NOTE 3 - LOANS

Major classifications of loans at March 31, 2013 and December 31, 2012 are summarized as follows:

	2013		2012
Residential real estate	$	214,468	$	214,743
Multifamily real estate		28,115		28,673
Commercial real estate:
Owner occupied		102,108		91,902
Non owner occupied		175,653		178,849
Commercial and industrial		84,045		84,430
Consumer		26,057		28,128
All other		70,090		77,900
	$	700,536	$	704,625

Activity in the allowance for loan losses by portfolio segment for the three months ending 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

Activity in the allowance for loan losses by portfolio segment for the three months ending March 31, 2012 was as follows:

Loan Class	Balance Dec 31, 2011		Provision for loan losses			Loans charged-off		Recoveries		Balance March 31, 2012

Residential real estate	$	2,134	$	276		$	65	$	23	$	2,368
Multifamily real estate		284		150			-		-		434
Commercial real estate:
Owner occupied		918		121			15		-		1,024
Non owner occupied		2,381		(22	)		38		-		2,321
Commercial and industrial		1,880		544			2		-		2,422
Consumer		298		47			66		26		305
All other		1,900		(166	)		335		38		1,437
Total	$	9,795	$	950		$	521	$	87	$	10,311

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 March 31, 2013 and December 31, 2012.

	2013		2012
Residential real estate	$	197	$	202
Multifamily real estate		3,136		3,173
Commercial real estate
Owner occupied		269		271
Non owner occupied		5,854		5,896
Commercial and industrial		498		511
All other		4,471		4,496
Total carrying amount	$	14,425	$	14,549

Carrying amount, net of allowance	$	13,925	$	14,049

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three-months ended March 31, 2013 or the three-months ended March 31, 2012.

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 the 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. 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 2012, 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 at March 31, 2013 and March 31, 2012. There was no accretable yield on the purchased loans above prior to October 1, 2012.

	2013			2012
Balance at January 1	$	635		$	-
New loans purchased		-			-
Accretion of income		(9	)		-
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at December 31	$	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, 2013 and December 31 2012. 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, 2013	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,125	$	2,780	$	2,363
Multifamily real estate		5,534		4,313		1,634
Commercial real estate
Owner occupied		1,013		837		836
Non owner occupied		3,224		2,131		592
Commercial and industrial		12,880		11,229		852
Consumer		179		165		-
All other		12,661		5,260		252
Total	$	38,616	$	26,715	$	6,529

December 31, 2012	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,145	$	2,813	$	208
Multifamily real estate		5,501		4,390		227
Commercial real estate
Owner occupied		1,153		976		783
Non owner occupied		3,207		2,174		74
Commercial and industrial		11,407		9,897		555
Consumer		278		267		-
All other		5,468		5,289		2,043
Total	$	30,159	$	25,806	$	3,890

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, 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	$	214,468	$	2,284	$	4,129	$	6,413	$	208,055
Multifamily real estate		28,115		2,469		5,322		7,791		20,324
Commercial real estate:
Owner occupied		102,108		614		1,068		1,682		100,426
Non owner occupied		175,653		4,218		2,448		6,666		168,987
Commercial and industrial		84,045		851		4,410		5,261		78,784
Consumer		26,057		245		52		297		25,760
All other		70,090		284		5,496		5,780		64,310
Total	$	700,536	$	10,965	$	22,925	$	33,890	$	666,646

The following table presents the aging of the recorded investment in past due loans as of December 31, 2012 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	$	214,743	$	9,356	$	2,040	$	11,396	$	203,347
Multifamily real estate		28,673		695		3,893		4,588		24,085
Commercial real estate:
Owner occupied		91,902		6,212		1,129		7,341		84,561
Non owner occupied		178,849		5,267		2,248		7,515		171,334
Commercial and industrial		84,430		2,306		2,485		4,791		79,639
Consumer		28,128		602		176		778		27,350
All other		77,900		468		7,332		7,800		70,100
Total	$	704,625	$	24,906	$	19,303	$	44,209	$	660,416

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, 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	$	278	$	1,788	$	-	$	2,066	$	4,364	$	209,907	$	197	$	214,468
Multifamily real estate		-		347		-		347		1,663		23,316		3,136		28,115
Commercial real estate:
Owner occupied		54		1,137		-		1,191		2,342		99,497		269		102,108
Non-owner occupied		362		1,605		-		1,967		1,308		168,491		5,854		175,653
Commercial and industrial		3,105		991		-		4,096		10,480		73,067		498		84,045
Consumer		-		174		-		174		-		26,057		-		26,057
All other		387		1,614		500		2,501		5,441		60,178		4,471		70,090
Total	$	4,186	$	7,656	$	500	$	12,342	$	25,598	$	660,513	$	14,425	$	700,536

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, 2012:

	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	$	358	$	1,805	$	-	$	2,163	$	4,609	$	209,932	$	202	$	214,743
Multifamily real estate		-		331		-		331		1,670		23,830		3,173		28,673
Commercial real estate:
Owner occupied		74		1,043		-		1,117		2,511		89,120		271		91,902
Non-owner occupied		362		1,526		-		1,888		2,627		170,326		5,896		178,849
Commercial and industrial		2,173		873		-		3,046		10,799		73,120		511		84,430
Consumer		-		244		-		244		-		28,128		-		28,128
All other		375		1,824		500		2,699		4,271		69,133		4,496		77,900
Total	$	3,342	$	7,646	$	500	$	11,488	$	26,487	$	663,589	$	14,549	$	704,625

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, 2013 The table includes $9,333 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	$	1,813	$	1,631	$	-
Multifamily real estate		6,372		4,493		-
Commercial real estate
Owner occupied		2,714		2,045		-
Non owner occupied		2,644		1,586		-
Commercial and industrial		2,026		823		-
All other		4,601		4,601		-
		20,170		15,179		-
With an allowance recorded:
Residential real estate	$	2,945	$	2,930	$	278
Commercial real estate
Owner occupied		566		566		54
Non owner occupied		809		790		362
Commercial and industrial		10,584		10,155		3,105
All other		12,710		5,311		887
		27,614		19,752		4,686
Total	$	47,784	$	34,931	$	4,686

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012. The table includes $9,421 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	$	1,886	$	1,714	$	-
Multifamily real estate		6,332		4,533		-
Commercial real estate
Owner occupied		2,876		2,196		-
Non owner occupied		3,912		2,916		-
Commercial and industrial		2,031		837		-
All other		3,426		3,427		-
		20,463		15,623		-
With an allowance recorded:
Residential real estate	$	3,118	$	3,097	$	358
Commercial real estate
Owner occupied		586		586		74
Non owner occupied		809		789		362
Commercial and industrial		10,771		10,473		2,173
All other		5,517		5,340		875
		20,801		20,285		3,842
Total	$	41,264	$	35,908	$	3,842

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, 2013 and March 31, 2012. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended March 31, 2013						Three months ended March 31, 2012
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	$	4,686	$	50	$	50	$	10,165	$	128	$	123
Multifamily real estate		4,513		30		30		8,598		1,307		1,303
Commercial real estate:
Owner occupied		2,696		38		29		9,171		894		885
Non-owner occupied		3,041		2		2		11,602		35		26
Commercial and industrial		11,144		4		4		7,767		107		107
Consumer		-		-		-		37		1		1
All other		9,339		82		82		8,583		97		81
Total	$	35,419	$	206	$	197	$	55,923	$	2,569	$	2,526

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 upon the facts and circumstances of the individual borrower(s).

The following table presents TDR's as of March 31, 2013 and December 31, 2012:

March 31, 2013	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	928	$	237	$	1,165
Commercial real estate
Owner occupied		-		4,392		4,392
Non owner occupied		-		4,887		4,887
Commercial and industrial		1,657		865		2,522
All other		16		2,193		2,209
Total	$	2,601	$	12,574	$	15,175

December 31, 2012	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	1,020	$	240	$	1,260
Commercial real estate
Owner occupied		-		4,224		4,224
Non owner occupied		-		4,920		4,920
Commercial and industrial		2		2,525		2,527
All other		-		2,197		2,197
Total	$	1,022	$	14,106	$	15,128

At March 31, 2013 $224,000 in specific reserves was allocated to loans that had restructured terms. At December 31, 2012 $220,000 in specific reserves was allocated to loans that had restructured terms.

The following table presents TDR's that occurred during the three ended March 31, 2013 and March 31, 2012:

	Three months ended March 31, 2013						Three months ended March 31, 2012
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

Commercial and industrial		-	$	-	$	-		2	$	1,999	$	1,999
All other		1		16		16		-		-		-
Total		1	$	16	$	16		2	$	1,999	$	1,999

The troubled debt restructurings described above did not increase the allowance for loan losses during the period ending March 31, 2013 and increased the allowance for loan losses by $40,000 during the period ending March 31, 2012.

During the three months ended March 31, 2013 and the three months ended March 31, 2012, 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, 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	$	195,696	$	9,726	$	8,963	$	83	$	214,468
Multifamily real estate		19,484		1,699		6,932		-		28,115
Commercial real estate:
Owner occupied		83,669		13,401		5,038		-		102,108
Non-owner occupied		163,454		5,734		6,465		-		175,653
Commercial and industrial		71,356		667		12,022		-		84,045
Consumer		25,855		142		60		-		26,057
All other		55,222		673		13,504		691		70,090
Total	$	614,736	$	32,042	$	52,984	$	774	$	700,536

As of December 31, 2012, 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	$	195,210	$	10,115	$	9,327	$	91	$	214,743
Multifamily real estate		19,747		1,912		7,014		-		28,673
Commercial real estate:
Owner occupied		74,529		8,994		8,379		-		91,902
Non-owner occupied		163,337		7,685		7,827		-		178,849
Commercial and industrial		70,180		2,739		11,508		3		84,430
Consumer		27,931		123		74		-		28,128
All other		64,009		814		12,386		691		77,900

Total	$	614,943	$	32,382	$	56,515	$	785	$	704,625