NOTE 3 - LOANS

Major classifications of loans at March 31, 2017 and December 31, 2016 are summarized as follows:

	2017		2016
Residential real estate	$	343,877	$	342,294
Multifamily real estate		74,941		74,165
Commercial real estate:
Owner occupied		135,490		129,370
Non owner occupied		235,630		220,836
Commercial and industrial		76,058		76,736
Consumer		30,001		30,916
All other		143,517		150,506
	$	1,039,514	$	1,024,823

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 was as follows:

Loan Class	Balance Dec 31, 2016		Provision (credit) for loan losses			Loans charged-off		Recoveries		Balance March 31, 2017

Residential real estate	$	2,948	$	129		$	(105)	$	5	$	2,977
Multifamily real estate		785		(15	)		-		-		770
Commercial real estate:
Owner occupied		1,543		32			-		1		1,576
Non owner occupied		2,350		77			(5)		-		2,422
Commercial and industrial		1,140		(34	)		-		23		1,129
Consumer		347		116			(117)		24		370
All other		1,723		61			(182)		48		1,650
Total	$	10,836	$	366		$	(409)	$	101	$	10,894

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 was as follows:

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

Residential real estate	$	2,501	$	78		$	(49)	$	9	$	2,539
Multifamily real estate		821		(76	)		-		-		745
Commercial real estate:
Owner occupied		1,509		21			-		1		1,531
Non owner occupied		2,070		267			-		-		2,337
Commercial and industrial		1,033		(136	)		-		36		933
Consumer		307		(11	)		(44)		36		288
All other		1,406		169			(60)		27		1,542
Total	$	9,647	$	312		$	(153)	$	109	$	9,915

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, 2017 and December 31, 2016.

	2017		2016
Residential real estate	$	1,528	$	1,619
Commercial real estate
Owner occupied		1,642		2,013
Non owner occupied		5,356		5,396
Commercial and industrial		221		232
All other		2,019		2,061
Total carrying amount	$	10,766	$	11,321
Contractual principal balance	$	13,977	$	14,784

Carrying amount, net of allowance	$	10,766	$	11,311

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three-months ended March 31, 2017, nor did it increase the allowance for loan losses for purchased impaired loans during the three-months ended March 31, 2016.

For those purchased loans disclosed 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. 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 at March 31, 2017 and March 31, 2016.

	2017			2016
Balance at January 1	$	1,208		$	185
New loans purchased		-			1,506
Accretion of income		(123	)		(40	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at March 31	$	1,085		$	1,651

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, 2017 and December 31, 2016. 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, 2017	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,858	$	2,955	$	848
Multifamily real estate		11,102		11,095		333
Commercial real estate
Owner occupied		2,340		2,253		23
Non owner occupied		294		196		-
Commercial and industrial		2,063		1,046		1,000
Consumer		347		324		-
All other		2,572		2,450		-
Total	$	22,576	$	20,319	$	2,204

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

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, 2017 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	$	343,877	$	3,679	$	2,074	$	5,753	$	338,124
Multifamily real estate		74,941		110		11,428		11,538		63,403
Commercial real estate:
Owner occupied		135,490		161		2,050		2,211		133,279
Non owner occupied		235,630		312		147		459		235,171
Commercial and industrial		76,058		742		1,915		2,657		73,401
Consumer		30,001		170		168		338		29,663
All other		143,517		1,633		2,447		4,080		139,437
Total	$	1,039,514	$	6,807	$	20,229	$	27,036	$	1,012,478

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 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, 2017:

	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	$	-	$	2,977	$	-	$	2,977	$	332	$	342,017	$	1,528	$	343,877
Multifamily real estate		-		770		-		770		13,598		61,343		-		74,941
Commercial real estate:
Owner occupied		227		1,349		-		1,576		2,739		131,109		1,642		135,490
Non-owner occupied		-		2,422		-		2,422		1,949		228,325		5,356		235,630
Commercial and industrial		262		867		-		1,129		1,292		74,545		221		76,058
Consumer		-		370		-		370		-		30,001		-		30,001
All other		8		1,642		-		1,650		7,221		134,277		2,019		143,517
Total	$	497	$	10,397	$	-	$	10,894	$	27,131	$	1,001,617	$	10,766	$	1,039,514

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

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, 2017. The table includes $199,000 of loans acquired with deteriorated credit quality for which 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	$	372	$	332	$	-
Multifamily real estate		13,605		13,598		-
Commercial real estate
Owner occupied		1,771		1,720		-
Non owner occupied		2,041		1,949		-
Commercial and industrial		2,312		1,217		-
All other		7,258		7,138		-
		27,359		25,954		-
With an allowance recorded:
Commercial real estate
Owner occupied		1,047		1,019		227
Commercial and industrial		285		274		262
All other		88		83		8
		1,420		1,376		497
Total	$	28,779	$	27,330	$	497

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016. The table includes $208,000 of loans acquired with deteriorated credit quality for which 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 the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended March 31, 2017 and March 31, 2016. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended March 31, 2017						Three months ended March 31, 2016
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	$	356	$	1	$	1	$	558	$	5	$	4
Multifamily real estate		13,620		65		61		566		13		12
Commercial real estate:
Owner occupied		2,770		6		6		441		-		-
Non-owner occupied		2,161		32		32		5,892		50		41
Commercial and industrial		1,558		7		7		500		3		3
All other		10,098		54		54		750		-		-
Total	$	30,563	$	165	$	161	$	8,707	$	71	$	60

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, 2017 and December 31, 2016:

March 31, 2017	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	331	$	243	$	574
Multifamily real estate		-		2,170		2,170
Commercial real estate
Owner occupied		604		248		852
Commercial and industrial		60		340		400
All other		751		4,369		5,120
Total	$	1,746	$	7,370	$	9,116

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
Non owner occupied		-		856		856
Commercial and industrial		62		352		414
All other		751		4,395		5,146
Total	$	942	$	8,268	$	9,210

At March 31, 2017 and December 31, 2016, $43,000 in specific reserves was allocated to loans that had restructured terms. As of March 31, 2017 and December 31, 2016, there were no commitments to lend additional amounts to these borrowers.

There were no TDR’s that occurred during the three months ended March 31, 2017. The following table presents TDR’s that occurred during the three months ended March 31, 2016.

	Three months ended March 31, 2016
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Residential real estate		2	$	299	$	299
Commercial real estate
Owner occupied		2		610		610
Non owner occupied		1		100		100
Commercial and industrial		1		20		20
Total		6	$	1,029	$	1,029

The modifications reported above for the three months ended March 31, 2016 involve one borrowing relationship that did not include any permanent reduction of the recorded investment in the loans nor change in the interest rate on the loans. The Company has modified the terms of the loans by extending payment terms and requiring interest only payments during a period of loan rehabilitation. These periods have exceeded normal extension and interest only periods customarily offered by the Company. During the three month ended March 31, 2016, the Company increased the allowance for loan losses by $145,000 related to these loans.

During the three months ended March 31, 2017 and the three months ended March 31, 2016, 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 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 March 31, 2017, 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	$	331,368	$	3,144	$	9,364	$	1	$	343,877
Multifamily real estate		60,203		77		14,661		-		74,941
Commercial real estate:
Owner occupied		124,622		6,382		4,486		-		135,490
Non-owner occupied		229,079		4,224		2,327		-		235,630
Commercial and industrial		70,574		3,340		2,114		30		76,058
Consumer		29,484		221		296		-		30,001
All other		133,915		1,754		7,848		-		143,517
Total	$	979,245	$	19,142	$	41,096	$	31	$	1,039,514

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