NOTE 3 - LOANS

Major classifications of loans at March 31, 2014 and December 31, 2013 are summarized as follows:

	2014		2013
Residential real estate	$	216,595	$	216,081
Multifamily real estate		31,691		38,456
Commercial real estate:
Owner occupied		94,498		90,539
Non owner occupied		212,316		208,756
Commercial and industrial		77,135		85,301
Consumer		24,451		25,113
All other		81,755		76,524
	$	738,441	$	740,770

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014 was as follows:

Loan Class	Balance Dec 31, 2013		Provision for loan losses			Loans charged-off		Recoveries		Balance March 31, 2014

Residential real estate	$	2,694	$	(427	)	$	19	$	2	$	2,250
Multifamily real estate		417		(120	)		-		-		297
Commercial real estate:
Owner occupied		1,407		71			1		-		1,477
Non owner occupied		2,037		648			300		-		2,385
Commercial and industrial		2,184		(596	)		63		2		1,527
Consumer		297		(70	)		26		19		220
All other		1,991		184			37		50		2,188
Total	$	11,027	$	(310	)	$	446	$	73	$	10,344

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 was as follows:

Loan Class	Balance Dec 31, 2012		Provision for loan losses			Loans charged-off		Recoveries		Balance March 31, 2013

Residential real estate	$	2,163	$	(28	)	$	71	$	2	$	2,066
Multifamily real estate		331		16			-		-		347
Commercial real estate:
Owner occupied		1,117		(158	)		67		299		1,191
Non owner occupied		1,888		79			-		-		1,967
Commercial and industrial		3,046		1,010			10		50		4,096
Consumer		244		(39	)		47		16		174
All other		2,699		(310	)		56		168		2,501
Total	$	11,488	$	570		$	251	$	535	$	12,342

Purchased Impaired 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 March 31, 2014 and December 31, 2013.

	2014		2013
Residential real estate	$	178	$	183
Multifamily real estate		552		1,229
Commercial real estate
Owner occupied		248		250
Non owner occupied		5,787		6,782
Commercial and industrial		496		496
All other		4,648		4,623
Total carrying amount	$	11,909	$	13,563

Carrying amount, net of allowance	$	11,277	$	12,931

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three-months ended March 31, 2014, nor did it increase the allowance for loan losses for purchased impaired loans during the three-months ended March 31, 2013.

For the majority of these loans, the Company cannot reasonably estimate the cash flows expected to be collected on the loans and therefore has continued to account for those 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 on those loans accounted for using the cost recovery method. 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.

The Company has determined that the cash flows from borrowers on a limited number of purchased loans can 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 March 31, 2014 and March 31, 2013.

	2014			2013
Balance at January 1	$	217		$	635
New loans purchased		-			-
Accretion of income		(3	)		(9	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at December 31	$	214		$	626

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 March 31, 2014 and December 31 2013. 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.

March 31, 2014	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	2,119	$	1,786	$	1,307
Multifamily real estate		1,946		1,215		1,377
Commercial real estate
Owner occupied		1,558		1,329		1,495
Non owner occupied		293		220		1,994
Commercial and industrial		2,961		1,576		123
Consumer		139		120		16
All other		12,229		4,814		146
Total	$	21,245	$	11,060	$	6,458

December 31, 2013	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	2,021	$	1,725	$	1,737
Multifamily real estate		3,282		1,889		1,369
Commercial real estate
Owner occupied		1,364		1,147		1,387
Non owner occupied		2,683		1,973		3,739
Commercial and industrial		6,838		4,961		84
Consumer		167		148		16
All other		12,212		4,798		146
Total	$	28,567	$	16,641	$	8,478

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 March 31, 2014 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	$	216,595	$	3,661	$	2,188	$	5,849	$	210,746
Multifamily real estate		31,691		-		2,040		2,040		29,651
Commercial real estate:
Owner occupied		94,498		928		2,111		3,039		91,459
Non owner occupied		212,316		4,122		1,994		6,116		206,200
Commercial and industrial		77,135		399		1,556		1,955		75,180
Consumer		24,451		345		56		401		24,050
All other		81,755		3,632		4,960		8,592		73,163
Total	$	738,441	$	13,087	$	14,905	$	27,992	$	710,449

The following table presents the aging of the recorded investment in past due loans as of December 31, 2013 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	$	216,081	$	4,770	$	2,431	$	7,201	$	208,880
Multifamily real estate		38,456		367		2,688		3,055		35,401
Commercial real estate:
Owner occupied		90,539		516		2,073		2,589		87,950
Non owner occupied		208,756		278		5,478		5,756		203,000
Commercial and industrial		85,301		1,433		1,438		2,871		82,430
Consumer		25,113		421		82		503		24,610
All other		76,524		2,510		4,881		7,391		69,133
Total	$	740,770	$	10,295	$	19,071	$	29,366	$	711,404

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 March 31, 2014:

	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	$	105	$	2,145	$	-	$	2,250	$	2,204	$	214,213	$	178	$	216,595
Multifamily real estate		-		297		-		297		1,813		29,326		552		31,691
Commercial real estate:
Owner occupied		201		1,276		-		1,477		1,909		92,341		248		94,498
Non-owner occupied		-		2,385		-		2,385		220		206,309		5,787		212,316
Commercial and industrial		370		1,025		132		1,527		897		75,742		496		77,135
Consumer		-		220		-		220		-		24,451		-		24,451
All other		94		1,594		500		2,188		2,998		74,109		4,648		81,755
Total	$	770	$	8,942	$	632	$	10,344	$	10,041	$	716,491	$	11,909	$	738,441

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, 2013:

	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	$	138	$	2,556	$	-	$	2,694	$	2,787	$	213,111	$	183	$	216,081
Multifamily real estate		-		417		-		417		1,822		35,405		1,229		38,456
Commercial real estate:
Owner occupied		170		1,237		-		1,407		2,386		87,903		250		90,539
Non-owner occupied		362		1,675		-		2,037		1,024		200,950		6,782		208,756
Commercial and industrial		1,088		964		132		2,184		4,270		80,535		496		85,301
Consumer		-		297		-		297		-		25,113		-		25,113
All other		102		1,389		500		1,991		3,279		68,622		4,623		76,524
Total	$	1,860	$	8,535	$	632	$	11,027	$	15,568	$	711,639	$	13,563	$	740,770

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 March 31, 2014. The table includes $5,875 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	1,409	$	1,192	$	-
Multifamily real estate		3,102		2,365		-
Commercial real estate
Owner occupied		1,459		1,276		-
Non owner occupied		285		220		-
Commercial and industrial		793		33		-
All other		2,914		2,896		-
		9,962		7,982		-
With an allowance recorded:
Residential real estate	$	1,201	$	1,190	$	105
Commercial real estate
Owner occupied		747		747		201
Commercial and industrial		1,670		1,247		502
All other		12,148		4,750		594
		15,766		7,934		1,402
Total	$	25,728	$	15,916	$	1,402

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013. The table includes $7,483 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	1,513	$	1,314	$	-
Multifamily real estate		4,449		3,051		-
Commercial real estate
Owner occupied		2,601		1,986		-
Non owner occupied		1,861		1,184		-
Commercial and industrial		809		49		-
All other		3,185		3,167		-
		14,418		10,751		-
With an allowance recorded:
Residential real estate	$	1,668	$	1,656	$	138
Commercial real estate
Owner occupied		515		515		170
Non owner occupied		810		790		362
Commercial and industrial		5,543		4,604		1,220
All other		12,132		4,735		602
		20,668		12,300		2,492
Total	$	35,086	$	23,051	$	2,492

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended March 31, 2014 and March 31, 2013. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended March 31, 2014						Three months ended March 31, 2013
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	$	2,676	$	34	$	34	$	4,686	$	50	$	50
Multifamily real estate		2,708		708		708		4,513		30		30
Commercial real estate:
Owner occupied		2,262		16		11		2,696		38		29
Non-owner occupied		1,097		627		627		3,041		2		2
Commercial and industrial		2,967		335		335		11,144		4		4
All other		7,774		44		44		9,339		82		82
Total	$	19,484	$	1,765	$	1,759	$	35,419	$	206	$	197

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 determination of an insignificant delay in payment is evaluated based on the facts and circumstances of the individual borrower(s).

The following table presents TDR’s as of March 31, 2014 and December 31, 2013:

March 31, 2014	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	22	$	205	$	227
Commercial real estate
Non owner occupied		-		500		500
Commercial and industrial		-		814		814
Consumer		-		4		4
All other		-		2,017		2,017
Total	$	22	$	3,540	$	3,562

December 31, 2013	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	23	$	296	$	319
Commercial real estate
Non owner occupied		-		506		506
Commercial and industrial		-		831		831
Consumer		-		5		5
All other		-		2,017		2,017
Total	$	23	$	3,655	$	3,678

At March 31, 2014 and December 31, 2013 there were no specific reserves allocated to loans that had restructured terms.

The following table presents TDR’s that occurred during the three months ended March 31, 2014 and March 31, 2013:

	Three months ended March 31, 2014						Three months ended March 31, 2013
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

All other		-		-		-		1	$	16	$	16
Total		-	$	-	$	-		1	$	16	$	16

The troubled debt restructurings described above did not increase the allowance for loan losses during the period ended March 31, 2014 and did not increase the allowance for loan losses during the period ended March 31, 2013.

During the three months ended March 31, 2014 and the three months ended March 31, 2013, there were no TDR’s for which there as 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 March 31, 2014 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	$	203,960	$	5,925	$	6,688	$	22	$	216,595
Multifamily real estate		28,419		907		2,365		-		31,691
Commercial real estate:
Owner occupied		83,778		7,830		2,890		-		94,498
Non-owner occupied		202,220		8,002		2,094		-		212,316
Commercial and industrial		73,680		2,030		1,391		34		77,135
Consumer		24,127		197		127		-		24,451
All other		67,863		5,753		8,036		103		81,755
Total	$	684,047	$	30,644	$	23,591	$	159	$	738,441

As of December 31, 2013, 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	$	202,789	$	6,204	$	7,065	$	23	$	216,081
Multifamily real estate		34,487		918		3,051		-		38,456
Commercial real estate:
Owner occupied		79,694		7,431		3,348		66		90,539
Non-owner occupied		196,338		8,569		3,849		-		208,756
Commercial and industrial		78,205		2,269		4,753		74		85,301
Consumer		24,772		204		137		-		25,113
All other		62,180		5,947		8,285		112		76,524

Total	$	678,465	$	31,542	$	30,488	$	275	$	740,770