NOTE 5 - LOANS

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

	2014		2013
Residential real estate	$	278,212	$	216,081
Multifamily real estate		30,310		38,456
Commercial real estate:
Owner occupied		120,861		90,539
Non owner occupied		230,750		208,756
Commercial and industrial		85,943		85,301
Consumer		32,745		25,113
All other		100,890		76,524
	$	879,711	$	740,770

Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during 2014 and 2013. 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 2014 activity with respect to all director and executive officer loans is as follows:

Balance, December 31, 2013	$	11,196
Additions, including loans now meeting disclosure requirements		2,486
Amounts collected and loans no longer meeting disclosure requirements		(4,726	)
Balance, December 31, 2014	$	8,956

Activity in the Allowance for Loan Losses

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2014 was as follows:

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

Residential real estate	$	2,694	$	(244	)	$	(421	)	$	64	$	2,093
Multifamily real estate		417		(113	)		-			-		304
Commercial real estate:
Owner occupied		1,407		315			(221	)		-		1,501
Non owner occupied		2,037		602			(323	)		-		2,316
Commercial and industrial		2,184		(589	)		(168	)		17		1,444
Consumer		297		47			(161	)		60		243
All other		1,991		516			(307	)		246		2,446
Total	$	11,027	$	534		$	(1,601	)	$	387	$	10,347

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2013 was as follows:

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

Residential real estate	$	2,163	$	803		$	(292	)	$	20	$	2,694
Multifamily real estate		331		86			-			-		417
Commercial real estate:
Owner occupied		1,117		123			(132	)		299		1,407
Non owner occupied		1,888		163			(14	)		-		2,037
Commercial and industrial		3,046		(918	)		(32	)		88		2,184
Consumer		244		168			(188	)		73		297
All other		2,699		(800	)		(251	)		343		1,991
Total	$	11,488	$	(375	)	$	(909	)	$	823	$	11,027

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

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, 2014 and December 31, 2013.

	2014		2013
Residential Real Estate	$	-	$	183
Multifamily Real Estate		497		1,229
Commercial Real Estate
Owner Occupied		131		250
Non owner Occupied		5,695		6,782
Commercial and industrial		136		496
All other		5,128		4,623
Total carrying amount	$	11,587	$	13,563

Carrying amount, net of allowance	$	10,639	$	12,931

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $316 for the year ended December 31, 2014 and increased the allowance for loan losses by $132 for the year ended December 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.

During 2014 and 2013, 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 the three years ended December 31, 2014. There was no accretable yield on the purchased loans above prior to January 1, 2012.

	2014			2013			2012
Balance at January 1	$	217		$	635		$	-
New loans purchased		-			-			-
Accretion of income		(13	)		(26	)		(6	)
Income recognized upon full repayment		-			(415	)		-
Reclassifications from non-accretable difference		-			23			641
Disposals		-			-			-
Balance at December 31	$	204		$	217		$	635

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

Residential real estate	$	1,996	$	1,768	$	668
Multifamily real estate		1,803		1,033		564
Commercial real estate
Owner occupied		2,115		1,928		-
Non owner occupied		2,020		1,819		26
Commercial and industrial		2,012		806		8
Consumer		213		185		-
All other		12,608		5,173		-
Total	$	22,767	$	12,712	$	1,266

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 December 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	$	278,212	$	5,810	$	1,706	$	7,516	$	270,696
Multifamily real estate		30,310		177		1,100		1,277		29,033
Commercial real estate:
Owner occupied		120,861		250		1,530		1,780		119,081
Non owner occupied		230,750		2,173		1,670		3,843		226,907
Commercial and industrial		85,943		1,720		608		2,328		83,615
Consumer		32,745		497		71		568		32,177
All other		100,890		234		5,127		5,361		95,529
Total	$	879,711	$	10,861	$	11,812	$	22,673	$	857,038

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 December 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	$	-	$	2,093	$	-	$	2,093	$	137	$	278,075	$	-	$	278,212
Multifamily real estate		-		304		-		304		536		29,277		497		30,310
Commercial real estate:
Owner occupied		107		1,394		-		1,501		2,011		118,719		131		120,861
Non-owner occupied		54		2,262		-		2,316		4,874		220,181		5,695		230,750
Commercial and industrial		291		1,105		48		1,444		902		84,905		136		85,943
Consumer		-		243		-		243		-		32,745		-		32,745
All other		-		1,546		900		2,446		1,109		94,653		5,128		100,890
Total	$	452	$	8,947	$	948	$	10,347	$	9,569	$	858,555	$	11,587	$	879,711

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 December 31, 2014. The table includes $5,673 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	$	179	$	137	$	-
Multifamily real estate		1,803		1,033		-
Commercial real estate
Owner occupied		1,404		1,304		-
Non owner occupied		4,398		4,190		-
Commercial and industrial		1,030		270		-
All other		1,144		1,108		-
		9,958		8,042		-
With an allowance recorded:
Commercial real estate
Owner occupied	$	707	$	707	$	107
Non owner occupied		684		684		54
Commercial and industrial		929		680		339
All other		12,525		5,129		900
		14,845		7,200		1,400
Total	$	24,803	$	15,242	$	1,400

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 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 by loan class, the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three years ended December 31, 2014. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Year ended Dec 31, 2014						Year ended Dec 31, 2013						Year ended Dec 31, 2012
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	1,964	$	267	$	267	$	4,069	$	180	$	171	$	8,887	$	518	$	516
Multifamily real estate		2,221		782		782		3,810		847		845		6,143		1,408		1,406
Commercial real estate:
Owner occupied		2,139		179		174		2,602		168		141		7,195		1,025		1,028
Non-owner occupied		2,085		711		704		2,509		9		9		9,785		73		79
Commercial and industrial		1,912		657		657		8,425		47		47		10,052		427		417
Consumer		-		-		-		-		-		-		29		2		2
All other		7,347		149		149		8,796		273		273		7,599		1,019		968
Total	$	17,668	$	2,745	$	2,733	$	30,211	$	1,524	$	1,486	$	49,690	$	4,472	$	4,416

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, 2014 and December 31, 2013:

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

Residential real estate	$	13	$	191	$	204
Commercial real estate
Non owner occupied		-		474		474
Commercial and industrial		-		761		761
All other		-		1,063		1,063
Total	$	13	$	2,489	$	2,502

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

	Year ended December 31, 2014						Year ended December 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 year ended December 31, 2014 or during the year ended December 31, 2013.

During the years ended December 31, 2014, 2013 and 2012, 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 by 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, 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	$	265,285	$	8,292	$	4,622	$	13	$	278,212
Multifamily real estate		27,260		2,017		1,033		-		30,310
Commercial real estate:
Owner occupied		111,024		6,505		3,332		-		120,861
Non-owner occupied		218,971		6,652		5,127		-		230,750
Commercial and industrial		83,634		1,007		1,275		27		85,943
Consumer		32,364		267		114		-		32,745
All other		89,173		4,873		6,844		-		100,890

Total	$	827,711	$	29,613	$	22,347	$	40	$	879,711

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