NOTE 3 - LOANS

Major classifications of loans at June 30, 2018 and December 31, 2017 are summarized as follows:

	2018		2017
Residential real estate	$	341,157	$	338,829
Multifamily real estate		58,154		62,151
Commercial real estate:
Owner occupied		136,795		136,048
Non-owner occupied		223,491		230,702
Commercial and industrial		78,358		78,259
Consumer		27,966		28,293
Construction and land		127,641		139,012
All other		34,091		35,758
	$	1,027,653	$	1,049,052

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

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

Residential real estate	$	2,986	$	(609	)	$	(148	)	$	25	$	2,254
Multifamily real estate		978		(410	)		(11	)		-		557
Commercial real estate:
Owner occupied		1,653		266			(3	)		1		1,917
Non-owner occupied		2,313		140			(16	)		-		2,437
Commercial and industrial		1,101		976			(504	)		26		1,599
Consumer		328		51			(63	)		38		354
Construction and land		2,408		864			(19	)		-		3,253
All other		337		337			(130	)		67		611
Total	$	12,104	$	1,615		$	(894	)	$	157	$	12,982

Activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2017 was as follows:

Loan Class	Balance Dec 31, 2016		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance June 30, 2017

Residential real estate	$	2,948	$	193		$	(199	)	$	31	$	2,973
Multifamily real estate		785		552			-			-		1,337
Commercial real estate:
Owner occupied		1,543		(166	)		-			241		1,618
Non-owner occupied		2,350		(12	)		(4	)		-		2,334
Commercial and industrial		1,140		9			(134	)		78		1,093
Consumer		347		138			(165	)		53		373
Construction and land		1,397		392			(124	)		10		1,675
All other		326		36			(140	)		70		292
Total	$	10,836	$	1,142		$	(766	)	$	483	$	11,695

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

June 30, 2018 was as follows:

Loan Class	Balance March 31, 2018		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance June 30, 2018

Residential real estate	$	2,262	$	82		$	(99	)	$	9	$	2,254
Multifamily real estate		647		(90	)		-			-		557
Commercial real estate:
Owner occupied		1,816		102			(1	)		-		1,917
Non-owner occupied		2,187		250			-			-		2,437
Commercial and industrial		1,651		163			(237	)		22		1,599
Consumer		369		2			(30	)		13		354
Construction and land		3,302		(49	)		-			-		3,253
All other		606		40			(63	)		28		611
Total	$	12,840	$	500		$	(430	)	$	72	$	12,982

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

June 30, 2017 was as follows:

Loan Class	Balance March 31, 2017		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance June 30, 2017

Residential real estate	$	2,977	$	64		$	(94	)	$	26	$	2,973
Multifamily real estate		770		567			-			-		1,337
Commercial real estate:
Owner occupied		1,576		(198	)		-			240		1,618
Non-owner occupied		2,422		(88	)		-			-		2,334
Commercial and industrial		1,129		43			(134	)		55		1,093
Consumer		370		22			(48	)		29		373
Construction and land		1,313		358			-			-		1,675
All other		332		9			(81	)		32		292
Total	$	10,894	$	776		$	(357	)	$	382	$	11,695

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 June 30, 2018 and December 31, 2017.

	2018		2017
Residential real estate	$	1,109	$	1,321
Commercial real estate
Owner occupied		1,410		1,508
Commercial and industrial		6		211
Construction and land		1,305		1,450
All other		286		286
Total carrying amount	$	4,116	$	4,776
Contractual principal balance	$	5,765	$	6,728

Carrying amount, net of allowance	$	4,116	$	4,676

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the six-months ended June 30, 2018, but did increase the allowance for loan losses by $50,000 during the six-months ended June 30, 2017.

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 June 30, 2018 and June 30, 2017.

	2018			2017
Balance at January 1	$	754		$	1,208
New loans purchased		-			-
Accretion of income		(80	)		(206	)
Loans placed on non-accrual		(41	)		-
Income recognized upon full repayment		(38	)		(197	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at June 30	$	595		$	805

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 June 30, 2018 and December 31, 2017. 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.

June 30, 2018	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,907	$	3,246	$	686
Multifamily real estate		1,984		1,972		-
Commercial real estate
Owner occupied		4,063		3,887		-
Non-owner occupied		1,635		1,573		2,889
Commercial and industrial		1,017		438		47
Consumer		233		205		-
Construction and land		4,803		4,711		27
All other		185		185		6
Total	$	17,827	$	16,217	$	3,655

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

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 June 30, 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	$	341,157	$	5,730	$	2,145	$	7,875	$	333,282
Multifamily real estate		58,154		106		1,972		2,078		56,076
Commercial real estate:
Owner occupied		136,795		249		1,512		1,761		135,034
Non-owner occupied		223,491		989		2,889		3,878		219,613
Commercial and industrial		78,358		56		239		295		78,063
Consumer		27,966		347		82		429		27,537
Construction and land		127,641		4,001		813		4,814		122,827
All other		34,091		-		191		191		33,900
Total	$	1,027,653	$	11,478	$	9,843	$	21,321	$	1,006,332

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 balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 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	$	-	$	2,254	$	-	$	2,254	$	298	$	339,750	$	1,109	$	341,157
Multifamily real estate		72		485		-		557		1,972		56,182		-		58,154
Commercial real estate:
Owner occupied		400		1,517		-		1,917		3,054		132,331		1,410		136,795
Non-owner occupied		79		2,358		-		2,437		7,564		215,927		-		223,491
Commercial and industrial		64		1,535		-		1,599		539		77,813		6		78,358
Consumer		-		354		-		354		-		27,966		-		27,966
Construction and land		990		2,263				3,253		4,511		121,825		1,305		127,641
All other		-		611		-		611		283		33,522		286		34,091
Total	$	1,605	$	11,377	$	-	$	12,982	$	18,221	$	1,005,316	$	4,116	$	1,027,653

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, 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

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 June 30, 2018. The table does not include any loans acquired with deteriorated credit quality.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	434	$	298	$	-
Commercial real estate
Owner occupied		2,187		2,186		-
Non-owner occupied		5,611		5,557		-
Commercial and industrial		1,005		474		-
All other		284		284		-
		9,521		8,799		-
With an allowance recorded:
Multifamily real estate		1,984		1,972		72
Commercial real estate
Owner occupied		894		868		400
Non-owner occupied		2,007		2,007		79
Commercial and industrial		72		64		64
Construction and land		4,602		4,511		990
		9,559		9,422		1,605
Total	$	19,080	$	18,221	$	1,605

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2017. The table includes $199,000 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	$	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 the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the six months ended June 30, 2018 and June 30, 2017. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Six months ended June 30, 2018						Six months ended June 30, 2017
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	$	302	$	-	$	-	$	345	$	1	$	1
Multifamily real estate		2,287		11		11		13,611		130		121
Commercial real estate:
Owner occupied		3,208		51		51		3,211		22		22
Non-owner occupied		9,535		241		241		2,079		61		61
Commercial and industrial		1,145		16		16		1,523		101		101
Construction and land		4,703		3		3		8,822		280		277
All other		288		4		4		307		9		9
Total	$	21,468	$	326	$	326	$	29,898	$	604	$	592

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 June 30, 2018 and June 30, 2017. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended June 30, 2018						Three months ended June 30, 2017
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	$	299	$	-	$	-	$	328	$	-	$	-
Multifamily real estate		2,199		1		1		13,596		65		59
Commercial real estate:
Owner occupied		3,154		26		26		3,417		16		16
Non-owner occupied		8,514		105		105		1,932		29		29
Commercial and industrial		966		8		8		1,471		27		27
Construction and land		4,218		3		3		6,900		48		46
All other		286		-		-		305		9		9
Total	$	19,636	$	143	$	143	$	27,949	$	194	$	186

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 June 30, 2018 and December 31, 2017:

June 30, 2018	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	357	$	117	$	474
Multifamily real estate		1,972		-		1,972
Commercial real estate
Owner occupied		402		1,784		2,186
Non-owner occupied		-		6,029		6,029
Commercial and industrial		-		474		474
Construction and land		3,925		-		3,925
All other		-		284		284
Total	$	6,656	$	8,688	$	15,344

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

At June 30, 2018, $1,136,000 in specific reserves was allocated to loans that had restructured terms resulting in a provision for loan losses $163,000 for the six months ended and a negative provision of $216,000 for the three months ended June 30, 2018. This compares toto no provision for loan losses on restructured loans for the three and six months ended June 30, 2017. At December 31, 2017, $1,029,000 in specific reserves was 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 six months ended June 30, 2018.

The following table presents TDR’s that occurred during the three and six months ended June 30, 2017.

	Three months ended June 30, 2017						Six months ended June 30, 2017
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 real estate
Owner occupied		2	$	1,525	$	1,525		2	$	1,525	$	1,525
Commercial & industrial		1		191		191		1		191		191
Total		3	$	1,716	$	1,716		3	$	1,716	$	1,716

The modifications reported above for the six months ended June 30, 2017 involve one borrowing relationship that did not include any permanent reduction of the recorded investment in the loans nor change in the interest rate on the loans. The Company has modified the terms of the loans granting interest only payments during a period of loan rehabilitation. These periods have exceeded normal interest only periods customarily offered by the Company. During the three and six month ended June 30, 2017, the Company did not increase the allowance for loan losses related to these loans.

During the three and six months ended June 30, 2018 and the three and six months ended June 30, 2017, 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 June 30, 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	$	331,254	$	1,120	$	8,783	$	-	$	341,157
Multifamily real estate		51,196		4,986		1,972		-		58,154
Commercial real estate:
Owner occupied		125,261		5,060		6,474		-		136,795
Non-owner occupied		212,252		3,018		8,221		-		223,491
Commercial and industrial		71,370		4,234		2,754		-		78,358
Consumer		27,616		-		350		-		27,966
Construction and land		112,956		8,647		6,038		-		127,641
All other		32,783		838		470		-		34,091
Total	$	964,688	$	27,903	$	35,062	$	-	$	1,027,653

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