NOTE 3 - LOANS

Major classifications of loans at March 31, 2015 and December 31, 2014 are summarized as follows:

	2015		2014
Residential real estate	$	277,825	$	278,212
Multifamily real estate		28,971		30,310
Commercial real estate:
Owner occupied		124,918		120,861
Non owner occupied		224,566		230,750
Commercial and industrial		81,113		85,943
Consumer		31,182		32,745
All other		103,539		100,890
	$	872,114	$	879,711

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 was as follows:

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

Residential real estate	$	2,093	$	154		$	74	$	23	$	2,196
Multifamily real estate		304		(17	)		-		-		287
Commercial real estate:
Owner occupied		1,501		(11	)		2		1		1,489
Non owner occupied		2,316		8			-		-		2,324
Commercial and industrial		1,444		165			161		2		1,450
Consumer		243		18			54		34		241
All other		2,446		(248	)		59		44		2,183
Total	$	10,347	$	69		$	350	$	104	$	10,170

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014 was as follows:

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

Residential real estate	$	2,694	$	(427	)	$	19	$	2	$	2,250
Multifamily real estate		417		(120	)		-		-		297
Commercial real estate:
Owner occupied		1,407		71			1		-		1,477
Non owner occupied		2,037		648			300		-		2,385
Commercial and industrial		2,184		(596	)		63		2		1,527
Consumer		297		(70	)		26		19		220
All other		1,991		184			37		50		2,188
Total	$	11,027	$	(310	)	$	446	$	73	$	10,344

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, 2015 and December 31, 2014.

	2015		2014
Multifamily real estate	$	479	$	497
Commercial real estate
Owner occupied		131		131
Non owner occupied		5,658		5,695
Commercial and industrial		133		136
All other		5,146		5,128
Total carrying amount	$	11,547	$	11,587
Contractual principal balance	$	21,215	$	21,250

Carrying amount, net of allowance	$	10,599	$	10,639

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three-months ended March 31, 2015, nor did it increase the allowance for loan losses for purchased impaired loans during the three-months ended March 31, 2014.

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 2015 and 2014, 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, 2015 and March 31, 2014.

	2015			2014
Balance at January 1	$	204		$	217
New loans purchased		-			-
Accretion of income		(5	)		(3	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at December 31	$	199		$	214

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, 2015 and December 31 2014. 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, 2015	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	2,598	$	2,094	$	1,060
Multifamily real estate		1,801		1,018		173
Commercial real estate
Owner occupied		989		831		-
Non owner occupied		1,988		1,757		-
Commercial and industrial		1,761		663		563
Consumer		208		181		-
All other		12,633		5,199		-
Total	$	21,978	$	11,743	$	1,796

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

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, 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	$	277,825	$	5,197	$	2,248	$	7,445	$	270,380
Multifamily real estate		28,971		1,126		712		1,838		27,133
Commercial real estate:
Owner occupied		124,918		2,217		453		2,670		122,248
Non owner occupied		224,566		1,827		1,757		3,584		220,982
Commercial and industrial		81,113		279		1,115		1,394		79,719
Consumer		31,182		414		76		490		30,692
All other		103,539		277		5,199		5,476		98,063
Total	$	872,114	$	11,337	$	11,560	$	22,897	$	849,217

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 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, 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	$	-	$	2,196	$	-	$	2,196	$	133	$	277,692	$	-	$	277,825
Multifamily real estate		-		287		-		287		2,082		26,410		479		28,971
Commercial real estate:
Owner occupied		69		1,420		-		1,489		901		123,886		131		124,918
Non-owner occupied		33		2,291		-		2,324		4,727		214,181		5,658		224,566
Commercial and industrial		359		1,043		48		1,450		975		80,005		133		81,113
Consumer		-		241		-		241		-		31,182		-		31,182
All other		-		1,283		900		2,183		1,008		97,385		5,146		103,539
Total	$	461	$	8,761	$	948	$	10,170	$	9,826	$	850,741	$	11,547	$	872,114

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

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, 2015. The table includes $5,673,000 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	$	175	$	133	$	-
Multifamily real estate		3,343		2,561		-
Commercial real estate
Owner occupied		549		486		-
Non owner occupied		4,336		4,105		-
Commercial and industrial		1,325		548		-
All other		1,044		1,008		-
		10,772		8,841		-
With an allowance recorded:
Commercial real estate
Owner occupied		415		415		69
Non-owner occupied		622		622		33
Commercial and industrial		747		475		407
All other		12,543		5,146		900
		14,327		6,658		1,409
Total	$	25,099	$	15,499	$	1,409

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2014. The table includes $5,673,000 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	$	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 the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended March 31, 2015 and March 31, 2014. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended March 31, 2015						Three months ended March 31, 2014
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	$	135	$	1	$	1	$	2,676	$	34	$	34
Multifamily real estate		1,796		-		-		2,708		708		708
Commercial real estate:
Owner occupied		1,457		9		8		2,262		16		11
Non-owner occupied		4,800		48		48		1,097		627		627
Commercial and industrial		987		4		4		2,967		335		335
All other		6,195		16		11		7,774		44		44
Total	$	15,370	$	78	$	72	$	19,484	$	1,765	$	1,759

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, 2015 and December 31, 2014:

March 31, 2015	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	13	$	187	$	200
Multifamily real estate		-		1,543		1,543
Commercial real estate
Non owner occupied		-		469		469
Commercial and industrial		-		427		427
All other		-		963		963
Total	$	13	$	3,589	$	3,602

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

At March 31, 2015 and December 31, 2014 there were no specific reserves allocated to loans that had restructured terms.

The following table presents TDR’s that occurred during the three months ended March 31, 2015. There were no TDR’s that occurred during the three months ended March 31, 2014.

	Three months ended March 31, 2015
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Multifamily Real Estate		1	$	1,543	$	1,543
Total		1	$	1,543	$	1,543

The modification of the multifamily residential real estate loan 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 ended March 31, 2015. 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.

During the three months ended March 31, 2015 and the three months ended March 31, 2014, 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, 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	$	265,445	$	7,339	$	5,028	$	13	$	277,825
Multifamily real estate		24,316		2,094		2,561		-		28,971
Commercial real estate:
Owner occupied		116,104		6,327		2,487		-		124,918
Non-owner occupied		212,908		6,734		4,924		-		224,566
Commercial and industrial		78,958		844		1,259		52		81,113
Consumer		30,794		289		99		-		31,182
All other		95,605		1,177		6,757		-		103,539
Total	$	824,130	$	24,804	$	23,115	$	65	$	872,114

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