3.	Loans Receivable

The Company’s loans receivable as of the respective dates are summarized as follows:


(Dollar amounts in thousands)	June 30, 2014			December 31, 2013
Mortgage loans:
Residential real estate
Single family	$	347,223		$	341,775
Multi family		42,154			37,857
Construction		40,590			44,327

Total residential real estate		429,967			423,959

Commercial real estate
Commercial		91,310			77,366
Construction		10,235			25,971

Total commercial real estate		101,545			103,337

Subtotal mortgage loans		531,512			527,296

Other loans:
Consumer loans
Home equity loans		84,504			82,987
Dealer auto and RV loans		49,437			46,502
Other loans		6,047			6,653

Total consumer loans		139,988			136,142
Commercial business		55,071			52,801

Subtotal other loans		195,059			188,943

Total loans receivable		726,571			716,239
Less:
Allowance for loan losses		6,816			6,805
Deferred loan fees and net discounts		(2,329	)		(2,007	)
Loans in process		12,711			15,805

Subtotal		17,198			20,603


Net loans receivable	$	709,373		$	695,636

At June 30, 2014 and December 31, 2013, the Company conducted its business through 23 offices in Allegheny, Beaver, Butler and Lawrence counties in Pennsylvania which also serves as its primary lending area. Management does not believe it has significant concentrations of credit risk to any one group of borrowers given its underwriting and collateral requirements.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: commercial business loans, commercial real estate loans, residential real estate loans and consumer loans. The Company sub-segments residential real estate loans into the following three classes: single family, construction and multi-family. Commercial real estate is sub-segmented into commercial and construction classes. The Company also sub-segments the consumer loan portfolio into the following three classes: home equity, dealer automobile and recreational vehicle (RV) 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 a three year period for all portfolio segments. Certain qualitative factors are then added to the historical loss percentages to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed for each portfolio segment:

•

Levels of and trends in delinquencies and nonaccruals

•

Changes in lending policies and procedures

•

Volatility of losses within each risk category

•

Loans and Lending staff acquired through acquisition

•

Economic trends

•

Concentrations of credit

•

Trends in volume and terms

•

Experience depth and ability of management

These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio. During the first six months of 2014, the qualitative factors for trends in volume and terms remained unchanged from December 31, 2013.

In terms of the Company’s loan portfolio, the commercial and industrial loans and commercial real estate loans are deemed to have more risk than the consumer real estate loans and other consumer loans in the portfolio. The commercial loans not secured by real estate are highly dependent on financial condition and are more dependent on economic conditions. The commercial loans secured by real estate are also dependent on economic conditions but generally have stronger forms of collateral. More recently, commercial real estate has been negatively impacted by devaluation so these commercial loans carry a higher qualitative factor for changes in the value of collateral. The commercial loans and commercial real estate loans have historically been responsible for the majority of the Company’s delinquencies, non-accrual loans, and charge-offs so both of these categories carry higher qualitative factors than consumer loans. The Company has historically experienced very low levels of consumer loan charge-offs so these qualitative factors are set lower than the commercial real estate and commercial and industrial loans.

Loans by Segment

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the statement of financial condition date. The Company considers the allowance for loan losses of $6.8 million adequate to cover loan losses inherent in the loan portfolio, at June 30, 2014. The following tables present by portfolio segment, the changes in the allowance for loan losses for the three and six month periods ended June 30, 2014 and 2013:


Three months ended June 30, 2014
(Dollar amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer		Residential		Unallocated			Total

Allowance for loan losses:

Beginning balance	$	535		$	1,832		$	1,045	$	2,786	$	520		$	6,718
Charge-offs		—			—			59		26		—			85
Recoveries		10			—			23		—		—			33
Provision		(74	)		(96	)		63		384		(127	)		150

Ending Balance	$	471		$	1,736		$	1,072	$	3,144	$	393		$	6,816


Three months ended June 30, 2013
(Dollar amounts in thousands)				Commercial
	Commercial			Real Estate			Consumer		Residential		Unallocated		Total

Allowance for loan losses:

Beginning balance	$	556		$	2,197		$	1,064	$	2,389	$	515	$	6,721
Charge-offs		—			7			107		1		2		117
Recoveries		—			—			49		—		—		49
Provision		(13	)		(88	)		56		37		83		75

Ending Balance	$	543		$	2,102		$	1,062	$	2,425	$	596	$	6,728


Six months ended June 30, 2014
(Dollar amounts in thousands)				Commercial
	Commercial			Real Estate		Consumer		Residential		Unallocated			Total

Allowance for loan losses:

Beginning balance	$	523		$	1,723	$	1,054	$	2,996	$	509		$	6,805
Charge-offs		—			—		171		34		—			205
Recoveries		103			—		53		—		—			156
Provision		(155	)		13		136		182		(116	)		60

Ending Balance	$	471		$	1,736	$	1,072	$	3,144	$	393		$	6,816


Six months ended June 30, 2013
(Dollar amounts in thousands)				Commercial
	Commercial			Real Estate		Consumer		Residential			Unallocated		Total

Allowance for loan losses:

Beginning balance	$	550		$	2,075	$	1,031	$	2,541		$	512	$	6,709
Charge-offs		—			7		253		11			2		273
Recoveries		—			—		67		—			—		67
Provision		(7	)		34		217		(105	)		86		225

Ending Balance	$	543		$	2,102	$	1,062	$	2,425		$	596	$	6,728

The following tables present by portfolio segment, the recorded investment in loans at June 30, 2014 and December 31, 2013:


As of June 30, 2014
(Dollar amounts in thousands)			Commercial
	Commercial		Real Estate		Consumer		Residential		Unallocated		Total

Allowance for loan losses:

Ending Balance	$	558	$	1,876	$	1,034	$	2,828	$	520	$	6,816


Ending balance: individually evaluated for impairment	$	56	$	847	$	47	$	401			$	1,351


Ending balance: collectively evaluated for impairment	$	415	$	889	$	1,025	$	2,743	$	393	$	5,465


Loans Receivable:

Ending Balance	$	55,071	$	101,545	$	139,988	$	429,967	$	—	$	726,571


Ending balance: individually evaluated for impairment	$	56	$	13,957	$	461	$	2,356	$	—	$	16,830


Ending balance: collectively evaluated for impairment	$	55,015	$	87,588	$	139,527	$	427,611	$	—	$	709,741


As of December 31, 2013
(Dollar amounts in thousands)			Commercial
	Commercial		Real Estate		Consumer		Residential		Unallocated		Total

Allowance for loan losses:

Ending Balance	$	523	$	1,723	$	1,054	$	2,996	$	509	$	6,805


Ending balance: individually evaluated for impairment	$	24	$	989	$	48	$	—	$	—	$	1,061


Ending balance: collectively evaluated for impairment	$	499	$	734	$	1,006	$	2,996	$	509	$	5,744


Loans Receivable:

Ending Balance	$	52,801	$	103,337	$	136,142	$	423,959	$	—	$	716,239


Ending balance: individually evaluated for impairment	$	24	$	14,385	$	407	$	2,206	$	—	$	17,022


Ending balance: collectively evaluated for impairment	$	52,777	$	88,952	$	135,735	$	421,753	$	—	$	699,217

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of June 30, 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.

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 be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful - loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss - loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.


As of June 30, 2014
(Dollar amounts in thousands)
	Residential Real Estate Multi - family		Residential Real Estate Construction		Commercial Real Estate Commercial		Commercial Real Estate Construction		Commercial		Total

Pass	$	42,154	$	38,256	$	78,056	$	10,235	$	55,032	$	223,733
Special Mention		—		341		1,222		—		11		1,574
Substandard		—		1,993		12,032		—		28		14,053
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—

Ending Balance	$	42,154	$	40,590	$	91,310	$	10,235	$	55,071	$	239,360


As of December 31, 2013
(Dollar amounts in thousands)
	Residential Real Estate Multi-family		Residential Real Estate Construction		Commercial Real Estate Commercial		Commercial Real Estate Construction		Commercial		Total

Pass	$	37,857	$	40,874	$	63,532	$	25,971	$	52,730	$	220,964
Special Mention		—		382		1,283		—		17		1,682
Substandard		—		3,071		12,551		—		54		15,676
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—

Ending Balance	$	37,857	$	44,327	$	77,366	$	25,971	$	52,801	$	238,322

The following tables present performing and nonperforming single family residential and consumer loans based on payment activity as of June 30, 2014 and December 31, 2013. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days delinquent.


As of June 30, 2014
(Dollar amounts in thousands)
	Residential Real Estate Single Family		Consumer Home Equity		Dealer Auto and RV		Other Consumer		Total

Performing	$	343,873	$	84,272	$	49,291	$	5,972	$	483,408
Nonperforming		3,350		232		146		75		3,803

Total	$	347,223	$	84,504	$	49,437	$	6,047	$	487,211


As of December 31, 2013
(Dollar amounts in thousands)
	Residential Real Estate Single Family		Consumer Home Equity		Dealer Auto and RV		Other Consumer		Total

Performing	$	338,370	$	82,692	$	46,364	$	6,588	$	474,014
Nonperforming		3,405		295		138		65		3,903

Total	$	341,775	$	82,987	$	46,502	$	6,653	$	477,917

Nonperforming loans also include certain loans that have been modified and classified as troubled debt restructuring (TDR) 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. Delinquent 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.

Non-performing loans, which include non-accrual loans and TDRs, were $8.9 million and $7.4 million at June 30, 2014 and December 31, 2013, respectively. The TDRs included in non-performing loans amounted to $186,000 and $368,000 at June 30, 2014 and December 31, 2013, respectively. The Company also had TDR’s that were in compliance with their modified terms of $9.3 million and $8.2 million at June 30, 2014 and December 31, 2013, respectively. The Company is not committed to lend additional funds to debtors whose loans are on non-accrual status.

Age Analysis of Past Due Loans Receivable by Class

The following tables are an aging analysis of the investment of past due loans receivable as of June 30, 2014 and December 31, 2013:


(Dollar amounts in thousands)													Recorded Investment > 90 Days and Accruing
As of June 30, 2014
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans Receivable

Residential real estate
Single family	$	633	$	475	$	3,350	$	4,458	$	342,765	$	347,223	$	—
Construction		—		—		—		—		40,590		40,590		—
Multi-family		—		—		—		—		42,154		42,154		—
Commercial Real Estate
Commercial		105		7		5,023		5,135		86,175		91,310		—
Construction		—		—		—		—		10,235		10,235		—
Consumer
Consumer - home equity		96		28		124		248		84,256		84,504		—
Consumer - dealer auto and RV		497		138		124		759		48,678		49,437		—
Consumer - other		37		24		75		136		5,911		6,047		—
Commercial		—				28		28		55,043		55,071		—

Total	$	1,368	$	672	$	8,724	$	10,764	$	715,807	$	726,571	$	—


(Dollar amounts in thousands)													Recorded Investment > 90 Days and Accruing
As of December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans Receivable

Residential real estate
Single family	$	653	$	319	$	3,405	$	4,377	$	337,398	$	341,775	$	—
Construction		—		—		—		—		44,327		44,327		—
Multi-family		—		—		—		—		37,857		37,857		—
Commercial Real Estate
Commercial		53		65		4,787		4,905		72,461		77,366		—
Construction		—		—		—		—		25,971		25,971		—
Consumer
Consumer - home equity		156		65		214		435		82,552		82,987		—
Consumer - dealer auto and RV		993		106		136		1,235		45,267		46,502		—
Consumer - other		47		43		65		155		6,498		6,653		—
Commercial		—		—		30		30		52,771		52,801		—

Total	$	1,902	$	598	$	8,637	$	11,137	$	705,102	$	716,239	$	—

Impaired Loans

Management considers commercial loans, commercial real estate loans and development loans which are 90 days or more past due to be impaired. Larger commercial loans, commercial real estate loans and development loans which are 60 days or more past due, including any troubled debt restructuring, are selected for impairment testing in accordance with GAAP. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the fair value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through a provision for loan loss estimate or a charge-off to the allowance for loan losses. The Company collectively reviews all residential real estate and consumer loans for impairment.

The following tables summarize impaired loans:

Impaired Loans

As of June 30, 2014 and December 31, 2013


(Dollar amounts in thousands)
	June 30, 2014						December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commercial Real Estate	$	2,834	$	2,940	$	—	$	3,139	$	3,246	$	—
Residential single family		1,380		1,380		—		1,356		1,356		—
Residential construction		—		—		—		850		850		—
Consumer loans
Home Equity		286		289		—		249		253		—
Dealer auto and RV		24		24		—		6		6		—

With an allowance recorded:

Commercial Real Estate	$	11,123	$	11,287	$	847	$	11,246	$	11,409	$	989
Commercial Business		56		56		56		24		24		24
Residential Single Family		976		976		401		—		—		—
Consumer Loans:
Home Equity		148		148		44		149		149		45
Dealer auto and RV		3		3		3		3		3		3

Total:

Commercial Real Estate		13,957		14,227		847		14,385		14,655		989
Commercial Business		56		56		56		24		24		24
Residential single family		2,356		2,356		401		1,356		1,356		—
Residential construction		—		—		—		850		850		—
Consumer		461		464		47		407		411		48

Total	$	16,830	$	17,103	$	1,351	$	17,022	$	17,296	$	1,061


(Dollar amounts in thousands)
	Three months ended June 30, 2014				Three months ended June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:

Commercial Real Estate	$	2,978	$	13	$	5,279	$	50
Commercial business loans		—		—		—		—
Residential single family		1,364		—		1,358		1
Residential construction loans		—		—		944		11
Consumer Loans:
Home equity		273		3		190		2
Dealer auto and RV		25		—		10		1

With an allowance recorded:
Commercial Real Estate		11,145		113		8,420		134
Commercial business loans		56		—		—		—
Residential single family		976		—		—		—
Residential construction loans		—		—		—		—
Consumer Loans:
Home equity		148		3		176		2
Dealer auto and RV		3		—		4		—

Total:

Commercial Real Estate	$	14,123	$	126	$	13,699	$	184
Commercial business loans		56		—		—		—
Residential single family		2,340		—		1,358		1
Residential construction loans		—		—		944		11
Consumer		449		6		380		5


(Dollar amounts in thousands)
	Six months ended June 30, 2014				Six months ended June 30, 2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:

Commercial Real Estate	$	3,025	$	27	$	5,207	$	120
Commercial business loans		—		—		—		—
Residential single family		1,360		1		1,359		4
Residential construction loans		—		—		898		18
Consumer Loans:
Home equity		262		7		170		6
Dealer auto and RV		26		1		11		2

With an allowance recorded:
Commercial Real Estate		11,179		226		8,180		258
Commercial business loans		56		1		—		—
Residential single family		488		—		—		—
Residential construction loans		—		—		—		—
Consumer Loans:
Home equity		149		4		175		5
Dealer auto and RV		3		—		4		—

Total:

Commercial Real Estate	$	14,204	$	253	$	13,387	$	378
Commercial business loans		56		1		—		—
Residential single family		1,848		1		1,359		4
Residential construction loans		—		—		898		18
Consumer		440		12		360		13

Nonaccrual Loans

Loans are considered nonaccrual upon reaching 90 days delinquent, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

On the following table are the loans receivable on nonaccrual status as of June 30, 2014 and December 31, 2013. The balances are presented by class of loans:


(Dollar amounts in thousands)	June 30,		December 31,
	2014		2013
Commercial	$	28	$	30
Commercial Real Estate		5,023		4,787
Residential		3,350		3,405
Consumer
Consumer - Home Equity		124		214
Consumer - Dealer auto and RV		124		136
Consumer - other		75		65

Total	$	8,724	$	8,637

Modifications

The Company’s loan portfolio also includes 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. Delinquent 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.

When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified 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 by segment or class of loan, as applicable, through an allowance estimate or a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination.

The following table includes the recorded investment and number of modifications for modified loans, as of June 30, 2014 and December 31, 2013. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.


(Dollar amounts in thousands)
	For the Three Months ended
	June 30, 2014
			Pre-Modification		Post-Modification Recorded Investment
			Outstanding
	Number of		Recorded		Maturity Date		Deferral of
	Contracts		Investment		Extension		Principal Payments		Other		Total

Troubled Debt Restructurings
Consumer
Home equity		1	$	46	$	46	$	—	$	—	$	46

Troubled Debt Restructurings		1	$	46	$	46	$	—	$	—	$	46


(Dollar amounts in thousands)
	For the Three Months ended
	June 30, 2013
			Pre-Modification		Post-Modification Recorded Investment
			Outstanding
	Number of		Recorded		Maturity Date		Deferral of
	Contracts		Investment		Extension		Principal Payments		Other		Total

Troubled Debt Restructurings
Commercial real estate		11	$	2,288	$	26	$	—	$	2,262	$	2,288
Consumer
Home equity		3		15		15		—		—		15

Troubled Debt Restructurings		14	$	2,303	$	41	$	—	$	2,262	$	2,303


(Dollar amounts in thousands)
	For the Six Months ended
	June 30, 2014
			Pre-Modification		Post-Modification Recorded Investment
			Outstanding
	Number of		Recorded		Maturity Date		Deferral of
	Contracts		Investment		Extension		Principal Payments		Other		Total

Troubled Debt Restructurings
Commercial		1	$	57	$	—	$	—	$	57	$	57
Consumer
Home equity		2		57		46				11		57
Dealer auto and RV		2		24		7		—		17		24

Troubled Debt Restructurings		5	$	138	$	53	$	—	$	85	$	138


(Dollar amounts in thousands)
	For the Six Months ended
	June 30, 2013
					Post-Modification Recorded Investment
			Pre-Modification
			Outstanding
	Number of		Recorded		Maturity Date		Deferral of
	Contracts		Investment		Extension		Principal Payments		Other		Total

Troubled Debt Restructurings
Commercial real estate		12	$	2,331	$	26	$	—	$	2,305	$	2,331
Consumer
Home equity		6		91		91		—		—		91

Troubled Debt Restructurings		18	$	2,422	$	117	$	—	$	2,305	$	2,422

The Company did not have any TDRs that defaulted subsequent to their modification during the periods reported.