NOTE 3 - LOANS

Major classifications of loans at March 31, 2020 and December 31, 2019 are summarized as follows:

	2020		2019
Residential real estate	$	387,909	$	389,985
Multifamily real estate		40,286		36,684
Commercial real estate:
Owner occupied		168,102		164,218
Non-owner occupied		306,854		304,316
Commercial and industrial		101,132		105,079
Consumer		26,409		29,007
Construction and land		119,415		136,138
All other		34,936		29,868
	$	1,185,043	$	1,195,295

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020 was as follows:

Loan Class	Balance Dec 31, 2019		Provision (credit) for loan losses			Loans charged- off			Recoveries		Balance March 31, 2020

Residential real estate	$	1,711	$	216		$	(93	)	$	4	$	1,838
Multifamily real estate		1,954		150			-			-		2,104
Commercial real estate:
Owner occupied		2,441		342			(566	)		3		2,220
Non-owner occupied		3,184		479			(24	)		3		3,642
Commercial and industrial		1,767		22			-			28		1,817
Consumer		281		2			(69	)		27		241
Construction and land		1,724		(349	)		-			37		1,412
All other		480		138			(74	)		38		582
Total	$	13,542	$	1,000		$	(826	)	$	140	$	13,856

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 was as follows:

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

Residential real estate	$	1,808	$	42		$	(32	)	$	5	$	1,823
Multifamily real estate		1,649		(61	)		-			2		1,590
Commercial real estate:
Owner occupied		2,120		236			(533	)		1		1,824
Non-owner occupied		3,058		400			(57	)		-		3,401
Commercial and industrial		1,897		(97	)		(110	)		31		1,721
Consumer		351		110			(107	)		11		365
Construction and land		2,255		(93	)		(13	)		-		2,149
All other		600		23			(51	)		34		606
Total	$	13,738	$	560		$	(903	)	$	84	$	13,479

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, 2020 and December 31, 2019.

	2020		2019
Residential real estate	$	2,436	$	2,565
Commercial real estate
Owner occupied		1,750		1,804
Non-owner occupied		2,533		2,628
Commercial and industrial		291		305
Consumer		19		22
Construction and land		476		483
All other		171		174
Total carrying amount	$	7,676	$	7,981
Contractual principal balance	$	11,424	$	11,681

Carrying amount, net of allowance	$	7,676	$	7,981

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three-months ended March 31, 2020 and March 31, 2019.

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 March 31, 2020 and March 31, 2019.

	2020			2019
Balance at January 1	$	619		$	642
New loans purchased		-			-
Accretion of income		(36	)		(53	)
Loans placed on non-accrual		-			(14	)
Income recognized upon full repayment		(7	)		(42	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at March 31	$	576		$	533

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, 2020 and December 31, 2019. 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, 2020	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	5,478	$	4,266	$	710
Multifamily real estate		4,184		3,797		-
Commercial real estate
Owner occupied		3,125		2,396		10
Non-owner occupied		4,214		2,872		66
Commercial and industrial		1,047		498		300
Consumer		367		283		16
Construction and land		374		337		-
All other		75		60		-
Total	$	18,864	$	14,509	$	1,102

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

Residential real estate	$	5,801	$	4,618	$	1,425
Multifamily real estate		4,113		3,726		-
Commercial real estate
Owner occupied		3,399		2,995		-
Non-owner occupied		3,120		1,852		340
Commercial and industrial		1,026		420		451
Consumer		364		313		9
Construction and land		470		440		3
All other		75		73		-
Total	$	18,368	$	14,437	$	2,228

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, 2020 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	$	387,909	$	5,829	$	2,505	$	8,334	$	379,575
Multifamily real estate		40,286		-		3,797		3,797		36,489
Commercial real estate:
Owner occupied		168,102		786		964		1,750		166,352
Non-owner occupied		306,854		3,058		849		3,907		302,947
Commercial and industrial		101,132		1,370		655		2,025		99,107
Consumer		26,409		128		152		280		26,129
Construction and land		119,415		150		5		155		119,260
All other		34,936		-		60		60		34,876
Total	$	1,185,043	$	11,321	$	8,987	$	20,308	$	1,164,735

The following table presents the aging of the recorded investment in past due loans as of December 31, 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	$	389,985	$	9,479	$	3,192	$	12,671	$	377,314
Multifamily real estate		36,684		-		3,726		3,726		32,958
Commercial real estate:
Owner occupied		164,218		337		1,199		1,536		162,682
Non-owner occupied		304,316		838		1,017		1,855		302,461
Commercial and industrial		105,079		245		708		953		104,126
Consumer		29,007		309		230		539		28,468
Construction and land		136,138		3,856		4		3,860		132,278
All other		29,868		-		73		73		29,795
Total	$	1,195,295	$	15,064	$	10,149	$	25,213	$	1,170,082

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, 2020:

	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	$	-	$	1,838	$	-	$	1,838	$	62	$	385,411	$	2,436	$	387,909
Multifamily real estate		1,855		249		-		2,104		3,797		36,489		-		40,286
Commercial real estate:
Owner occupied		-		2,220		-		2,220		1,492		164,860		1,750		168,102
Non-owner occupied		407		3,235		-		3,642		4,064		300,257		2,533		306,854
Commercial and industrial		456		1,361		-		1,817		773		100,068		291		101,132
Consumer		-		241		-		241		-		26,390		19		26,409
Construction and land		-		1,412				1,412		325		118,614		476		119,415
All other		-		582		-		582		-		34,765		171		34,936
Total	$	2,718	$	11,138	$	-	$	13,856	$	10,513	$	1,166,854	$	7,676	$	1,185,043

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, 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	$	-	$	1,711	$	-	$	1,711	$	63	$	387,357	$	2,565	$	389,985
Multifamily real estate		1,737		217		-		1,954		3,726		32,958		-		36,684
Commercial real estate:
Owner occupied		653		1,788		-		2,441		2,685		159,729		1,804		164,218
Non-owner occupied		271		2,913		-		3,184		3,830		297,858		2,628		304,316
Commercial and industrial		390		1,377		-		1,767		678		104,096		305		105,079
Consumer		-		281		-		281		-		28,985		22		29,007
Construction and land		51		1,673		-		1,724		431		135,224		483		136,138
All other		-		480		-		480		-		29,694		174		29,868
Total	$	3,102	$	10,440	$	-	$	13,542	$	11,413	$	1,175,901	$	7,981	$	1,195,295

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, 2020. The table includes $710,000 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	$	184	$	62	$	-
Multifamily real estate		97		89		-
Commercial real estate
Owner occupied		2,189		1,811		-
Non-owner occupied		1,668		830		-
Commercial and industrial		509		-		-
Construction and land		361		326		-
		5,008		3,118		-
With an allowance recorded:
Multifamily real estate		4,088		3,708		1,855
Commercial real estate
Non-owner occupied		3,760		3,624		407
Commercial and industrial		786		773		456
		8,634		8,105		2,718
Total	$	13,642	$	11,223	$	2,718

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019. The table includes $758,000 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	$	188	$	63	$	-
Multifamily real estate		96		89		-
Commercial real estate
Owner occupied		2,201		1,842		-
Non-owner occupied		2,512		1,732		-
Commercial and industrial		509		-		-
		5,506		3,726		-
With an allowance recorded:
Multifamily real estate	$	4,017	$	3,637	$	1,737
Commercial real estate
Owner occupied		1,189		1,162		653
Non-owner occupied		2,654		2,537		271
Commercial and industrial		689		678		390
Construction and land		460		431		51
		9,009		8,445		3,102
Total	$	14,515	$	12,171	$	3,102

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, 2020 and March 31, 2019. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended March 31, 2020						Three months ended March 31, 2019
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	$	62	$	-	$	-	$	264	$	-	$	-
Multifamily real estate		3,761		-		-		3,877		-		-
Commercial real estate:
Owner occupied		2,408		3		3		3,874		3		3
Non-owner occupied		4,362		36		36		10,580		94		91
Commercial and industrial		726		1		1		500		1		1
Construction and land		378		-		-		1,341		8		8
Total	$	11,697	$	40	$	40	$	20,436	$	106	$	103

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, 2020 and December 31, 2019:

March 31, 2020	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	28	$	153	$	181
Multifamily real estate		3,708		-		3,708
Commercial real estate
Owner occupied		-		202		202
Non-owner occupied		-		2,637		2,637
Commercial and industrial		191		-		191
Total	$	3,927	$	2,992	$	6,919

December 31, 2019	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	32	$	157	$	189
Multifamily real estate		3,636		-		3,636
Commercial real estate
Owner occupied		1,162		207		1,369
Non-owner occupied		-		2,656		2,656
Commercial and industrial		191		-		191
Total	$	5,021	$	3,020	$	8,041

At March 31, 2020, $2,108,000 in specific reserves was allocated to loans that had restructured terms resulting in a provision for loan losses of $203,000 for the three months ended March 31, 2020, compared to a negative $65,000 in provision for loan losses on restructured loans during the three months ended March 31, 2019. At December 31, 2019, $2,471,000 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 months ended March 31, 2020 or the three months ended March 31, 2019.

During the three months ended March 31, 2020 and the three months ended March 31, 2019, 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.

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020. Provisions of the CARES Act permit certain loan payment modifications by banks that would normally be considered TDR’s to be exempt from the TDR rules. To date, management has exercised these provisions of the CARES Act on some loan modifications on an individually requested basis.

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 March 31, 2020, 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	$	373,530	$	3,210	$	11,169	$	-	$	387,909
Multifamily real estate		32,269		4,220		3,797		-		40,286
Commercial real estate:
Owner occupied		158,862		4,766		4,474		-		168,102
Non-owner occupied		290,508		10,782		5,564		-		306,854
Commercial and industrial		96,476		3,250		1,406		-		101,132
Consumer		26,063		4		342		-		26,409
Construction and land		111,084		7,667		664		-		119,415
All other		34,876		-		60		-		34,936
Total	$	1,123,668	$	33,899	$	27,476	$	-	$	1,185,043

As of December 31, 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	$	374,835	$	3,477	$	11,673	$	-	$	389,985
Multifamily real estate		28,103		4,855		3,726		-		36,684
Commercial real estate:
Owner occupied		152,695		5,123		6,400		-		164,218
Non-owner occupied		290,096		8,617		5,603		-		304,316
Commercial and industrial		101,085		2,693		1,301		-		105,079
Consumer		28,618		5		384		-		29,007
Construction and land		123,473		11,868		797				136,138
All other		29,698		97		73		-		29,868
Total	$	1,128,603	$	36,735	$	29,957	$	-	$	1,195,295