NOTE 5 - LOANS

Major classifications of loans at year-end are summarized as follows:

	2012		2011
Residential real estate	$	214,743	$	221,756
Multifamily real estate		28,673		34,335
Commercial real estate:
Owner occupied		91,902		101,864
Non owner occupied		178,849		166,540
Commercial and industrial		84,430		76,960
Consumer		28,128		30,090
All other		77,900		59,378
	$	704,625	$	690,923

Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during 2012 and 2011. Such related party loans are governed by federal banking regulations which require such loans to be made in the ordinary course of business.

An analysis of the 2012 activity with respect to all director and executive officer loans is as follows:

Balance, December 31, 2011	$	18,412
Additions, including loans now meeting disclosure requirements		2,865
Amounts collected and loans no longer meeting disclosure requirements		(4,638	)
Balance, December 31, 2012	$	16,639

Activity in the Allowance for Loan Losses

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2012 was as follows:

Loan Class	Balance Dec 31, 2011		Provision for loan losses			Loans charged-off			Recoveries		Balance Dec 31, 2012

Residential real estate	$	2,134	$	709		$	(728	)	$	48	$	2,163
Multifamily real estate		284		47			-			-		331
Commercial real estate:
Owner occupied		918		(68	)		(15	)		282		1,117
Non owner occupied		2,381		(198	)		(318	)		23		1,888
Commercial and industrial		1,880		2,419			(1,259	)		6		3,046
Consumer		298		72			(227	)		101		244
All other		1,900		1,279			(606	)		126		2,699
Total	$	9,795	$	4,260		$	(3,153	)	$	586	$	11,488

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2011 was as follows:

Loan Class	Balance Dec 31, 2010		Provision for loan losses			Loans charged-off			Recoveries		Balance Dec 31, 2011

Residential real estate	$	2,666	$	(241	)	$	(347	)	$	56	$	2,134
Multifamily real estate		252		11			-			21		284
Commercial real estate:
Owner occupied		1,141		(52	)		(171	)		-		918
Non owner occupied		1,644		1,081			(382	)		38		2,381
Commercial and industrial		2,421		(555	)		(23	)		37		1,880
Consumer		366		(4	)		(152	)		88		298
All other		1,375		3,390			(2,951	)		86		1,900
Total	$	9,865	$	3,630		$	(4,026	)	$	326	$	9,795

Activity in the allowance for loan losses was as follows:

	2010
Balance, beginning of year	$	7,569
Loans charged off		(1,473	)
Recoveries		472
Provision for loan losses		3,297
Balance, end of year	$	9,865

Purchased Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at December 31, 2012 and December 31, 2011.

	2012		2011
Residential Real Estate	$	202	$	282
Multifamily Real Estate		3,173		3,708
Commercial Real Estate
Owner Occupied		271		1,934
Non owner Occupied		5,896		6,427
Commercial and industrial		511		583
All other		4,496		1,925
Total carrying amount	$	14,549	$	14,859

Carrying amount, net of allowance	$	14,049	$	14,859

For those purchased loans disclosed above, the Company decreased the allowance for loan losses by $190 for the year ended December 31, 2011 and increased the allowance for loan losses by $500 for the year ended December 31, 2012.

For the majority of these loans in 2012, and for all of these loans prior to 2012, the Company cannot reasonably estimate the cash flows expected to be collected on the loans and therefore has continued to account for the loans using the cost recovery method of income recognition. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment. If, in the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan. Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero. Any loan accounted for under the cost recovery method is also still included as a non-accrual loan in the amounts presented in the tables below.

During 2012, the Company determined that the cash flows from borrowers on a limited number of purchased loans could be reasonably estimated. As such, a portion of the non-accretable difference was reclassified to accretable yield and is being recognized as interest income over the remaining life of the loan(s).

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at December 31, 2012. There was no accretable yield on the purchased loans above prior to January 1, 2012.

	2012
Balance at January 1	$	-
New loans purchased		-
Accretion of income		(6	)
Reclassifications from non-accretable difference		641
Disposals		-
Balance at December 31	$	635

During 2012, the Company purchased $9,969 of contractually required payments on a loan classified as "all other" for which it was probable at acquisition that all contractually required payments would not be collected. The fair value on the loan was estimated to be $2,772 at the time of acquisition. The Company cannot reasonably estimate the cash flows expected to be collected on the loan as the loan is in the process of collection and the proceeds for repayment are expected to come from collateral sales, the timing of which cannot be reasonably estimated. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment.

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2012 and December 31 2011. The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

December 31, 2012	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,145	$	2,813	$	208
Multifamily real estate		5,501		4,390		227
Commercial real estate
Owner occupied		1,153		976		783
Non owner occupied		3,207		2,174		74
Commercial and industrial		11,407		9,897		555
Consumer		278		267		-
All other		5,468		5,289		2,043
Total	$	30,159	$	25,806	$	3,890

December 31, 2011	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	4,479	$	4,111	$	1,216
Multifamily real estate		13,118		11,139		-
Commercial real estate
Owner occupied		9,970		8,260		851
Non owner occupied		12,938		9,835		1,596
Commercial and industrial		4,756		3,227		814
Consumer		246		237		50
All other		9,198		5,545		-
Total	$	54,705	$	42,354	$	4,527

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the aging of the recorded investment in past due loans as of December 31, 2012 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	214,743	$	9,356	$	2,040	$	11,396	$	203,347
Multifamily real estate		28,673		695		3,893		4,588		24,085
Commercial real estate:
Owner occupied		91,902		6,212		1,129		7,341		84,561
Non owner occupied		178,849		5,267		2,248		7,515		171,334
Commercial and industrial		84,430		2,306		2,485		4,791		79,639
Consumer		28,128		602		176		778		27,350
All other		77,900		468		7,332		7,800		70,100
Total	$	704,625	$	24,906	$	19,303	$	44,209	$	660,416

The following table presents the aging of the recorded investment in past due loans as of December 31, 2011 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	221,756	$	6,729	$	3,635	$	10,364	$	211,392
Multifamily real estate		34,335		3,249		8,892		12,141		22,194
Commercial real estate:
Owner occupied		101,864		8,081		3,981		12,062		89,802
Non owner occupied		166,540		2,444		6,065		8,509		158,031
Commercial and industrial		76,960		1,714		3,153		4,867		72,093
Consumer		30,090		497		233		730		29,360
All other		59,378		222		5,532		5,754		53,624
Total	$	690,923	$	22,936	$	31,491	$	54,427	$	636,496

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2012:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	358	$	1,805	$	-	$	2,163	$	4,609	$	209,932	$	202	$	214,743
Multifamily real estate		-		331		-		331		1,670		23,830		3,173		28,673
Commercial real estate:
Owner occupied		74		1,043		-		1,117		2,511		89,120		271		91,902
Non-owner occupied		362		1,526		-		1,888		2,627		170,326		5,896		178,849
Commercial and industrial		2,173		873		-		3,046		10,799		73,120		511		84,430
Consumer		-		244		-		244		-		28,128		-		28,128
All other		375		1,824		500		2,699		4,271		69,133		4,496		77,900
Total	$	3,342	$	7,646	$	500	$	11,488	$	26,487	$	663,589	$	14,549	$	704,625

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	451	$	1,683	$	-	$	2,134	$	9,795	$	211,679	$	282	$	221,756
Multifamily real estate		-		284		-		284		8,594		22,033		3,708		34,335
Commercial real estate:
Owner occupied		138		780		-		918		8,663		91,267		1,934		101,864
Non-owner occupied		922		1,459		-		2,381		5,147		154,966		6,427		166,540
Commercial and industrial		894		986		-		1,880		3,636		72,741		583		76,960
Consumer		37		261		-		298		37		30,053		-		30,090
All other		605		1,295		-		1,900		8,372		49,081		1,925		59,378
Total	$	3,047	$	6,748	$	-	$	9,795	$	44,244	$	631,820	$	14,859	$	690,923

In the tables below, total individually evaluated impaired loans include certain purchased loans that were acquired with deteriorated credit quality that are still individually evaluated for impairment.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012. The table includes $9,421 of loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	1,886	$	1,714	$	-
Multifamily real estate		6,332		4,533		-
Commercial real estate
Owner occupied		2,876		2,196		-
Non owner occupied		3,912		2,916		-
Commercial and industrial		2,031		837		-
All other		3,426		3,427		-
		20,463		15,623		-
With an allowance recorded:
Residential real estate	$	3,118	$	3,097	$	358
Commercial real estate
Owner occupied		586		586		74
Non owner occupied		809		789		362
Commercial and industrial		10,771		10,473		2,173
All other		5,517		5,340		875
		20,801		20,285		3,842
Total	$	41,264	$	35,908	$	3,842

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011. The table includes $14,859 of loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	5,602	$	5,329	$	-
Multifamily real estate		15,513		12,302		-
Commercial real estate
Owner occupied		10,939		9,291		-
Non owner occupied		12,296		9,383		-
Commercial and industrial		3,392		2,287		-
All other		8,957		5,306		-
		56,699		43,898		-
With an allowance recorded:
Residential real estate	$	4,803	$	4,748	$	451
Commercial real estate
Owner occupied		1,384		1,306		138
Non owner occupied		2,240		2,191		922
Commercial and industrial		2,242		1,932		894
Consumer		37		37		37
All other		4,992		4,991		605
		15,698		15,205		3,047
Total	$	72,397	$	59,103	$	3,047

Impaired loans were as follows:

	2012		2011		2010
Impaired loans at year-end with an allowance	$	20,285	$	15,205	$	17,397
Impaired loans at year-end with no allowance		15,623		43,898		31,703
Amount of the allowance for loan losses allocated		3,842		3,047		2,522
Average of impaired loans during the year		49,690		53,719		67,942
Interest income recognized during impairment		4,472		1,836		789
Cash-basis interest income recognized		4,416		1,802		733

The following table presents by loan class, the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the year ended December 31, 2012 and December 31, 2011. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Year ended December 31, 2012						Year ended December 31, 2011
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	8,887	$	518	$	516	$	2,227	$	84	$	81
Multifamily real estate		6,143		1,408		1,406		8,428		150		151
Commercial real estate:
Owner occupied		7,195		1,025		1,028		12,653		1,083		1,082
Non-owner occupied		9,785		73		79		11,417		113		84
Commercial and industrial		10,052		427		417		7,196		217		211
Consumer		29		2		2		43		5		5
All other		7,599		1,019		968		11,755		184		188
Total	$	49,690	$	4,472	$	4,416	$	53,719	$	1,836	$	1,802

Troubled Debt Restructurings

A loan is classified as a troubled debt restructuring ("TDR") when loan terms are modified due to a borrower's financial difficulties and a concession is granted to a borrower that would not have otherwise been considered. Most of the Company's loan modifications involve a restructuring of loan terms prior to maturity to temporarily reduce the payment amount and/or to require only interest for a temporary period, usually up to six months. These modifications generally do not meet the definition of a TDR because the modifications are considered to be an insignificant delay in payment.

The following table presents TDR's as of December 31, 2012 and December 31, 2011:

December 31, 2012	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	1,020	$	240	$	1,260
Commercial real estate
Owner occupied		-		4,224		4,224
Non owner occupied		-		4,920		4,920
Commercial and industrial		2		2,525		2,527
All other		-		2,197		2,197
Total	$	1,022	$	14,106	$	15,128

December 31, 2011	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	59	$	1,371	$	1,430
Commercial real estate
Owner occupied		4,541		-		4,541
Non owner occupied		3,135		1,641		4,776
Commercial and industrial		42		897		939
Consumer		11		1		12
All other		-		2,041		2,041
Total	$	7,788	$	5,951	$	13,739

At December 31, 2012, $220 in specific reserves was allocated to loans that had restructured terms. At December 31, 2011, $238 in specific reserves was allocated to loans that had restructured terms.

The following table presents TDR's that occurred during the years ended December 31, 2012 and December 31, 2011.

	Year ended December 31, 2012						Year ended December 31, 2011
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Residential real estate		-	$	-	$	-		1	$	827	$	827
Commercial real estate
Owner occupied		-		-		-		1		4,541		4,541
Non-owner occupied		1		519		519		2		4,689		4,689
Commercial and industrial		1		1,809		1,809		2		894		894
All other		1		190		190		1		2,041		2,041
Total		3	$	2,518	$	2,518		7	$	12,992	$	12,992

The troubled debt restructurings described above increased the allowance for loan losses by $168 during the year ended December 31, 2012 and $178 during the year ended December 31, 2011.

During the years ended December 31, 2012 and December 31, 2011, there were no TDR's for which there was a payment default within twelve months following the modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured residential real estate, on a monthly basis. For consumer loans, including consumer loans secured by residential real estate, the analysis involves monitoring the performing status of the loan. At the time such loans become past due by 30 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	195,210	$	10,115	$	9,327	$	91	$	214,743
Multifamily real estate		19,747		1,912		7,014		-		28,673
Commercial real estate:
Owner occupied		74,529		8,994		8,379		-		91,902
Non-owner occupied		163,337		7,685		7,827		-		178,849
Commercial and industrial		70,180		2,739		11,508		3		84,430
Consumer		27,931		123		74		-		28,128
All other		64,009		814		12,386		691		77,900

Total	$	614,943	$	32,382	$	56,515	$	785	$	704,625

As of December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	198,865	$	8,105	$	14,731	$	55	$	221,756
Multifamily real estate		16,798		2,218		15,319		-		34,335
Commercial real estate:
Owner occupied		79,753		5,377		16,600		134		101,864
Non-owner occupied		146,305		4,883		15,352		-		166,540
Commercial and industrial		58,158		8,675		10,095		32		76,960
Consumer		29,753		198		102		37		30,090
All other		43,485		1,052		14,064		777		59,378

Total	$	573,117	$	30,508	$	86,263	$	1,035	$	690,923