NOTE 5 - LOANS

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

	2016		2015
Residential real estate	$	342,294	$	285,826
Multifamily real estate		74,165		50,452
Commercial real estate:
Owner occupied		129,370		119,265
Non owner occupied		220,836		188,918
Commercial and industrial		76,736		68,339
Consumer		30,916		31,445
All other		150,506		105,501
	$	1,024,823	$	849,746

As more fully discussed under Note 2 above, the table above includes loans purchased in the acquisition of Bankshares. The composition of the major classifications of the loans acquired from Bankshares at December 31, 2016 are summarized as follows:

	2016
Residential real estate	$	45,683
Multifamily real estate		3,238
Commercial real estate:
Owner occupied		19,190
Non owner occupied		9,146
Commercial and industrial		17,582
Consumer		1,885
All other		17,126
	$	113,850

Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during 2016 and 2015.

An analysis of the 2016 activity with respect to all director and executive officer loans is as follows:

Balance, December 31, 2015	$	7,727
Additions, including loans now meeting disclosure requirements		607
Amounts collected and loans no longer meeting disclosure requirements		(4,169	)
Balance, December 31, 2016	$	4,165

Activity in the Allowance for Loan Losses

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2016 was as follows:

Loan Class	Balance Dec 31, 2015		Provision (credit) for loan losses			Loans charged-off		Recoveries		Balance Dec 31, 2016

Residential real estate	$	2,501	$	608		$	209	$	48	$	2,948
Multifamily real estate		821		(36	)		-		-		785
Commercial real estate:
Owner occupied		1,509		46			14		2		1,543
Non owner occupied		2,070		380			100		-		2,350
Commercial and industrial		1,033		136			74		45		1,140
Consumer		307		294			340		86		347
All other		1,406		320			273		270		1,723
Total	$	9,647	$	1,748		$	1,010	$	451	$	10,836

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2015 was as follows:

Loan Class	Balance Dec 31, 2014		Provision (credit) for loan losses			Loans charged-off		Recoveries		Balance Dec 31, 2015

Residential real estate	$	2,093	$	675		$	359	$	92	$	2,501
Multifamily real estate		304		517			-		-		821
Commercial real estate:
Owner occupied		1,501		23			17		2		1,509
Non owner occupied		2,316		(905	)		-		659		2,070
Commercial and industrial		1,444		(17	)		403		9		1,033
Consumer		243		176			209		97		307
All other		2,446		(143	)		1,108		211		1,406
Total	$	10,347	$	326		$	2,096	$	1,070	$	9,647

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 (credit) 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

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, 2016 and December 31, 2015.

	2016		2015
Residential Real Estate	$	1,619	$	-
Commercial Real Estate
Owner Occupied		2,013		131
Non owner Occupied		5,396		5,549
Commercial and industrial		232		80
All other		2,061		-
Total carrying amount	$	11,321	$	5,760
Contractual principal balance	$	14,784	$	7,251

Carrying amount, net of allowance	$	11,311	$	5,680

For those purchased loans disclosed above, the Company decreased the allowance for loan losses by $70 for the year ended December 31, 2016 but increased the allowance for loan losses by $31 for the year ended December 31, 2015.

For those purchased loans discussed above, where the Company can reasonably estimate the cash flows expected to be collected on the loans, a portion of the purchase discount is 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 is being recognized as interest income over the remaining life of the loan.

Where the Company cannot reasonably estimate the cash flows expected to be collected on the loans, it 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. The carrying values of these loans totaled $208 at December 31, 2016 including $199 acquired from Bankshares. 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 accretable yield, or income expected to be collected, on the purchased loans above is as follows the three years ended December 31, 2016.

	2016			2015			2014
Balance at January 1	$	185		$	204		$	217
New loans purchased		1,151			-			-
Accretion of income		(128	)		(19	)		(13	)
Income recognized upon full repayment		-			-			-
Reclassifications from non-accretable difference		-			-			-
Disposals		-			-			-
Balance at December 31	$	1,208		$	185		$	204

As part of the acquisition of Bankshares on January 15, 2016, the Company purchased credit impaired loans for which it was probable at acquisition that all contractually required payments would not be collected. The contractually required payments of such loans totaled $10,040, while the cash flow expected to be collected at acquisition totaled $8,437 and the fair value of the acquired loans totaled $7,286.

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, 2016 and December 31, 2015. 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, 2016	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,467	$	2,794	$	606
Multifamily real estate		11,157		11,106		334
Commercial real estate
Owner occupied		1,769		1,704		15
Non owner occupied		294		196		36
Commercial and industrial		2,537		1,209		1,008
Consumer		366		347		-
All other		8,408		8,391		-
Total	$	27,998	$	25,747	$	1,999

December 31, 2015	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	2,367	$	2,091	$	867
Multifamily real estate		416		75		-
Commercial real estate
Owner occupied		791		773		558
Non owner occupied		3,732		3,400		-
Commercial and industrial		1,460		337		870
Consumer		257		234		-
All other		287		231		737
Total	$	9,310	$	7,141	$	3,032

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, 2016 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	$	342,294	$	6,113	$	1,596	$	7,709	$	334,585
Multifamily real estate		74,165		-		11,440		11,440		62,725
Commercial real estate:
Owner occupied		129,370		1,746		1,474		3,220		126,150
Non owner occupied		220,836		1,803		159		1,962		218,874
Commercial and industrial		76,736		330		2,120		2,450		74,286
Consumer		30,916		403		223		626		30,290
All other		150,506		577		8,187		8,764		141,742
Total	$	1,024,823	$	10,972	$	25,199	$	36,171	$	988,652

The following table presents the aging of the recorded investment in past due loans as of December 31, 2015 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	$	285,826	$	6,298	$	1,681	$	7,979	$	277,847
Multifamily real estate		50,452		1,415		75		1,490		48,962
Commercial real estate:
Owner occupied		119,265		1,354		1,195		2,549		116,716
Non owner occupied		188,918		2,481		3,400		5,881		183,037
Commercial and industrial		68,339		220		1,064		1,284		67,055
Consumer		31,445		288		101		389		31,056
All other		105,501		3,157		935		4,092		101,409
Total	$	849,746	$	15,213	$	8,451	$	23,664	$	826,082

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, 2016:

	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	$	-	$	2,948	$	-	$	2,948	$	379	$	340,296	$	1,619	$	342,294
Multifamily real estate		-		785		-		785		13,641		60,524		-		74,165
Commercial real estate:
Owner occupied		244		1,299		-		1,543		2,801		124,556		2,013		129,370
Non-owner occupied		-		2,350		-		2,350		2,373		213,067		5,396		220,836
Commercial and industrial		266		864		10		1,140		1,418		75,086		232		76,736
Consumer		-		347		-		347		-		30,916		-		30,916
All other		86		1,637		-		1,723		12,976		135,469		2,061		150,506
Total	$	596	$	10,230	$	10	$	10,836	$	33,588	$	979,914	$	11,321	$	1,024,823

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, 2015:

	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	$	-	$	2,501	$	-	$	2,501	$	575	$	285,251	$	-	$	285,826
Multifamily real estate		-		821		-		821		75		50,377		-		50,452
Commercial real estate:
Owner occupied		44		1,465		-		1,509		446		118,688		131		119,265
Non-owner occupied		22		2,048		-		2,070		6,502		176,867		5,549		188,918
Commercial and industrial		153		800		80		1,033		544		67,715		80		68,339
Consumer		-		307		-		307		-		31,445		-		31,445
All other		-		1,406		-		1,406		750		104,751		-		105,501
Total	$	219	$	9,348	$	80	$	9,647	$	8,892	$	835,094	$	5,760	$	849,746

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, 2016. The table includes $208 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	$	743	$	379	$	-
Multifamily real estate		13,692		13,641		-
Commercial real estate
Owner occupied		1,803		1,766		-
Non owner occupied		2,465		2,373		-
Commercial and industrial		2,429		1,338		-
All other		9,868		9,853		-
		31,000		29,350		-
With an allowance recorded:
Commercial real estate
Owner occupied	$	1,055	$	1,035	$	244
Commercial and industrial		431		288		276
All other		3,124		3,123		86
		4,610		4,446		606
Total	$	35,610	$	33,796	$	606

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2015. The table includes $80 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	$	636	$	575	$	-
Multifamily real estate		416		75		-
Commercial real estate
Owner occupied		276		269		-
Non owner occupied		6,554		6,222		-
Commercial and industrial		1,160		391		-
All other		805		750		-
		9,847		8,282		-
With an allowance recorded:
Commercial real estate
Owner occupied	$	177	$	177	$	44
Non owner occupied		280		280		22
Commercial and industrial		528		233		233
		985		690		299
Total	$	10,832	$	8,972	$	299

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, 2016. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Year ended Dec 31, 2016						Year ended Dec 31, 2015						Year ended Dec 31, 2014
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	$	566	$	21	$	18	$	378	$	11	$	11	$	1,964	$	267	$	267
Multifamily real estate		3,993		198		181		855		685		685		2,221		782		782
Commercial real estate:
Owner occupied		1,475		19		16		1,015		28		27		2,139		179		174
Non-owner occupied		4,527		314		314		4,942		180		180		2,085		711		704
Commercial and industrial		1,249		36		35		810		26		26		1,912		657		657
All other		5,157		219		27		4,023		56		56		7,347		149		149
Total	$	16,967	$	807	$	591	$	12,023	$	986	$	985	$	17,668	$	2,745	$	2,733

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 December 31, 2016 and 2015:

December 31, 2016	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	129	$	464	$	593
Multifamily real estate		-		2,201		2,201
Commercial real estate
Owner occupied		-		856		856
Commercial and industrial		62		352		414
All other		751		4,395		5,146
Total	$	942	$	8,268	$	9,210

December 31, 2015	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	7	$	222	$	229
Multifamily real estate		-		2,201		2,201
Commercial real estate
Non owner occupied		-		454		454
Commercial and industrial		-		396		396
All other		-		723		723
Total	$	7	$	3,996	$	4,003

At December 31, 2016, $43 in specific reserves was allocated to loans that had restructured terms. At December 31, 2015, there were no specific reserves allocated to loans that had restructured terms. There were no commitments to lend additional amounts on these loans.

The following table presents TDR's that occurred during the years ended December 31, 2016 and 2015.

	Year ended December 31, 2016						Year ended December 31, 2015
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		8	$	483	$	483		-	$	-	$	-
Multifamily real estate		-		-		-		2		3,744		3,744
Commercial real estate								-
Owner occupied		3		865		865		-		-		-
Non owner occupied		1		100		100		-		-		-
Commercial and industrial		1		20		20		-		-		-
All other		1		4,106		4,106		-		-		-
Total		14	$	5,574	$	5,574		2	$	3,744	$	3,744

The modifications reported above for the year ended December 31, 2016 involve reducing the borrowers' required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current. The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans. The Company increased the allowance for loan losses related to these loans by $139 during the year ended December 31, 2016. During the twelve months following modification, the $100 non-owner occupied loan and the $20 commercial and industrial loan failed to comply with the modified terms and resulted in a payment default. These two loans were subsequently charged-off during the year ended December 31, 2016.

The modifications reported above for the year ended December 31, 2015 involve a modification of one multifamily residential real estate loan during the three months ended March 31, 2015. The modification did not include a permanent reduction of the recorded investment in the loan and did not increase the allowance for loan losses during the period. The modification included a lengthening of the amortization period and reduction in the stated interest rate, however the maturity date was reduced to the end of a fifteen month forbearance period with a balloon payment due at maturity. The loan was fully repaid during the three months ended June 30, 2015.

The second multifamily residential real estate loan reported above for the year ended December 31, 2015 was modified with a nine month forbearance agreement requiring payments of interest only. Cash collateral securing the loan was also released during the forbearance period to allow the borrower to improve the property to secure moderate income tenants. The maturity period for loan was not extended.

During the years ended December 31, 2015 and 2014, 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, 2016, 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	$	328,905	$	4,880	$	8,507	$	2	$	342,294
Multifamily real estate		59,375		78		14,712		-		74,165
Commercial real estate:
Owner occupied		118,134		6,720		4,516		-		129,370
Non-owner occupied		213,641		4,391		2,804		-		220,836
Commercial and industrial		72,094		2,337		2,275		30		76,736
Consumer		30,369		242		305		-		30,916
All other		134,945		1,958		13,603		-		150,506
Total	$	957,463	$	20,606	$	46,722	$	32	$	1,024,823

As of December 31, 2015, 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	$	273,741	$	5,389	$	6,689	$	7	$	285,826
Multifamily real estate		46,135		2,041		2,276		-		50,452
Commercial real estate:
Owner occupied		112,989		3,964		2,312		-		119,265
Non-owner occupied		179,179		2,891		6,848		-		188,918
Commercial and industrial		64,563		2,859		873		44		68,339
Consumer		31,000		269		176		-		31,445
All other		101,839		2,490		1,172		-		105,501
Total	$	809,446	$	19,903	$	20,346	$	51	$	849,746