NOTE 5 - LOANS

Major classifications of loans at year-end are summarized as follows:

	2017		2016
Residential real estate	$	338,829	$	342,294
Multifamily real estate		62,151		74,165
Commercial real estate:
Owner occupied		136,048		129,370
Non-owner occupied		230,702		220,836
Commercial and industrial		78,259		76,736
Consumer		28,293		30,916
Construction and land		139,012		117,828
All other		35,758		32,678
Total	$	1,049,052	$	1,024,823

Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during 2017 and 2016.

An analysis of the 2017 activity with respect to all director and executive officer loans is as follows:

Balance, December 31, 2016	$	4,165
Additions, including loans now meeting disclosure requirements		469
Amounts collected and loans no longer meeting disclosure requirements		(1,217	)
Balance, December 31, 2017	$	3,417

Activity in the Allowance for Loan Losses

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2017 was as follows:

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

Residential real estate	$	2,948	$	439		$	(458	)	$	57	$	2,986
Multifamily real estate		785		693			(500	)		-		978
Commercial real estate:
Owner occupied		1,543		(100	)		(32	)		242		1,653
Non-owner occupied		2,350		(27	)		(10	)		-		2,313
Commercial and industrial		1,140		51			(189	)		99		1,101
Consumer		347		132			(278	)		127		328
Construction and land		1,397		1,130			(129	)		10		2,408
All other		326		181			(307	)		137		337
Total	$	10,836	$	2,499		$	(1,903	)	$	672	$	12,104

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2016 was as follows:

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

Residential real estate	$	2,501	$	608		$	(209	)	$	48	$	2,948
Multifamily real estate		821		(36	)		-			-		785
Commercial real estate:
Owner occupied		1,509		46			(14	)		2		1,543
Non-owner occupied		2,070		380			(100	)		-		2,350
Commercial and industrial		1,033		136			(74	)		45		1,140
Consumer		307		294			(340	)		86		347
Construction and land		1,061		193			-			143		1,397
All other		345		127			(273	)		127		326
Total	$	9,647	$	1,748		$	(1,010	)	$	451	$	10,836

Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2015 was as follows:

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

Residential real estate	$	2,093	$	675		$	(359	)	$	92	$	2,501
Multifamily real estate		304		517			-			-		821
Commercial real estate:
Owner occupied		1,501		23			(17	)		2		1,509
Non-owner occupied		2,316		(905	)		-			659		2,070
Commercial and industrial		1,444		(17	)		(403	)		9		1,033
Consumer		243		176			(209	)		97		307
Construction and land		1,744		118			(900	)		99		1,061
All other		702		(261	)		(208	)		112		345
Total	$	10,347	$	326		$	(2,096	)	$	1,070	$	9,647

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 December 31, 2017 and December 31, 2016.

	2017		2016
Residential real estate	$	1,321	$	1,619
Commercial real estate
Owner occupied		1,508		2,013
Non-owner occupied		-		5,396
Commercial and industrial		211		232
Construction and land		1,450		1,602
All other		286		459
Total carrying amount	$	4,776	$	11,321
Contractual principal balance	$	6,728	$	14,784

Carrying amount, net of allowance	$	4,676	$	11,311

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $90 for the year ended December 31, 2017 but decreased the allowance for loan losses by $70 for the year ended December 31, 2016.

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 the three years ended December 31, 2017.

	2017			2016			2015
Balance at January 1	$	1,208		$	185		$	204
New loans purchased		-			1,151			-
Accretion of income		(249	)		(128	)		(19	)
Income recognized upon full repayment		(205	)		-			-
Reclassifications from non-accretable difference		-			-			-
Disposals		-			-			-
Balance at December 31	$	754		$	1,208		$	185

As part of the acquisition of Bankshares on January 15, 2016, the Company purchased credit impaired loans for which it was probable at acquisition that all contractually required payments would not be collected. The contractually required payments of such loans totaled $10,040, while the cash flow expected to be collected at acquisition totaled $8,437 and the fair value of the acquired loans totaled $7,286.

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 December 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 or interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

December 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	$	2,944	$	2,422	$	869
Multifamily real estate		2,128		2,128		334
Commercial real estate
Owner occupied		2,623		2,483		134
Non-owner occupied		1,862		1,755		85
Commercial and industrial		1,313		544		1,139
Consumer		268		241		-
Construction and land		5,824		5,673		830
Total	$	16,962	$	15,246	$	3,391

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		-
Construction and land		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 December 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	$	338,829	$	5,242	$	1,835	$	7,077	$	331,752
Multifamily real estate		62,151		-		334		334		61,817
Commercial real estate:
Owner occupied		136,048		311		1,784		2,095		133,953
Non-owner occupied		230,702		12		225		237		230,465
Commercial and industrial		78,259		123		1,611		1,734		76,525
Consumer		28,293		492		87		579		27,714
Construction and land		139,012		144		2,508		2,652		136,360
All other		35,758		-		-		-		35,758
Total	$	1,049,052	$	6,324	$	8,384	$	14,708	$	1,034,344

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
Construction and land		117,828		259		8,187		8,446		109,382
All other		32,678		318		-		318		32,360
Total	$	1,024,823	$	10,972	$	25,199	$	36,171	$	988,652

The following tables 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, 2017 and December 31, 2016:

December 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	$	-	$	2,986	$	-	$	2,986	$	308	$	337,200	$	1,321	$	338,829
Multifamily real estate		218		760		-		978		2,462		59,689		-		62,151
Commercial real estate:
Owner occupied		307		1,346		-		1,653		3,314		131,226		1,508		136,048
Non-owner occupied		88		2,225		-		2,313		11,578		219,124		-		230,702
Commercial and industrial		104		897		100		1,101		1,304		76,744		211		78,259
Consumer		-		328		-		328		-		28,293		-		28,293
Construction and land		685		1,723		-		2,408		5,672		131,890		1,450		139,012
All other		-		337		-		337		293		35,179		286		35,758
Total	$	1,402	$	10,602	$	100	$	12,104	$	24,931	$	1,019,345	$	4,776	$	1,049,052

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
Construction and land		86		1,311		-		1,397		12,665		103,561		1,602		117,828
All other		-		326		-		326		311		31,908		459		32,678
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 December 31, 2017. The table includes $199 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	$	446	$	308	$	-
Multifamily real estate		334		334		-
Commercial real estate
Owner occupied		2,451		2,439		-
Non-owner occupied		9,602		9,506		-
Commercial and industrial		1,719		1,188		-
Construction and land		1,798		1,678		-
All other		293		293		-
		16,643		15,746		-
With an allowance recorded:
Multifamily real estate	$	2,128	$	2,128	$	218
Commercial real estate
Owner occupied		895		875		307
Non-owner occupied		2,072		2,072		88
Commercial and industrial		466		315		204
Construction and land		4,024		3,994		685
		9,585		9,384		1,502
Total	$	26,228	$	25,130	$	1,502

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016. The table includes $208 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	$	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		-
Construction and land		9,557		9,542		-
All other		311		311		-
		31,000		29,350		-
With an allowance recorded:
Commercial real estate
Owner occupied	$	1,055	$	1,035	$	244
Commercial and industrial		431		288		276
Construction and land		3,124		3,123		86
		4,610		4,446		606
Total	$	35,610	$	33,796	$	606

The following table presents by loan class, the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three years ended December 31, 2017. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Year ended Dec 31, 2017						Year ended Dec 31, 2016						Year ended Dec 31, 2015
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	333	$	3	$	3	$	566	$	21	$	18	$	378	$	11	$	11
Multifamily real estate		11,376		262		246		3,993		198		181		855		685		685
Commercial real estate:
Owner occupied		3,335		74		74		1,475		19		16		1,015		28		27
Non-owner occupied		4,680		213		213		4,527		314		314		4,942		180		180
Commercial and industrial		1,480		123		123		1,249		36		35		810		26		26
Construction and land		7,804		314		309		5,010		211		19		3,989		56		56
All other		302		18		18		147		8		8		34		-		-
Total	$	29,310	$	1,007	$	986	$	16,967	$	807	$	591	$	12,023	$	986	$	985

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 December 31, 2017 and 2016:

December 31, 2017	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	393	$	107	$	500
Multifamily real estate		2,128		-		2,128
Commercial real estate
Owner occupied		601		1,783		2,384
Non-owner occupied		-		9,904		9,904
Commercial and industrial		56		497		553
Construction and land		3,994		-		3,994
All other		-		293		293
Total	$	7,172	$	12,584	$	19,756

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
Owner occupied		-		856		856
Commercial and industrial		62		352		414
Construction and land		751		4,084		4,835
All other		-		311		311
Total	$	942	$	8,268	$	9,210

At December 31, 2017, $1,029 in specific reserves was allocated to loans that had restructured terms. At December 31, 2016, $43 in specific reserves was allocated to loans that had restructured terms. There were no commitments to lend additional amounts on these loans.

The following table presents TDR's that occurred during the years ended December 31, 2017 and 2016.

	Year ended December 31, 2017						Year ended December 31, 2016
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

Residential real estate		1	$	82	$	82		8	$	483	$	483
Commercial real estate
Owner occupied		2		1,525		1,525		3		865		865
Non-owner occupied		3		9,913		9,913		1		100		100
Commercial and industrial		1		191		191		1		20		20
Construction and land		-		-		-		1		4,106		4,106
Total		7	$	11,711	$	11,711		14	$	5,574	$	5,574

The modifications reported above for the year ended December 31, 2017 involve reducing the borrowers' required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current. The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans. The Company increased the allowance for loan losses related to these loans by $88 during the year ended December 31, 2017.

The modifications reported above for the year ended December 31, 2016 involve reducing the borrowers' required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current. The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans. The Company increased the allowance for loan losses related to these loans by $139 during the year ended December 31, 2016.

During the year ended December 31, 2017, there were no TDR's for which there was a payment default within twelve months following the modification. During the year ended December 31, 2016, the $100 non-owner occupied loan and the $20 commercial and industrial loan failed to comply with the modified terms in the twelve months following modification and resulted in a payment default. These two loans were subsequently charged-off during the year ended December 31, 2016.

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 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 December 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	$	327,185	$	667	$	10,976	$	1	$	338,829
Multifamily real estate		55,084		4,605		2,462		-		62,151
Commercial real estate:
Owner occupied		124,244		4,937		6,867		-		136,048
Non-owner occupied		216,079		2,428		12,195		-		230,702
Commercial and industrial		70,078		5,851		2,330		-		78,259
Consumer		27,889		-		404		-		28,293
Construction and land		126,323		5,460		7,229		-		139,012
All other		34,468		795		495		-		35,758

Total	$	981,350	$	24,743	$	42,958	$	1	$	1,049,052

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
Construction and land		103,719		1,072		13,037		-		117,828
All other		31,226		886		566		-		32,678

Total	$	957,463	$	20,606	$	46,722	$	32	$	1,024,823