NOTE 3 - LOANS

Major classifications of loans at September 30, 2019 and December 31, 2018 are summarized as follows:

	2019		2018
Residential real estate	$	381,310	$	381,027
Multifamily real estate		38,074		54,016
Commercial real estate:
Owner occupied		151,446		138,209
Non-owner occupied		292,879		282,608
Commercial and industrial		98,779		103,624
Consumer		25,296		27,688
Construction and land		122,464		128,926
All other		30,614		33,203
	$	1,140,862	$	1,149,301

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2019 was as follows:

Loan Class	Balance Dec 31, 2018		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance Sept 30, 2019

Residential real estate	$	1,808	$	165		$	(121	)	$	34	$	1,886
Multifamily real estate		1,649		143			-			7		1,799
Commercial real estate:
Owner occupied		2,120		700			(533	)		5		2,292
Non-owner occupied		3,058		334			(57	)		2		3,337
Commercial and industrial		1,897		191			(393	)		48		1,743
Consumer		351		125			(175	)		34		335
Construction and land		2,255		(349	)		(14	)		-		1,892
All other		600		6			(171	)		92		527
Total	$	13,738	$	1,315		$	(1,464	)	$	222	$	13,811

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2018 was as follows:

Loan Class	Balance Dec 31, 2017		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance Sept 30, 2018

Residential real estate	$	2,986	$	(509	)	$	(229	)	$	30	$	2,278
Multifamily real estate		978		(504	)		(11	)		-		463
Commercial real estate:
Owner occupied		1,653		174			(21	)		1		1,807
Non-owner occupied		2,313		500			(16	)		2		2,799
Commercial and industrial		1,101		1,108			(525	)		40		1,724
Consumer		328		90			(105	)		50		363
Construction and land		2,408		651			(20	)		400		3,439
All other		337		380			(203	)		96		610
Total	$	12,104	$	1,890		$	(1,130	)	$	619	$	13,483

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2019 was as follows:

Loan Class	Balance June 30, 2019		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance Sept 30, 2019

Residential real estate	$	1,880	$	61		$	(62	)	$	7	$	1,886
Multifamily real estate		1,716		78			-			5		1,799
Commercial real estate:
Owner occupied		1,790		500			-			2		2,292
Non-owner occupied		3,280		57			-			-		3,337
Commercial and industrial		2,000		13			(280	)		10		1,743
Consumer		368		(4	)		(35	)		6		335
Construction and land		2,140		(247	)		(1	)		-		1,892
All other		599		(33	)		(74	)		35		527
Total	$	13,773	$	425		$	(452	)	$	65	$	13,811

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018 was as follows:

Loan Class	Balance June 30, 2018		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance Sept 30, 2018

Residential real estate	$	2,254	$	100		$	(81	)	$	5	$	2,278
Multifamily real estate		557		(94	)		-			-		463
Commercial real estate:
Owner occupied		1,917		(92	)		(18	)		-		1,807
Non-owner occupied		2,437		360			-			2		2,799
Commercial and industrial		1,599		132			(21	)		14		1,724
Consumer		354		39			(42	)		12		363
Construction and land		3,253		(213	)		(1	)		400		3,439
All other		611		43			(73	)		29		610
Total	$	12,982	$	275		$	(236	)	$	462	$	13,483

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 September 30, 2019 and December 31, 2018.

	2019		2018
Residential real estate	$	2,132	$	2,665
Commercial real estate
Owner occupied		1,671		2,040
Non-owner occupied		2,694		3,434
Commercial and industrial		333		1,720
Construction and land		556		1,212
All other		233		225
Total carrying amount	$	7,619	$	11,296
Contractual principal balance	$	11,037	$	15,436

Carrying amount, net of allowance	$	7,619	$	11,296

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the nine months ended September 30, 2019 and September 30, 2018.

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 September 30, 2019 and September 30, 2018.

	2019			2018
Balance at January 1	$	642		$	754
New loans purchased		-			-
Accretion of income		(149	)		(141	)
Loans placed on non-accrual		-			(52	)
Income recognized upon full repayment		(74	)		(38	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at September 30	$	419		$	523

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 September 30, 2019 and December 31, 2018. 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.

September 30, 2019	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	5,043	$	4,014	$	975
Multifamily real estate		4,113		3,726		-
Commercial real estate
Owner occupied		3,807		3,482		54
Non-owner occupied		3,010		1,786		447
Commercial and industrial		1,224		434		-
Consumer		235		191		-
Construction and land		483		458		-
All other		75		73		-
Total	$	17,990	$	14,164	$	1,476

December 31, 2018	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	4,966	$	3,708	$	954
Multifamily real estate		4,127		3,905		-
Commercial real estate
Owner occupied		3,692		3,436		56
Non-owner occupied		5,761		4,592		76
Commercial and industrial		1,303		625		-
Consumer		292		253		-
Construction and land		857		856		-
All other		75		73		-
Total	$	21,073	$	17,448	$	1,086

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 September 30, 2019 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	$	381,310	$	6,108	$	2,776	$	8,884	$	372,426
Multifamily real estate		38,074		-		89		89		37,985
Commercial real estate:
Owner occupied		151,446		56		1,995		2,051		149,395
Non-owner occupied		292,879		1,787		990		2,777		290,102
Commercial and industrial		98,779		314		261		575		98,204
Consumer		25,296		255		49		304		24,992
Construction and land		122,464		285		3		288		122,176
All other		30,614		-		73		73		30,541
Total	$	1,140,862	$	8,805	$	6,236	$	15,041	$	1,125,821

The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 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	$	381,027	$	7,078	$	2,594	$	9,672	$	371,355
Multifamily real estate		54,016		-		110		110		53,906
Commercial real estate:
Owner occupied		138,209		124		2,601		2,725		135,484
Non-owner occupied		282,608		172		3,301		3,473		279,135
Commercial and industrial		103,624		2,235		262		2,497		101,127
Consumer		27,688		247		112		359		27,329
Construction and land		128,926		388		810		1,198		127,728
All other		33,203		546		73		619		32,584
Total	$	1,149,301	$	10,790	$	9,863	$	20,653	$	1,128,648

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 September 30, 2019:

	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	$	-	$	1,886	$	-	$	1,886	$	65	$	379,113	$	2,132	$	381,310
Multifamily real estate		1,570		229		-		1,799		3,725		34,349		-		38,074
Commercial real estate:
Owner occupied		426		1,866		-		2,292		2,699		147,076		1,671		151,446
Non-owner occupied		219		3,118		-		3,337		3,917		286,268		2,694		292,879
Commercial and industrial		192		1,551		-		1,743		386		98,060		333		98,779
Consumer		-		335		-		335		-		25,296		-		25,296
Construction and land		66		1,826				1,892		446		121,462		556		122,464
All other		-		527		-		527		-		30,381		233		30,614
Total	$	2,473	$	11,338	$	-	$	13,811	$	11,238	$	1,122,005	$	7,619	$	1,140,862

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, 2018:

	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	$	-	$	1,808	$	-	$	1,808	$	298	$	378,064	$	2,665	$	381,027
Multifamily real estate		1,281		368		-		1,649		3,905		50,111		-		54,016
Commercial real estate:
Owner occupied		692		1,428		-		2,120		2,820		133,349		2,040		138,209
Non-owner occupied		267		2,791		-		3,058		10,111		269,063		3,434		282,608
Commercial and industrial		414		1,483		-		1,897		558		101,346		1,720		103,624
Consumer		-		351		-		351		-		27,688		-		27,688
Construction and land		142		2,113		-		2,255		1,351		126,363		1,212		128,926
All other		-		600		-		600		-		32,978		225		33,203
Total	$	2,796	$	10,942	$	-	$	13,738	$	19,043	$	1,118,962	$	11,296	$	1,149,301

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 September 30, 2019. The table includes $1,174,000 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	$	192	$	65	$	-
Multifamily real estate		96		89		-
Commercial real estate
Owner occupied		2,618		2,334		-
Non-owner occupied		2,527		1,776		-
Commercial and industrial		509		-		-
		5,942		4,264		-
With an allowance recorded:
Multifamily real estate		4,016		3,636		1,570
Commercial real estate
Owner occupied		1,114		1,087		426
Non-owner occupied		2,702		2,593		219
Commercial and industrial		396		386		192
Construction and land		470		446		66
		8,698		8,148		2,473
Total	$	14,640	$	12,412	$	2,473

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018. The table includes $1,160,000 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	$	426	$	298	$	-
Multifamily real estate		110		110		-
Commercial real estate
Owner occupied		1,305		1,092		-
Non-owner occupied		8,458		7,740		-
Commercial and industrial		531		-		-
Construction and land		786		786		-
		11,616		10,026		-
With an allowance recorded:
Multifamily real estate	$	4,016	$	3,795	$	1,281
Commercial real estate
Owner occupied		2,523		2,478		692
Non-owner occupied		2,852		2,781		267
Commercial and industrial		562		558		414
Construction and land		565		565		142
		10,518		10,177		2,796
Total	$	22,134	$	20,203	$	2,796

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the nine months ended September 30, 2019 and September 30, 2018. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Nine months ended Sept 30, 2019						Nine months ended Sept 30, 2018
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	$	217	$	-	$	-	$	301	$	-	$	-
Multifamily real estate		3,823		-		-		2,192		11		11
Commercial real estate:
Owner occupied		3,779		10		10		3,163		54		54
Non-owner occupied		9,009		664		664		9,005		327		327
Commercial and industrial		517		3		3		990		21		21
Construction and land		910		123		123		4,633		12		12
All other		-		-		-		216		10		10
Total	$	18,255	$	800	$	800	$	20,500	$	435	$	435

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 September 30, 2019 and September 30, 2018. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended Sept 30, 2019						Three months ended Sept 30, 2018
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	$	170	$	-	$	-	$	299	$	-	$	-
Multifamily real estate		3,768		-		-		1,939		-		-
Commercial real estate:
Owner occupied		3,683		4		4		3,041		3		3
Non-owner occupied		7,439		478		478		7,489		86		86
Commercial and industrial		535		1		1		532		5		5
Construction and land		480		2		2		4,467		9		9
All other		-		-		-		142		6		6
Total	$	16,075	$	485	$	485	$	17,909	$	109	$	109

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 September 30, 2019 and December 31, 2018:

September 30, 2019	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	36	$	161	$	197
Multifamily real estate		3,636		-		3,636
Commercial real estate
Owner occupied		1,087		210		1,297
Non-owner occupied		-		2,674		2,674
Commercial and industrial		191		-		191
Total	$	4,950	$	3,045	$	7,995

December 31, 2018	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	347	$	97	$	444
Multifamily real estate		3,795		-		3,795
Commercial real estate
Owner occupied		1,647		222		1,869
Non-owner occupied		-		5,964		5,964
Commercial and industrial		191		-		191
Total	$	5,980	$	6,283	$	12,263

At September 30, 2019, $1,956,000 in specific reserves were allocated to loans that had restructured terms resulting in a provision for loan losses of $263,000 for the three months ended September 30, 2019 and $413,000 for the nine months ended September 30, 2019. This compares to a provision for loan losses on restructured loans of $140,000 for the three months ended September 30, 2018 and $303,000 for the nine months ended September 30, 2018. At December 31, 2018, $1,630,000 in specific reserves were allocated to loans that had restructured terms. There were no commitments to lend additional amounts to these borrowers.

There were no new TDR’s that occurred during the three and nine months ended September 30, 2019 and September 30, 2018.

During the three and nine months ended September 30, 2019 and the three and nine months ended September 30, 2018, 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, and smaller balance non-homogeneous loans, the analysis involves monitoring the performing status of the loan. At the time such loans become past due by 90 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 September 30, 2019, 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	$	368,996	$	3,026	$	9,288	$	-	$	381,310
Multifamily real estate		32,577		1,771		3,726		-		38,074
Commercial real estate:
Owner occupied		140,610		4,401		6,435		-		151,446
Non-owner occupied		281,887		5,426		5,566		-		292,879
Commercial and industrial		94,930		2,969		880		-		98,779
Consumer		25,059		-		237		-		25,296
Construction and land		111,764		9,798		902		-		122,464
All other		30,290		155		169		-		30,614
Total	$	1,086,113	$	27,546	$	27,203	$	-	$	1,140,862

As of December 31, 2018, 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	$	369,808	$	1,376	$	9,681	$	162	$	381,027
Multifamily real estate		45,187		4,924		3,905		-		54,016
Commercial real estate:
Owner occupied		126,422		4,840		6,947		-		138,209
Non-owner occupied		262,149		7,647		12,812		-		282,608
Commercial and industrial		96,066		5,280		2,278		-		103,624
Consumer		27,344		31		313		-		27,688
Construction and land		107,196		19,728		2,002				128,926
All other		32,749		381		73		-		33,203
Total	$	1,066,921	$	44,207	$	38,011	$	162	$	1,149,301