Note 3 - Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2016

Receivables [Abstract]

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

3.     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. 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, 2016 were $2.30 billion compared to $2.28 billion at December 31, 2015, an increase of $17.9 million, or 0.8%. The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at March 31, 2016 and December 31, 2015, and the percentage change in loans from the end of 2015 to the end of the first quarter of 2016, are as follows:

											Percent
	March 31, 2016					December 31, 2015					Increase
	Balance		%			Balance		%			(Decrease)
Originated loans
Commercial:
Commercial and industrial	$	613,570,000		36.4	%	$	577,872,000		35.7	%		6.2	%
Vacant land, land development, and residential construction		28,451,000		1.7			30,138,000		1.9			(5.6	)
Real estate – owner occupied		334,948,000		19.8			330,798,000		20.5			1.3
Real estate – non-owner occupied		549,226,000		32.5			520,754,000		32.2			5.5
Real estate – multi-family and residential rental		36,582,000		2.2			33,954,000		2.1			7.7
Total commercial		1,562,777,000		92.6			1,493,516,000		92.4			4.6
Retail:
Home equity and other		68,342,000		4.1			67,816,000		4.2			0.8
1-4 family mortgages		56,357,000		3.3			55,255,000		3.4			2.0
Total retail		124,699,000		7.4			123,071,000		7.6			1.3
Total originated loans	$	1,687,476,000		100.0	%	$	1,616,587,000		100.0	%		4.4	%

											Percent
	March 31, 2016					December 31, 2015					Increase
	Balance		%			Balance		%			(Decrease)
Acquired loans
Commercial:
Commercial and industrial	$	101,042,000		16.6	%	$	118,431,000		17.9	%		(14.7%	)
Vacant land, land development, and residential construction		11,179,000		1.9			14,982,000		2.3			(25.4	)
Real estate – owner occupied		106,714,000		17.5			115,121,000		17.4			(7.3	)
Real estate – non-owner occupied		116,787,000		19.2			123,597,000		18.7			(5.5	)
Real estate – multi-family and residential rental		75,951,000		12.5			81,049,000		12.3			(6.3	)
Total commercial		411,673,000		67.7			453,180,000		68.6			(9.2	)
Retail:
Home equity and other		67,341,000		11.1			72,830,000		11.0			(7.5	)
1-4 family mortgages		129,178,000		21.2			135,130,000		20.4			(4.4	)
Total retail		196,519,000		32.3			207,960,000		31.4			(5.5	)
Total acquired loans	$	608,192,000		100.0	%	$	661,140,000		100.0	%		(8.0%	)

											Percent
	March 31, 2016					December 31, 2015					Increase
	Balance		%			Balance		%			(Decrease)
Total loans
Commercial:
Commercial and industrial	$	714,612,000		31.1	%	$	696,303,000		30.6	%		2.6	%
Vacant land, land development, and residential construction		39,630,000		1.7			45,120,000		2.0			(12.2	)
Real estate – owner occupied		441,662,000		19.3			445,919,000		19.6			(1.0	)
Real estate – non-owner occupied		666,013,000		29.0			644,351,000		28.3			3.4
Real estate – multi-family and residential rental		112,533,000		4.9			115,003,000		5.0			(2.1	)
Total commercial		1,974,450,000		86.0			1,946,696,000		85.5			1.4
Retail:
Home equity and other		135,683,000		5.9			140,646,000		6.2			(3.5	)
1-4 family mortgages		185,535,000		8.1			190,385,000		8.3			(2.5	)
Total retail		321,218,000		14.0			331,031,000		14.5			(3.0	)
Total loans	$	2,295,668,000		100.0	%	$	2,277,727,000		100.0	%		0.8	%

The total contractually required payments due on and carrying value of acquired impaired loans were $21.3 million and $10.1 million, respectively, as of March 31, 2016. The total contractually required payments due on and carrying value of acquired impaired loans were $24.6 million and $13.1 million, respectively, as of December 31, 2015. Changes in the accretable yield for acquired impaired loans for the three months ended March 31, 2016 and March 31, 2015 were as follows:

Balance at December 31, 2015	$	5,193,000
Additions		21,000
Accretion income		(680,000	)
Net reclassification from nonaccretable to accretable		2,372,000
Reductions (1)		(587,000	)
Balance at March 31, 2016	$	6,319,000
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	)
Balance at March 31, 2015	$	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, 2016 and December 31, 2015 were as follows:

	March 31,		December 31,
	2016		2015
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		1,702,000		1,954,000
Total nonperforming originated loans	$	1,702,000	$	1,954,000

Nonperforming acquired loans as of March 31, 2016 and December 31, 2015 were as follows:

	March 31,		December 31,
	2016		2015
Loans past due 90 days or more still accruing interest	$	0	$	5,000
Nonaccrual loans		3,140,000		3,485,000
Total nonperforming acquired loans	$	3,140,000	$	3,490,000

The recorded principal balance of nonperforming loans was as follows:

	March 31,		December 31,
	2016		2015
Commercial:
Commercial and industrial	$	486,000	$	458,000
Vacant land, land development, and residential construction		140,000		155,000
Real estate – owner occupied		1,641,000		1,797,000
Real estate – non-owner occupied		51,000		79,000
Real estate – multi-family and residential rental		81,000		157,000
Total commercial		2,399,000		2,646,000
Retail:
Home equity and other		611,000		771,000
1-4 family mortgages		1,832,000		2,027,000
Total retail		2,443,000		2,798,000
Total nonperforming loans	$	4,842,000	$	5,444,000

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, 2016:

	30 – 59 Days  Past Due		60 – 89 Days Past Due		Greater Than 89 Days Past Due		Total  Past Due		Current		Total Loans		Recorded Balance > 89 Days and Accruing
Originated loans
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0	$	613,570,000	$	613,570,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		28,451,000		28,451,000		0
Real estate – owner occupied		425,000		0		4,000		429,000		334,519,000		334,948,000		0
Real estate – non-owner occupied		0		0		0		0		549,226,000		549,226,000		0
Real estate – multi-family and residential rental		0		0		0		0		36,582,000		36,582,000		0
Total commercial		425,000		0		4,000		429,000		1,562,348,000		1,562,777,000		0
Retail:
Home equity and other		99,000		0		2,000		101,000		68,241,000		68,342,000		0
1-4 family mortgages		0		17,000		351,000		368,000		55,989,000		56,357,000		0
Total retail		99,000		17,000		353,000		469,000		124,230,000		124,699,000		0
Total past  due loans	$	524,000	$	17,000	$	357,000	$	898,000	$	1,686,578,000	$	1,687,476,000	$	0

					Greater								Recorded
	30 – 59		60 – 89		Than 89								Balance > 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	$	20,000	$	17,000	$	383,000	$	420,000	$	100,622,000	$	101,042,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		11,179,000		11,179,000		0
Real estate – owner occupied		269,000		0		648,000		917,000		105,797,000		106,714,000		0
Real estate – non-owner occupied		0		0		498,000		498,000		116,289,000		116,787,000		0
Real estate – multi-family and residential rental		15,000		0		65,000		80,000		75,871,000		75,951,000		0
Total commercial		304,000		17,000		1,594,000		1,915,000		409,758,000		411,673,000		0
Retail:
Home equity and other		353,000		134,000		19,000		506,000		66,835,000		67,341,000		0
1-4 family mortgages		979,000		233,000		381,000		1,593,000		127,585,000		129,178,000		0
Total retail		1,332,000		367,000		400,000		2,099,000		194,420,000		196,519,000		0
Total past due loans	$	1,636,000	$	384,000	$	1,994,000	$	4,014,000	$	604,178,000	$	608,192,000	$	0

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

					Greater								Recorded
	30 – 59		60 – 89		Than 89								Balance > 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	$	577,872,000	$	577,872,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		30,138,000		30,138,000		0
Real estate – owner occupied		432,000		0		9,000		441,000		330,357,000		330,798,000		0
Real estate – non-owner occupied		0		0		0		0		520,754,000		520,754,000		0
Real estate – multi-family and residential rental		0		0		0		0		33,954,000		33,954,000		0
Total commercial		432,000		0		9,000		441,000		1,493,075,000		1,493,516,000		0
Retail:
Home equity and other		186,000		108,000		0		294,000		67,522,000		67,816,000		0
1-4 family mortgages		107,000		95,000		356,000		558,000		54,697,000		55,255,000		0
Total retail		293,000		203,000		356,000		852,000		122,219,000		123,071,000		0
Total past due loans	$	725,000	$	203,000	$	365,000	$	1,293,000	$	1,615,294,000	$	1,616,587,000	$	0

					Greater								Recorded
	30 – 59		60 – 89		Than 89								Balance > 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	$	0	$	5,000	$	541,000	$	546,000	$	117,885,000	$	118,431,000	$	0
Vacant land, land development, and residential construction		27,000		0		0		27,000		14,955,000		14,982,000		0
Real estate – owner occupied		323,000		425,000		1,142,000		1,890,000		113,231,000		115,121,000		0
Real estate – non-owner occupied		53,000		703,000		79,000		835,000		122,762,000		123,597,000		0
Real estate – multi-family and residential rental		223,000		54,000		0		277,000		80,772,000		81,049,000		0
Total commercial		626,000		1,187,000		1,762,000		3,575,000		449,605,000		453,180,000		0
Retail:
Home equity and other		395,000		44,000		28,000		467,000		72,363,000		72,830,000		5,000
1-4 family mortgages		960,000		354,000		416,000		1,730,000		133,400,000		135,130,000		0
Total retail		1,355,000		398,000		444,000		2,197,000		205,763,000		207,960,000		5,000
Total past due loans	$	1,981,000	$	1,585,000	$	2,206,000	$	5,772,000	$	655,368,000	$	661,140,000	$	5,000

Impaired originated loans as of March 31, 2016, and average originated impaired loans for the three months ended March 31, 2016, 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	$	1,888,000	$	1,888,000		$	1,695,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		285,000		69,000			287,000
Real estate – non-owner occupied		5,659,000		5,659,000			5,678,000
Real estate – multi-family and residential rental		0		0			0
Total commercial		7,832,000		7,616,000			7,660,000
Retail:
Home equity and other		19,000		9,000			7,000
1-4 family mortgages		1,222,000		573,000			615,000
Total retail		1,241,000		582,000			622,000
Total with no related allowance recorded	$	9,073,000	$	8,198,000		$	8,282,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	284,000	$	235,000	$	78,000	$	270,000
Vacant land, land development and residential construction		2,010,000		1,640,000		73,000		1,648,000
Real estate – owner occupied		5,852,000		1,300,000		238,000		1,307,000
Real estate – non-owner occupied		4,754,000		4,754,000		188,000		4,798,000
Real estate – multi-family and residential rental		1,006,000		1,006,000		335,000		1,017,000
Total commercial		13,906,000		8,935,000		912,000		9,040,000
Retail:
Home equity and other		511,000		470,000		140,000		516,000
1-4 family mortgages		165,000		126,000		35,000		127,000
Total retail		676,000		596,000		175,000		643,000
Total with an allowance recorded	$	14,582,000	$	9,531,000	$	1,087,000	$	9,683,000
Total impaired loans:
Commercial	$	21,738,000	$	16,551,000	$	912,000	$	16,700,000
Retail		1,917,000		1,178,000		175,000		1,265,000
Total impaired loans	$	23,655,000	$	17,729,000	$	1,087,000	$	17,965,000

Impaired acquired loans as of March 31, 2016, and average impaired acquired loans for the three months ended March 31, 2016, 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	$	1,456,000	$	1,430,000		$	1,462,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		1,885,000		1,669,000			1,811,000
Real estate – non-owner occupied		773,000		772,000			826,000
Real estate – multi-family and residential rental		405,000		282,000			343,000
Total commercial		4,519,000		4,153,000			4,442,000
Retail:
Home equity and other		394,000		277,000			293,000
1-4 family mortgages		1,609,000		1,274,000			1,411,000
Total retail		2,003,000		1,551,000			1,704,000
Total with no related allowance recorded	$	6,522,000	$	5,704,000		$	6,146,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	391,000	$	379,000	$	102,000	$	378,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		50,000		50,000		4,000		50,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		20,000		20,000		1,000		22,000
Total commercial		461,000		449,000		107,000		450,000
Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		0		0		0		88,000
Total retail		0		0		0		88,000
Total with an allowance recorded	$	461,000	$	449,000	$	107,000	$	538,000
Total impaired loans:
Commercial	$	4,980,000	$	4,602,000	$	107,000	$	4,892,000
Retail		2,003,000		1,551,000		0		1,792,000
Total impaired loans	$	6,983,000	$	6,153,000	$	107,000	$	6,684,000

Impaired originated loans as of December 31, 2015, and average impaired originated 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	$	1,509,000	$	1,501,000		$	1,550,000
Vacant land, land development and residential construction		0		0			203,000
Real estate – owner occupied		712,000		505,000			1,950,000
Real estate – non-owner occupied		5,696,000		5,696,000			662,000
Real estate – multi-family and residential rental		0		0			313,000
Total commercial		7,917,000		7,702,000			4,678,000
Retail:
Home equity and other		14,000		5,000			191,000
1-4 family mortgages		1,328,000		657,000			547,000
Total retail		1,342,000		662,000			738,000
Total with no related allowance recorded	$	9,259,000	$	8,364,000		$	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	$	352,000	$	305,000	$	165,000	$	5,196,000
Vacant land, land development and residential construction		2,017,000		1,655,000		245,000		2,000,000
Real estate – owner occupied		5,867,000		1,314,000		242,000		15,596,000
Real estate – non-owner occupied		4,841,000		4,841,000		201,000		15,816,000
Real estate – multi-family and residential rental		1,028,000		1,028,000		365,000		1,354,000
Total commercial		14,105,000		9,143,000		1,218,000		39,962,000
Retail:
Home equity and other		600,000		562,000		209,000		125,000
1-4 family mortgages		165,000		128,000		47,000		1,151,000
Total retail		765,000		690,000		256,000		1,276,000
Total with an allowance recorded	$	14,870,000	$	9,833,000	$	1,474,000	$	41,238,000
Total impaired loans:
Commercial	$	22,022,000	$	16,845,000	$	1,218,000	$	44,640,000
Retail		2,107,000		1,352,000		256,000		2,014,000
Total impaired loans	$	24,129,000	$	18,197,000	$	1,474,000	$	46,654,000

Impaired acquired loans as of December 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	$	1,528,000	$	1,494,000		$	1,267,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		2,233,000		1,952,000			160,000
Real estate – non-owner occupied		880,000		880,000			317,000
Real estate – multi-family and residential rental		452,000		404,000			714,000
Total commercial		5,093,000		4,730,000			2,458,000
Retail:
Home equity and other		471,000		310,000			504,000
1-4 family mortgages		1,804,000		1,548,000			894,000
Total retail		2,275,000		1,858,000			1,398,000
Total with no related allowance recorded	$	7,368,000	$	6,588,000		$	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	$	383,000	$	376,000	$	102,000	$	57,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		51,000		51,000		4,000		1,464,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		23,000		23,000		0		14,000
Total commercial		457,000		450,000		106,000		1,535,000
Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		175,000		175,000		6,000		142,000
Total retail		175,000		175,000		6,000		142,000
Total with an allowance recorded	$	632,000	$	625,000	$	112,000	$	1,677,000
Total impaired loans:
Commercial	$	5,550,000	$	5,180,000	$	106,000	$	3,993,000
Retail		2,450,000		2,033,000		6,000		1,540,000
Total impaired loans	$	8,000,000	$	7,213,000	$	112,000	$	5,533,000

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 $0.3 million and $0.4 million during the first quarter of 2016 and 2015, respectively. No interest income was recognized on nonaccrual loans during either the first quarter of 2016 or 2015.

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, 2016:

Originated loans

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

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	417,049,000	$	16,694,000	$	231,625,000	$	434,645,000	$	19,947,000
Grades 5 – 7		196,431,000		11,617,000		101,552,000		114,581,000		15,629,000
Grades 8 – 9		90,000		140,000		1,771,000		0		1,006,000
Total commercial	$	613,570,000	$	28,451,000	$	334,948,000	$	549,226,000	$	36,582,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Total retail	$	68,342,000	$	56,357,000

Acquired loans

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

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	51,717,000	$	2,892,000	$	43,806,000	$	66,096,000	$	42,159,000
Grades 5 – 7		46,749,000		7,811,000		58,971,000		48,792,000		33,071,000
Grades 8 – 9		2,576,000		476,000		3,937,000		1,899,000		721,000
Total commercial	$	101,042,000	$	11,179,000	$	106,714,000	$	116,787,000	$	75,951,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Total retail	$	67,341,000	$	129,178,000

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

Originated loans

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

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	417,120,000	$	18,118,000	$	230,629,000	$	400,350,000	$	19,121,000
Grades 5 – 7		160,454,000		10,365,000		98,332,000		120,404,000		13,806,000
Grades 8 – 9		298,000		1,655,000		1,837,000		0		1,027,000
Total commercial	$	577,872,000	$	30,138,000	$	330,798,000	$	520,754,000	$	33,954,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Total retail	$	67,816,000	$	55,255,000

Acquired loans

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

	Commercial and Industrial		Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Commercial Real Estate - Multi-Family and Residential Rental
Internal credit risk grade groupings:
Grades 1 – 4	$	67,978,000	$	3,095,000	$	45,807,000	$	71,197,000	$	44,763,000
Grades 5 – 7		47,589,000		11,364,000		63,563,000		50,066,000		35,288,000
Grades 8 – 9		2,864,000		523,000		5,751,000		2,334,000		998,000
Total commercial	$	118,431,000	$	14,982,000	$	115,121,000	$	123,597,000	$	81,049,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Total retail	$	72,830,000	$	135,130,000

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, 2016 are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	13,672,000		$	1,421,000		$	140,000	$	15,233,000
Provision for loan losses		94,000			503,000			74,000		671,000
Charge-offs		(89,000	)		(386,000	)		0		(475,000	)
Recoveries		247,000			296,000			0		543,000
Ending balance	$	13,924,000		$	1,834,000		$	214,000	$	15,972,000
Ending balance: individually evaluated for impairment	$	913,000		$	175,000		$	0	$	1,088,000
Ending balance: collectively evaluated for impairment	$	13,011,000		$	1,659,000		$	214,000	$	14,884,000
Total loans:
Ending balance	$	1,562,777,000		$	124,699,000				$	1,687,476,000
Ending balance: individually evaluated for impairment	$	16,551,000		$	1,178,000				$	17,729,000
Ending balance: collectively evaluated for impairment	$	1,546,226,000		$	123,521,000				$	1,669,747,000

Activity in the allowance for loan losses for acquired loans during the three months ended March 31, 2016 is as follows:

	Commercial			Retail
	Loans			Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	420,000		$	28,000		$	0	$	448,000
Provision for loan losses		(110,000	)		39,000			0		(71,000	)
Charge-offs		0			0			0		0
Recoveries		(44,000	)		(43,000	)		0		(87,000	)
Ending balance	$	266,000		$	24,000		$	0	$	290,000

The negative loan recoveries reflected for acquired loans during the first three months of 2016 resulted from reversals of prior-period recoveries associated with certain purchased credit impaired (“PCI”) loans that were subject to pre-acquisition charge-offs.  Post-acquisition payments received on these PCI loans were incorrectly reported as loan loss recoveries in prior periods; during the first quarter of 2016, these recoveries were reversed and properly reported as recovery income if associated with specifically reviewed PCI loans or retained gains if associated with PCI-pooled loans.

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.

Loans modified as troubled debt restructurings during the three months ended March 31, 2016 were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated loans
Commercial:
Commercial and industrial		1	$	20,000	$	20,000
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		1		20,000		20,000
Retail:
Home equity and other		0		0		0
1-4 family mortgages		0		0		0
Total originated retail		0		0		0
Total originated loans		1	$	20,000	$	20,000
Acquired loans
Commercial:
Commercial and industrial		0	$	0	$	0
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 acquired commercial		0		0		0
Retail:
Home equity and other		1		26,000		26,000
1-4 family mortgages		1		19,000		19,000
Total acquired retail		2		45,000		45,000
Total acquired loans		2	$	45,000	$	45,000

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

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, 2016 (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, 2016 (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 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 ten 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

Activity for originated loans categorized as troubled debt restructurings during the three months ended March 31, 2016 is as follows:

	Commercial and Industrial			Commercial Vacant Land, Land Development, and Residential Construction			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance	$	2,028,000		$	2,086,000		$	1,400,000		$	10,657,000		$	476,000
Charge-Offs		0			0			0			0			0
Payments		(101,000	)		(24,000	)		(31,000	)		(128,000	)		(7,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		19,000			0			0			0			0
Ending Balance	$	1,946,000		$	2,062,000		$	1,369,000		$	10,529,000		$	469,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	146,000	$	128,000
Charge-Offs		0		0
Payments		0		(2,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		0
Ending Balance	$	146,000	$	126,000

Activity for acquired loans categorized as troubled debt restructurings during the three months ended March 31, 2016 is as follows:

	Commercial and Industrial			Commercial Vacant Land, Land Development, and ResidentialConstruction		Commercial  Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance	$	1,686,000		$	0	$	1,652,000		$	647,000		$	331,000
Charge-Offs		(48,000	)		0		0			0			0
Payments		0			0		(197,000	)		(10,000	)		(53,000	)
Transfers to ORE		0			0		0			0			0
Net Additions/Deletions		49,000			0		0			0			0
Ending Balance	$	1,687,000		$	0	$	1,455,000		$	637,000		$	278,000

	Retail			Retail
	Home Equity			1-4 Family
	and Other			Mortgages
Retail Loan Portfolio:
Beginning Balance	$	141,000		$	316,000
Charge-Offs		0			0
Payments		(6,000	)		0
Transfers to ORE		0			0
Net Additions/Deletions		26,000			19,000
Ending Balance	$	161,000		$	335,000

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

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

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

	March 31,		December 31,
	2016		2015
Commercial:
Commercial and industrial	$	147,000	$	221,000
Vacant land, land development, and residential construction		29,000		186,000
Real estate – owner occupied		111,000		115,000
Real estate – non-owner occupied		188,000		201,000
Real estate – multi-family and residential rental		220,000		365,000
Total commercial		695,000		1,088,000
Retail:
Home equity and other		18,000		14,000
1-4 family mortgages		0		6,000
Total retail		18,000		20,000
Total related allowance	$	713,000	$	1,108,000

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.