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Note 4 - Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2015

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the allowance, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding. Interest is not accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

Acquired loans are those purchased in the Firstbank merger (See Note 2 – Business Combination for further information). These loans were recorded at estimated fair value at the Merger Date with no carryover of the related allowance. The acquired loans were segregated between those considered to be performing (“acquired non-impaired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected. Acquired loans restructured after acquisition are not considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the Merger Date and are accounted for in pools.

The fair value estimates for acquired loans are based on expected prepayments and the amount and timing of discounted expected principal, interest and other cash flows. Credit discounts representing the principal losses expected over the life of the loan are also a component of the initial fair value. In determining the Merger Date fair value of acquired impaired loans, and in subsequent accounting, we have generally aggregated acquired commercial and consumer loans into pools of loans with common risk characteristics.

The difference between the fair value of an acquired non-impaired loan and contractual amounts due at the Merger Date is accreted into income over the estimated life of the loan. Contractually required payments represent the total undiscounted amount of all uncollected principal and interest payments. Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

The excess of an acquired impaired loan’s undiscounted contractually required payments over the amount of its undiscounted cash flows expected to be collected is referred to as the non-accretable difference. The non-accretable difference, which is neither accreted into income nor recorded on the consolidated balance sheet, reflects estimated future credit losses and uncollectible contractual interest expected to be incurred over the life of the acquired impaired loan. The excess cash flows expected to be collected over the carrying amount of the acquired loan is referred to as the accretable yield. This amount is accreted into interest income over the remaining life of the acquired loans or pools using the level yield method. The accretable yield is affected by changes in interest rate indices for variable rate loans, changes in prepayment speed assumptions and changes in expected principal and interest payments over the estimated lives of the acquired impaired loans.

We evaluate quarterly the remaining contractual required payments receivable and estimate cash flows expected to be collected over the lives of the impaired loans. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Merger Date. Prepayments affect the estimated lives of loans and could change the amount of interest income, and possibly principal, expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary. The adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

Increases in expected cash flows of acquired impaired loans subsequent to the Merger Date are recognized prospectively through adjustments of the yield on the loans or pools over their remaining lives, while decreases in expected cash flows are recognized as impairment through a provision for loan losses and an increase in the allowance.

Our total loans at March 31, 2015 were $2.12 billion compared to $2.09 billion at December 31, 2014, an increase of $31.5 million, or 1.5%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2015 and December 31, 2014, and the percentage change in loans from the end of 2014 to the end of the first quarter of 2015, are as follows:

											Percent
	March 31, 2015					December 31, 2014					Increase
	Balance		%			Balance		%			(Decrease)
Originated loans
Commercial:
Commercial and industrial	$	434,211,000		32.6	%	$	384,570,000		30.8	%		12.9	%
Vacant land, land development, and residential construction		35,948,000		2.7			29,826,000		2.4			20.5
Real estate – owner occupied		302,379,000		22.8			291,758,000		23.4			3.6
Real estate – non-owner occupied		423,381,000		31.9			410,977,000		33.0			3.0
Real estate – multi-family and residential rental		34,922,000		2.6			36,058,000		2.9			(3.2	)
Total commercial		1,230,841,000		92.6			1,153,189,000		92.5			6.7

Retail:
Home equity and other		53,707,000		4.1			50,059,000		4.0			7.3
1-4 family mortgages		44,165,000		3.3			42,868,000		3.5			3.0
Total retail		97,872,000		7.4			92,927,000		7.5			5.3

Total originated loans	$	1,328,713,000		100.0	%	$	1,246,116,000		100.0	%		6.6	%

											Percent
	March 31, 2015					December 31, 2014					Increase
	Balance		%			Balance		%			(Decrease)
Acquired loans
Commercial:
Commercial and industrial	$	153,464,000		19.4	%	$	166,037,000		19.7			(7.6	)%
Vacant land, land development, and residential construction		20,102,000		2.5			22,148,000		2.6			(9.2	)
Real estate – owner occupied		129,616,000		16.4			138,630,000		16.4			(6.5	)
Real estate – non-owner occupied		142,771,000		18.0			148,597,000		17.6			(3.9	)
Real estate – multi-family and residential rental		82,555,000		10.4			86,702,000		10.3			(4.8	)
Total commercial		528,508,000		66.7			562,114,000		66.6			(6.0	)
Retail:
Home equity and other		99,279,000		12.5			109,219,000		13.0			(9.1	)
1-4 family mortgages		164,260,000		20.8			171,828,000		20.4			(4.4	)
Total retail		263,539,000		33.3			281,047,000		33.4			(6.2	)

Total acquired loans	$	792,047,000		100.0	%	$	843,161,000		100.0	%		(6.1	)%

	March 31, 2015					December 31, 2014					Percent Increase
	Balance		%			Balance		%			(Decrease)
Total loans
Commercial:
Commercial and industrial	$	587,675,000		27.7	%	$	550,607,000		26.4	%		6.7	%
Vacant land, land development, and residential construction		56,050,000		2.7			51,974,000		2.5			7.8
Real estate – owner occupied		431,995,000		20.4			430,388,000		20.5			0.4
Real estate – non-owner occupied		566,152,000		26.7			559,574,000		26.8			1.2
Real estate – multi-family and residential rental		117,477,000		5.5			122,760,000		5.9			(4.3	)
Total commercial		1,759,349,000		83.0			1,715,303,000		82.1			2.6

Retail:
Home equity and other		152,986,000		7.2			159,278,000		7.6			(4.0	)
1-4 family mortgages		208,425,000		9.8			214,696,000		10.3			(2.9	)
Total retail		361,411,000		17.0			373,974,000		17.9			(3.4	)

Total loans	$	2,120,760,000		100.0	%	$	2,089,277,000		100.0	%		1.5	%

The total outstanding balance and carrying value of acquired impaired loans was $31.3 million and $17.6 million, respectively, as of March 31, 2015. Changes in the accretable yield for acquired impaired loans for the three months ended March 31, 2015 were as follows:

Balance at December 31, 2014	$	4,998,000
Additions		0
Accretion income		(646,000	)
Net reclassification from nonaccretable to accretable		941,000
Reductions (1)		(52,000	)

Ending balance	$	5,241,000

(1)

Reductions primarily reflect the result of exit events, including loan payoffs and charge-offs.

Nonperforming originated loans as of March 31, 2015 and December 31, 2014 were as follows:

	March 31,		December 31,
	2015		2014

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		23,077,000		26,048,000

Total nonperforming originated loans	$	23,077,000	$	26,048,000

Nonperforming acquired loans as of March 31, 2015 and December 31, 2014 were as follows:

	March 31,		December 31,
	2015		2014

Loans past due 90 days or more still accruing interest	$	0	$	26,000
Nonaccrual loans		3,190,000		3,358,000

Total nonperforming acquired loans	$	3,190,000	$	3,384,000

The recorded principal balance of nonperforming loans was as follows:

	March 31,		December 31,
	2015		2014
Commercial:
Commercial and industrial	$	5,636,000	$	6,478,000
Vacant land, land development, and residential construction		197,000		209,000
Real estate – owner occupied		17,467,000		18,062,000
Real estate – non-owner occupied		360,000		378,000
Real estate – multi-family and residential rental		87,000		106,000
Total commercial		23,747,000		25,233,000

Retail:
Home equity and other		762,000		800,000
1-4 family mortgages		1,758,000		3,399,000
Total retail		2,520,000		4,199,000

Total nonperforming loans	$	26,267,000	$	29,432,000

Acquired impaired loans are not reported as nonperforming loans based on acquired impaired loan accounting. Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

An age analysis of past due loans is as follows as of March 31, 2015:

					Greater								Recorded Balance
	30 – 59		60 – 89		Than 89								> 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Originated loans
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0	$	434,211,000	$	434,211,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		35,948,000		35,948,000		0
Real estate – owner occupied		0		0		106,000		106,000		302,273,000		302,379,000		0
Real estate – non-owner occupied		0		0		113,000		113,000		423,268,000		423,381,000		0
Real estate – multi-family and residential rental		0		0		0		0		34,922,000		34,922,000		0
Total commercial		0		0		219,000		219,000		1,230,622,000		1,230,841,000		0

Retail:
Home equity and other		133,000		300,000		0		433,000		53,274,000		53,707,000		0
1-4 family mortgages		0		84,000		321,000		405,000		43,760,000		44,165,000		0
Total retail		133,000		384,000		321,000		838,000		97,034,000		97,872,000		0

Total past due loans	$	133,000	$	384,000	$	540,000	$	1,057,000	$	1,327,656,000	$	1,328,713,000	$	0

					Greater								Recorded Balance
	30 – 59		60 – 89		Than 89								> 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Acquired loans
Commercial:
Commercial and industrial	$	285,000	$	0	$	711,000	$	996,000	$	152,468,000	$	153,464,000	$	0
Vacant land, land development, and residential construction		26,000		0		0		26,000		20,076,000		20,102,000		0
Real estate – owner occupied		1,371,000		0		1,041,000		2,412,000		127,204,000		129,616,000		0
Real estate – non-owner occupied		0		0		296,000		296,000		142,475,000		142,771,000		0
Real estate – multi-family and residential rental		0		69,000		93,000		162,000		82,393,000		82,555,000		0
Total commercial		1,682,000		69,000		2,141,000		3,892,000		524,616,000		528,508,000		0

Retail:
Home equity and other		245,000		90,000		362,000		697,000		98,582,000		99,279,000		0
1-4 family mortgages		1,204,000		54,000		1,021,000		2,279,000		161,981,000		164,260,000		0
Total retail		1,449,000		144,000		1,383,000		2,976,000		260,563,000		263,539,000		0

Total past due loans	$	3,131,000	$	213,000	$	3,524,000	$	6,868,000	$	785,179,000	$	792,047,000	$	0

An age analysis of past due loans is as follows as of December 31, 2014:

					Greater								Recorded Balance
	30 – 59		60 – 89		Than 89								> 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Originated loans
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0	$	384,570,000	$	384,570,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		29,826,000		29,826,000		0
Real estate – owner occupied		0		0		120,000		120,000		291,638,000		291,758,000		0
Real estate – non-owner occupied		0		0		116,000		116,000		410,861,000		410,977,000		0
Real estate – multi-family and residential rental		0		0		0		0		36,058,000		36,058,000		0
Total commercial		0		0		236,000		236,000		1,152,953,000		1,153,189,000		0

Retail:
Home equity and other		38,000		3,000		0		41,000		50,018,000		50,059,000		0
1-4 family mortgages		0		0		366,000		366,000		42,502,000		42,868,000		0
Total retail		38,000		3,000		366,000		407,000		92,520,000		92,927,000		0

Total past due loans	$	38,000	$	3,000	$	602,000	$	643,000	$	1,245,473,000	$	1,246,116,000	$	0

					Greater								Recorded Balance
	30 – 59		60 – 89		Than 89								> 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Acquired Loans
Commercial:
Commercial and industrial	$	29,000	$	32,000	$	76,000	$	137,000	$	165,900,000	$	166,037,000	$	0
Vacant land, land development, and residential construction		0		38,000		0		38,000		22,110,000		22,148,000		0
Real estate – owner occupied		51,000		425,000		1,625,000		2,101,000		136,529,000		138,630,000		0
Real estate – non-owner occupied		68,000		598,000		395,000		1,061,000		147,536,000		148,597,000		0
Real estate – multi-family and residential rental		37,000		0		105,000		142,000		86,560,000		86,702,000		0
Total commercial		185,000		1,093,000		2,201,000		3,479,000		558,635,000		562,114,000		0

Retail:
Home equity and other		445,000		419,000		155,000		1,019,000		108,200,000		109,219,000		26,000
1-4 family mortgages		1,087,000		408,000		750,000		2,245,000		169,583,000		171,828,000		0
Total retail		1,532,000		827,000		905,000		3,264,000		277,783,000		281,047,000		26,000

Total past due loans	$	1,717,000	$	1,920,000	$	3,106,000	$	6,743,000	$	836,418,000	$	843,161,000	$	26,000

Impaired originated loans as of March 31, 2015, and average originated impaired loans for the three months ended March 31, 2015, were as follows:

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,955,000	$	1,936,000	$	-	$	1,550,000
Vacant land, land development and residential construction		535,000		197,000		-		203,000
Real estate – owner occupied		3,629,000		2,000,000		-		1,950,000
Real estate – non-owner occupied		198,000		114,000		-		662,000
Real estate – multi-family and residential rental		368,000		309,000		-		313,000
Total commercial		6,685,000		4,556,000		-		4,678,000

Retail:
Home equity and other		207,000		190,000		-		191,000
1-4 family mortgages		1,135,000		534,000		-		547,000
Total retail		1,342,000		724,000		-		738,000

Total with no related allowance recorded	$	8,027,000	$	5,280,000	$	-	$	5,416,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	5,296,000	$	5,165,000	$	2,776,000	$	5,196,000
Vacant land, land development and residential construction		2,000,000		2,000,000		232,000		2,000,000
Real estate – owner occupied		15,729,000		15,518,000		2,179,000		15,596,000
Real estate – non-owner occupied		15,682,000		15,682,000		4,394,000		15,816,000
Real estate – multi-family and residential rental		1,336,000		1,336,000		577,000		1,354,000
Total commercial		40,043,000		39,701,000		10,158,000		39,962,000

Retail:
Home equity and other		200,000		167,000		131,000		125,000
1-4 family mortgages		346,000		302,000		77,000		1,151,000
Total retail		546,000		469,000		208,000		1,276,000

Total with an allowance recorded	$	40,589,000	$	40,170,000	$	10,366,000	$	41,238,000

Total impaired loans:
Commercial	$	46,728,000	$	44,257,000	$	10,158,000	$	44,640,000
Retail		1,888,000		1,193,000		208,000		2,014,000
Total impaired loans	$	48,616,000	$	45,450,000	$	10,366,000	$	46,654,000

Impaired acquired loans as of March 31, 2015, and average impaired acquired loans for the three months ended March 31, 2015, were as follows:

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,006,000	$	956,000	$	-	$	1,267,000
Vacant land, land development and residential construction		0		0		-		0
Real estate – owner occupied		233,000		206,000		-		160,000
Real estate – non-owner occupied		349,000		308,000		-		317,000
Real estate – multi-family and residential rental		959,000		941,000		-		714,000
Total commercial		2,547,000		2,411,000		-		2,458,000

Retail:
Home equity and other		525,000		368,000		-		504,000
1-4 family mortgages		1,173,000		923,000		-		894,000
Total retail		1,698,000		1,291,000		-		1,398,000

Total with no related allowance recorded	$	4,245,000	$	3,702,000	$	-	$	3,856,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	115,000	$	115,000	$	13,000	$	57,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		1,471,000		1,426,000		562,000		1,464,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		28,000		28,000		0		14,000
Total commercial		1,614,000		1,569,000		575,000		1,535,000

Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		343,000		283,000		13,000		142,000
Total retail		343,000		283,000		13,000		142,000

Total with an allowance recorded	$	1,957,000	$	1,852,000	$	588,000	$	1,677,000

Total impaired loans:
Commercial	$	4,161,000	$	3,980,000	$	575,000	$	3,993,000
Retail		2,041,000		1,574,000		13,000		1,540,000
Total impaired loans	$	6,202,000	$	5,554,000	$	588,000	$	5,533,000

Impaired originated loans as of December 31, 2014, and average impaired originated loans for the three months ended March 31, 2014, were as follows:

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,170,000	$	1,164,000	$	-	$	358,000
Vacant land, land development and residential construction		540,000		209,000		-		353,000
Real estate – owner occupied		3,609,000		1,901,000		-		735,000
Real estate – non-owner occupied		1,210,000		1,210,000		-		1,247,000
Real estate – multi-family and residential rental		375,000		317,000		-		1,000
Total commercial		6,904,000		4,801,000		-		2,694,000

Retail:
Home equity and other		207,000		191,000		-		555,000
1-4 family mortgages		1,144,000		560,000		-		629,000
Total retail		1,351,000		751,000		-		1,184,000

Total with no related allowance recorded	$	8,255,000	$	5,552,000	$	-	$	3,878,000

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	5,299,000	$	5,226,000	$	1,578,000	$	1,197,000
Vacant land, land development and residential construction		2,000,000		2,000,000		151,000		4,023,000
Real estate – owner occupied		15,745,000		15,674,000		2,200,000		1,500,000
Real estate – non-owner occupied		16,033,000		15,949,000		4,779,000		20,262,000
Real estate – multi-family and residential rental		1,371,000		1,371,000		666,000		1,886,000
Total commercial		40,448,000		40,220,000		9,374,000		28,868,000

Retail:
Home equity and other		115,000		84,000		84,000		190,000
1-4 family mortgages		2,194,000		2,000,000		694,000		2,196,000
Total retail		2,309,000		2,084,000		778,000		2,386,000

Total with an allowance recorded	$	42,757,000	$	42,304,000	$	10,152,000	$	31,254,000

Total impaired loans:
Commercial	$	47,352,000	$	45,021,000	$	9,374,000	$	31,562,000
Retail		3,660,000		2,835,000		778,000		3,570,000
Total impaired loans	$	51,012,000	$	47,856,000	$	10,152,000	$	35,132,000

Impaired acquired loans as of December 31, 2014, and average impaired acquired loans for the three months ended March 31, 2014, were as follows:

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,586,000	$	1,579,000	$	-	$	NA
Vacant land, land development and residential construction		0		0		-	NA
Real estate – owner occupied		113,000		113,000		-	NA
Real estate – non-owner occupied		326,000		326,000		-	NA
Real estate – multi-family and residential rental		487,000		487,000		-	NA
Total commercial		2,512,000		2,505,000		-	NA

Retail:
Home equity and other		641,000		639,000		-	NA
1-4 family mortgages		866,000		866,000		-	NA
Total retail		1,507,000		1,505,000		-	NA

Total with no related allowance recorded	$	4,019,000	$	4,010,000	$	-	$	NA

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	NA
Vacant land, land development and residential construction		0		0		0	NA
Real estate – owner occupied		1,516,000		1,502,000		605,000	NA
Real estate – non-owner occupied		0		0		0	NA
Real estate – multi-family and residential rental		0		0		0	NA
Total commercial		1,516,000		1,502,000		605,000	NA

Retail:
Home equity and other		0		0		0	NA
1-4 family mortgages		0		0		0	NA
Total retail		0		0		0	NA

Total with an allowance recorded	$	1,516,000	$	1,502,000	$	605,000	$	NA

Total impaired loans:
Commercial	$	4,028,000	$	4,007,000	$	605,000	$	NA
Retail		1,507,000		1,505,000		0	NA
Total impaired loans	$	5,535,000	$	5,512,000	$	605,000	$	NA

Impaired loans for which no allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated collateral value. Interest income recognized on accruing troubled debt restructurings totaled $0.4 million and $0.5 million during the first quarter of 2015 and 2014, respectively. No interest income was recognized on nonaccrual loans during either the first quarter of 2015 or 2014.

Credit Quality Indicators. We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a ten grade rating system. The rating system utilizes standardized grade paradigms that analyze several critical factors such as cash flow, operating performance, financial condition, collateral, industry condition and management. All commercial loans are graded at inception and reviewed and, if appropriate, re-graded at various intervals thereafter. The risk assessment for retail loans is primarily based on the type of collateral and payment activity.

Credit quality indicators were as follows as of March 31, 2015:

Originated loans

Commercial credit exposure – credit risk profiled by internal credit risk grades:

			Commercial Vacant Land,						Commercial
			Land		Commercial		Commercial		Real Estate -
	Commercial		Development,		Real Estate -		Real Estate -		Multi-Family
	and		and Residential		Owner		Non-Owner		and Residential
	Industrial		Construction		Occupied		Occupied		Rental

Internal credit risk grade groupings:
Grades 1 – 4	$	317,742,000	$	17,255,000	$	203,094,000	$	295,402,000	$	12,632,000
Grades 5 – 7		108,649,000		16,430,000		81,245,000		117,222,000		20,947,000
Grades 8 – 9		7,820,000		2,263,000		18,040,000		10,757,000		1,343,000
Total commercial	$	434,211,000	$	35,948,000	$	302,379,000	$	423,381,000	$	34,922,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	53,707,000	$	44,165,000

Acquired loans

Commercial credit exposure – credit risk profiled by internal credit risk grades:

			Commercial Vacant Land,						Commercial
			Land		Commercial		Commercial		Real Estate -
	Commercial		Development,		Real Estate -		Real Estate -		Multi-Family
	and		and Residential		Owner		Non-Owner		and Residential
	Industrial		Construction		Occupied		Occupied		Rental

Internal credit risk grade groupings:
Grades 1 – 4	$	67,795,000	$	5,635,000	$	39,732,000	$	67,500,000	$	35,725,000
Grades 5 – 7		82,344,000		12,844,000		82,819,000		71,656,000		45,230,000
Grades 8 – 9		3,325,000		1,623,000		7,065,000		3,615,000		1,600,000
Total commercial	$	153,464,000	$	20,102,000	$	129,616,000	$	142,771,000	$	82,555,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	99,279,000	$	164,260,000

Credit quality indicators were as follows as of December 31, 2014:

Originated loans

Commercial credit exposure – credit risk profiled by internal credit risk grades:

			Commercial Vacant Land,						Commercial
			Land		Commercial		Commercial		Real Estate -
	Commercial		Development,		Real Estate -		Real Estate -		Multi-Family
	and		and Residential		Owner		Non-Owner		and Residential
	Industrial		Construction		Occupied		Occupied		Rental

Internal credit risk grade groupings:
Grades 1 – 4	$	266,631,000	$	11,242,000	$	190,656,000	$	285,035,000	$	12,394,000
Grades 5 – 7		109,639,000		16,375,000		83,123,000		113,982,000		22,282,000
Grades 8 – 9		8,300,000		2,209,000		17,979,000		11,960,000		1,382,000
Total commercial	$	384,570,000	$	29,826,000	$	291,758,000	$	410,977,000	$	36,058,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	50,059,000	$	42,868,000

Acquiredloans

Commercial credit exposure – credit risk profiled by internal credit risk grades:

			Commercial Vacant Land,						Commercial
			Land		Commercial		Commercial		Real Estate -
	Commercial		Development,		Real Estate -		Real Estate -		Multi-Family
	and		and Residential		Owner		Non-Owner		and Residential
	Industrial		Construction		Occupied		Occupied		Rental

Internal credit risk grade groupings:
Grades 1 – 4	$	72,411,000	$	5,875,000	$	39,496,000	$	65,886,000	$	35,858,000
Grades 5 – 7		90,320,000		14,472,000		92,212,000		78,103,000		49,781,000
Grades 8 – 9		3,306,000		1,801,000		6,922,000		4,608,000		1,063,000
Total commercial	$	166,037,000	$	22,148,000	$	138,630,000	$	148,597,000	$	86,702,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	109,219,000	$	171,828,000

All commercial loans are graded using the following criteria:

Grade 1.

Excellent credit rating that contain very little, if any, risk of loss.

Grade 2.

Strong sources of repayment and have low repayment risk.

Grade 3.

Good sources of repayment and have limited repayment risk.

Grade 4.

Adequate sources of repayment and acceptable repayment risk; however, characteristics are present that render the credit more vulnerable to a negative event.

Grade 5.

Marginally acceptable sources of repayment and exhibit defined weaknesses and negative characteristics.

Grade 6.

Well defined weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if the credit does not stabilize or if further deterioration is observed in the near term, the loan will likely be downgraded and placed on the Watch List (i.e., list of lending relationships that receive increased scrutiny and review by the Board of Directors and senior management).

Grade 7.

Defined weaknesses or negative trends that merit close monitoring through Watch List status.

Grade 8.

Inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral, resulting in a distinct possibility of loss requiring close monitoring through Watch List status.

Grade 9.

Vital weaknesses exist where collection of principal is highly questionable.

Grade 10.

Considered uncollectable and of such little value that continuance as an asset is not warranted.

The primary risk elements with respect to commercial loans are the financial condition of the borrower, the sufficiency of collateral, and timeliness of scheduled payments. We have a policy of requesting and reviewing periodic financial statements from commercial loan customers and employ a disciplined and formalized review of the existence of collateral and its value. The primary risk element with respect to each residential real estate loan and consumer loan is the timeliness of scheduled payments. We have a reporting system that monitors past due loans and have adopted policies to pursue creditor’s rights in order to preserve our collateral position.

Activity in the allowance for loan losses and the recorded investments in originated loans as of and during the three months ended March 31, 2015 are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	17,736,000		$	1,487,000		$	76,000		$	19,299,000
Provision for loan losses		(499,000	)		79,000			(37,000	)		(457,000	)
Charge-offs		(78,000	)		(363,000	)		0			(441,000	)
Recoveries		1,818,000			32,000			0			1,850,000
Ending balance	$	18,977,000		$	1,235,000		$	39,000		$	20,251,000

Ending balance: individually evaluated for impairment	$	10,158,000		$	208,000		$	0		$	10,366,000

Ending balance: collectively evaluated for impairment	$	8,819,000		$	1,027,000		$	39,000		$	9,885,000


Total loans:
Ending balance	$	1,230,841,000		$	97,872,000					$	1,328,713,000

Ending balance: individually evaluated for impairment	$	44,257,000		$	1,193,000					$	45,450,000

Ending balance: collectively evaluated for impairment	$	1,186,584,000		$	96,679,000					$	1,283,263,000

Activity in the allowance for loan losses for acquired loans during the three months ended March 31, 2015 is as follows:

	Commercial			Retail
	Loans			Loans			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	681,000		$	61,000		$	0	$	742,000
Provision for loan losses		(60,000	)		117,000			0		57,000
Charge-offs		0			(7,000	)		0		(7,000	)
Recoveries		1,000			6,000			0		7,000
Ending balance	$	622,000		$	177,000		$	0	$	799,000

In accordance with acquisition accounting rules, acquired loans were recorded at fair value at the Merger Date and the prior allowance was eliminated.

Activity in the allowance for loan losses and the recorded investments in originated loans as of and during the three months ended March 31, 2014 are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	20,455,000		$	2,358,000		$	8,000		$	22,821,000
Provision for loan losses		(1,454,000	)		(434,000	)		(12,000	)		(1,900,000	)
Charge-offs		(586,000	)		(2,000	)		0			(588,000	)
Recoveries		586,000			35,000			0			621,000
Ending balance	$	19,001,000		$	1,957,000		$	(4,000	)	$	20,954,000

Ending balance: individually evaluated for impairment	$	9,508,000		$	971,000		$	0		$	10,479,000

Ending balance: collectively evaluated for impairment	$	9,493,000		$	986,000		$	(4,000	)	$	10,475,000


Total loans:
Ending balance	$	1,004,218,000		$	62,578,000					$	1,066,796,000

Ending balance: individually evaluated for impairment	$	29,883,000		$	3,512,000					$	33,395,000

Ending balance: collectively evaluated for impairment	$	974,335,000		$	59,066,000					$	1,033,401,000

Loans modified as troubled debt restructurings during the three months ended March 31, 2015 were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated loans
Commercial:
Commercial and industrial		6	$	568,000	$	593,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		0		0		0
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total originated commercial		6		568,000		593,000

Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total originated retail		0		0		0

Total originated loans		6	$	568,000	$	593,000

Acquired loans
Commercial:
Commercial and industrial		1	$	79,000	$	79,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		2		50,000		50,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total acquired commercial		3		129,000		129,000

Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total acquired retail		0		0		0

Total acquired loans		3	$	129,000	$	129,000

Loans modified as troubled debt restructurings during the three months ended March 31, 2014 were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated loans
Commercial:
Commercial and industrial		1	$	14,000	$	14,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		0		0		0
Real estate – non-owner occupied		2		354,000		323,000
Real estate – multi-family and residential rental		0		0		0
Total originated commercial		3		368,000		337,000

Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total originated retail		0		0		0

Total originated loans		3	$	368,000	$	337,000

The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2015 (amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		0		0
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		0		0

Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0

Total		0	$	0

The following acquired loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due within the three months ended March 31, 2015 (amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		1		1,339,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		1,339,000

Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0

Total		1	$	1,339,000

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		0		0
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		0		0

Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0

Total		0	$	0

Activity for originated loans categorized as troubled debt restructurings during the three months ended March 31, 2015 is as follows:

				Commercial Vacant Land,									Commercial
				Land			Commercial			Commercial			Real Estate -
	Commercial			Development,			Real Estate -			Real Estate -			Multi-Family
	and			and Residential			Owner			Non-Owner			and Residential
	Industrial			Construction			Occupied			Occupied			Rental

Commercial Loan Portfolio:
Beginning Balance	$	7,026,000		$	2,680,000		$	17,160,000		$	17,439,000		$	505,000
Charge-Offs		0			0			0			0			0
Payments		(1,155,000	)		(26,000	)		(194,000	)		(1,376,000	)		(7,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		685,000			0			0			0			0
Ending Balance	$	6,556,000		$	2,654,000		$	16,966,000		$	16,063,000		$	498,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	0	$	1,967,000
Charge-Offs		0		(125,000	)
Payments		0		(1,540,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		0
Ending Balance	$	0	$	302,000

Activity for acquired loans categorized as troubled debt restructurings during the three months ended March 31, 2015 is as follows:

			Commercial Vacant Land,								Commercial
			Land		Commercial			Commercial			Real Estate -
	Commercial		Development,		Real Estate -			Real Estate -			Multi-Family
	and		and Residential		Owner			Non-Owner			and Residential
	Industrial		Construction		Occupied			Occupied			Rental

Commercial Loan Portfolio:
Beginning Balance	$	1,439,000	$	0	$	1,569,000		$	64,000		$	381,000
Charge-Offs		0		0		0			0			0
Payments		0		0		(179,000	)		(2,000	)		(48,000	)
Transfers to ORE		0		0		0			0			0
Net Additions/Deletions		80,000		0		102,000			0			0
Ending Balance	$	1,519,000	$	0	$	1,492,000		$	62,000		$	333,000

	Retail			Retail
	Home Equity			1-4 Family
	and Other			Mortgages
Retail Loan Portfolio:
Beginning Balance	$	26,000		$	178,000
Charge-Offs		0			0
Payments		(26,000	)		(1,000	)
Transfers to ORE		0			0
Net Additions/Deletions		0			0
Ending Balance	$	0		$	177,000

Activity for originated loans categorized as troubled debt restructurings during the three months ended March 31, 2014 is as follows:

				Commercial Vacant Land,									Commercial
				Land			Commercial			Commercial			Real Estate -
	Commercial			Development,			Real Estate -			Real Estate -			Multi-Family
	and			and Residential			Owner			Non-Owner			and Residential
	Industrial			Construction			Occupied			Occupied			Rental

Commercial Loan Portfolio:
Beginning Balance	$	1,656,000		$	4,501,000		$	1,816,000		$	22,311,000		$	2,620,000
Charge-Offs		0			0			(11,000	)		0			(420,000	)
Payments		(266,000	)		(3,149,000	)		(49,000	)		(1,001,000	)		(1,468,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		14,000			2,898,000			0			319,000			0
Ending Balance	$	1,404,000		$	4,250,000		$	1,756,000		$	21,629,000		$	732,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	0	$	2,191,000
Charge-Offs		0		0
Payments		0		(69,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		0
Ending Balance	$	0	$	2,122,000

The allowance related to originated loans categorized as troubled debt restructurings was as follows:

	March 31,		December 31,
	2015		2014

Commercial:
Commercial and industrial	$	13,000	$	16,000
Vacant land, land development, and residential construction		232,000		151,000
Real estate – owner occupied		168,000		182,000
Real estate – non-owner occupied		4,394,000		4,778,000
Real estate – multi-family and residential rental		577,000		666,000
Total commercial		5,384,000		5,793,000

Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0

Total related allowance	$	5,384,000	$	5,793,000

In general, our policy dictates that a renewal or modification of an 8- or 9-rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated 8 contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated 9 reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal; we believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe 8- or 9-rated loans renewed or modified were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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