4.) Loans and Allowance for Loan Losses:

The Company, through the Bank, grants residential, consumer and commercial loans to customers located primarily in Northeastern Ohio and Western Pennsylvania.

The following represents the composition of the loan portfolio for the period ending:

	(Amounts in thousands)
	March 31, 2014				December 31, 2013
	Balance		%		Balance		%
Commercial	$	45,150		14.5	$	73,643		21.2
Commercial real estate		201,010		64.4		206,744		59.6
Residential real estate		42,147		13.5		42,288		12.2
Consumer - home equity		19,515		6.2		19,510		5.6
Consumer - other		4,401		1.4		4,648		1.4
Total loans	$	312,223			$	346,833

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented loans in the portfolio by product type. Loans are segmented into the following pools: commercial loans, commercial real estate loans, residential real estate loans and consumer loans. The Company also sub-segments the consumer loan portfolio into the following two classes: home equity loans and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over multiple periods for all portfolio segments. Management evaluates these results and utilizes the most reflective period in the calculation. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor.

These factors include, but are not limited to, the following:

Factor Considered:	Risk Trend:
Levels of and trends in charge-offs, classifications and non-accruals	Stable
Trends in volume and terms	Increasing
Changes in lending policies and procedures	Stable
Experience, depth and ability of management	Stable
Economic trends	Decreasing
Concentrations of credit	Increasing

The following factors are analyzed and applied to loans internally graded with higher credit risk in addition to the above factors for non-classified loans:

Factor Considered:	Risk Trend:
Levels and trends in classification	Stable
Declining trends in financial performance – Commercial real estate and Commercial	Stable
Structure and lack of performance measures – Commercial real estate and Commercial	Stable
Migration between risk categories	Increasing

The provision charged to operations can be allocated to a loan segment either as a positive or negative value as a result of any material changes to: net charge-offs or recovery, risk factors or loan balances. The increase in provision to the commercial real estate loan category was due mainly to an increase in the historical loss factor.

The following is an analysis of changes in the allowance for loan losses for the periods ended:

	(Amounts in thousands)
March 31, 2014	Commercial			Commercial real estate		Residential real estate			Consumer - home equity			Consumer - other			Total
Balance at beginning of period	$	593		$	2,638	$	356		$	88		$	89		$	3,764
Loan charge-offs		(112	)		—		—			—			(35	)		(147	)
Recoveries		262			—		1			5			16			284
Net loan recoveries (charge-offs)		150			—		1			5			(19	)		137
Provision charged to operations		(59	)		259		(64	)		(3	)		17			150
Balance at end of period	$	684		$	2,897	$	293		$	90		$	87		$	4,051

March 31, 2013	Commercial			Commercial real estate			Residential real estate			Consumer - home equity			Consumer - other			Total
Balance at beginning of period	$	639		$	2,616		$	343		$	123		$	104		$	3,825
Loan charge-offs		(1	)		(72	)		(74	)		—			(29	)		(176	)
Recoveries		4			—			1			5			32			42
Net loan recoveries (charge-offs)		3			(72	)		(73	)		5			3			(134	)
Provision charged to operations		(23	)		194			64			(21	)		(14	)		200
Balance at end of period	$	619		$	2,738		$	334		$	107		$	93		$	3,891

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the consolidated balance sheet date.

The following tables present a full breakdown by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods ended March 31, 2014 and December 31, 2013:

	(Amounts in thousands)
March 31, 2014	Commercial		Commercial real estate		Residential real estate		Consumer - home equity		Consumer - other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	47	$	251	$	—	$	—	$	—	$	298
Collectively evaluated for impairment		637		2,646		293		90		87		3,753
Total ending allowance balance	$	684	$	2,897	$	293	$	90	$	87	$	4,051
Loan Portfolio:
Individually evaluated for impairment	$	313	$	5,299	$	—	$	—	$	—	$	5,612
Collectively evaluated for impairment		44,837		195,711		42,147		19,515		4,401		306,611
Total ending loans balance	$	45,150	$	201,010	$	42,147	$	19,515	$	4,401	$	312,223

December 31, 2013	Commercial		Commercial real estate		Residential real estate		Consumer - home equity		Consumer - other		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	50	$	251	$	—	$	—	$	—	$	301
Collectively evaluated for impairment		543		2,387		356		88		89		3,463
Total ending allowance balance	$	593	$	2,638	$	356	$	88	$	89	$	3,764
Loan Portfolio:
Individually evaluated for impairment	$	418	$	5,134	$	—	$	—	$	—	$	5,552
Collectively evaluated for impairment		73,225		201,610		42,288		19,510		4,648		341,281
Total ending loans balance	$	73,643	$	206,744	$	42,288	$	19,510	$	4,648	$	346,833

The decrease in commercial loan balances from year-end was due in part to 60-day term commercial loans for a total of $27.6 million that closed in December 2013 and were fully secured by segregated deposit accounts with the Bank. The loans matured in the first quarter of 2014.

The following tables represent credit exposures by internally assigned grades for March 31, 2014 and December 31, 2013. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

—	Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Within this category, there are grades of exceptional, quality, acceptable and pass monitor.

—	Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

—	Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

—	Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset but with the severity which makes collection in full highly questionable and improbable, based on existing circumstances.

—

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. This rating does not mean that the assets have no recovery or salvage value but rather that the assets should be charged off now, even though partial or full recovery may be possible in the future.

The following table is a summary of credit quality indicators by internally assigned grade as of March 31, 2014 and December 31, 2013:

	(Amounts in thousands)
	Commercial		Commercial real estate
March 31, 2014
Pass	$	44,248	$	186,661
Special Mention		556		7,971
Substandard		346		6,378
Doubtful		—		—
Ending Balance	$	45,150	$	201,010

	Commercial		Commercial real estate
December 31, 2013
Pass	$	72,562	$	192,604
Special Mention		626		9,158
Substandard		455		4,982
Doubtful		—		—
Ending Balance	$	73,643	$	206,744

The Company evaluates the classification of consumer, home equity and residential loans primarily on a pooled basis. If the Company becomes aware that adverse or distressed conditions exist that may affect a particular loan, the loan is downgraded following the above definitions of special mention and substandard.

The following table is a summary of consumer credit exposure as of March 31, 2014 and December 31, 2013:

	(Amounts in thousands)
	Residential real estate		Consumer – home equity		Consumer- other
March 31, 2014
Performing	$	41,794	$	19,397	$	4,387
Nonperforming		353		118		14
Total	$	42,147	$	19,515	$	4,401

	Residential real estate		Consumer – home equity		Consumer- other
December 31, 2013
Performing	$	41,807	$	19,438	$	4,632
Nonperforming		481		72		16
Total	$	42,288	$	19,510	$	4,648

Loans are considered to be nonperforming when they become 90 days past due or on nonaccrual status, though the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from interest income. Loans in foreclosure are considered nonperforming.

Troubled Debt Restructuring

Nonperforming loans also include certain loans that have been modified in trouble debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There were no loans modified as TDRs for the three months ended March 31, 2014 and 2013. There were no TDRs that subsequently defaulted in the twelve month periods ended March 31, 2014 and 2013.

The following table is an aging analysis of the recorded investment of past due loans as of March 31, 2014 and December 31, 2013:

	(Amounts in thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
March 31, 2014
Commercial	$	—	$	15	$	28	$	43	$	45,107	$	45,150	$	—
Commercial real estate		1,274		—		1,136		2,410		198,600		201,010		—
Residential real estate		376		—		253		629		41,518		42,147		—
Consumer:
Consumer - home equity		89		—		118		207		19,308		19,515		—
Consumer - other		1		—		13		14		4,387		4,401		—
Total	$	1,740	$	15	$	1,548	$	3,303	$	308,920	$	312,223	$	—

	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
December 31, 2013
Commercial	$	—	$	—	$	30	$	30	$	73,613	$	73,643	$	—
Commercial real estate		—		—		1,136		1,136		205,608		206,744		—
Residential real estate		—		201		380		581		41,707		42,288		—
Consumer:
Consumer - home equity		—		7		65		72		19,438		19,510		—
Consumer - other		29		—		16		45		4,603		4,648		—
Total	$	29	$	208	$	1,627	$	1,864	$	344,969	$	346,833	$	—

An impaired loan is a loan on which, based on current information and events, it is probable that a creditor will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. However, an insignificant delay or insignificant shortfall in amount of payments on a loan does not indicate that the loan is impaired.

When a loan is determined to be impaired, impairment should be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, the Company will measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

The following are the criteria for selecting individual loans / relationships for impairment analysis. Non-homogenous loans which meet the criteria below are evaluated quarterly.

—	All borrowers whose loans are classified doubtful by examiners and internal loan review

—	All loans on non-accrual status

—	Any loan in foreclosure

—	Any loan with a specific reserve

—	Any loan determined to be collateral dependent for repayment

—	Loans classified as troubled debt restructuring

Any loan evaluated for impairment is excluded from the general pool of loans in the ALLL calculation regardless if a specific reserve was determined. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table presents the recorded investment and unpaid principal balances for impaired loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with the associated allowance amount, if applicable, at March 31, 2014 and December 31, 2013. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment for the three months ended March 31, 2014 and 2013.

	(Amounts in thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance
March 31, 2014
With no related allowance recorded:
Commercial	$	219	$	219	$	—
Commercial real estate		3,723		4,433		—
With an allowance recorded:
Commercial		94		94		47
Commercial real estate		1,576		1,576		251
Total:
Commercial	$	313	$	313	$	47
Commercial real estate	$	5,299	$	6,009	$	251

	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2013
With no related allowance recorded:
Commercial	$	320	$	320	$	—
Commercial real estate		3,554		3,554		—
With an allowance recorded:
Commercial		98		98		50
Commercial real estate		1,580		1,580		251
Total:
Commercial	$	418	$	418	$	50
Commercial real estate	$	5,134	$	5,134	$	251

	(Amounts in thousands)
	THREE MONTHS ENDED
	Average Recorded Investment		Interest Income Recognized
March 31, 2014
With no related allowance recorded:
Commercial	$	222	$	6
Commercial real estate		3,668		45
With an allowance recorded:
Commercial		95		—
Commercial real estate		1,577		8
Total:
Commercial	$	317	$	6
Commercial real estate	$	5,245	$	53

	THREE MONTHS ENDED
	Average Recorded Investment		Interest Income Recognized
March 31, 2013
With no related allowance recorded:
Commercial	$	4	$	—
Commercial real estate		855		4
With an allowance recorded:
Commercial		46		—
Commercial real estate		3,980		27
Total:
Commercial	$	50	$	—
Commercial real estate	$	4,835	$	31

The following table is a summary of classes of loans on non-accrual status as of March 31, 2014 and December 31, 2013:

	(Amounts in thousands)
	March 31, 2014		December 31, 2013
Commercial	$	94	$	98
Commercial real estate		1,277		1,279
Residential real estate		353		481
Consumer:
Consumer - home equity		118		72
Consumer - other		14		16
Total	$	1,856	$	1,946