2018 annual report - 1st summit bank...rewarding excellence the annual report cover features 1st...

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E X P E R I E N C E T H E D I F F E R E N C E

R E W A R D I N GE X C E L L E N C E

The Annual Report cover features 1ST SUMMIT BANK

employees at an event in the 1ST SUMMIT ARENA @ Cambria

County War Memorial in May 2018. This was the location for

one of the Bank’s quarterly recognition and award celebrations

held each year. At this event, spouses and guests were also in

attendance to watch our professionals in action. There were

sports-related activities, dinner, and an extensive awards cer-

emony that recognized many employees for meeting various

job standards, achieving financial goals, and providing

extraordinary customer sales and service. Everyone had a

great time and they admired how the Cambria County War

Memorial has been transformed into 1ST SUMMIT ARENA.

1 S T S U M M I T B A N C O R P & S U B S I D I A R I E S

(In thousands, except per share data)

Net Income $ 10,750 $ 9,892 $ 10,136 + 9 % Cash Dividends 3,162 2,889 2,627 + 9 %

Per Share Net Income $ 9.79 $ 9.01 $ 9.22 + 9 % Cash Dividends 2.88 2.63 2.39 + 10 % Book Value 89.81 86.57 80.36 + 4 % Market Value 123.00 113.00 104.00 + 9 %

Financial Position

Assets $ 1,073,275 $ 1,041,0 1 3 $ 996,919 + 3 % Deposits 930,034 908,751 867,066 + 2 % Net Loans 535,360 505,564 492,012 + 6 % Investment Securities 488,684 491,069 448,897 — Trust and Investment Assets 313,038 296,786 270,947 + 5 % Shareholders’ Equity 98,599 95,094 88,330 + 4 % Allowance for Loan Losses 5,843 5,884 6,328 - 1 %

Selected Financial Ratios Return on Average Assets 1.01 % 0.97 % 1.04 % — Return on Average Equity 11.52 % 10.59 % 11.53 % — Equity Capital to Total Assets 9.19 % 9.13 % 8.86 % — Tier 1 Capital to Total Assets 10.26 % 9.78 % 9.53 % — Allowance for Loan Losses to Loans 1.08 % 1.15 % 1.27 % — Non-performing Assets to Total Assets 0.33 % 0.25 % 0.24 % —

% Change For The Year Ended December 31 2018 2017 2016 Over Prior Year

It is a real pleasure to report on yet another successful year for

1ST SUMMIT BANCORP. The financial results were strong despite

intense competition from banks of all sizes, industry disruption by

“fintech” companies, and volatile interest rates throughout the year.

Net income was a record $10.8 million, even after a reduction in

earnings for equity securities held. A new accounting change

moved the reporting of equity securities from the balance sheet

to the income statement, based on changes in market value. This

reduced earnings by about $.5 million. Otherwise, net income

would have exceeded $11.2 million. Core earnings were up, as the

net interest margin increased 6% and there was less dependence

on securities gains.

Shareholder return was significant, as earnings per share increased

almost 9% to $9.79. Total stock return for the year was up 11.3%, as

the share price increased $10.00 to $123.00 at year end, and the

cash dividend was raised $.25 a share by the Board of Directors,

marking the 42nd consecutive year of a dividend increase. This record

is indicative of strong, consistent performance year after year.

Of course, the Tax Reform Bill reduced the federal tax rate for the

Company. It allowed us to reposition assets, spend money for the

future, and share this windfall with all of our stakeholders.

Our customers, communities, shareholders, and staff all benefitted

financially from the reduced taxes the Company enjoyed in 2018.

We increased interest rates to depositors early in the year and

kept loan rates lower than normal, increased our donations by an

additional 10% to help those in our communities who needed it

the most, raised the cash dividend significantly for shareholders,

and rewarded our professionals with a $1,000 special bonus early

in the year.

Cash Dividends increased for the

42nd consecutive year, a record that only a

handful of banks have achieved nationwide.

Dividends increased

almost 10% to $2.88 a share.

We saw growth and improvement in the local economy which,

coupled with a strong business development effort, allowed for a

$30 million increase in loans outstanding. The loans were funded

mainly by increased deposits which totaled more than $930 million.

In addition, as loans grew, we let lower-yielding investment securities

run off the balance sheet to take advantage of higher yields in the

loan portfolio.

The loan growth did not come about by sacrificing loan quality or

relaxing our credit standards. Net charge-offs represented a low

.09% of loans outstanding and non-performing assets were .33%

of assets, well below industry standards. Our risk profile for lending

has been consistent for many years. We entertain all types of

loan requests and take pride in being creative lenders who help

customers meet their needs and financial goals, without taking

undue risk.

We are broad-based lenders who make loans to businesses

and consumers, alike. Whether it is for commercial real estate

development, equipment and technology loans, retail, or professional

services, we tailor our lending to meet those businesses’ needs.

Our consumer lending is a greater share of loans than most

community banks, and we have an ever-growing real estate

mortgage portfolio. Our consistency is evident by the fact that our

loans never declined throughout the financial crisis and great

recession, dating back to 2007.

Even with the impressive dividend record, the capital position

remains strong. The Tier 1 capital ratio exceeded 10% at year end,

and all of the risk-based capital ratios are considerably above the

well-capitalized parameters that regulators require. This strong

capital position can provide for growth and expansion opportunities

that may become available in the future.

All of our Stakeholders—our customers, shareholders, communities and our professionals—benefited from the reduced federal

tax rate this past year.

Net income totaled a

record $10.8 million.

2018 was another year of numerous achievements for the Company

and its subsidiaries.

1ST SUMMIT BANCORP was once again recognized by American

Banker magazine for being one of the 200 most profitable community

banks in the nation for its three-year return on equity, ranking #48.

1ST SUMMIT BANK also received several honors again this year:

• Recognized as one of the top 1% performing community

banks by the Institution for Extraordinary Banking.

• Selected as one of the 100 Best Places to Work in PA.

This was the 18th consecutive year for this award, which

makes 1ST SUMMIT the only Company in Pennsylvania to

have done so.

• Readers of the Johnstown Tribune- Democrat newspaper

selected 1ST SUMMIT BANK as “Simply the Best Bank” for

the 10th time.

• American Banker magazine chose the Bank as one of only

80 banks as “Best Banks to Work For” in the USA for banks

of all sizes. (Ranked #26)

• PA Business Central newspaper rated the Bank as one of the

Top 100 Organizations in their 23-county trade area.

These awards do not simply happen. It takes a philosophy and culture

that is focused on performance; one that has a dedicated and

proficient workforce, and a Board of Directors who supports these

efforts and provides the resources to help the Company succeed

in so many ways.

Extraordinary Banking™ Awards

A panel of bankers selected 1ST SUMMIT as a Top Bank for:

extraordinary customer serviceemployee engagement

community involvementfinancial literacy to customers

As bankers, we have the opportunity to help improve the quality of

life and economic vibrancy of the communities we serve. Of course,

lending money to businesses and consumers can greatly enhance

the quality of life for others and build stronger communities, but our

Company does more than that.

Besides offering numerous financial services, we can help others by

utilizing our time, talents, and financial resources. Our professionals

and board members spend countless hours volunteering, taking

leadership roles where needed, and giving broad financial support

throughout our market area.

Our professionals logged more than 11,600 hours helping people in

need, providing financial literacy coaching in 15 school districts, and

volunteering for festivals, charity events, social agencies, and more.

Also, many board members, officers, and staff helped fill numerous

leadership roles for non-profit agencies, economic development

groups, and civic organizations.

The Company made financial donations and contributions to more

than 400 worthy organizations during the year. After the year began,

we added an additional 10% to our donations budget, as a result of

the tax cut benefit, to help those most in need in our communities.

Community service and involvement is a

cornerstone of our values. In 2018, our professionals raised more than $50,000 for local causes. This was

separate from our corporate donations. They had

fun, while giving back to others.

During the year, the Bank continued to invest in technology to

enable more ease of banking for customers. Businesses now

have a mobile app and mobile deposit feature, and anyone can

utilize our smartwatch online banking app. We are working on

additional features to provide even quicker banking services

anytime and anywhere.

Cambria Thrift Consumer Discount Company acquired another

finance company, City Finance of McKeesport. This is the fifth

office for Cambria Thrift and the first venture into Allegheny

County for the Company. The combined assets helped stabilize

the overall earnings for Cambria Thrift and should provide

additional growth in the years ahead.

The Bank’s Main Office will be going through an extensive remodeling

project in 2019. The main banking floor and the financial services

center will be redone to make it an exciting place for customers

to do business and interact with our professionals for solutions to

their financial needs. There will be a new modern décor for the offices,

similar to our recently-built Ebensburg facility.

The Banking Industry is going through dynamic change and

transformation. Competition has grown immensely within

traditional banking and through disruption from nonbanks, particularly

“fintech” companies who rely on new technologies to change the way

customers bank.

Also, the largest banks in the country are expanding at a rapid

pace in order to be “national” in their presence at the expense of

regional and community banks. They are spending huge sums of

money on expansion and technology to gain a competitive edge.

This is reminiscent of the early 1980’s when the number of bank

charters dropped dramatically as smaller banks found it difficult

to compete with the rapid changes in banking.

Throughout the year, our professionals helped

teach our next generation the fundamentals necessary

for a secure financial future.

We do not believe further consolidation will benefit customers

if the number of banks is reduced to only a few very large

institutions. Today, many rural communities across the US have

seen their local banks disappear and banking services become

almost nonexistent. Many of these communities have suffered

economic decline as a result of fewer banks.

At 1ST SUMMIT, we are committed to keeping up with the changes

by investing in the newest technology and services for our

customers and clients. However, one important trait that we

have that the biggest banks cannot compete with is our

personal attention and extraordinary service. We will continue

to develop the finest services possible and continue to develop

our workforce to be the best bankers. When customers deal with

us, they can “Experience the Difference” of how they are treated

as humans, not numbers, whether in person or through the many

innovative ways they prefer to bank today. Customers will always

desire personal contact when they have problems or questions,

no matter how much technology helps them with their everyday

transactions and conveniences. We always go the extra step to

provide customer delight by doing whatever it takes to make sure

customers’ needs are not simply met, but are exceeded. That’s

what makes a difference.

Our success this past year is the result of a seasoned and

dedicated staff of professionals and a board of directors that has

extensive knowledge and foresight. We remain a purpose driven

Company that is committed to helping our region grow and prosper

while enhancing shareholder value each year. Your support as

shareholders and customers is invaluable.

We look forward to another rewarding year and thank all of you for

your continued investment with 1ST SUMMIT BANCORP.

Numerous shareholders attend the Annual Meeting

each year. It is gratifying to know they have such an interest in the Company.

After the meeting, they enjoy the

fellowship of the board and officers.

Joseph R. KondiskoChairman, 1ST SUMMIT BANCORP & 1ST SUMMIT BANKK Management Group

Elmer C. LasloPresident & CEO, 1ST SUMMIT BANCORP & 1ST SUMMIT BANK

Rex W. McQuaide, Esq.W.C. McQuaide, Inc.

John W. McCallMcCall Motors, Inc.

Stephen G. ZamiasZamias Services, Inc.

Edward J. Sheehan, Jr.Concurrent Technologies Corp.

Michael E. Ondesko, Jr.Dunlo Transfer Co., Inc.

Robert P. Gardill, IIGeneral American Resources

Jacqueline M. MartellaMartella’s Pharmacies, Boswell Prescription/Boswell Pharmacy Services, LLC

William G. McKelvey

Barry M. Alberter

Dominic A. Bellvia

Robert P. Gardill

Elmer C. LasloPresident & Chief Executive Officer

Jeffry D. CramerExecutive Vice President

Carol A. MyersExecutive Vice President & Treasurer

Timothy W. SmithSenior Vice President & Secretary

Donald F. YeagerSenior Vice President

Polly A. PreviteSenior Vice President

John E. KubinskySenior Vice President

Michael SeighSenior Vice President & Assistant Treasurer

Board of Directors: (seated) Joseph Kondisko;

Michael Ondesko, Jr.; Edward Sheehan, Jr.;

Robert Gardill, II; Elmer Laslo (standing) John McCall;

Jacqueline Martella; Rex McQuaide; Stephen Zamias


Jeffry D. CramerExecutive Vice President &Chief Lending Officer

Carol A. MyersExecutive Vice President,Treasurer & Chief Financial Officer

Timothy W. SmithSr. Vice President, Secretary &Information Systems Officer

Donald F. YeagerSr. Vice President &Retail Banking Group Head

Polly A. PreviteSr. Vice President & Operations Officer

John E. KubinskySr. Vice President & Loan Group Head

NORTHERN AREA

George E. Letcher, Jr., CPAProfessor EmeritusUniversity of Pittsburgh at Johnstown

Anthony F. PacificoA & M Pacific AssociatesPacific Hospitality

Paul J. CalandraCresson Steel/Jennmar Corp.

Jeffrey R. HoltzHoltz and Associates Real Estate, LLC

Marie E. PolinskyChoices People SupportingPeople, Inc. (retired)

Michael J. BellviaPro Disposal, Inc.

Gerald M. MoschgatMainline PharmacyMainline Vision & Eyewear

SOUTHERN AREA

Charles F. Erickson, Jr.Allegheny Logistics Center

Leah Spangler, Ed.D.The Learning Lamp &Ignite Education Solutions

F. Nicholas JacobsSunstone Management Resources

Mark J. DurayCitizens’ Cemetery Association

Mark R. TercekLCT Energy

Edward L. WianTri-County Motor Sales, Inc.

WESTERN AREA

Joseph R. GreenAttorney at Law

Stephen W. OsborneIndiana University of Pennsylvania

Eric E. Bononi, CPA, EsquireBononi and Company, P.C.

David S. GehlmanLigonier Creamery, Inc.

Ronald M. DevineCBIZ Insurance Services

Douglas R. McIlwainMcIlwain Charters

Steven L. RemaleyRoy & Associates, PC

1ST SUMMIT BANK Leadership Team: (seated) Carol Myers,

John Kubinsky, Donald Yeager, Jeffry Cramer, Timothy Smith

(standing) Elmer Laslo, Polly Previte


Jeffry D. CramerExecutive Vice President &Chief Lending Officer

Carol A. MyersExecutive Vice President,Treasurer & Chief Financial Officer

Timothy W. SmithSr. Vice President, Secretary &Information Systems Officer

Donald F. YeagerSr. Vice President &Retail Banking Group Head

Polly A. PreviteSr. Vice President &Operations Officer

John E. KubinskySr. Vice President & Loan Group Head

Michael SeighSr. Vice President of Finance

Domenic M. CagliusoVice President & Sr. Trust and Investment ServicesDepartment Head

Russell E. GillmanVice President & Sr. Commercial Loan Department Head

Sean P. LewisVice President & Sr. CorporateBusiness Development Officer

Susan K. StemVice President & Customer Service Coordinator

Kenneth R. SzczurVice President & Sr. BusinessDevelopment Officer-Western Region

Leeann K. WylandVice President & ExecutiveAssistant to the CEO

Julie A. EdwardsVice President & General Auditor

Lori R. BaumgardnerVice President &Sr. Marketing Director

Scott A. MagnettiVice President & Sr. BusinessDevelopment Officer-Northern Region

Kathy J. BerkebileVice President & Sr. BusinessDevelopment Officer-Southern Region

Jonathan E. TapocikVice President & Sr. BusinessDevelopment Officer-Western Region

Paul M. KundrodAssistant Vice President &Consumer Loan Department Head

Jerry F. UpdykeAssistant Vice President &Sr. Loan Officer

Stacy L. MartinAssistant Vice President &Mortgage Loan Department Head

Leslie N. MorgensternAssistant Vice President & Credit Administration Department Head

J. Ilene BoughnerAssistant Vice President,Regional Lender & Sr. Personal Banking Officer-Indiana

Richard F. ChimelewskiAssistant Vice President &Wealth ManagementBusiness Development Officer

Kelly L. GoncherAssistant Vice President & Sr. Loan Officer

Tonya M. KellyAssistant Vice President &Retail Banking Operations Officer

Lawrence AlbertelliAssistant Vice President & Sr. Credit Administration Officer

Brian W. BrittonAssistant Treasurer &Sr. Electronic Banking Officer

Julie A. MikolichAssistant Secretary &Personal Banking Officer-Downtown Johnstown

Peter J. NastaseAssistant Secretary &Personal Banking Officer-Cresson

Jennifer L. SwingerAssistant Treasurer &Assistant Controller

Elliott T. SumnerAssistant Secretary & Network Engineer

Jessica M. MarshallAssistant Secretary &Operational Risk and Compliance Officer

Sarah A. ZajdelAssistant Secretary &Community OfficeCustomer Service Officer

Jason R. MillerAssistant Secretary & Customer Service Officer-Salix

Annette M. RoseAssistant Secretary &Trust Administration Officer

Joseph P. IvockAssistant Treasurer &Data Center Officer

Kathleen L. BurkettAssistant Vice President &Management Information Systems Officer

Connie L. WeyandtAssistant Vice President &Sr. Bankwide Auditor

Jeannine M. GoncherAssistant Vice President &Human Resources Officer

Pamela H. CarrollAssistant Vice President &Community Reinvestment Officer

Ramona LicastroAssistant Vice President &Credit Quality Officer

Susan J. McQuillenAssistant Vice President &Bookkeeping Operations Officer

Christina L. HinesAssistant Vice President & RegionalPersonal Banking Officer-Ebensburg

Eleanore B. BucchiAssistant Vice President & RegionalPersonal Banking OfficerWestmoreland Co.

Christine R. SerreAssistant Vice President & Sr. Personal Banking Officer-Sidman

Susan A. MartinAssistant Vice President& Sr. Personal Banking Officer-Westmont

Mary E. WoyAssistant Vice President& Sr. Personal Banking Officer-Somerset

Gregory D. PetrillaAssistant Vice President& Sr. Personal Banking Officer-Portage

D I R E C T O R S

Elmer C. Laslo

Jeffry D. Cramer

Joseph R. Kondisko

Rex W. McQuaide, Esq.

John W. McCall

O F F I C E R S

Elmer C. LasloChairman & Chief Executive Officer

Jeffry D. CramerPresident & Treasurer

Connie B. HobbsSr. Vice PresidentSecretary & Assistant Treasurer

Stephen G. Zamias

Edward J. Sheehan, Jr.

Michael E. Ondesko, Jr.

Robert P. Gardill, II

Jacqueline M. Martella

Board of Directors and Stockholders1ST SUMMIT BANCORP of Johnstown, Inc.Johnstown, Pennsylvania

Report on the Financial StatementsWe have audited the accompanying consolidated financial statements of 1ST SUMMIT BANCORP of Johnstown, Inc. and subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2018 and 2017; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the “financial statements”).

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

Other Matter We have also audited, in accordance with auditing standards generally accepted in the United States of America, the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013, and our report dated February 28, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Cranberry Township, PennsylvaniaFebruary 28, 2019

December 31, 2018 2017ASSETS Cash and due from banks..................................................... $ 11,747,570 $ 8,428,211 Interest-bearing deposits in banks........................................ 163,997 74,542 Cash and cash equivalents........................................... 11,911,567 8,502,753

Investment securities available for sale................................. 259,420,520 263,454,594 Investment securities held to maturity (fair value of $217,702,440 and $225,828,467)............................. 223,826,034 227,614,343 Equity securities held at fair value......................................... 5,437,897 — Loans.................................................... ............................... 541,203,143 511,448,551 Less allowance for loan losses............................................. 5,843,046 5,884,409 Net loans................................................................. 535,360,097 505,564,142

Premises and equipment, net............................................... 9,517,421 9,670,689 Goodwill .............................................................................. 388,768 388,768 Bank-owned life insurance................................................... 13,356,455 12,972,719 Accrued interest receivable................................................... 3,575,225 3,513,126 Federal Home Loan Bank stock............................................. 1,736,200 1,721,800 Other assets......................................................................... 8,744,907 7,610,465

TOTAL ASSETS..................................................... $ 1,073,275,091 $ 1,041,013,399

LIABILITIES Deposits: Noninterest-bearing checking.................................. $ 66,861,329 $ 63,770,910 Interest-bearing checking .......................................... 209,629,926 206,293,407 Money market .......................................................... 111,811,978 129,963,156 Savings.................................................................. . 136,767,653 141,573,722 Time........................................................................ 404,963,514 367,149,512

Total deposits ....................................................... 930,034,400 908,750,707 Short-term borrowings......................................................... 10,001,600 1,533,000 Other borrowed funds.......................................................... . 28,418,668 29,642,541 Accrued interest payable and other liabilities........................ 6,221,651 5,993,272

TOTAL LIABILITIES................................................. 974,676,319 945,919,520

STOCKHOLDERS’ EQUITYPreferred stock, no par value; 300,000 shares authorized; none issued ............................................................. — — Common stock, $5 par value; 4,800,000 shares authorized; 1,101,519 issued ..................................................... 5,507,595 5,507,595 Capital surplus ..................................................................... 5,751,796 5,742,674 Retained earnings ................................................................. 93,645,290 85,372,009 Accumulated other comprehensive loss................................ (5,927,577 (1,153,068Treasury stock, at cost (3,551 shares and 3,598 shares)....... (378,332 (375,331

TOTAL STOCKHOLDERS’ EQUITY............................ 98,598,772 95,093,879

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY.............................. $ 1,073,275,091 $ 1,041,013,399

See accompanying notes to the consolidated financial statements.

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Year Ended December 31, 2018 2017INTEREST AND DIVIDEND INCOME Interest and fees on loans................................................. $ 26,420,894 $ 24,423,351 Interest and dividends on investment securities: Taxable..................................................................... . 8,223,535 7,824,970 Exempt from federal income tax................................. 5,026,042 4,537,226 Other interest ................................................................... 152,012 119,349

Total interest and dividend income........................ 39,822,483 36,904,896 INTEREST EXPENSE Deposits.......................................................................... . 9,345,522 7,567,687 Short-term borrowings..................................................... 211,310 29,647 Other borrowed funds....................................................... 1,044,411 932,683

Total interest expense............................................ 10,601,243 8,530,017

NET INTEREST INCOME....................................................... 29,221,240 28,374,879

PROVISION FOR LOAN LOSSES......................................... 445,250 1,231,550

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 28,775,990 27,143,329

OTHER INCOME Service charges on deposit accounts................................ 2,010,809 1,758,822 Gain on sale of debt and equity investment securities, net. 186,477 2,495,070 Loss on equity securities change in fair value, net............. (534,286 — Wealth management income.............................................. 1,108,490 1,077,551 Earnings on bank-owned life insurance............................. 413,565 411,064 Bank card income............................................................. 1,347,074 1,308,926 Other income................................................................... . 293,403 557,218

Total other income ................................................. 4,825,532 7,608,651

OTHER EXPENSE Salaries and employee benefits......................................... 12,338,879 11,671,359 Occupancy expense......................................................... . 1,615,338 1,613,102 Equipment expense........................................................... 1,366,495 1,421,492 Federal deposit insurance expense.................................... 279,200 313,500 Data processing expense.................................................. 812,149 749,313 Shares tax expense........................................................... 873,628 814,270 Donations expense........................................................... 265,931 243,172 Other expense................................................................... 3,830,420 4,058,207

Total other expense............................................... 21,382,040 20,884,415

INCOME BEFORE INCOME TAXES 12,219,482 13,867,565 Income tax expense ........................................................... 1,469,540 3,975,347

NET INCOME.......................................................................... $ 10,749,942 $ 9,892,218

EARNINGS PER SHARE........................................................ $ 9.79 $ 9.01

AVERAGE SHARES OUTSTANDING..................................... 1,097,888 1,098,418


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Accumulated Other Total Outstanding Common Capital Retained Comprehensive Treasury Stockholders’ Shares Stock Surplus Earnings Loss Stock Equity

Balance, December 31, 2016 1,098,883 $ 5,507,595 $ 5,728,212 $ 78,368,951 $ 1,018,792 $ 255,614 $ 88,330,352

Net income 9,892,218 9,892,218 Other comprehensive loss 134,276 134,276 Cash dividends ($2.63 per share) 2,889,160 2,889,160 Purchase of treasury stock 2,082 224,445 224,445 Sale of treasury stock 1,120 14,462 104,728 119,190

Balance, December 31, 2017 1,097,921 5,507,595 5,742,674 85,372,009 1,153,068 375,331 95,093,879

Net income 10,749,942 10,749,942 Other comprehensive loss 4,089,368 4,089,368 Change in accounting principle for adoption of ASU 2016-01 382,651 382,651 — Change in accounting principle for adoption of ASU 2018-02 302,490 302,490 — Cash dividends ($2.88 per share) 3,161,802 3,161,802 Purchase of treasury stock 340 40,460 40,460 Sale of treasury stock 387 9,122 37,459 46,581

Balance, December 31, 2018 1,097,968 $ 5,507,595 $ 5,751,796 $ 93,645,290 $ 5,927,577 $ 378,332 $


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Year Ended December 31, 2018 2017

NET INCOME................................................................... .... $ 10,749,942 $ 9,892,218 COMPONENTS OF OTHER COMPREHENSIVE LOSS:

Unrealized gain (loss) on available-for-sale securities........................................ (5,127,645 ) 2,291,624 Tax effect................................................................... .... 1,076,808 (779,154)

Reclassification adjustment for available-for-sale securities gains realized in income...................................................... (48,773 ) (2,495,070 ) Tax effect................................................................... .... 10,242 848,324

TOTAL OTHER COMPREHENSIVE LOSS........................ (4,089,368 ) (134,276 )

TOTAL COMPREHENSIVE INCOME................................. $ 6,660,574 $ 9,757,942

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( )( ) 98,598,772

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Year Ended December 31, 2018 2017OPERATING ACTIVITIES Net income................................................................... ......... $ 10,749,942 $ 9,892,218 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.......................................... ..... 445,250 1,231,550 Depreciation and amortization.................................. ...... 2,414,522 2,637,455 Gain on sale of debt and equity investment securities, net .. (186,477 ) (2,495,070 ) Loss on equity securities change in fair value, net ......... 534,286 — Deferred income taxes................................................... . (42,194 ) 1,308,411 Earnings on bank-owned life insurance.................... ..... (413,565 ) (411,064 ) Increase in accrued interest receivable............................ (62,099 ) (459,411 ) Increase in accrued interest payable............................... 314,435 40,537 Other, net .................... .................... .................... ........... 56,547 (87,287 ) Net cash provided by operating activities........ ........ 13,810,647 11,657,339 INVESTING ACTIVITIES Investment securities available for sale: Proceeds from sales........ ........... ........... ........... ...... ........ 2,539,127 13,090,837 Proceeds from maturities and paydowns........ ........... ..... 21,625,470 26,552,038 Purchases........ ........... ........... ........... ........... ................. . (30,428,417 ) (105,949,812) Investment securities held to maturity: Proceeds from sales........ ........... ........... ........... ...... ........ 2,342,167 2,464,948 Proceeds from maturities and paydowns........ ........... ..... 22,777,567 30,469,999 Purchases........ ........... ........... ........... ........... ................. . (22,108,868 ) (8,442,494 ) Equity securities held: Proceeds from sales........ ........... ........... ........... ...... ........ 250,230 — Purchases........ ........... .......... ........... ...... ........... ...... ....... (1,837,702 ) — Net increase in loans........ ........... ........... ........... ........... . ....... (30,331,275 ) (15,346,260 ) Purchases of premises and equipment........ ........... ................ (706,782 ) (656,093 ) Proceeds from bank-owned life insurance........ ........... .......... — 279,381 Purchases of bank-owned life insurance........ ........... ............ (112,282 ) (1,021,440 ) Proceeds from sale of real estate owned........ ........... ............. 230,593 344,359 Redemption of Federal Home Loan Bank stock . ........... ......... 5,954,600 3,090,700 Purchase of Federal Home Loan Bank stock........ ........... ........ (5,969,000 ) (3,323,700 ) Net cash used for investing activities........ .............. (35,774,572 ) (58,447,537 ) FINANCING ACTIVITIES Net increase in deposits ........ ........... ........... ........... ............... 21,283,693 41,684,295 Net change in short-term borrowings ........ ........... ........... ...... 8,468,600 1,533,000 Proceeds from other borrowed funds........ ........... ........... ....... 5,776,127 2,249,285 Repayments of other borrowed funds........ ........... ........... ...... (7,000,000 ) (8,000,000 ) Dividends paid on common stock........ ........... ........... ........... (3,161,802 ) (2,889,160 ) Purchases of treasury stock........ ........... ........... ........... ......... (40,460 ) (224,445 ) Proceeds from sales of treasury stock........ ........... ................ 46,581 119,190 Net cash provided by financing activities........ ........ 25,372,739 34,472,165

Increase (decrease) in cash and cash equivalents.... 3,408,814 (12,318,033 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ ... 8,502,753 20,820,786

CASH AND CASH EQUIVALENTS AT END OF YEAR........ ...... $ 11,911,567 $ 8,502,753


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Nature of Operations and Basis of PresentationThe consolidated financial statements include the accounts of 1ST SUMMIT BANCORP of Johnstown, Inc. (the “Company”), and its wholly owned subsidiaries, 1ST SUMMIT BANK (the “Bank”) and Cambria Thrift Consumer Discount Company (“Cambria”). All significant intercompany transactions have been eliminated in consolidation. The investment in subsidiaries on the parent company financial statements is carried in the parent company’s equity and equals the underlying net assets of the subsidiaries.The Company is a Pennsylvania company organized to become the holding company of the Bank. The Bank is a state-chartered bank located in Pennsylvania. Cambria is a Pennsylvania-chartered consumer finance company. The Company’s principal sources of revenue emanate from its portfolio of residential real estate, commercial mortgage, commercial, and consumer loans, its investment portfolio, as well as trust and a variety of deposit services to its customers through 16 Bank and 5 Cambria locations. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation. Both the Bank and Cambria are regulated by the Pennsylvania Department of Banking.The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Consolidated Balance Sheet date and reported amounts of revenues and expenses for the period. Actual results could differ from those estimates.

Investment SecuritiesDebt securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method for debt securities. Interest and dividends on invest-ment securities are recognized as income when earned.Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary. For debt securities, management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the investor does not intend to sell the security, and it is more likely than not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the noncredit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings.

Equity securities are held at fair value. Holding gains and losses are recorded in income. Dividends on equity securities are recognized as income when earned.

Investment in Federal Home Loan Bank (“FHLB”) StockThe Bank is a member of the FHLB of Pittsburgh and, as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and, as such, is classified as restricted stock, carried at cost and evaluated for impairment. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing tem-porary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared with the capital stock amount and the length of time this situation has persisted; (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the FHLB; and (d) the liquidity position of the FHLB. There was no impairment of the FHLB stock as of December 31, 2018 or 2017.

LoansLoans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding principal amount, net of unearned income. Interest from installment loans is recognized in income based on the simple-interest method, actuarial method, or sum-of-the-month’s-digits method depending on which entity originated the loans. All three methods result in approximate level rates of return over the terms of the loans. Interest on real estate mortgages and com-mercial loans is recognized as income when earned on the accrual method. Generally, the policy has been to stop accruing interest on loans when it is determined that a reasonable doubt exists as to the collectability of additional interest. Interest previously accrued, but deemed uncollectible, is deducted from current interest income. Payments received on nonaccrual loans are either applied to principal or reported as interest income according to man-agement’s judgment as to the collectability of principal. Loans are returned to accrual status when past due interest is collected and the collection of principal is probable.Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield. Management is amortizing these amounts over the contractual life of the related loans.

Allowance for Loan LossesThe allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio, as of the Consolidated Balance Sheet date. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management’s monthly evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to change in the near term.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

Premises and EquipmentLand is carried at cost. Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years for furniture, fixtures, and equipment and 25 to 40 years for building premises. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from 7 to 15 years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improve-ments are capitalized.

GoodwillThe Company accounts for goodwill using an annual impairment analysis of goodwill that includes a qualitative assessment in order to determine if the two-step process of measuring impairment is necessary 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 irregu-larly and in varying amounts. No impairment of goodwill was recognized in any of the periods presented.

Bank-Owned Life Insurance (“BOLI”)The Bank purchased life insurance policies on certain key employees and directors. BOLI is recorded at its cash surrender value or the amount that can be realized and is shown on the Consolidated Balance Sheet. Any increases in the cash surrender value are recorded as other income on the Consolidated Statement of Income, while administrative expenses of $142,111 and $126,288 are recorded as other expense and as a reduction of the cash surrender value for years ended December 31, 2018 and 2017.

Trust DepartmentTrust department assets (other than cash deposits) held by the Bank in fiduciary or agency capacities for its customers are not included in the accompanying Consolidated Balance Sheet since such items are not assets of the Bank.

Advertising CostsAdvertising costs are expensed as incurred. Total advertising costs included in other expense on the Consolidated Statement of Income were $323,963 in 2018 and $298,801 in 2017.

Income TaxesThe Company, the Bank, and Cambria file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Tax Cuts and Jobs Act, enacted on December 22, 2017, lowered the federal corporate tax rate from 35% to 21% effective January 1, 2018. As a result, in 2017, the carrying value of net deferred tax assets were reduced with increased income tax expense by $933,398.

Earnings Per ShareThe Company currently maintains a simple capital structure; thus, there are no dilutive effects on earnings per share. Earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding for the period.

Comprehensive IncomeThe Company is required to present comprehensive income in a full set of general-purpose financial statements for all periods presented. Other comprehensive income is comprised of unrealized holding gains (losses) on the available-for-sale securities portfolio and reclassification adjustment for realized gains recognized in income.

Statement of Cash FlowsFor purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits at banks with original maturities of 90 days or less. Cash payments for interest in 2018 and 2017 were $10,286,808 and $8,489,480, respectively. Income tax payments totaled $1,677,288 in 2018 and $2,604,000 in 2017. In 2018, there was a noncash transfer of repossessed assets of $37,362 from loans to other assets and a noncash transfer of real estate of $285,090 from loans to real estate owned. In 2017, there was a noncash transfer of repossessed assets of $138,877 from loans to other assets and a noncash transfer of real estate of $663,495 from loans to real estate owned.

Adoption of Accounting StandardsIn January 2016, the FASB finalized ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This accounting standard (a) requires separate presentation of equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) on the balance sheet and measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.The adoption resulted in the Company recognizing a one-time cumulative effect adjustment of $382,651 between accumulated other comprehensive loss and retained earnings on the consolidated balance sheet for the fair value of equity securities included in accumulated other comprehensive loss as of the beginning of the period. The adjustment had no impact on net income on any prior periods presented.The Company has adopted this standard during the reporting period. On a prospective basis, the Company implemented changes to the measurement of the fair value of financial instruments using an exit price notion for disclosure purposes included in Note 18 to the financial statements. The December 3l, 2017, fair value of each class of financial instruments disclosure did not utilize the exit price notion when measuring fair value and, therefore, may not be comparable to the December 3l, 2018 disclosure.In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for certain income tax effects stranded in AOCI as a result of the Tax Act. Consequently, the reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. However, because the ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be included in income from continuing operations is not affected. ASU No. 2018-02 is effective for the Company’s reporting period beginning on January 1, 2019; early adoption is permitted. The Company elected to adopt ASU No. 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. The reclassification decreased AOCI and increased retained earnings by $302,490, with zero net effect on total shareholders’ equity.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont’d)

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB issued targeted updates to clarify specific implementation issues including ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including service charges on deposit accounts, wealth management income, bank card income, and other income. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See Note 2 Revenue Recognition for more information.

Reclassification of Comparative AmountsCertain comparative amounts for the prior year have been reclassified to conform to current-year classifications. Such reclassifications had no effect on net income or stockholders’ equity.

2. REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606 using the modified retrospective method, and applied the guidance to all contracts in scope that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.The core principle of Topic 606, Revenue from Contracts with Customers, is that an entity recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. Topic 606 requires entities to exercise more judgment when consid-ering the terms of a contract than under Topic 605, Revenue Recognition. Topic 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. Topic 606 does not apply to revenue associated with interest income on financial instruments, including loans and securities. Additionally, certain noninterest income streams such as income from bank owned life insurance, and gain and losses on sales of debt and equity securities are out of scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation beyond what is presented in the Consolidated Statement of Income was not necessary.

Service Charges on Deposit AccountsTopic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts which consists of monthly service fees, wire transfer fees, ATM fees, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, revenue is recognized upon completion of transaction.

Wealth Management IncomeWealth management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets along with commissions from the sale of mutual funds and annuities. The Company’s performance obligation for management and administration is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to the customers’ accounts. The Company’s performance obligation for mutual fund and annuity sales is generally satisfied upon completion of the transaction.

Bank Card IncomeBank card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as VISA. The Company’s performance obligation for these fees are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Other IncomeOther income within the scope of Topic 606 is primarily comprised of credit life insurance commissions and safe deposit box rents. Credit life insur-ance commissions are recognized over time using the monthly outstanding balance method which corresponds to the underlying insurance policy pe-riod, for which the Company is obligated to perform under contract with the insurance carrier. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

3. INVESTMENT SECURITIES

The amortized cost and fair value of investment securities (excluding equity securities as of December 31, 2018) as of December 31 are summarized as follows:

2018 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value

AVAILABLE FOR SALEObligations of states and political subdivisions $ 103,010,009 $ 313,199 $ (2,661,479 ) $ 100,661,729 Mortgage-backed securities in government-sponsored entities 160,413,774 154,384 (5,238,012) 155,330,146 Corporate bonds 3,500,000 — (71,355 ) 3,428,645

Total debt securities $ 266,923,783 $ 467,583 $ (7,970,846) $ 259,420,520

3. INVESTMENT SECURITIES (Cont’d)

2017 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value AVAILABLE FOR SALEObligations of states and political subdivisions $ 98,051,241 $ 803,749 $ (888,673 ) $ 97,966,317 Mortgage-backed securities in government-sponsored entities 160,931,460 201,793 (2,411,334 ) 158,721,919 Corporate bonds 2,500,000 — (32,380 ) 2,467,620 Total debt securities 261,482,701 1,005,542 (3,332,387 ) 259,155,856 Mutual fund 500,000 — (12,928 ) 487,072 Equity securities - financial institutions 3,218,963 600,953 (8,250 ) 3,811,666

Total $ 265,201,664 $ 1,606,495 $ (3,353,565 ) $ 263,454,594

2018 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value HELD TO MATURITY U.S. government agency securities $ 13,071,048 $ 80,358 $ (156,396) $ 12,995,010 Obligations of states and political subdivisions 74,223,519 267,084 2,467,330 ) 72,023,273 Mortgage-backed securities in government-sponsored entities 136,531,467 60,026 (3,907,336) 132,684,157

Total $ 223,826,034 $ 407,468 $ (6,531,062) $ 217,702,440

2017 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value HELD TO MATURITY U.S. government agency securities $ 13,096,889 $ 293,371 $ (109,160) $ 13,281,100 Obligations of states and political subdivisions 74,698,154 668,090 (1,348,769 ) 74,017,475 Mortgage-backed securities in government-sponsored entities 139,819,300 596,453 (1,885,861 ) 138,529,892

Total $ 227,614,343 $ 1,557,914 $ (3,343,790 ) $ 225,828,467

(

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31:

2018 Less than Twelve Months Twelve Months or Greater Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value LossesU.S. government agency securities $ 3,998,300 $ (13,816 ) $ 1,857,420 $ (142,580 ) $ 5,855,720 $ (156,396 )Obligations of states and political subdivisions 38,180,125 (602,292 ) 72,914,835 (4,526,517) 111,094,960 (5,128,809 ) Mortgage-backed securities in government- sponsored entities 32,204,890 (341,440 ) 234,927,904 (8,803,908 ) 267,132,794 (9,145,348 )Corporate bonds 498,825 (1,175 ) 929,820 (70,180) 1,428,645 (71,355 ) Total debt securities $ 74,882,140 $ (958,723 ) $ 310,629,979 $ (13,543,185 ) $ 385,512,119 $ (14,501,908)

2017 Less than Twelve Months Twelve Months or Greater Total Gross Gross Gross Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value LossesU.S. government agency securities $ — $ — $ 1,890,840 $ (109,160) $ 1,890,840 $ (109,160 )Obligations of states and political subdivisions 37,803,264 (486,119 ) 29,729,594 (1,751,323 ) 67,532,858 (2,237,442 ) Mortgage-backed securities in government- sponsored entities 110,493,696 (942,759 ) 132,426,968 (3,354,436) 242,920,664 (4,297,195 ) Corporate bonds 967,620 (32,380 ) — — 967,620 (32,380 ) Total debt securities 149,264,580 (1,461,258 ) 164,047,402 (5,214,919 ) 313,311,982 (6,676,177 ) Mutual fund — — 487,072 (12,928 ) 487,072 (12,928 )Equity securities- financial institutions 317,850 (8,250 ) — — 317,850 (8,250 ) Total $ 149,582,430 $ (1,469,508 ) $164,534,474 $ (5,227,847 ) $ 314,116,904 $ (6,697,355 )

The Company reviews its position quarterly and has asserted that at December 31, 2018, the declines outlined in the above table 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 its cost basis, which may be at maturity. There were 588 positions that were temporarily impaired at December 31, 2018.

3. INVESTMENT SECURITIES (Cont’d)

The Company conducts periodic reviews of its investments in debt securities to identify and evaluate each investment that has an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in Accumulated Other Comprehensive Income (“AOCI”) for available-for-sale securities, while such losses related to held-to-maturity securities are not recorded, as these investments are carried at their amortized cost. Regardless of the classification of the securities as available for sale or held to maturity, the Company has assessed each unrealized loss position for credit impairment. Factors considered in determining whether a loss is temporary include: • the length of time and the extent to which fair value has been below cost; • the severity of the impairment; • the cause of the impairment and the financial condition and near-term prospects of the issuer; • activity in the market of the issuer which may indicate adverse credit conditions; • if the Company intends to sell the investment; • if it’s more likely than not the Company will be required to sell the investment before recovering its amortized cost basis; and • if the Company does not expect to recover the investment’s entire amortized cost basis (even if the Company does not intend to sell the security). The Company’s review for impairment generally entails: • identification and evaluation of investments that have indications of possible impairment; • analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period; • discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairment; and • documentation of the results of these analyses, as required under business policies.

For debt securities that are not deemed to be credit impaired, management performs additional analysis to assess whether it intends to sell or would more likely than not be required to sell the investment before the expected recovery of the amortized cost basis. Management has asserted that it has no intent to sell and that it believes it is more likely than not that it will not be required to sell the investment before recovery of its amortized cost basis. The Company has concluded that the unrealized losses disclosed in the table above are not other than temporary but are the result of interest rate changes, sector credit ratings changes, or Company-specific ratings changes that are not expected to result in the noncollection of principal and interest during the period.For debt securities, a critical component of the evaluation for other-than-temporary impairment is the identification of credit impaired securities where management does not receive cash flows sufficient to recover the entire amortized cost basis of the security. Where management deems the security to be other-than-temporarily impaired based upon the above factors and the duration and extent to which the market value has been less than cost, the inability to forecast a recovery in market value, and other factors concerning the issuers in the pooled security, the decline is recorded in earnings.The amortized cost and fair values of debt securities at December 31, 2018, by contractual maturity, are shown below. The Company’s mortgage-backed securities have contractual maturities ranging from 1 to 20 years. 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.

Proceeds from sales of debt and equity investment securities during 2018 and 2017 were $5,131,524 and $15,555,785, respectively. The Company sold $2,342,167 and $2,464,948 of held-to-maturity securities during 2018 and 2017, respectively. These securities were sold under ASC 320 safe harbor rules so as not to taint the remaining held-to-maturity securities. These securities had amortized down to below 15% of the original purchase par balance. Debt and equity securities gains and losses of the Company are summarized in the following table:

Year Ended December 31, 2018 2017Gains on sales of held-to-maturity securities amortized down to below 15% of original purchase par balance $ 51,731 $ 110,111 Gross gains on available for sale securities 48,773 2,384,998 Gross (losses) on available for sale securities — (39 ) Gross gains realized on the sale of equity securities during the period 65,429 — Gross gains resulting from business combinations (1) 20,544 —

Total $ 186,477 $ 2,495,070

(1) Amounts occur when the Company owns common stock of an entity that is acquired in a business combination and the Company receives common stock of the acquiring entity in a non-monetary exchange.Net losses on the change in fair value of equity securities were $534,286 in 2018.Investment securities with a carrying value of $194,870,149 and $182,449,466 at December 31, 2018 and 2017, respectively, were pledged to secure public deposits, borrowings, and for other purposes as required by law.

4. LOANS

Major classifications of loans are summarized as follows: 2018 2017Consumer $ 34,290,226 $ 33,660,294 Residential real estate 259,059,427 242,599,491 Construction 24,544,523 26,102,477 Commercial and industrial 106,707,169 92,677,789 Commercial real estate - nonowner occupied 35,269,879 31,841,328 Commercial real estate - all other 81,331,919 84,567,172 541,203,143 511,448,551 Less allowance for loan losses 5,843,046 5,884,409

Net loans $ 535,360,097 $ 505,564,142

Gross loan balances at December 31, 2018 and 2017, are net of unearned income including net deferred loan fees of $1,025,078 and $898,373, respectively.The Company had nonaccrual loans as follows:

2018 2017Consumer $ 148,307 $ 184,321 Residential real estate 720,431 73,021 Construction — — Commercial and industrial — 6,940 Commercial real estate - nonowner occupied 566,637 740,822 Commercial real estate - all other 399,327 103,895

Total nonaccrual loans $ 1,834,702 $ 1,108,999

AVAILABLE FOR SALE HELD-TO-MATURITY Amortized Fair Amortized Fair Cost Value Cost Value Due in one year or less $ 423 $ 424 $ — $ — Due after one year through five years 1,662,642 1,657,191 14,263,327 14,306,316 Due after five years through ten years 32,866,095 32,728,658 41,866,944 41,531,037 Due after ten years 232,394,623 225,034,247 167,695,763 161,865,087 Total $ 266,923,783 $ 259,420,520 $ 223,826,034 $ 217,702,440

In the normal course of business, loans are extended to directors, executive officers, and their associates. A summary of loan activity for those directors, executive officers, and their associates with loan balances in excess of $60,000 for the year ended December 31, 2018, is as follows:

2017 Additions Repayments 2018

$ 18,142,677 $ 18,896,308 $ 13,724,010 $ 23,314,975

The Company’s primary business activity is with customers located within its local trade area. Commercial, residential, personal, and agricultural loans are granted. The Company also selectively purchases and funds commercial and residential loans originated outside its trade area, provided such loans meet the Company’s credit policy guidelines. Although the Company has a diversified loan portfolio at December 31, 2018 and 2017, the repayment of the loans outstanding to individuals and businesses is dependent upon the local economic conditions in its immediate trade area.

5. COMMITMENTS

In the normal course of business, there are various outstanding commitments and contingent liabilities which are not reflected in the accompanying consolidated financial statements. These commitments comprised the following at December 31:

2018 2017Commercial loan commitments $ 55,538,663 $ 40,052,388 One-to-four family commitments 35,474,720 32,965,837 Other commitments 16,702,648 15,640,556Standby letters of credit and financial guarantees 3,341,590 3,087,510 Total $ 111,057,621 $ 91,746,291

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. In the normal course of business, the Company makes various commitments which are not reflected in the accompanying financial statements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The Company’s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Performance letters of credit represent conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid- or performance-related contracts. The coverage period for these

instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. For secured letters of credit, the collateral is typically Bank deposit instruments or customer business assets.

6. ALLOWANCE FOR LOAN LOSSES

Management establishes the allowance for loan losses based upon its evaluation of the pertinent factors underlying the types and quality of loans in the portfolio. Commercial loans and commercial real estate loans are reviewed on a regular basis with larger loan relationships greater than $750,000 being reviewed twice, annually. Commercial loans and commercial real estate loans which are 90 days or more past due are considered for impairment testing. These loans are analyzed to determine if they are “impaired,” which means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. All loans that are delinquent 90 days and are placed on nonaccrual status are classified on an individual basis. Residential loans 90 days past due which are still accruing interest are classified as Substandard as per the Company’s asset classification policy. The remaining loans are evaluated and classified as groups of loans with similar risk characteristics. The Company allocates allowances based on the factors described below, which conform to the Company’s asset classification policy. In reviewing risk within the Bank’s loan portfolio, management has determined there to be several different risk categories or portfolio segments within the loan portfolio. The allowance for loan losses consists of the following portfolio segments: (i) the consumer loan portfolio; (ii) the residential real estate loan portfolio; (iii) the construction loan portfolio; (iv) the commercial and industrial loan portfolio; (v) the commercial real estate – nonowner occupied loan portfolio; (vi) the commercial real estate – all other loan portfolio; and (vii) the unallocated portion. Factors considered in this process included general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor to be applied to nonclassified loans. The following qualitative factors are analyzed: • Changes in lending policies and procedures • Experience depth and ability of management • Economic trends • Trends in volume and terms • Levels of and trends in delinquencies and nonaccruals • Volatility of losses within each risk category • Concentrations of credit

The Company also maintains an unallocated allowance to account for any factors or conditions that may cause a potential loss but are not specifically addressed in the process described above. The Company analyzes its loan portfolio each month to determine the appropriateness of its allowance for loan losses.

Balance December 31, 2016 $ 542,342 $ 1,833,638 $ 341,583 $ 1,128,610 $ 695,311 $ 1,323,417 $ 463,326 $ 6,328,227 Add:

Provision for loan losses 346,359 (100,756 56,865 51,483 1,056,412 43,572 (222,385 1,231,550

Recoveries 86,230 11,989 — 3,014 — — — 101,233

Less loans charged-off 459,032 64,431 — 144,867 997,000 111,271 — 1,776,601

Balance December 31, 2017 515,899 1,680,440 398,448 1,038,240 754,723 1,255,718 240,941 5,884,409

Add: Provision for loan losses 238,087 254,370 (130,909 268,487 279,033 (488,498 24,680 445,250 Recoveries 45,880 486 — 26,953 — 111,271 — 184,590 Less loans charged-off 288,078 74,505 — 60,690 130,000 117,930 — 671,203 Balance December 31, 2018 $ 511,788 $ 1,860,791 $ 267,539 $ 1,272,990 $ 903,756 $ 760,561 $ 265,621 $ 5,843,046

6. ALLOWANCE FOR LOAN LOSSES (Cont’d)

Changes in the allowance for loan losses for the years ended December 31 are as follows: Commercial Commercial Real Estate - Commerical Residential and Nonowner Real Estate - Consumer Real Estate Construction Industrial Occupied All Other Unallocated Total

During 2018, the reserves for consumer loans decreased slightly due to a decline in the historical loss factors for this portfolio. The reserve for residential real estate loans increased during the year as the related loan balances and the historical loss factors increased for this portfolio. The reserves for construc-tion loans decreased as loan balances in this sector decreased along with specific impaired reserves. The reserves for commercial and industrial loans and commercial real estate-nonowner increased as the related loan balances increased in these portfolios. The reserves for commercial real estate-all other decreased as related loan balances decreased, along with specific reserves and substandard loans, and a large recovery was realized in this portfolio segment. During 2017, the reserves for consumer loans decreased due to declines in the qualitative factors related to stronger economic conditions. The reserves for

residential real estate loans declined during the year as a percentage of the loan balance due to declines in the qualitative factors related to economic conditions for loans in this portfolio segment. The reserves for construction loans increased as loan balances in that sector have increased. The reserves for commercial and industrial loans decreased during 2017 as a percentage of the loan balance primarily due to several large charge-offs in this portfolio segment. The increase in the reserves for the commercial real estate- non-owner occupied segment was driven by an increase in historical losses in this segment along with a reduction in the specific reserve for impaired loans. The decrease in the commercial real estate-all other segment was due to a decrease in historical losses in this segment.

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December 31, 2018 Allowance for loan losses: Ending balance: collectively

evaluated for impairment $ 511,788 $ 1,860,791 $ 233,550 $ 1,272,990 $ 903,756 $ 760,561 $ 265,621 $ 5,809,057 Ending balance: individually evaluated for impairment — — 33,989 — — — — 33,989 Ending balance $ 511,788 $ 1,860,791 $ 267,539 $ 1,272,990 $ 903,756 $ 760,561 $ 265,621 $ 5,843,046

Loans: Ending balance: collectively evaluated for impairment $ 34,290,226 $ 259,059,427 $ 23,238,978 $ 106,707,169 $ 34,703,242 $ 79,731,260 $ 537,730,302 Ending balance: individually evaluated for impairment — — 1,305,545 — 566,637 1,600,659 3,472,841 Ending balance $ 34,290,226 $ 259,059,427 $ 24,544,523 $ 106,707,169 $ 35,269,879 $ 81,331,919 $ 541,203,143

Loans receivable and the related allowance for loan losses at December 31, 2018 and 2017, as well as the method the Company uses to evaluate these loans within their allowance for loan losses are summarized, by portfolio segment, as follows:

Commercial Commercial Real Estate - Commerical Residential and Nonowner Real Estate - Consumer Real Estate Construction Industrial Occupied All Other Unallocated Total

December 31, 2017 Allowance for loan losses:

Ending balance: collectively

evaluated for impairment $ 515,899 $ 1,680,440 $ 298,448 $ 1,038,240 $ 754,723 $ 1,107,718 $ 240,941 $ 5,636,409

Ending balance: individually evaluated for impairment — — 100,000 — — 148,000 — 248,000

Ending balance $ 515,899 $ 1,680,440 $ 398,448 $ 1,038,240 $ 754,723 $ 1,255,718 $ 240,941 $ 5,884,409

Loans:

Ending balance: collectively evaluated for impairment $ 33,660,294 $ 242,597,554 $ 24,745,432 $ 92,539,791 $ 31,100,506 $ 82,431,180 $ — $ 507,074,757

Ending balance: individually evaluated for impairment — 1,937 1,357,045 137,998 740,822 2,135,992 4,373,794

Ending balance $ 33,660,294 $ 242,599,491 $ 26,102,477 $ 92,677,789 $ 31,841,328 $ 84,567,172 $ $ 511,448,551

Commercial Commercial Real Estate - Commerical Residential and Nonowner Real Estate - Consumer Real Estate Construction Industrial Occupied All Other Unallocated Total


Impaired Loans with Impaired Loans No Specific with Specific Allowance Allowance Total Impaired Loans Unpaid Average Interest Recorded Related Recorded Recorded Principal Recorded Income Investment Allowance Investment Investment Balance Investment Recognized

December 31, 2018 Consumer $ — $ — $ — $ — $ — $ 47,145 $ — Residential real estate — — — — — 161 —Construction 838,872 33,989 466,673 1,305,545 1,305,545 1,327,003 87,096 Commercial and industrial — — — — — 11,481 34 Commercial real estate - nonowner occupied — — 566,637 566,637 1,693,637 688,958 — Commercial real estate - all other — — 1,600,659 1,600,659 2,357,573 1,820,583 43,422

Total impaired loans $ 838,872 $ 33,989 $ 2,633,969 $ 3,472,841 $ 5,356,755 $ 3,895,331 $ 130,552

Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Also, any loan modified in a trouble debt restructuring is also considered to be impaired. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability while not classifying the loan as impaired, provided the loan is not

a commercial or commercial real estate classification. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of loans is determined by the difference between the present value of the expected cash flows related to the loan using the original interest rate and its recorded value or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.


Impaired Loans with Impaired Loans No Specific with Specific Allowance Allowance Total Impaired Loans Unpaid Average Interest Recorded Related Recorded Recorded Principal Recorded Income Investment Allowance Investment Investment Balance Investment Recognized

December 31, 2017 Consumer $ — $ — $ — $ — $ — $ — $ — Residential real estate — — 1,937 1,937 1,937 6,470 — Construction 518,173 100,000 838,872 1,357,045 1,357,045 1,378,503 90,179 Commercial and industrial — — 137,998 137,998 137,998 135,757 5,841 Commercial real estate - nonowner occupied — — 740,822 740,822 1,737,822 1,256,197 84,648 Commercial real estate - all other 1,307,150 148,000 828,842 2,135,992 2,878,314 1,994,771 91,007

Total impaired loans $ 1,825,323 $ 248,000 $ 2,548,471 $ 4,373,794 $ 6,113,116 $ 4,771,698 $ 271,675

Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogenous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 89 days or less, generally are not classified as impaired. Management determines the significance of payment

delays on a case-by-case basis, taking into consideration all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and interest owed.

90 Days + 30-89 Days 90 Days + Total Past Due, December 31, 2018 Current Past Due Past Due Past Due Total Loans Still Accruing

Consumer $ 33,518,635 $ 459,809 $ 311,782 $ 771,591 $ 34,290,226 $ 163,476 Residential real estate 256,478,962 1,101,217 1,479,248 2,580,465 259,059,427 758,816 Construction 24,532,669 11,854 — 11,854 24,544,523 — Commercial and industrial 106,443,857 55,185 208,127 263,312 106,707,169 208,127 Commercial real estate - nonowner occupied 34,620,821 — 649,058 649,058 35,269,879 82,421 Commercial real estate - all other 80,239,301 693,291 399,327 1,092,618 81,331,919 —

Total $ 535,834,245 $ 2,321,356 $ 3,047,542 $ 5,368,898 $ 541,203,143 $ 1,212,840

90 Days + 30-89 Days 90 Days + Total Past Due, December 31, 2017 Current Past Due Past Due Past Due Total Loans Still Accruing

Consumer $ 33,004,318 $ 375,367 $ 280,609 $ 655,976 $ 33,660,294 $ 96,288 Residential real estate 239,450,082 2,403,701 745,708 3,149,409 242,599,491 672,687 Construction 26,096,633 5,844 — 5,844 26,102,477 — Commercial and industrial 92,466,621 90,483 120,685 211,168 92,677,789 113,745 Commercial real estate - nonowner occupied 31,067,472 33,034 740,822 773,856 31,841,328 — Commercial real estate - all other 84,014,048 261,712 291,412 553,124 84,567,172 187,517

Total $ 506,099,174 $ 3,170,141 $ 2,179,236 $ 5,349,377 $ 511,448,551 $ 1,070,237


Management uses a six-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first two categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. All construction, commercial, and commercial real estate loans greater than 90 days past due are considered Substandard. Balances in the Substandard category are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Balances in the Doubtful category have all the deficiencies inherent in the Substandard category, with the added characteristics that the deficiencies make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. Any portion of a loan deemed uncollectable is placed in the Loss category.

All consumer and residential real estate loans greater than 90 days past due are considered nonperforming. The nonperforming classification is based solely on delinquency levels. It is the policy of the Company that consumer loans are generally fully or partially charged down to the fair value of col-lateral securing the asset when the loan is 120 days past due for open-end loans, 90 days past due for unsecured open-end loans and 90 days past due for closed-end loans unless the loan is well secured and in the process of collection. The outstanding balance of any consumer or residential mortgage loan that exceeds 90 days past due is reviewed to determine collectability. If not all principal and interest is determined to be collectable the balance is transferred to nonaccrual status and subsequently evaluated to determine the fair value of the collateral less selling costs. A charge down is recorded for any deficiency determined from the collateral evaluation.

Special Pass Mention Substandard Doubtful Total

December 31, 2018 Construction $ 22,948,823 $ 290,100 $ 1,271,600 $ 34,000 $ 24,544,523 Commercial and industrial 105,238,769 915,400 553,000 — 106,707,169 Commercial real estate - nonowner occupied 33,347,379 173,300 1,749,200 — 35,269,879 Commercial real estate - all other 78,419,219 1,304,300 1,608,400 — 81,331,919 Total $ 239,954,190 $ 2,683,100 $ 5,182,200 $ 34,000 $ 247,853,490

Performing Nonperforming TotalDecember 31, 2018Consumer $ 33,978,443 $ 311,783 $ 34,290,226 Residential real estate 257,580,179 1,479,248 259,059,427 $ 291,558,622 $ 1,791,031 $ 293,349,653

Special Pass Mention Substandard Doubtful Total

December 31, 2017 Construction $ 24,470,777 $ 260,700 $ 1,271,000 $ 100,000 $ 26,102,477 Commercial and industrial 91,250,689 961,200 465,900 — 92,677,789 Commercial real estate - nonowner occupied 29,634,928 208,900 1,997,500 — 31,841,328 Commercial real estate - all other 80,727,172 1,704,100 1,987,900 148,000 84,567,172

Total $ 226,083,566 $ 3,134,900 $ 5,722,300 $ 248,000 $ 235,188,766

Performing Nonperforming TotalDecember 31, 2017Consumer $ 33,379,685 $ 280,609 $ 33,660,294 Residential real estate 241,853,783 745,708 242,599,491 $ 275,233,468 $ 1,026,317 $ 276,259,785


7. PREMISES AND EQUIPMENT

Major classifications of premises and equipment are summarized as follows:

2018 2017Land $ 2,901,688 $ 2,899,788 Buildings 9,870,077 9,712,281 Furniture, fixtures, and equipment 8,939,482 8,493,763 Leasehold improvements 1,886,913 1,785,546 23,598,160 22,891,378 Less accumulated depreciation and amortization 14,080,739 13,220,689

Total $ 9,517,421 $ 9,670,689

Depreciation and amortization charged to operations was $860,050 in 2018 and $879,973 in 2017.

Foreclosed Assets Held For SaleForeclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of December 31, 2018 and December 31, 2017, a total of $495,064 and $461,380, respectively of foreclosed assets were included with other assets. As of December 31, 2018 and December 31, 2017, included within foreclosed assets is $380,805 and $366,306, respectively of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2018 and December 31, 2017, the Company had initiated formal foreclosure procedures on $1,052,961 and $468,356 of consumer residential mortgages, respectively, that have not yet been moved to foreclosed assets. Troubled Debt RestructuringConsistent with accounting and regulatory guidance, the Company recognizes a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Company’s objective in offering a TDR is to increase the probability of repayment of the borrower’s loan. To be considered a TDR, the borrower must be experiencing financial difficulties and, the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would not otherwise be considered. The Company had one loan modification that was considered a TDR during the year ended December 31, 2018. The pre- and post-modification balance of the loan was $736,764. The modification was an extension of the maturity date. The Company had no loan modifications that were considered TDRs during the year ended December 21, 2017.

8. GOODWILL

For each of the years ended December 31, 2018 and 2017, goodwill has a net carrying amount of $388,768.The gross carrying amount of goodwill is tested for impairment in the fourth quarter, after the annual forecasting process. Based on fair value of the reporting unit, estimated using the expected present value of future cash flows, no goodwill impairment loss was recognized in 2018 or 2017.

9. TIME DEPOSITS

The scheduled maturities of time deposits are as follows:

2019 $ 175,434,337 2020 119,447,842 2021 64,096,925 2022 36,969,579 2023 8,608,977 Thereafter 405,854

Total $ 404,963,514

The aggregate of all time deposit accounts of $250,000 or more amounted to $64,816,064 and $52,534,362 at December 31, 2018 and 2017, respectively.

Maturities of other borrowed funds at December 31, 2018, are as follows:

Year Ending Weighted- December 31, Amount Average Rate

2019 $ 12,524,426 2.53 % 2020 7,708,242 3.74 2021 — — 2022 — — 2023 2,000,000 4.50 Thereafter 6,186,000 5.49

Total $ 28,418,668 3.64 %

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 Bank free and clear of any liens or encumbrances. The advances are collateralized by FHLB stock, obligations of U.S. government corporations and agencies, mortgage-backed securities, and first mortgage loans. During 2018, the Bank had a borrowing limit of approximately $270,948,250, with a variable rate of interest, based on the FHLB’s cost of funds. Subordinated capital debt consists of variable rate and fixed rate obligations with maturity dates ranging from September 1, 2019, through December 29, 2023. This is comprised of $2,000,000 of notes issued by the Bank and $7,732,668 of notes issued by Cambria. The Company fully and unconditionally guarantees these notes and they are subordinate in right of payments to the depositors and all claims of creditors. Interest on fixed rate notes is computed at 5.0 percent. Interest on variable notes is computed at 1.5 percent above the Federal Reserve discount rate, or 1 percent below the prime rate. Subordinated capital notes of $3,524,427, $4,208,241, and $2,000,000 mature in 2019, 2020, and 2023, respectively.The Company formed a special purpose entity (“Entity 1”) to issue $3,000,000 of floating rate, obligated mandatorily redeemable securities and $93,000 in common securities as part of a pooled offering with a maturity date of April 24, 2033. The rate is determined quarterly and floats based on the three-month LIBOR plus 3.25 percent. At December 31, 2018, the rate was 5.79 percent. The Entity 1 may redeem them, in whole or in part, at face value on a quarterly basis with proper notice. The Company borrowed the proceeds of the issuance from the Entity 1 in April 2003 in the form of a $3,093,000 note payable, which is included in the liabilities section of the Company’s Consolidated Balance Sheet. The Company formed an additional special purpose entity (“Entity 2”) to issue $3,000,000 of floating rate, obligated mandatorily redeemable securities and $93,000 in common securities as part of a pooled offering with a maturity date of April 6, 2034. The rate is determined quarterly and floats based on the three-month LIBOR plus 2.75 percent. At December 31, 2018, the rate was 5.19 percent. The Entity 2 may redeem them, in whole or in part, at face value on a quarterly basis with proper notice. The Company borrowed the proceeds of the issuance from the Entity 2 in March 2004 in the form of a $3,093,000 note payable, which is included in the liabilities section of the Company’s Consolidated Balance Sheet.Under current accounting rules, the Company’s minority interest in both Entity 1 and Entity 2 was recorded at the initial investment amount and is included in the other assets section of the Consolidated Balance Sheet. Neither Entity 1 nor Entity 2 is consolidated as part of the Company’s consolidated financial statements.

10. OTHER BORROWED FUNDS

10. OTHER BORROWED FUNDS (Cont’d)

The following table sets forth information concerning other borrowed funds:

Weighted- Stated Interest Maturity Range Average Rate Range At December 31, Description From To Interest Rate From To 2018 2017

Fixed rate 02/01/19 02/10/20 1.75 % 1.21 % 2.31 % $ 12,500,000 $ 14,000,000 Subordinated capital debt 09/01/19 12/29/23 4.89 % 4.50 % 5.00 % 9,732,668 9,456,541 Long-term notes payable 04/24/33 04/06/34 5.49 % 5.19 % 5.79 % 6,186,000 6,186,000

$ 28,418,668 $ 29,642,541

12. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS

Savings PlanThe Company maintains a trusteed Section 401(k) plan with contributions matching those by eligible employees to a maximum of 25 percent of employee contributions annually, to a maximum of 5 percent of base salary. The Company may also make an elective contribution annually. All employees who work over 1,000 hours per year are eligible to participate in the plan. The Company’s contribution to this plan was $212,658 and $201,652 in 2018 and 2017, respectively.The plan assets include 87,953 shares of the Company’s common stock that is valued at $10,818,219.

Deferred Compensation PlanThe Company has a deferred director’s compensation plan whereby participating directors elected to forego directors’ fees. To fund benefits under the deferred compensation plan, the Company established a rabbi trust. The Company guarantees a return equal to the average New York prime rate of interest to plan participants with a floor of 6 percent. Contributions to the plan were $100,950 in 2018 and $98,450 in 2017. The Company carried a liability of $2,389,193 in 2018 and $2,470,127 in 2017.

Performance Unit PlanOn January 24, 2017, the Board of Directors approved the 2017 Performance Unit Plan which is intended to serve as a successor program to the Company’s 2012 Performance Unit Plan. The plan may award annual grants to executive management and directors equal in value to the appreciation on a share of stock between the date the performance unit becomes vested and the date of award. Since January 24, 2017, at the beginning of each succeeding year, a participant may elect to receive full payment in cash of allocated performance units as of the preceding year-end. During 2018, $79,775 in expense was recognized under the plan while $90,275 in expense was recognized during 2017. The Company carried a liability of $170,050 in 2018 and $90,275 in 2017.

11. SHORT-TERM BORROWINGS

The Company has entered into a borrowing agreement with a revolving line of credit agreement on September 13, 2013 whereby it can borrow up to $270,948,250 from the FHLB. 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 Bank free and clear of any liens or encumbrances. At December 31, 2018, there was an outstanding balance of $10,001,600. The maturity date on the revolving line of credit is May 3, 2027. The interest rate was 2.62 percent at December 31, 2018. This line was in place at December 31, 2017 with an outstanding balance of $1,533,000 at an interest rate of 1.54 percent.

13. INCOME TAXES

Federal income tax expense consists of the following:

2018 2017Currently payable $ 1,511,734 $ 2,666,937 Deferred (42,194) 375,012 Change in corporate tax rate — 933,398

Total $ 1,469,540 $ 3,975,347

The components of the net deferred tax assets at December 31 are as follows:

2018 2017

Deferred tax assets: Allowance for loan losses $ 1,230,041 $ 1,238,737 Deferred directors’ fees 342,431 290,111 Deferred performance plan 35,711 18,958 Other-than-temporary impairment losses 903 903 Net unrealized loss on available-for-sale securities 1,575,685 366,885 Other 22,379 70,472 Total 3,207,150 1,986,066 Deferred tax liabilities: Premises and equipment 158,817 160,577 Deferred loan origination costs, net 211,763 241,444 Investment discount accretion 44,119 38,273 Unrealized gain - merger 6,917 11,231 Total 421,616 451,525 Net deferred tax assets $ 2,785,534 $ 1,534,541

No valuation allowance was established at December 31, 2018 and 2017, in view of the Company’s ability to carryback taxes paid in previous years and certain tax strategies coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

The reconciliation of the statutory rate and the effective income tax rate is as follows:

2018 2017

% of % of

Pretax Pretax Amount Income Amount Income Computed at statutory rate $ 2,566,091 21.0 % $ 4,714,972 34.0 %Effect of tax-free interest income (1,183,959 (9.7 (1,761,153 (12.7 BOLI earnings (86,849 (0.7 (139,762 (1.0

Nondeductible interest to carry tax-exempt assets 78,945 0.6 93,395 0.7 Other 95,312 0.8 134,497 1.0 Change in corporate tax rate — — 933,398 6.7Income tax expense and effective rate $ 1,469,540 12.0 % $ 3,975,347 28.7 %

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In December 2017, the President signed the Tax Cuts and Jobs Act, which among other things, reduced the corporate tax rate from 35% to 21%. This resulted in a $933,398 adjustment to reduce the carrying value of deferred tax assets (liabilities) as of December 31, 2017, which was recorded as an increase in income tax expense during 2017.

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13. INCOME TAXES (Cont’d)

The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Bank recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statement of Income. The Bank’s federal and PA shares tax returns for taxable years through 2014 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

14. LEASE COMMITMENTS

At December 31, 2018, the Bank was committed under noncancelable lease agreements for minimum rental payments to lessors as follows: Lease Payments 2019 $ 494,381 2020 229,240 2021 153,210 2022 96,603 2023 64,864 Thereafter 4,869 Total $ 1,043,167

Rental expense on leased premises and equipment totaled $570,646 in 2018 and $564,378 in 2017.

15. REGULATORY RESTRICTIONS

The Company’s wholly owned subsidiary, the Bank, is subject to the Pennsylvania Banking Code which restricts the availability of surplus for dividend purposes. At December 31, 2018, surplus funds of $9,363,126 were not available for dividends.Included in “Cash and due from banks” are required federal reserves of $1,372,000 and $1,630,000 at December 31, 2018 and 2017, respectively, for facilitating the implementation of monetary policy by the Federal Reserve System.

The required reserves are computed by applying prescribed ratios to the classes of average deposit balances.These are held in the form of vault cash and a depository amount held with the Federal Reserve Bank.Federal law prohibits 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 capital surplus

16. REGULATORY CAPITAL REQUIREMENTS

Federal regulations require the Company and the Bank to maintain mini-mum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average total assets.In addition to the capital requirements, the Federal Deposit Insurance Corporation (“FDIC”) Improvement Act 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.The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the company must meet specific capital guidelines that involve quantitative measures of the company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.Quantitative measures established by regulation to ensure capital adequacy require the company to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. For December 31, 2018 and December 31, 2017, the final Basel III rules require the Company to maintain minimum amounts of ratios of Common equity tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Additionally under Basel III rules the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. As of December 31, 2018 and 2017, the FDIC categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well-capitalized financial institution, the Company must maintain minimum Total capital, Common equity tier 1 capital, Tier 1 capital, and Tier 1 leverage capital ratios as set forth in the table.

2018

Actual For Capital Adequacy Purposes To Be Well Capitalized

Amount Ratio Amount Ratio Amount Ratio

Total capital (to risk-weighted assets) $ 117,580,627 19.75 % $ 47,623,840 8.00 % $ 59,529,800 10.00 %

Common equity tier 1 capital (to risk- $ 104,137,581 17.49 % $ 26,788,410 4.50 % $ 38,694,370 6.50 % weighted assets)

Tier 1 capital (to risk-weighted assets) $ 110,137,581 18.50 % $ 35,717,880 6.00 % $ 47,623,840 8.00 %

Tier 1 capital (to average assets) $ 110,137,581 10.39 % $ 42,402,800 4.00 % $ 53,003,500 5.00 %

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

2017

Actual For Capital Adequacy Purposes To Be Well Capitalized

Amount Ratio Amount Ratio Amount Ratio

Total capital (to risk-weighted assets) $ 110,003,487 19.37 % $ 45,429,200 8.00 % $ 56,786,500 10.00 %

Common equity tier 1 capital (to risk- $ 95,858,179 16.88 % $ 25,553,925 4.50 % $ 36,911,225 6.50 % weighted assets)

Tier 1 capital (to risk-weighted assets) $ 101,858,179 17.93 % $ 34,071,900 6.00 % $ 45,429,200 8.00 %

Tier 1 capital (to average assets) $ 101,858,179 10.00 % $ 40,749,400 4.00 % $ 50,936,750 5.00 %

17. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The following three levels show the fair value hierarchy that prioritizes the use of inputs used in valuation methodologies.

Level I: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.Level II: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.Level III: Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.The following tables present the assets reported on the Consolidated Balance Sheet at their fair value as of December 31, 2018 and 2017, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

December 31, 2018

Level I Level II Level III Total

Assets: Investment securities available for sale, mutual fund and equity securities held Obligations of states and political subdivisions $ — $ 100,661,729 $ — $100,661,729 Mortgage-backed securities in government-sponsored entities — 155,330,146 — 155,330,146 Corporate bonds 500,000 2,928,645 — 3,428,645 Mutual fund 475,992 — — 475,992 Equity securities - financial institutions 4,961,905 — — 4,961,905 Total $ 5,937,897 $ 258,920,520 $ — $ 264,858,417

Financial instruments are considered Level III when their values are deter-mined using pricing models and discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The Company had no recurring Level III measurements during 2018 or 2017.

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value as of December 31, 2018 and 2017, by level within the fair value hierarchy.

December 31, 2018 Level I Level II Level III Total

Assets: Other real estate owned $ — $ — $ 231,013 $ 231,013 Impaired loans — — 1,230,545 1,230,545 $ — $ — $ 1,461,558 $ 1,461,558 December 31, 2017 Level I Level II Level III Total

Assets: Other real estate owned $ — $ — $ 32,848 $ 32,848 Impaired loans — — 1,913,323 1,913,323 $ — $ — $ 1,946,171 $ 1,946,171

December 31, 2017

Level I Level II Level III Total

Assets: Investment securities available for sale Obligations of states and political subdivisions $ — $ 97,966,317 $ — $ 97,966,317 Mortgage-backed securities in government-sponsored entities — 158,721,919 — 158,721,919 Corporate bonds — 2,467,620 — 2,467,620 Mutual fund 487,072 — — 487,072 Equity securities - financial institutions 3,811,666 — — 3,811,666 Total $ 4,298,738 $ 259,155,856 $ — $ 263,454,594

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Company uses Level III inputs to determine fair value:

December 31, 2018 Quantitative Information About Level III Fair Value Measurements

Valuation Estimate Techniques Unobservable Input AverageAssets: Other real estate owned $ 231,013 Appraisal of Appraisal adjustments (2) 44 % collateral (1) Liquidation expenses (2) 58 % Impaired loans $ 1,230,545 Fair value of Appraisal adjustments (2) 17 % collateral (1) Liquidation expenses (2) 2 %

December 31, 2017 Quantitative Information About Level III Fair Value Measurements

Valuation Estimate Techniques Unobservable Input AverageAssets: Other real estate owned $ 32,848 Appraisal of Appraisal adjustments (2) 75 % collateral (1) Liquidation expenses (2) 98 % Impaired loans $ 1,913,323 Fair value of Appraisal adjustments (2) 42 % collateral (1) Liquidation expenses (2) 2 %

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

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

17. FAIR VALUE MEASUREMENTS (Cont’d)

Other real estate owned (“OREO”) is carried at the lower of cost or fair value, which is measured at the foreclosure date. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is neces-sary, the loan is not considered to be carried at fair value, and is therefore not included in the table above. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its esti-mated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as Level III measurement since these adjust-ments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table above as it is not currently being carried at its fair value. At December 31, 2018 and 2017, the fair values shown above exclude estimated selling costs of $75,750 and $60,000.

18. FAIR VALUE DISCLOSURE

The fair value of the Company’s financial instruments not recorded at fair value on a recurring basis as of December 31 is as follows:

2018 Carrying Fair Value Value Level I Level II Level IIIFinancial assets: Investment securities held to maturity $ 223,826,034 $ 217,702,440 $ — $ 217,702,440 $ — Net loans 535,360,097 525,234,976 — — 525,234,976

Financial liabilities: Deposits $ 930,034,400 $ 923,143,748 $ 525,070,886 $ — $ 398,072,862 Other borrowed funds 28,418,668 28,360,668 — — 28,360,668

2017 Carrying Fair Value Value Level I Level II Level IIIFinancial assets: Investment securities held to maturity $ 227,614,343 $ 225,828,467 $ — $ 225,828,467 $ — Net loans 505,564,142 502,083,398 — — 502,083,398

Financial liabilities: Deposits $ 908,750,707 $ 902,844,482 $ 541,601,195 $ — $ 361,243,287 Other borrowed funds 29,642,541 29,569,541 — — 29,569,541

For cash and due from banks, interest bearing deposits in banks, accrued interest receivable, FHLB stock, bank owned life insurance, short-term borrowings, and accrued interest payable, the carrying value is a reasonable estimate of fair value.

19. SUBSEQUENT EVENTS

Management has reviewed events occurring through February 28, 2019, the date the financial statements were issued and no other subsequent events occurred requiring accrual or disclosure.

20. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the significant amounts reclassified out of accumulated other comprehensive income and the changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2018 and 2017:

2018 2017

Net Unrealized Net Unrealized Affected Line on Gains (Losses) on Gains (Losses) on the Consolidated Investment Securities Investment Securities Statement of Income

Accumulated other comprehensive income (loss), beginning of year $ (1,153,068 ) $ (1,018,792 )

Change in accounting principle for adoption of ASU 2016-01 (382,651 ) —

Change in accounting principle for adoption of ASU 2018-02 (302,490 ) —

Unrealized gain (loss) on available-for- sale securities (5,127,645 ) 2,291,621

Tax effect 1,076,808 (779,151 )

Net unrealized gain (loss) on available- for-sale securities (4,050,837 ) 1,512,470

Reclassification adjustment for available- for-sale gain realized in income (48,773 ) (2,495,070) Gain on sale of available-for-sale securities, net Tax effect 10,242 848,324 Income tax expense

Reclassification adjustment for gain realized in income after tax (38,531 ) (1,646,746 )

Accumulated other comprehensive loss, end of year $ (5,927,577 ) $ (1,153,068 )

21. PARENT COMPANY

Following are condensed financial statements for the parent company: CONDENSED BALANCE SHEET

December 31, 2018 2017 ASSETS Cash in bank subsidiary $ 526,449 $ 1,607,355 Investment securities available for sale 2,623,752 4,440,603 Equity securities held at fair value 2,804,354 — Investment in bank subsidiary 96,725,500 93,161,167 Investment in non-bank subsidiaries 1,639,996 1,599,851 Premises and equipment, net 494,641 502,844 Other assets 1,094,211 974,443

TOTAL ASSETS $ 105,908,903 $ 102,286,263 LIABILITIES Long-term note payable $ 6,186,000 $ 6,186,000 Other liabilities 1,124,131 1,006,384

TOTAL LIABILITIES 7,310,131 7,192,384

STOCKHOLDERS’ EQUITY 98,598,772 95,093,879

TOTAL LIABILITIES AND

STOCKHOLDERS’ EQUITY $ 105,908,903 $ 102,286,263

CONDENSED STATEMENT OF INCOME AND COMPREHENSIVE INCOME

Year Ended December 31,

2018 2017 INCOME Dividends from bank subsidiary $ 3,712,173 $ 3,639,413 Dividends from non-bank subsidiary 11,000 53,000 Interest and dividends on investment securities 169,189 145,772 Partnership Income 11,440 50,241 Investment securities gains on sale, net 66,817 652,885 Equity securities holding losses, net (367,866 ) —

TOTAL INCOME 3,602,753 4,541,311

EXPENSES Interest expense 325,306 263,289 Operating expenses 360,779 327,778 Income before income tax benefit 2,916,668 3,950,244 Income tax expense (benefit) (178,819 ) 50,099 Income before equity in undistributed net income of subsidiaries 3,095,487 3,900,145 Equity in undistributed net income of subsidiaries 7,654,455 5,992,073

NET INCOME $10,749,942 $ 9,892,218

CONDENSED STATEMENT OF CASH FLOWS

Year Ended December 31, 2018 2017 OPERATING ACTIVITIES Net income $ 10,749,942 $ 9,892,218 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (7,654,455) (5,992,073 ) Investment securities gains on sale, net (66,817 ) (652,885 ) Equity securities holding losses, net 367,866 — Increase in prepaid income tax (28,938 ) — Other, net 55,188 (259,178 )

Net cash provided by operating activities 3,422,786 2,988,082

INVESTING ACTIVITIES Purchases of investment securities (1,199,136 ) (1,299,001 ) Purchases of equity securities (574,113 ) — Proceeds from maturities and paydowns 286,785 269,632 Proceeds from sales of investment securities — 2,010,030 Proceeds from sales of equity securities 140,823 — Purchases of premises and equipment (2,370 ) (41,008 )

Net cash provided by (used for) investing activities (1,348,011 ) 939,653 FINANCING ACTIVITIES Dividends paid (3,161,802) (2,889,160 ) Purchases of treasury stock (40,460 ) (224,445 ) Proceeds from sales of treasury stock 46,581 119,190

Net cash used for financing activities (3,155,681) (2,994,415 )

(Decrease) increase in cash (1,080,906 ) 933,320

CASH AT BEGINNING OF YEAR 1,607,355 674,035

CASH AT END OF YEAR $ 526,449 $ 1,607,355

INTRODUCTION

Management’s discussion and analysis and related financial data are presented to assist in the understanding and evaluation of the financial condition and results of operations of 1ST SUMMIT BANCORP of Johnstown, Inc. (the “Company”) and its main subsidiaries, 1ST SUMMIT BANK (the “Bank”) and Cambria Thrift Consumer Discount Company (“Cambria”) for the years ended December 31, 2018 and 2017. This section should be read in conjunction with the consolidated financial statements and related footnotes.

Sections of this financial review, as well as the notes to the consolidated financial statements, contain certain forward-looking statements which reflect management’s beliefs and expectations based on information currently available and may contain the words “expect,” “estimate,” “anticipate,” “should,” “intend,” “probability,” “risk,” “target,” “objective,” and similar expressions or variations on such expressions. These forward-looking statements are inherently subject to significant risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, economic conditions, costs of opening new offices, and the ability to control costs and expenses. You should not place undue reliance on our forward-looking statements. Forward-looking statements speak only as of the date on which they were made. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

RESULTS OF OPERATIONS - SUMMARY

Net income for the year was $10,749,942 compared to $9,892,218 for the year 2017. This represents an increase of $857,724 or 8.7% from the prior year. Earnings per share for 2018 were $9.79, increasing from $9.01 in 2017. The return on average assets for the year ended December 31, 2018, was 1.01% and 0.97% for the year ended December 31, 2017. The return on average equity for 2018, was 11.52%, and 10.59% for 2017.

The increase in earnings was principally attributable to an improved net interest margin, higher non-interest income excluding securities gains and losses, and a lower effective tax rate. Net interest income totaled $29,221,240, compared to $28,374,879 in 2017. Net interest income increased as a result of there being approximately $41.4 million more in average earning assets during 2018. The net interest margin, on a fully tax equivalent basis, for 2018 was 3.09% compared to 3.22% in 2017.

Other income for 2018, excluding net gain on sale of debt and equity securities of $186,477 and net loss on equity securities change in fair value of $534,286, was $5,173,341, an increase of $59,760 or 1.2% over 2017. This category of income increased due to higher wealth management income, service charges on deposit accounts, bank-owned life insurance income, and bank card inter-change income. Net gain on sale of debt and equity securities was $186,477 and net loss on equity securities change in fair value was

$534,286 compared to net securities gains of $2,495,070 in 2017, a decrease of $2,842,879. This decrease was primarily the result of selling fewer securities in 2018. In addition, the equity securities change in fair value losses of $534,286 was the result of the financial instruments rule, ASU 2016-01 that went into effect January 1, 2018, which requires any changes in fair value on equity securities to be reported in net income. Total other income represented 10.8% of total revenues in 2018 compared to 17.1% in 2017.

Other expenses totaled $21,382,040 in 2018 compared to$20,884,415 in 2017, an increase of $497,625 or 2.4%. The higher expenses were principally due to higher salaries and benefits costs for additional hiring, higher occupancy, and data processing expense.

FINANCIAL CONDITION

Total AssetsTotal assets at December 31, 2018 were $1.073 billion compared to $1.041 billion at December 31, 2017, an increase of $32.3 million or 3.1%. Net loans increased $29.8 million, while debt and equity securities decreased by $2.4 million, cash and equivalents were up $3.4 million, and all other assets combined were up $1.4 million. This increase in assets was funded by deposit growth of $21.3 million for the year and an increase in short-term debt of $8.5 million.

Loans ReceivableThe Company grants credit to commercial, consumer, and real estate customers with the view of serving the community’s credit needs. Loan growth was broad based with residential real estate loans showing the greatest increase, as well as commercial and in-dustrial, commercial real estate non-owner occupied, and consumer loans contributing to growth. Total loans receivable represented the most significant percentage of the Company’s assets at 50.4% of total assets. This includes loans at both the Bank and Cambria. At December 31, 2018, total loans receivable were $541.2 million compared to $511.4 million at December 31, 2017, an increase of $29.8 million, or 5.8%.

Residential real estate, which includes home equity lending, totaled $259.1 million at December 31, 2018 compared to $242.6 million at December 31, 2017. This increase of $16.5 million was net of payments and refinancing activity. In 2018, fixed rate mortgage products were preferred by customers and accounted for the majority of the lending activity.

Construction loans, which include loans for real estate development along with residential construction, totaled $24.5 million at December 31, 2018 compared to $26.1 million at December 31, 2017, a decrease of $1.6 million or 6.0%. Commercial loans consist principally of loans made to small and medium sized businesses within the Company’s market and are usually secured by real estate and other assets of the borrower. Commercial and commercial real estate loans grew to $223.3 million at December 31, 2018, from $209.1 million in 2017, an increase of $14.2 million or 6.8%.

Non-Performing Assets and Allowance for Loan and Lease LossesNon-performing assets consist of non-performing loans, (non-ac-crual and credits delinquent 90 days and over) real estate acquired through foreclosure, and non-performing investment securities. Commercial, real estate and consumer loans are generally placed on non-accrual status when interest is 90 days delinquent or when management ascertains that an obligor’s financial condition renders collection of interest doubtful.

The Company’s emphasis on asset quality as a key objective continued in 2018. Non-performing assets totaled $3.5 million, representing 0.33% of total assets at year-end 2018, compared to $2.6 million and 0.25% of assets at December 31, 2017. Non-performing assets include loans of $3.0 million and foreclosed real estate of $0.5 million at December 31, 2018, compared to $2.2 million and $0.4 million, respectively, at December 31, 2017.

The allowance for loan and lease losses (“allowance”) is a re-serve to provide for possible loan portfolio losses. The allowance decreased to $5.8 million, representing 1.08% of total loans at December 31, 2018 and totaled $5.9 million or 1.15% of total loans at December 31, 2017. The provision for loan losses (“provision”) is an expense charged to earnings to fund the allowance. The provi-sion of $445,250 or 0.08% of loans during 2018 compares with $1,231,550 or 0.24% of loans during 2017. Net loan charge-offs in 2018 were $486,613 or 0.09% of average loans compared to net loan charge-offs of $1,675,368 or 0.33% of average loans in 2017.

Adequacy of the allowance for loan and lease losses is evaluated on a monthly basis. The evaluation includes, but is not restricted to, the composition of risks inherent in the loan portfolio, the analysis of impaired loans and a historical review of loans. The current al-lowance of $5.8 million at December 31, 2018 is deemed adequate and at 1.08% of loans, represents a favorable ratio. The reserve has increased 4.1% over the past five years.

(In thousands) Allowance for Loan and Lease Losses 2018 2017 2016 2015 2014

Allowance balance, January 1.................................................................. $ 5,884 $6,328 $6,149 $5,768 $5,612 Charge-offs: Consumer................................................................................... (288 ) (459 ) (393 ) (317 ) (290 ) Residential real estate.................................................................... (75 ) (64 ) (112 ) (132 ) (79 ) Commercial and all other............................................................... (308 ) (1,253 ) (152 ) (946 ) (538 )

Total charge-offs.................................................................................... (671 ) (1,776 ) (657 ) (1,395 ) (907 ) Recoveries: Consumer................................................................................... 46 86 72 63 52 Residential real estate.................................................................... — 12 3 11 2 Commercial and all other............................................................... 139 3 10 — 25

Total recoveries..................................................................................... 185 101 85 74 79 Provisions............................................................................................ 445 1,231 751 1,702 984 Allowance balance, December 31............................................................. $ 5,843 $5,884 $6,328 $6,149 $5,768 Allowance for loan losses as a percent of total loans outstanding................................................................. 1.08 % 1.15 % 1.27 % 1.30 % 1.27 % Net loans charged-off as a percent of average loans outstanding............................................................. 0.09 % 0.33 % 0.12 % 0.29 % 0.19 %

The following table sets forth information relative to the Company’s allowance for loan and lease losses on the indicated dates:

1 S T S U M M I T B A N C O R P & S U B S I D I A R I E S

December 31, (In thousands) Non-Performing Assets 2018 2017 2016 2015 2014 Non-accrual loans: Consumer................................................................................... $ 148 $ 185 $ 141 $ 162 $ 34 Residential real estate................................................................... 720 73 218 311 502 Commercial and all other............................................................... 967 851 69 135 829Total non-accrual loans.......................................................................... 1,835 1,109 428 608 1,365Accruing loans which are contractually past due 90 days or more..................................................................... 1,213 1,070 1,848 990 1,271Total non-performing loans..................................................................... 3,048 2,179 2,276 1,598 2,636Foreclosed real estate............................................................................ 495 461 145 267 82Non-performing investments................................................................... — — — — 2,232 Total non-performing assets.................................................................... $ 3,543 $2,640 $2,421 $1,865 $ 4,950

Non-performing loans to total loans.......................................................... 0.56 % 0.43 % 0.46 % 0.34 % 0.58 %Non-performing loans to total assets......................................................... 0.28 % 0.21 % 0.23 % 0.17 % 0.29 %Non-performing assets to total assets........................................................ 0.33 % 0.25 % 0.24 % 0.20 % 0.54 %

Non-Performing Assets and Allowance for Loan and Lease Losses (Cont’d)

The following table sets forth information relative to non-accrual loans, non-performing loans and non-performing assets on the indicated dates:

SecuritiesThe securities portfolio consists principally of issues of United States Government agencies, including mortgage-backed securities, municipal obligations, corporate debt, and equity securities of other financial institutions. The Company classifies its investments in three categories at the time of purchase as held to maturity (“HTM”),available for sale (“AFS”), and equity securities. The Company does not have a trading account. Securities classified as HTM are those in which the Company has the ability and intent to hold the security until contractual maturity. At December 31, 2018, the HTM portfolio totaled $223.8 million and consisted of longer-term municipal obligations, U.S. Government agencies, and mortgage-backed securities. Securities classified as AFS are eligible to be sold due to liquidity needs or interest rate risk management. These securities are adjusted to and carried at their fair value with any unrealized gains or losses, net of tax, recorded in the equity section of the consolidated balance sheet as accumulated other comprehensive loss. At December 31, 2018, $259.4 million in securities were so classified and carried at their fair value, with unrealized losses, net of tax of $5.9 million, included in accumulated other comprehen-sive loss in stockholders’ equity. On January 1, 2018 ASU 2016-01 became effective, requiring equity securities to be adjusted to and carried at their fair value with any changes in fair value recorded as gains or losses in income. At December 31, 2018, $5.4 million in equity securities were so classified and carried at fair value.

At December 31, 2018, the average life of the portfolio was 7.4 years compared to 5.6 years at the prior year end. The increase was principally due to the purchase of longer-term amortizing securities, coupled with natural amortization in the portfolio. Total purchases

for the year were $54.4 million, securities matured or called with cash flows of $44.4 million, and securities sales of $5.1 million. The purchases were funded principally by cash flow from the portfolio and deposit growth.

At December 31, 2018, the Company’s securities portfolio (HTM, AFS, and equities) totaled $488.7 million with the mix as follows: U. S. Government agencies 2.7%, mortgage-backed securities 59.7%, municipal obligations 35.8%, corporate obligations, equity securities of other financial institutions, and mutual funds combined 1.8%. The portfolio contained no structured notes, step-up bonds, and no off-balance sheet derivatives were in use. The portfolio totaled $491.1 million at December 31, 2017.

DepositsThe Company provides a complete range of deposit products to its customers through the Bank’s sixteen community offices. These products include interest-bearing and noninterest-bearing demand deposit accounts, statement savings, and money market accounts. Time deposits consist of certificates of deposit with terms of up to ten years and include individual retirement accounts.

Deposits, the main source of funding for the Company, grew $21.3 million or 2.3% to a year-end total of $930.0 million. In 2018, the time deposit category showed the most significant growth. As of December 31, 2018, the Company’s time deposits increased $37.8 million, or 10.3% to $405.0 million. Time deposits of $250,000 or more, which include public funds, were $64.8 million at December 31, 2018, compared with $52.5 million at year end 2017.

Deposits (Cont’d)

These deposits are usually subject to competitive bids and the Company bases its bids on current interest rates, loan demand, and the relative cost of other funding sources. Noninterest-bearing checking deposits totaled $66.9 million, increasing $3.1 million from the prior year. In addition, interest-bearing checking deposits totaled $209.6 million, increasing $3.3 million from the prior year. Money market deposits totaled $111.8 million, decreasing $18.2 million from the prior year, while savings accounts totaled $136.8 million, decreasing $4.8 million from the prior year.

Interest Rate RiskInterest rate sensitivity and market risk of assets and liabilities are managed by the Asset and Liability Management Committee. The principal objective of the committee is to maximize net interest income within acceptable levels of risk which are established by policy. Interest rate risk is monitored and managed by using financial modeling techniques to measure the impact of changes in interest rates.

Net interest income, which is the primary source of the Company’s earnings, is impacted by changes in interest rates. To manage the impact of interest rate changes, the balance sheet must be structured so that repricing opportunities exist for both assets and liabilities at approximately the same time intervals. An imbalance in repricing opportunities at a given point in time reflects interest rate sensitivity gaps measured as the difference between rate-sensitive assets and rate-sensitive liabilities. These are static gap measurements used as early indicators of potential interest rate risk exposures over specific intervals. At December 31, 2018, the rate sensitivity gaps for specific intervals were within the Company’s policy limits.

The Company also uses net interest income simulation to assist in interest rate risk management. The process includes simulating various interest rate scenarios and their respective impact on net interest income. It is assumed that a change in rates is instantaneous and that all rates move in a parallel manner. Assumptions are also made concerning prepayment speeds on loans and securities. While management believes such assumptions to be reasonable, there can be no assurance that modeled results will approximate actual results. The following is a rate shock for a twelve-month period, assuming a static balance sheet as of December 31, 2018:

The Company also projects future cash flows from assets and liabilities over a long-term horizon and then discounts these cash flows using instantaneous parallel shocks to interest rates. The aggregation of these discounted cash flows is the Economic Value of Equity (“EVE”). At December 31, 2018, the EVE at risk in all scenarios was within the Company’s policy limit.

LiquidityLiquidity can be viewed as the ability to fund customers’ borrowing needs and withdrawal requests while supporting asset growth. The Company’s primary sources of liquidity include deposit generation and cash flow from asset maturities and securities repayments.

At December 31, 2018, the Company had cash and cash equivalents of $11.9 million in the form of cash, due from banks, and short-term interest-bearing deposits with other institutions. In addition, the Company had securities available for sale of $259.4 million which could be used for liquidity needs. Cash and securities available for sale totaled $271.3 million and represented 25.3% of total assets compared to 26.1% of total assets at December 31, 2017. The Company also monitors other liquidity measures, all of which were well within the Company’s policy guidelines at December 31, 2018. The Company believes its liquidity position is adequate.

The Company maintains established lines of credit with the Federal Home Loan Bank (“FHLB”) of Pittsburgh and other correspondent banks which support liquidity needs. The approximate borrowing capacity from the FHLB was $270.9 million. At December 31, 2018, the Company had $22.5 million in borrowings from the FHLB, which is $7.0 million higher than at December 31, 2017.

Off-Balance Sheet ArrangementsThe Company’s financial statements do not reflect various commitments that are made in the normal course of business which may involve some liquidity risk. These commitments consist primarily of unfunded loans, standby letters of credit, and financial guarantees made under the same standards as on-balance sheet instruments. Unused commitments at December 31, 2018 totaled $111.1 million and consisted of $107.8 million of unfunded loans and $3.3 million in standby letters of credit and financial guarantees. Since these instruments generally have fixed expiration dates within one year of their original origination, and because many of them will expire without being drawn upon, they do not present significant liquidity risk.

Management believes any amounts actually drawn upon can be funded in the normal course of operations. The Company has no investment in, or financial relationship with, any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.At December 31, 2018, the level of net interest income at risk in all

scenarios was within the Company’s policy limit.

Parallel rate shock in basis points -100 +100 +200 +300

Net interest income change (in thousands): $ (181 ) $ 221 $ 37 $ (624 ) Percentage change from static (0.6 ) % 0.8 % 0.1 % (2.1 ) %

Contractual ObligationsThe following table represents the aggregate on- and off-balance sheet contractual obligations to make future payments:

December 31, 2018 (In thousands)

Less Than Over 1 Year 1-3 Years 4-5 Years 5 Years Total

Time deposits............................................. $ 175,434 $ 183,545 $ 45,579 $ 406 $ 404,964 Short- and long-term debt........................... 22,526 7,708 2,000 6,186 38,420 Operating leases......................................... 494 382 162 5 1,043

$ 198,454 $191,635 $ 47,741 $ 6,597 $ 444,427

The Company is not aware of any known trends, demands, commitments, events, or uncertainties which would result in any material increase or decrease in liquidity.

RESULTS OF OPERATIONS

Net Interest IncomeNet interest income is the difference between income earned on loans and securities and interest paid on deposits and borrowings. For the year ended December 31, 2018, net interest income was $29,221,240, an increase of $846,361 or 3.0% over 2017. The resulting interest spread, on a fully tax equivalent basis, for 2018 was 3.09% compared to 3.22% in 2017.

Interest income for the year ended December 31, 2018 totaled $39,822,483 compared to $36,904,896 in 2017. The increase of $2,917,587 was principally due to a significantly higher level of earning assets during the year. On average, loans represented 51.1% of earning assets, compared to 51.4% in 2017. Invest-ment securities represented 48.8% of average earning assets in 2018, compared to 48.3% in 2017. Average federal funds sold and interest-bearing balances represented 0.1% in 2018 and 0.4% in 2017.

Interest income earned on loans totaled $26,420,894 in 2018, with a yield of 5.09% on a fully tax equivalent basis, increasing from $24,423,351 in 2017, with a yield of 4.90% on a fully tax equivalent basis. The increase in yield was applicable to higher reinvestment rates on loans for the year with an average prime rate of 4.91% in 2018 and 4.10% in 2017. Loans averaged $522.5 million in 2018, compared to $504.0 million in 2017.

Securities averaged $498.8 million in 2018 with interest income of $13,249,577 and a fully tax equivalent yield of 2.95%, compared to $473.7 million, $12,362,196 and 3.12%, respectively, in 2017. The decrease in yield was principally due to lower long-term inter-est rates in 2018 with more investment income from tax exempt municipal obligations. Principal cash flow from securities was reinvested in mortgage-backed securities, U.S. Government agency securities, and tax exempt municipal obligations.

Interest expense for the year ended December 31, 2018, totaled $10,601,243 increasing from $8,530,017 in 2017. The Company’s cost of interest-bearing deposits increased to 1.00% from 0.85% in 2017. The average cost of interest-bearing liabilities in 2018 was 1.09%, an increase of 16 basis points from 0.93% in 2017.

Other IncomeThe following table shows other income by selected categories:

Other income totaled $4,825,532 in 2018, a decrease of $2,783,119 from $7,608,651 in 2017. Other income is revenue derived from sources other than interest and dividends. Excluding net loss on equity securities change in fair value of $534,286 and net gain on sale of debt and equity investment securities of $186,477 in 2018 and $2,495,070 in 2017, other income for the year was $5,173,341, compared to $5,113,581, an increase of $59,760 or 1.2%.

Year Ended December 31, (In thousands) Other Income 2018 2017 Service charges and fees on deposit accounts.............. $ 2,011 $ 1,759 Fiduciary activities......................... 706 677 Mutual funds and annuities............ 402 401 Bank-owned life insurance income 414 411 Debit/check card income................ 1,018 891 Credit card income......................... 329 417 Other income................................. 294 558 Subtotal..................................... 5,174 5,114 Gain on sale of debt and equity investment securities, net...... 186 2,495 Loss on equity securities change in fair value, net...... (534 ) —

Total........................................... $ 4,826 $ 7,609

Other Income (Cont’d)

Service charge income and fees on deposit accounts were $2,010,809 in 2018 and $1,758,822 in 2017. Deposit accounts include Consumer “Club” and “NOW” accounts, No Frills checking, Regular checking, PrimeTimers’ checking, Business Regular checking and Business interest-bearing checking accounts. The increase in income was a result of more customers using our special overdraft privilege service.

Wealth management income of $1,108,490 in 2018 was a 2.9% increase from $1,077,551 in 2017. This includes trust department income, mutual fund fees and discount brokerage fees. Income from trust department activities was $706,067 in 2018, compared to $676,381 in 2017, with the increase principally due to more assets under management in 2018. Commissions on sales of annuities and mutual funds were $401,910 on sales of $12.4 million in 2018, increasing from revenues of $400,857 on sales of $12.3 million in 2017. Brokerage fees were not significant in 2018 or 2017.

Income on bank-owned life insurance was $413,565 in 2018 and $411,064 in 2017. The Bank implemented this program in the second quarter of 2004 where key officers are granted life insurance coverage, with the Bank and the officers’ beneficiaries to receive insurance proceeds through these split dollar policies.

Debit card income was $1,018,009 in 2018, an increase of $126,527 or 14.2%, compared with $891,482 in 2017. This rev-enue source was a result of customers transacting business with VISA® merchants.

Credit card fees decreased to $329,065 from $417,444 in 2017, a 21.2% decrease attributed to a change in our merchant processing program which reduces both our income and expense for merchant processing which benefits both our merchants and the bank.

The balance of other income, $293,403, down from $557,218 was comprised primarily of revenues received from title insurance, credit life/accident and health insurance, stop payments, safe deposit box rents, and secondary market activity.

The Company had losses on equity securities change in fair value, net of $534,286 and gains on sales of debt and equity securities of $186,477 compared to $2,495,070 in 2017. This revenue was from the sale of selected equity holdings of other financial institutions and selected bonds from the investment portfolio.

The Company had no impairment losses in 2018 or 2017. Securities are evaluated quarterly to determine if a decline in value is other than temporary. Once a decline in value is determined to be other than temporary, the amount of credit loss is charged to earnings. Any remaining difference between fair value and amortized cost is recognized in other comprehensive income.

Other ExpenseThe following table shows other expense by selected categories:

Other expense totaled $21,382,040 in 2018, an increase of $497,625 or 2.4% over $20,884,415 in 2017. Salaries and employee benefit costs, which represented 57.7% of total other expense, were $12,338,879 for 2018, an increase of $667,520 or 5.7%. Occupancy expense increased just $2,236 or 0.1% in 2018. Equipment expense decreased $54,997 or 3.9% in 2018. Federal depository insurance expense decreased 10.9% to $279,200 in 2018. Data processing expense was up 8.4% to $812,149 in 2018. Pennsylvania shares tax expense, a tax levied on the book value of shares of stock in banks and trust companies that conduct business in Pennsylvania, increased $59,358 or 7.3% in 2018 to $873,628. Donations expense increased $22,759 or 9.4% in 2018 to $265,931. Other operating expense was $3,830,420 for 2018, a decrease of $227,787 or 5.6%. The other operating expense category includes a wide array of operating expenses.

Income TaxesFederal income tax expense in 2018 was $1,469,540 with an effective tax rate of 12.0%, compared to expense of $3,975,347, with an effective tax rate of 28.7% in 2017. The decrease in the effective tax rate was primarily due to passage of the Tax Cuts and Jobs Act, effective January 1, 2018 which reduced the corporate tax rate from 35% to 21%. The Company continued to take advantage of tax-free income to minimize its tax rate.

Year Ended December 31, (In thousands) Other Expense 2018 2017 Salaries and employee benefits............. $ 12,339 $ 11,671 Occupancy expense............................... 1,615 1,613 Equipment expense............................... 1,367 1,422 Federal depository insurance expense... 279 314 Data processing expense....................... 812 749 Pennsylvania shares tax expense........... 874 814 Donations expense.................................. 266 243 Other operating expense........................ 3,830 4,058 Total.................................................. $21,382 $ 20,884

Stockholders’ EquityTotal stockholders’ equity at December 31, 2018 was $98,598,772 compared to $95,093,879 at December 31, 2017. Excluding accumulated other comprehensive loss, total stockholders’ equity was $104,526,349 in 2018 and $96,246,947 in 2017, an 8.6% increase.

Book value of the common stock was $89.81 per share at December 31, 2018, compared to $86.57 per share at December 31, 2017. At year-end 2018, the market price was $123.00 per share, compared to $113.00 at December 31, 2017.

At December 31, 2018, the Company had a Total risk-based capital ratio of 19.75%, Common equity tier 1 risk-based capital ratio of 17.49%, Tier 1 risk-based capital ratio of 18.50%, and Tier 1 leverage capital ratio of 10.39%, compared to a Total risk-based capital ratio of 19.37%, Common equity tier 1 risk-based capital ratio of 16.88%, Tier 1 risk-based capital ratio of 17.93%, and Tier 1 leverage capital ratio of 10.00%, for 2017. The Bank was considered well capitalized under the regulatory framework for prompt corrective action. To be considered well capitalized, the Bank must maintain minimum Total risk-based capital, Common equity tier 1 risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios as set forth in the table below:

To Be Considered Minimum Actual Well Capitalized Required

Ratios At December 31, 2018

Total capital to risk-weighted assets.......................................................... 19.75% 10.00% 8.00%Common equity tier 1 capital to risk-weighted assets.......................... 17.49% 6.50% 4.50%Tier 1 capital to risk-weighted assets........................................................ 18.50% 8.00% 6.00%Tier 1 leverage ratio....................................................................................... 10.39% 5.00% 4.00%

At December 31, 2017

Total capital to risk-weighted assets.......................................................... 19.37% 10.00% 8.00%Common equity tier 1 capital to risk-weighted assets.......................... 16.88% 6.50% 4.50%Tier 1 capital to risk-weighted assets........................................................ 17.93% 8.00% 6.00%Tier 1 leverage ratio....................................................................................... 10.00% 5.00% 4.00%

Unaudited quarterly results

(In thousands, except per share data) First Second Third Fourth

2018CONDENSED INCOME STATEMENT Interest income $ 9,557 $ 9,745 $ 10,059 $ 10,461 Interest expense 2,323 2,501 2,768 3,009 Net interest income 7,234 7,244 7,291 7,452 Provision for loan and lease losses 88 97 107 153 Net interest income after provision 7,146 7,147 7,184 7,299 Other income 1,190 1,352 1,320 1,312 Gain on sale of debt and equity securities, net 85 48 34 19 Gain (loss) on equity securities change in fair value, net 14 101 (61 ) (588 ) Noninterest expense 5,276 5,346 5,342 5,418 Income before income taxes 3,159 3,302 3,135 2,624 Applicable income taxes 401 410 386 273 Net income $ 2,758 $ 2,892 $ 2,749 $ 2,351

PER COMMON SHARE Net income $ 2.51 $ 2.64 $ 2.50 $ 2.14 Dividends paid $ 0.70 $ 0.72 $ 0.72 $ 0.74 Market price $ 117.00 $ 120.00 $ 123.00 $ 123.00

2017CONDENSED INCOME STATEMENT Interest income $ 8,921 $ 9,104 $ 9,351 $ 9,529 Interest expense 2,053 2,073 2,150 2,254 Net interest income 6,868 7,031 7,201 7,275 Provision for loan and lease losses 176 245 311 500 Net interest income after provision 6,692 6,786 6,890 6,775 Other income 1,198 1,394 1,282 1,239 Securities gains and impairment losses, net 473 303 342 1,377 Noninterest expense 4,975 5,116 5,136 5,657 Income before income taxes 3,388 3,367 3,378 3,734 Applicable income taxes 767 736 697 1,775 Net income $ 2,621 $ 2,631 $ 2,681 $ 1,959

PER COMMON SHARE Net income $ 2.39 $ 2.40 $ 2.44 $ 1.78 Dividends paid $ 0.63 $ 0.65 $ 0.65 $ 0.70 Market price $ 105.00 $ 107.00 $ 109.00 $ 113.00

(In thousands, except per share data)

BALANCE SHEET 2018 2017 2016 2015 2014 2013

ASSETSCash and cash equivalents $ 11,912 $ 8,503 $ 20,821 $ 8,785 $ 8,541 $ 8,856 Investment securities 488,684 491,069 448,897 437,253 425,113 389,641 Loans 541,203 511,448 498,340 474,719 454,256 440,280Allowance for loan losses 5,843 5,884 6,328 6,149 5,768 5,612

Net loans 535,360 505,564 492,012 468,570 448,488 434,668Fixed assets 9,517 9,671 9,895 8,804 8,650 8,724 Other assets 27,802 26,206 25,294 25,224 19,793 23,834

TOTAL ASSETS $ 1,073,275 $ 1,041,013 $ 996,919 $ 948,636 $ 910,585 $ 865,723

LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits $ 930,034 $ 908,751 $ 867,066 $ 816,022 $ 797,090 $ 762,559Borrowed funds 38,420 31,176 35,393 43,256 30,281 33,683 Other liabilities 6,222 5,992 6,130 5,891 5,125 5,015 Total stockholders’ equity 98,599 95,094 88,330 83,467 78,089 64,466

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,073,275 $ 1,041,013 $ 996,919 $ 948,636 $ 910,585 $ 865,723

STATEMENT OF INCOME 2018 2017 2016 2015 2014 2013

Total interest income $ 39,822 $ 36,905 $ 35,198 $ 34,771 $ 34,805 $ 33,492 Total interest expense 10,601 8,530 8,200 8,107 8,205 8,817

Net interest income 29,221 28,375 26,998 26,664 26,600 24,675 Provision for loan losses 445 1,232 751 1,702 984 904 Net interest income after provision 28,776 27,143 26,247 24,962 25,616 23,771 Other income 5,174 5,113 4,799 4,551 4,349 4,158 Gain on sale of debt and equity securities, net 186 2,495 1,666 2,714 421 677Gain (loss) on equity securities change in fair value, net (534 — — — — — Noninterest expense 21,382 20,884 19,601 19,309 17,955 16,880

Income before income taxes 12,220 13,867 13,111 12,918 12,431 11,726 Income tax expense 1,470 3,975 2,975 3,008 2,861 2,666

NET INCOME $ 10,750 $ 9,892 $ 10,136 $ 9,910 $ 9,570 $ 9,060 PER SHARE DATA

Net income $ 9.79 $ 9.01 $ 9.22 $ 9.02 $ 8.71 $ 8.25 Cash dividend $ 2.88 $ 2.63 $ 2.39 $ 2.23 $ 1.97 $ 1.81 Book value $ 89.81 $ 86.57 $ 80.36 $ 76.00 $ 71.10 $ 58.69 Market value $ 123.00 $ 113.00 $ 104.00 $ 96.00 $ 92.00 $ 86.00

Average shares outstanding 1,097,888 1,098,418 1,099,177 1,098,277 1,098,256 1,098,331

)

2019 marks the 95th Anniversary of 1ST SUMMIT BANCORP.

The Company’s roots go back to 1924, when Salix State Bank first

opened its doors. In 1982, Salix State Bank became Summit Bank,

and in 1990 SUMMIT BANCORP, a holding company, was formed.

SUMMIT BANCORP became 1ST SUMMIT BANCORP in 1996, and

that same year the holding company acquired a second subsidiary,

Cambria Thrift Consumer Discount.

From a humble beginning, this Company has grown into a dynamic

organization that helps drive the economy throughout its market

area. Today, 1ST SUMMIT BANCORP provides a wide range of

banking, financial, and investment services to individuals and

businesses. These services are provided by the Company’s

subsidiaries, 1ST SUMMIT BANK, 1ST SUMMIT Trust and Investment

Services, and Cambria Thrift Consumer Discount Company. There

are 21 offices located across 6 counties in Pennsylvania.

S H A R E H O L D E R I N F O R M AT I O N

Cambria ThriftConsumer Discount Company

S H A R E H O L D E RI N F O R M A T I O N

ANNUAL MEETINGThe Annual Meeting of the Shareholders of

1ST SUMMIT BANCORP of Johnstown, Inc. will be held at 3:00 pm on Wednesday, April 24, 2019 at Sunnehanna Country Club,

Sunnehanna Drive, Johnstown, PA. We encourage your attendance and look forward to sharing our continued success with you.

Call Leeann Wyland at 814-262-4141 for reservations.

STOCK INFORMATION 1ST SUMMIT BANCORP of Johnstown, Inc. common stock is traded on

OTC Pink under the symbol “FSMK”. If you are interested in buying or selling stock, we provide a free service to match buyers and sellers, on a bid basis, at no cost.

Requests for information or assistance should be directed to Leeann Wyland at 814-262-4141 or by mail to Shareholder Relations,

1ST SUMMIT BANCORP, PO Box 5480, Johnstown, PA 15904.

DIVIDEND CALENDAR If 1ST SUMMIT BANCORP issues a quarterly dividend payment,

it will be paid on or about March 15, June 15, September 15, and December 15.

TRANSFER AGENT 1ST SUMMIT BANK Trust Department

PO Box 5480, Johnstown, PA 15904 | 814-262-4043 or 814-262-4141

ACKNOWLEDGMENTS A special thanks to the following professionals who assisted in the

production of this report: Carol Myers, Leeann Wyland, Lori Baumgardner, CambriArts Advertising.

MAIN OFFICE 125 Donald Lane, PO Box 5480 , Johnstown, Pennsylvania 15904

814-262-4010 | 888-262-4010 | www.1stsummit.com

16 COMMUNITY OFFICES Serving Cambria, Somerset, Indiana, Blair, and Westmoreland counties.

MAIN OFFICE 123 West High Street, Ebensburg, Pennsylvania 15931

814-472-9300 | www.loansforallreasons.com

5 COMMUNITY OFFICES Serving Cambria, Indiana and Allegheny counties.

Licensed by the PA Department of Banking #21976

S U B S I D I A R I E S

125 Donald LanePO Box 5480

Johnstown, Pennsylvania 15904 www.1stsummit.com

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