NOTE 3 - LOANS

Major classifications of loans at June 30, 2019 and December 31, 2018 are summarized as follows:

	2019		2018
Residential real estate	$	381,525	$	381,027
Multifamily real estate		39,298		54,016
Commercial real estate:
Owner occupied		134,423		138,209
Non-owner occupied		296,780		282,608
Commercial and industrial		104,437		103,624
Consumer		25,848		27,688
Construction and land		132,814		128,926
All other		33,128		33,203
	$	1,148,253	$	1,149,301

Activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2019 was as follows:

Loan Class	Balance Dec 31, 2018		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2019

Residential real estate	$	1,808	$	104		$	(59	)	$	27	$	1,880
Multifamily real estate		1,649		65			-			2		1,716
Commercial real estate:
Owner occupied		2,120		200			(533	)		3		1,790
Non-owner occupied		3,058		277			(57	)		2		3,280
Commercial and industrial		1,897		178			(113	)		38		2,000
Consumer		351		129			(140	)		28		368
Construction and land		2,255		(102	)		(13	)		-		2,140
All other		600		39			(97	)		57		599
Total	$	13,738	$	890		$	(1,012	)	$	157	$	13,773

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 three months ended June 30, 2019 was as follows:

Loan Class	Balance March 31, 2019		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2019

Residential real estate	$	1,823	$	62		$	(27	)	$	22	$	1,880
Multifamily real estate		1,590		126			-			-		1,716
Commercial real estate:
Owner occupied		1,824		(36	)		-			2		1,790
Non-owner occupied		3,401		(123	)		-			2		3,280
Commercial and industrial		1,721		275			(3	)		7		2,000
Consumer		365		19			(33	)		17		368
Construction and land		2,149		(9	)		-			-		2,140
All other		606		16			(46	)		23		599
Total	$	13,479	$	330		$	(109	)	$	73	$	13,773

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

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, 2019 and December 31, 2018.

	2019		2018
Residential real estate	$	2,355	$	2,665
Commercial real estate
Owner occupied		1,754		2,040
Non-owner occupied		3,062		3,434
Commercial and industrial		350		1,720
Construction and land		587		1,212
All other		231		225
Total carrying amount	$	8,339	$	11,296
Contractual principal balance	$	11,922	$	15,436

Carrying amount, net of allowance	$	8,339	$	11,296

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the six-months ended June 30, 2019 and June 30, 2018.

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, 2019 and June 30, 2018.

	2019			2018
Balance at January 1	$	642		$	754
New loans purchased		-			-
Accretion of income		(94	)		(80	)
Loans placed on non-accrual		-			(41	)
Income recognized upon full repayment		(73	)		(38	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at June 30	$	475		$	595

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, 2019 and December 31, 2018. 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, 2019	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	4,248	$	3,190	$	1,066
Multifamily real estate		4,112		3,810		-
Commercial real estate
Owner occupied		4,124		3,864		72
Non-owner occupied		5,891		4,705		88
Commercial and industrial		1,131		500		7
Consumer		212		172		-
Construction and land		539		525		13
All other		75		73		38
Total	$	20,332	$	16,839	$	1,284

December 31, 2018	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	4,966	$	3,708	$	954
Multifamily real estate		4,127		3,905		-
Commercial real estate
Owner occupied		3,692		3,436		56
Non-owner occupied		5,761		4,592		76
Commercial and industrial		1,303		625		-
Consumer		292		253		-
Construction and land		857		856		-
All other		75		73		-
Total	$	21,073	$	17,448	$	1,086

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, 2019 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	$	381,525	$	8,441	$	1,894	$	10,335	$	371,190
Multifamily real estate		39,298		4,171		89		4,260		35,038
Commercial real estate:
Owner occupied		134,423		1,220		2,855		4,075		130,348
Non-owner occupied		296,780		788		3,455		4,243		292,537
Commercial and industrial		104,437		557		335		892		103,545
Consumer		25,848		250		45		295		25,553
Construction and land		132,814		350		55		405		132,409
All other		33,128		60		111		171		32,957
Total	$	1,148,253	$	15,837	$	8,839	$	24,676	$	1,123,577

The following table presents the aging of the recorded investment in past due loans as of December 31, 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	$	381,027	$	7,078	$	2,594	$	9,672	$	371,355
Multifamily real estate		54,016		-		110		110		53,906
Commercial real estate:
Owner occupied		138,209		124		2,601		2,725		135,484
Non-owner occupied		282,608		172		3,301		3,473		279,135
Commercial and industrial		103,624		2,235		262		2,497		101,127
Consumer		27,688		247		112		359		27,329
Construction and land		128,926		388		810		1,198		127,728
All other		33,203		546		73		619		32,584
Total	$	1,149,301	$	10,790	$	9,863	$	20,653	$	1,128,648

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, 2019:

	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	$	19	$	1,861	$	-	$	1,880	$	113	$	379,057	$	2,355	$	381,525
Multifamily real estate		1,483		233		-		1,716		3,810		35,488		-		39,298
Commercial real estate:
Owner occupied		113		1,677		-		1,790		3,223		129,446		1,754		134,423
Non-owner occupied		233		3,047		-		3,280		10,047		283,671		3,062		296,780
Commercial and industrial		447		1,553		-		2,000		684		103,403		350		104,437
Consumer		-		368		-		368		-		25,848		-		25,848
Construction and land		99		2,041				2,140		513		131,714		587		132,814
All other		-		599		-		599		-		32,897		231		33,128
Total	$	2,394	$	11,379	$	-	$	13,773	$	18,390	$	1,121,524	$	8,339	$	1,148,253

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, 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	$	-	$	1,808	$	-	$	1,808	$	298	$	378,064	$	2,665	$	381,027
Multifamily real estate		1,281		368		-		1,649		3,905		50,111		-		54,016
Commercial real estate:
Owner occupied		692		1,428		-		2,120		2,820		133,349		2,040		138,209
Non-owner occupied		267		2,791		-		3,058		10,111		269,063		3,434		282,608
Commercial and industrial		414		1,483		-		1,897		558		101,346		1,720		103,624
Consumer		-		351		-		351		-		27,688		-		27,688
Construction and land		142		2,113		-		2,255		1,351		126,363		1,212		128,926
All other		-		600		-		600		-		32,978		225		33,203
Total	$	2,796	$	10,942	$	-	$	13,738	$	19,043	$	1,118,962	$	11,296	$	1,149,301

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, 2019. The table includes $1,346,000 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	$	438	$	228	$	-
Multifamily real estate		97		89		-
Commercial real estate
Owner occupied		2,652		2,419		-
Non-owner occupied		8,536		7,808		-
Commercial and industrial		552		43		-
Construction and Land		35		35		-
		12,310		10,622		-
With an allowance recorded:
Residential real estate		47		47		19
Multifamily real estate		4,016		3,721		1,483
Commercial real estate
Owner occupied		1,553		1,525		113
Non-owner occupied		2,793		2,701		233
Commercial and industrial		650		641		447
Construction and land		491		479		99
		9,550		9,114		2,394
Total	$	21,860	$	19,736	$	2,394

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018. The table includes $1,160,000 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	$	426	$	298	$	-
Multifamily real estate		110		110		-
Commercial real estate
Owner occupied		1,305		1,092		-
Non-owner occupied		8,458		7,740		-
Commercial and industrial		531		-		-
Construction and land		786		786		-
		11,616		10,026		-
With an allowance recorded:
Multifamily real estate	$	4,016	$	3,795	$	1,281
Commercial real estate
Owner occupied		2,523		2,478		692
Non-owner occupied		2,852		2,781		267
Commercial and industrial		562		558		414
Construction and land		565		565		142
		10,518		10,177		2,796
Total	$	22,134	$	20,203	$	2,796

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, 2019 and June 30, 2018. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Six months ended June 30, 2019						Six months ended June 30, 2018
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	$	267	$	-	$	-	$	302	$	-	$	-
Multifamily real estate		3,855		-		-		2,287		11		11
Commercial real estate:
Owner occupied		3,898		6		6		3,208		51		51
Non-owner occupied		10,556		186		186		9,535		241		241
Commercial and industrial		478		2		2		1,145		16		16
Construction and land		1,065		121		121		4,703		3		3
All other		-		-		-		288		4		4
Total	$	20,119	$	315	$	315	$	21,468	$	326	$	326

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, 2019 and June 30, 2018. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended June 30, 2019						Three months ended June 30, 2018
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	$	253	$	-	$	-	$	299	$	-	$	-
Multifamily real estate		3,830		-		-		2,199		1		1
Commercial real estate:
Owner occupied		4,062		3		3		3,154		26		26
Non-owner occupied		10,573		92		92		8,514		105		105
Commercial and industrial		437		1		1		966		8		8
Construction and land		922		113		113		4,218		3		3
All other		-		-		-		286		-		-
Total	$	20,077	$	209	$	209	$	19,636	$	143	$	143

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, 2019 and December 31, 2018:

June 30, 2019	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	43	$	165	$	208
Multifamily real estate		3,721		-		3,721
Commercial real estate
Owner occupied		1,526		214		1,740
Non-owner occupied		-		5,893		5,893
Commercial and industrial		191		-		191
Total	$	5,481	$	6,272	$	11,753

December 31, 2018	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	347	$	97	$	444
Multifamily real estate		3,795		-		3,795
Commercial real estate
Owner occupied		1,647		222		1,869
Non-owner occupied		-		5,964		5,964
Commercial and industrial		191		-		191
Total	$	5,980	$	6,283	$	12,263

At June 30, 2019, $1,692,000 in specific reserves was allocated to loans that had restructured terms resulting in a provision for loan losses $150,000 for the six months ended and a provision of $216,000 for the three months ended June 30, 2019. This compares to $163,000 of provision for loan losses on restructured loans for the six ended June 30, 2018 and a negative provision of $217,000 for the three months ended June 30, 2018. At December 31, 2018, $1,630,000 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 TDR’s that occurred during the three and six months ended June 30, 2019.

During the three and six months ended June 30, 2019 and the three and six months ended June 30, 2018, 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 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, 2019, 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	$	369,315	$	2,745	$	9,256	$	209	$	381,525
Multifamily real estate		33,698		1,790		3,810		-		39,298
Commercial real estate:
Owner occupied		122,600		4,746		7,077		-		134,423
Non-owner occupied		280,181		3,821		12,778		-		296,780
Commercial and industrial		100,151		2,989		1,004		293		104,437
Consumer		25,588		-		260		-		25,848
Construction and land		119,870		11,893		1,016		35		132,814
All other		32,807		248		73		-		33,128
Total	$	1,084,210	$	28,232	$	35,274	$	537	$	1,148,253

As of December 31, 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	$	369,808	$	1,376	$	9,681	$	162	$	381,027
Multifamily real estate		45,187		4,924		3,905		-		54,016
Commercial real estate:
Owner occupied		126,422		4,840		6,947		-		138,209
Non-owner occupied		262,149		7,647		12,812		-		282,608
Commercial and industrial		96,066		5,280		2,278		-		103,624
Consumer		27,344		31		313		-		27,688
Construction and land		107,196		19,728		2,002				128,926
All other		32,749		381		73		-		33,203
Total	$	1,066,921	$	44,207	$	38,011	$	162	$	1,149,301