NOTE 3 - LOANS

Major classifications of loans at September 30, 2015 and December 31, 2014 are summarized as follows:

	2015		2014
Residential real estate	$	284,052	$	278,212
Multifamily real estate		37,202		30,310
Commercial real estate:
Owner occupied		117,125		120,861
Non owner occupied		208,101		230,750
Commercial and industrial		76,314		85,943
Consumer		31,894		32,745
All other		100,374		100,890
	$	855,062	$	879,711

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2015 was as follows:

Loan Class	Balance Dec 31, 2014		Provision (Credit) for loan losses			Loans charged-off		Recoveries		Balance Sept 30, 2015

Residential real estate	$	2,093	$	557		$	102	$	74	$	2,622
Multifamily real estate		304		291			-		-		595
Commercial real estate:
Owner occupied		1,501		(3	)		2		2		1,498
Non owner occupied		2,316		(599	)		-		659		2,376
Commercial and industrial		1,444		71			403		7		1,119
Consumer		243		128			167		82		286
All other		2,446		(213	)		1,058		154		1,329
Total	$	10,347	$	232		$	1,732	$	978	$	9,825

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014 was as follows:

Loan Class	Balance Dec 31, 2013		Provision (Credit) for loan losses			Loans charged-off		Recoveries		Balance Sept 30, 2014

Residential real estate	$	2,694	$	(419	)	$	308	$	55	$	2,022
Multifamily real estate		417		(137	)		-		-		280
Commercial real estate:
Owner occupied		1,407		112			207		-		1,312
Non owner occupied		2,037		310			323		-		2,024
Commercial and industrial		2,184		(335	)		111		11		1,749
Consumer		297		(12	)		105		45		225
All other		1,991		628			267		216		2,568
Total	$	11,027	$	147		$	1,321	$	327	$	10,180

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2015 was as follows:

Loan Class	Balance June 30, 2015		Provision (Credit) for loan losses			Loans charged-off		Recoveries		Balance Sept. 30, 2015

Residential real estate	$	2,466	$	185		$	35	$	6	$	2,622
Multifamily real estate		512		83			-		-		595
Commercial real estate:
Owner occupied		1,476		21			-		1		1,498
Non owner occupied		2,332		44			-		-		2,376
Commercial and industrial		1,139		211			234		3		1,119
Consumer		274		23			35		24		286
All other		2,495		(258	)		946		38		1,329
Total	$	10,694	$	309		$	1,250	$	72	$	9,825

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2014 was as follows:

Loan Class	Balance June 30, 2014		Provision (Credit) for loan losses			Loans charged-off		Recoveries		Balance Sept 30, 2014

Residential real estate	$	2,140	$	(28	)	$	137	$	47	$	2,022
Multifamily real estate		311		(31	)		-		-		280
Commercial real estate:
Owner occupied		1,364		73			125		-		1,312
Non owner occupied		2,270		(246	)		-		-		2,024
Commercial and industrial		1,489		281			27		6		1,749
Consumer		232		21			46		18		225
All other		2,071		466			63		94		2,568
Total	$	9,877	$	536		$	398	$	165	$	10,180

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, 2015 and December 31, 2014.

	2015		2014
Multifamily real estate	$	-	$	497
Commercial real estate
Owner occupied		131		131
Non owner occupied		5,587		5,695
Commercial and industrial		114		136
All other		-		5,128
Total carrying amount	$	5,832	$	11,587
Contractual principal balance	$	7,450	$	21,250

Carrying amount, net of allowance	$	5,718	$	10,639

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $66,000 for the three and nine months ended September 30, 2015. The allowance for loan losses was not increased for purchased impaired loans during the three and nine months ended September 30, 2014.

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. 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, 2015 and September 30, 2014.

	2015			2014
Balance at January 1	$	204		$	217
New loans purchased		-			-
Accretion of income		(14	)		(9	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at September 30	$	190		$	208

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, 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.

September 30, 2015	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	2,439	$	2,188	$	971
Multifamily real estate		411		70		-
Commercial real estate
Owner occupied		879		806		1,132
Non owner occupied		1,928		1,628		1,811
Commercial and industrial		1,465		354		1,388
Consumer		211		198		-
All other		88		33		-
Total	$	7,431	$	5,277	$	5,302

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 September 30, 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	$	284,052	$	5,320	$	2,086	$	7,406	$	276,646
Multifamily real estate		37,202		312		70		382		36,820
Commercial real estate:
Owner occupied		117,125		2,137		1,674		3,811		113,314
Non owner occupied		208,101		4,115		3,439		7,554		200,547
Commercial and industrial		76,314		303		1,571		1,874		74,440
Consumer		31,894		442		91		533		31,361
All other		100,374		904		-		904		99,470
Total	$	855,062	$	13,533	$	8,931	$	22,464	$	832,598

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 September 30, 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	$	177	$	2,445	$	-	$	2,622	$	475	$	283,577	$	-	$	284,052
Multifamily real estate		-		595		-		595		71		37,131		-		37,202
Commercial real estate:
Owner occupied		33		1,465		-		1,498		772		116,222		131		117,125
Non-owner occupied		-		2,376		-		2,376		4,212		198,302		5,587		208,101
Commercial and industrial		139		866		114		1,119		546		75,654		114		76,314
Consumer		-		286		-		286		-		31,894		-		31,894
All other		-		1,329		-		1,329		912		99,462		-		100,374
Total	$	349	$	9,362	$	114	$	9,825	$	6,988	$	842,242	$	5,832	$	855,062

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 September 30, 2015. The table includes $114,000 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	$	295	$	254	$	-
Multifamily real estate		412		71		-
Commercial real estate
Owner occupied		457		392		-
Non owner occupied		4,512		4,212		-
Commercial and industrial		1,180		407		-
All other		967		912		-
		7,823		6,248		-
With an allowance recorded:
Residential real estate	$	227	$	221	$	177
Commercial real estate
Owner occupied		380		380		33
Commercial and industrial		536		253		253
		1,143		854		463
Total	$	8,966	$	7,102	$	463

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 nine months ended September 30, 2015 and September 30, 2014. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Nine months ended Sept. 30, 2015						Nine months ended Sept. 30, 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	$	329	$	5	$	5	$	2,421	$	209	$	209
Multifamily real estate		1,051		685		685		2,518		746		746
Commercial real estate:
Owner occupied		1,157		25		25		2,171		39		30
Non-owner occupied		4,552		137		115		1,388		644		634
Commercial and industrial		856		20		20		2,152		546		546
All other		4,841		43		28		7,624		126		126
Total	$	12,786	$	915	$	878	$	18,274	$	2,310	$	2,291

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, 2015 and September 30, 2014. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended Sept. 30, 2015						Three months ended Sept. 30, 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	$	523	$	3	$	3	$	2,166	$	148	$	148
Multifamily real estate		305		671		671		2,328		19		19
Commercial real estate:
Owner occupied		857		7		7		2,080		10		9
Non-owner occupied		4,304		43		34		1,679		17		7
Commercial and industrial		726		6		6		1,337		4		4
All other		3,487		14		-		7,475		45		45
Total	$	10,202	$	744	$	721	$	17,065	$	243	$	232

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, 2015 and December 31, 2014:

September 30, 2015	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	8	$	176	$	184
Commercial real estate
Non owner occupied		-		459		459
Commercial and industrial		-		406		406
All other		-		886		886
Total	$	8	$	1,927	$	1,935

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 September 30, 2015 and December 31, 2014 there were no specific reserves allocated to loans that had restructured terms and there were no commitments to lend additional amounts on these loans.

The following table presents TDR's that occurred during the nine months ended September 30, 2015. There were no TDR's that occurred during the nine months ended September 30, 2014.

	Nine months ended Sept. 30, 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 above occurred during the three months ended March 31, 2015 and was fully repaid during the three months ended June 30, 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.

During the three and nine months ended September 30, 2015 and the three and nine months ended September 30, 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 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 September 30, 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	$	271,872	$	5,268	$	6,904	$	8	$	284,052
Multifamily real estate		32,858		2,055		2,289		-		37,202
Commercial real estate:
Owner occupied		110,387		3,814		2,924		-		117,125
Non-owner occupied		198,092		2,917		7,092		-		208,101
Commercial and industrial		73,507		1,839		921		47		76,314
Consumer		31,503		223		168		-		31,894
All other		97,686		1,348		1,340		-		100,374
Total	$	815,905	$	17,464	$	21,638	$	55	$	855,062

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