposits                                 |       | $                               | 182,319,508 |   | $ | 182,947,100 |   | $ | 122,619,731 |   | $ | — |   | $ | 60,327,369 |   |
| FHLB advances - long-term                |       | 437,875                         |        | 441,664 |   | — |   | — |   | 441,664 |   |
| Accrued interest payable                 |       | 131,924                         |        | 131,924 |   | 131,924 |   | — |   | — |   |
|                                     |       |                            |        |   |   |   |   |   |   |   |   |
| ** **                               | ** ** | **December 31, 2013** | ** **  |
| ** **                               | ** ** | **Carrying**                    | ** **  | **Fair** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Value**                       | ** **  | **Value** | ** ** | **Level I** | ** ** | **Level II** | ** ** | **Level III** | ** ** |
| Financial assets:                        |       |                            |        |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                |       | $                               | 8,209,520   |   | $ | 8,209,520 |   | $ | 8,209,520 |   | $ | — |   | $ | — |   |
| Certificates of deposit with other banks |       | 11,609,136                      |        | 11,895,906 |   | — |   | — |   | 11,895,906 |   |
| Investment securities:                   |       |                            |        |   |   |   |   |   |   |   |   |
| Available for sale                       |       | 18,112,284                      |        | 18,112,284 |   | — |   | 18,112,284 |   | — |   |
| Held to maturity                         |       | 14,356,610                      |        | 14,399,659 |   | — |   | 14,399,659 |   | — |   |
| Net loans                                |       | 120,334,474                     |        | 121,705,007 |   | — |   | — |   | 121,705,007 |   |
| Accrued interest receivable              |       | 568,280                         |        | 568,280 |   | 568,280 |   | — |   | — |   |
| Restricted investments in bank stock     |       | 598,500                         |        | 598,500 |   | 598,500 |   | — |   | — |   |
| Cash surrender value of life insurance   |       | 5,978,318                       |        | 5,978,318 |   | 5,978,318 |   | — |   | — |   |
|                                     |       |                            |        |   |   |   |   |   |   |   |   |
| Financial liabilities:                   |       |                            |        |   |   |   |   |   |   |   |   |
| Deposits                                 |       | $                               | 154,984,397 |   | $ | 155,607,656 |   | $ | 100,254,174 |   | $ | — |   | $ | 55,353,482 |   |
| FHLB advances - long-term                |       | 1,472,630                       |        | 1,503,698 |   | — |   | — |   | 1,503,698 |   |
| Accrued interest payable                 |       | 152,865                         |        | 152,865 |   | 152,865 |   | — |   | — |   |

 

40

----

 

**13.****                  ****FAIR VALUE MEASUREMENTS (Continued)**

 

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract that creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

 

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale.  If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

 

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling.  As many of these assumptions result from judgments made by management based upon estimates that are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument.  In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

 

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

 

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

 

**Cash and Cash Equivalents, Accrued Interest Receivable, Restricted Investments in Bank Stock, and Accrued Interest Payable**

 

The fair value is equal to the current carrying value.

 

**Certificates of Deposit with Other Banks**

 

The fair values of certificates of deposit with other banks are based on the discounted value of contractual cash flows.  The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

 

**Investment Securities Available for Sale and Held to Maturity**

 

The fair value of investment securities available for sale and held to maturity 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.

 

**Net Loans**

 

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality.  Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

 

Acquired loans are recorded at fair value on the date of acquisition.  The fair values of loans with evidence of credit deterioration (impaired loans) are recorded net of a non-accretable difference and, if appropriate, an accretable yield.  The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the non-accretable difference, which is included in the carrying amount of acquired loans.

 

41

----

 

**13.****                  ****FAIR VALUE MEASUREMENTS (Continued)**

 

**Deposits and FHLB Advances — Long-Term**

 

The fair values of certificates of deposit and FHLB advances — long-term are based on the discounted value of contractual cash flows.  The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.  Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.

 

**Cash Surrender Value of Life Insurance**

 

The fair value is equal to the cash surrender value of the life insurance policies.

 

**Commitments to Extend Credit**

 

These financial instruments are generally not subject to sale, and estimated fair values are not readily available.  The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.  The contractual amounts of unfunded commitments are presented in Note 11.

 

**14.****                  ****ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

 

The following table presents significant amounts reclassified out of accumulated other comprehensive loss for the period ended December 31, 2014:

 
| ** **                  | ** ** | **Amount Reclassified** | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **from Accumulated**    | ** ** |
| ** **                  | ** ** | **Other Comprehensive** | ** ** |
| ** **                  | ** ** | **Loss**                     | ** ** |
|                        |       |                         |       |
| Investment securities gains |       | $                            | (107,596   | ) |
| Income tax expense          |       | 36,583                       |       |
|                        |       | $                            | (71,013    | ) |

 

The following tables present the changes in accumulated other comprehensive income (loss) by component net of tax for the years ended December 31, 2014 and 2013:

 
| ** **                                                | ** ** | **Net Unrealized**         | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **Gains (Losses) on** | ** ** |
| ** **                                                | ** ** | **Investment Securities**  | ** ** |
| Accumulated other comprehensive income, January 1,   2014 |       | $                               | (96,302    | ) |
| Other comprehensive income                                |       | 22,069                          |       |
| Accumulated other comprehensive loss, December 31,   2014 |       | $                               | (74,233    | ) |

 

42

----

 

**14.****            ****ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)**

 
| ** **                                                | ** ** | **Net Unrealized**         | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **Gains (Losses) on** | ** ** |
| ** **                                                | ** ** | **Investment Securities**  | ** ** |
| Accumulated other comprehensive income, January 1,   2013 |       | $                               | 285,692    |   |
| Other comprehensive loss                                  |       | (381,994                        | )          |
| Accumulated other comprehensive loss, December 31,   2013 |       | $                               | (96,302    | ) |

 

**15.****                  ****BUSINESS COMBINATION**

 

**Agreement and Plan of Merger**

 

On March 28, 2014, the Company closed on a merger transaction pursuant to which GNB Financial Services, Inc. acquired Liberty Centre Bancorp, Inc. in a cash transaction.  The acquisition extended the Company’s footprint in central Pennsylvania.

 

Liberty Centre Bancorp, Inc. (“LCB”) was the $28 million holding company of Liberty Savings Bank (“Liberty”), a federally chartered stock savings bank headquartered in Pottsville, Pennsylvania, with two locations located in Pottsville and a loan production office in Macungie, Pennsylvania.

 

Under the terms of the merger agreement, LCB shareholders received cash consideration for their shares of LCB stock for a total purchase price of $735,770.  As a result of the acquisition, LCB merged with and into a wholly owned subsidiary of GNB Financial Services, Inc. and Liberty Savings Bank merged with and into The Gratz Bank.

 

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition.  Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of Liberty.  The Company also recorded an identifiable intangible asset representing the core deposit base of Liberty based on management’s evaluation of the cost of such deposits relative to alternative funding sources.  Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products. Management used market quotations to determine the fair value of investment securities.  Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available.

 

43

----

 

**15.****                  ****BUSINESS COMBINATION (Continued)**

 

**Agreement and Plan of Merger****(Continued)**

 

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. Liberty’s loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality.  Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $830,035 of purchased credit-impaired loans subject to a non-accretable difference of $814,992. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and, as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

 

Liberty’s loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value.  Additionally, consideration was given to management’s best estimates of default rates and payment speeds.  At acquisition, Liberty’s loan portfolio without evidence of deterioration totaled $16,349,098 and was recorded at a fair value of $16,549,240.

 

The following condensed statement reflects the values assigned to LCB’s net assets as of the acquisition date:

 
| Total purchase price                     |   |        |   | $       | 735,770 |   |
|------------------------------------------|--------|-------------|--------|---------|---------|--------|
|                                     |   |        |   |    |    |
| Net assets acquired:                     |   |        |   |    |    |
| Cash                                     |   | 3,575,466   |   |    |    |
| Investment securities available for sale |   | 4,798       |   |    |    |
| Loans                                    |   | 16,041,120  |   |    |    |
| Restricted investments in bank stock     |   | 329,900     |   |    |    |
| Accrued interest receivable              |   | 52,597      |   |    |    |
| Premises and equipment, net              |   | 218,751     |   |    |    |
| Core deposit intangible                  |   | 61,664      |   |    |    |
| Deferred tax assets                      |   | 388,865     |   |    |    |
| Other assets                             |   | 72,591      |   |    |    |
| Time deposits                            |   | (9,582,419  | )      |    |    |
| Deposits other than time deposits        |   | (10,448,660 | )      |    |    |
| Accrued interest payable                 |   | (7,029      | )      |    |    |
| Other liabilities                        |   | (104,723    | )      | 602,921 |    |
|                                     |   |        |   |    |    |
| Goodwill resulting from merger           |   |        |   | $       | 132,849 |   |

 

44

----

 

**15.****                  ****BUSINESS COMBINATION (Continued)**

 

**Agreement and Plan of Merger****(Continued)**

 

Results of operations for Liberty Centre Bancorp, Inc. prior to the acquisition date are not included in the Consolidated Statement of Income for the year ended December 31, 2013. The following table presents financial information regarding the former Liberty Centre Bancorp, Inc. operations included in the Consolidated Statement of Income from the date of acquisition through December 31, 2014.

 
| ** **          | ** ** | **Actual From   Acquisition   Date Through   December 31,   2014** | ** ** |
|---------------------|------------|-----------------------------------------------------------------------------------|------------|
| Net interest income |       | $                                                                                 | 542,928    |   |
| Noninterest income  |       | 32,126                                                                            |       |
| Net income          |       | 436,465                                                                           |       |
|                     |            |                                                                                   |            |  |

 

In addition, the following table presents unaudited pro forma information as if the acquisition of Liberty Centre Bancorp, Inc. had occurred on January 1, 2013, under the “Pro Forma” columns.  The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments net of the related income tax effects are included in the amounts below.

 
| ** **                    | ** ** | **Pro Forma (Unaudited)**                        | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **For the Years Ended   December 31,** | ** ** |
| ** **                    | ** ** | **2014**                                                   | ** ** | **2013** | ** ** |
| Net interest income           |       | $                                                          | 7,012,083  |   | $ | 8,395,261 |   |
| Noninterest income            |       | 1,011,734                                                  |       | 1,001,697 |   |
| Net income                    |       | 308,180                                                    |       | 1,209,139 |   |
|                          |       |                                                       |       |   |   |
| Pro forma earnings per share: |       |                                                       |       |   |   |
| Basic                         |       | 0.61                                                       |       | 2.39 |   |
| Diluted                       |       | 0.61                                                       |       | 2.39 |   |
|                               |            |                                                            |            |  |  |  |  |

 

45

----

 

**16.****                  ****SUBSEQUENT EVENTS — AGREEMENT AND PLAN OF MERGER**

 

On July 3, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FNBM Financial Corporation  (“FNBM”), the parent company of The First National Bank of Minersville, under which the Company will acquire FNBM for approximately $13.4 million in stock and cash.  Under the terms of the Merger Agreement, FNMB will merge with and into the Company (the “Merger”) after which The First National Bank of Minersville will merge with and into The Gratz Bank. Each outstanding share of FNBM common stock will be converted into the right to receive $276.57 per share or 4.7684 shares of the Company’s common stock. This consideration is subject to election of FNBM shareholders and allocation procedures designed to result in transaction consideration that is not greater than 60 percent common stock nor 50 percent cash. Additionally, the consideration is subject to a downward adjustment if loan delinquencies at FNBM increase, or shareholders’ equity at FNBM decreases, beyond specified amounts.  Cash will be paid in lieu of fractional shares at a value based on the average closing sale price of the Company’s common stock for the 20 trading days immediately prior to the closing date.

 

The Merger is intended to qualify as a tax-free reorganization for federal income tax purposes. As a result, the shares of FNBM exchanged for the Company’s shares will be transferred on a tax-free basis. The Merger is expected to close during the first quarter of 2015. If the Merger is not consummated under certain circumstances, FNBM has agreed to pay the Company a termination fee of $600,000.

 

46

----

 

**17.****                  ****PARENT COMPANY**

 

Condensed financial statements of GNB Financial Services, Inc. are as follows:

 

CONDENSED BALANCE SHEET

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2014**              | ** ** | **2013** | ** ** |
|                                            |       |                  |       |   |   |
| ASSETS                                          |       |                  |       |   |   |
| Cash                                            |       | $                     | 2,370,521  |   | $ | 166 |   |
| Investment in subsidiary                        |       | 23,830,042            |       | 25,406,672 |   |
|                                            |       |                  |       |   |   |
| TOTAL ASSETS                                    |       | $                     | 26,200,563 |   | $ | 25,406,838 |   |
|                                            |       |                  |       |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY       |       |                  |       |   |   |
| Other liabilities                               |       | $                     | 11,696     |   | $ | 69 |   |
| Stockholders’ equity                       |       | 26,188,867            |       | 25,406,769 |   |
|                                            |       |                  |       |   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |       | $                     | 26,200,563 |   | $ | 25,406,838 |   |

 

CONDENSED STATEMENT OF INCOME

 
| ** **                                                            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                            | ** ** | **2014**                                   | ** ** | **2013** | ** ** |
|                                                                  |       |                                       |       |   |   |
| INCOME                                                                |       |                                       |       |   |   |
| Dividends from bank subsidiary                                        |       | $                                          | 3,682,289  |   | $ | 985,239 |   |
| Total income                                                          |       | 3,682,289                                  |       | 985,239 |   |
|                                                                  |       |                                       |       |   |   |
| EXPENSES                                                              |       | 5,775                                      |       | 6,986 |   |
|                                                                  |       |                                       |       |   |   |
| Income (loss) before equity in undistributed   earnings of subsidiary |       | 3,676,514                                  |       | 978,253 |   |
| Equity in undistributed earnings of subsidiary                        |       | (2,236,324                                 | )          | 1,172,493 |   |
|                                                                  |       |                                       |       |   |   |
| NET INCOME                                                            |       | $                                          | 1,440,190  |   | $ | 2,150,746 |   |
|                                                                  |       |                                       |       |   |   |
| COMPREHENSIVE INCOME                                                  |       | $                                          | 1,462,259  |   | $ | 1,768,752 |   |

 

47

----

 

**17.****            ****PARENT COMPANY**

 

CONDENSED STATEMENT OF CASH FLOWS

 
| ** **                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                          | ** ** | **2014**                                   | ** ** | **2013** | ** ** |
| OPERATING ACTIVITIES                                                                |       |                                       |       |   |   |
| Net income                                                                          |       | $                                          | 1,440,190  |   | $ | 2,150,746 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities: |       |                                       |       |   |   |
| Equity in undistributed earnings of subsidiary                                      |       | 2,236,324                                  |       | (1,172,493 | ) |
| Other, net                                                                          |       | 11,622                                     |       | (2 | ) |
| Net cash provided by operating activities                                           |       | 3,688,136                                  |       | 978,251 |   |
|                                                                                |       |                                       |       |   |   |
| INVESTING ACTIVITIES                                                                |       |                                       |       |   |   |
| Acquisition of net assets of                                                        |       |                                       |       |   |   |
| Liberty Centre Bancorp, Inc.                                                   |       | (637,620                                   | )          | — |   |
| Net cash used for investing activities                                              |       | (637,620                                   | )          | — |   |
|                                                                                |       |                                       |       |   |   |
| FINANCING ACTIVITIES                                                                |       |                                       |       |   |   |
| Purchase of treasury stock                                                          |       | —                                     |       | (301,200 | ) |
| Sale of treasury stock                                                              |       | 2,128                                      |       | — |   |
| Cash dividends paid                                                                 |       | (682,289                                   | )          | (677,184 | ) |
| Net cash used for financing activities                                              |       | (680,161                                   | )          | (978,384 | ) |
|                                                                                |       |                                       |       |   |   |
| Increase (decrease) in cash                                                         |       | 2,370,355                                  |       | (133 | ) |
|                                                                                |       |                                       |       |   |   |
| CASH AT BEGINNING OF PERIOD                                                         |       | 166                                        |       | 299 |   |
|                                                                                |       |                                       |       |   |   |
| CASH AT END OF PERIOD                                                               |       | $                                          | 2,370,521  |   | $ | 166 |   |

 

48

----