NOTE

– 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 included in other assets in the Consolidated Balance Sheets. 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 interest 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 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 Sheets, reflects estimated future credit losses and uncollectable 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 contractually 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.

Year-end loans disaggregated by class of loan within the loan portfolio segments were as follows:

	December 31, 2016					December 31, 2015					Percent Increase
	Balance		%			Balance		%			(Decrease)
Originated Loans
Commercial:
Commercial and industrial	$	636,771,000		33.8	%	$	577,872,000		35.7	%		10.2	%
Vacant land, land development, and residential construction		26,519,000		1.4			30,138,000		1.9			(12.0	)
Real estate – owner occupied		363,509,000		19.3			330,798,000		20.5			9.9
Real estate – non-owner occupied		652,054,000		34.6			520,754,000		32.2			25.2
Real estate – multi-family and residential rental		50,045,000		2.6			33,954,000		2.1			47.4
Total commercial		1,728,898,000		91.7			1,493,516,000		92.4			15.8

Retail:
Home equity and other		69,831,000		3.7			67,816,000		4.2			3.0
1-4 family mortgages		85,819,000		4.6			55,255,000		3.4			55.3
Total retail		155,650,000		8.3			123,071,000		7.6			26.5

Total originated loans	$	1,884,548,000		100.0	%	$	1,616,587,000		100.0	%		16.6	%

	December 31, 2016					December 31, 2015					Percent Increase
	Balance		%			Balance		%			(Decrease)
Acquired Loans
Commercial:
Commercial and industrial	$	77,132,000		15.6	%	$	118,431,000		17.9	%		(34.9	% )
Vacant land, land development, and residential construction		8,309,000		1.7			14,982,000		2.3			(44.5	)
Real estate – owner occupied		86,955,000		17.6			115,121,000		17.4			(24.5	)
Real estate – non-owner occupied		96,215,000		19.5			123,597,000		18.7			(22.2	)
Real estate – multi-family and residential rental		67,838,000		13.7			81,049,000		12.3			(16.3	)
Total commercial		336,449,000		68.1			453,180,000		68.6			(25.8	)

Retail:
Home equity and other		48,216,000		9.8			72,830,000		11.0			(33.8	)
1-4 family mortgages		109,407,000		22.1			135,130,000		20.4			(19.0	)
Total retail		157,623,000		31.9			207,960,000		31.4			(24.2	)

Total acquired loans	$	494,072,000		100.0	%	$	661,140,000		100.0	%		(25.3	% )

	December 31, 2016					December 31, 2015					Percent Increase
	Balance		%			Balance		%			(Decrease)
Total Loans
Commercial:
Commercial and industrial	$	713,903,000		30.0	%	$	696,303,000		30.6	%		2.5	%
Vacant land, land development, and residential construction		34,828,000		1.5			45,120,000		2.0			(22.8	)
Real estate – owner occupied		450,464,000		18.9			445,919,000		19.6			1.0
Real estate – non-owner occupied		748,269,000		31.5			644,351,000		28.3			16.1
Real estate – multi-family and residential rental		117,883,000		4.9			115,003,000		5.0			2.5
Total commercial		2,065,347,000		86.8			1,946,696,000		85.5			6.1

Retail:
Home equity and other		118,047,000		5.0			140,646,000		6.2			(16.1	)
1-4 family mortgages		195,226,000		8.2			190,385,000		8.3			2.5
Total retail		313,273,000		13.2			331,031,000		14.5			(5.4	)

Total loans	$	2,378,620,000		100.0	%	$	2,277,727,000		100.0	%		4.4	%

The total contractually required payments and carrying value of acquired impaired loans were

$15.5

million and

$6.2

million, respectively, as of

December

31,

2016.

The total contractually required payments 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 years ended

December

31,

2016

and

December

31,

2015

were as follows:

	2016
Balance at December 31, 2015	$	5,193,000
Additions		245,000
Accretion income		(2,388,000	)
Net reclassification from nonaccretable to accretable		4,635,000
Reductions (1)		(1,761,000	)
Removal due to pool excess recovery (2)		(4,198,000	)
Balance at December 31, 2016	$	1,726,000

	2015
Balance at December 31, 2014	$	4,998,000
Additions		26,000
Accretion income		(2,607,000	)
Net reclassification from nonaccretable to accretable		4,272,000
Reductions (1)		(1,496,000	)
Balance at December 31, 2015	$	5,193,000

(1)

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

(2)

Cost recovery accounting occurs once a pool’s recorded investment is reduced to

zero

based on the outcome of the aggregated loan level activity at cash flow estimation. Proceeds received on pools in recovery status are deemed as recovery income, and are recorded as interest income as payments are received, with accretion no longer being recognized.

Concentrations within the loan portfolio were as follows at year-end:

	2016					2015
	Balance		Percentage of Loan Portfolio			Balance		Percentage of Loan Portfolio
Commercial real estate loans to lessors of non-residential buildings	$	562,902,000		23.7	%	$	506,721,000		22.2	%

Year-end nonperforming originated loans were as follows:

	2016		2015

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		3,328,000		1,954,000
Total nonperforming loans	$	3,328,000	$	1,954,000

Year-end nonperforming acquired loans were as follows:

	2016		2015

Loans past due 90 days or more still accruing interest	$	0	$	5,000
Nonaccrual loans		2,611,000		3,485,000
Total nonperforming loans	$	2,611,000	$	3,490,000

The recorded principal balance of all nonperforming loans was as follows:

	December 31, 2016		December 31, 2015
Commercial:
Commercial and industrial	$	2,296,000	$	458,000
Vacant land, land development, and residential construction		95,000		155,000
Real estate – owner occupied		285,000		1,797,000
Real estate – non-owner occupied		488,000		79,000
Real estate – multi-family and residential rental		17,000		157,000
Total commercial		3,181,000		2,646,000

Retail:
Home equity and other		496,000		771,000
1-4 family mortgages		2,262,000		2,027,000
Total retail		2,758,000		2,798,000

Total nonperforming loans	$	5,939,000	$	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

December

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	$	27,000	$	0	$	27,000	$	636,744,000	$	636,771,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		26,519,000		26,519,000		0
Real estate – owner occupied		0		0		0		0		363,509,000		363,509,000		0
Real estate – non-owner occupied		0		0		0		0		652,054,000		652,054,000		0
Real estate – multi-family and residential rental		0		0		0		0		50,045,000		50,045,000		0
Total commercial		0		27,000		0		27,000		1,728,871,000		1,728,898,000		0

Retail:
Home equity and other		46,000		98,000		0		144,000		69,687,000		69,831,000		0
1- 4 family mortgages		758,000		122,000		337,000		1,217,000		84,602,000		85,819,000		0
Total retail		804,000		220,000		337,000		1,361,000		154,289,000		155,650,000		0

Total past due loans	$	804,000	$	247,000	$	337,000	$	1,388,000	$	1,883,160,000	$	1,884,548,000	$	0

	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
Acquired Loans

Commercial:
Commercial and industrial	$	0	$	11,000	$	16,000	$	27,000	$	77,105,000	$	77,132,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		8,309,000		8,309,000		0
Real estate – owner occupied		62,000		0		50,000		112,000		86,843,000		86,955,000		0
Real estate – non-owner occupied		0		0		353,000		353,000		95,862,000		96,215,000		0
Real estate – multi-family and residential rental		0		0		17,000		17,000		67,821,000		67,838,000		0
Total commercial		62,000		11,000		436,000		509,000		335,940,000		336,449,000		0

Retail:
Home equity and other		258,000		26,000		45,000		329,000		47,887,000		48,216,000		0
1- 4 family mortgages		1,255,000		467,000		439,000		2,161,000		107,246,000		109,407,000		0
Total retail		1,513,000		493,000		484,000		2,490,000		155,133,000		157,623,000		0

Total past due loans	$	1,575,000	$	504,000	$	920,000	$	2,999,000	$	491,073,000	$	494,072,000	$	0

An age analysis of past due loans is as follows as of

December

31,

2015:

	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	$	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

	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
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		0
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		0

Total past due loans	$	1,981,000	$	1,585,000	$	2,206,000	$	5,772,000	$	655,368,000	$	661,140,000	$	0

Impaired originated loans with no related allowance recorded were as follows as of

December

31,

2016:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,498,000	$	1,498,000		$	1,574,000
Vacant land, land development and residential construction		487,000		95,000			32,000
Real estate – owner occupied		0		0			270,000
Real estate – non-owner occupied		0		0			3,752,000
Real estate – multi-family and residential rental		130,000		130,000			43,000
Total commercial		2,115,000		1,723,000			5,671,000
Retail:
Home equity and other		114,000		114,000			99,000
1-4 family mortgages		1,270,000		630,000			813,000
Total retail		1,384,000		744,000			912,000

Total with no related allowance recorded	$	3,499,000	$	2,467,000		$	6,583,000

Impaired originated loans with an allowance recorded and total impaired originated loans were as follows as of

December

31,

2016:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,405,000	$	2,382,000	$	673,000	$	717,000
Vacant land, land development and residential construction		999,000		999,000		28,000		1,011,000
Real estate – owner occupied		906,000		906,000		97,000		2,095,000
Real estate – non-owner occupied		5,020,000		5,020,000		247,000		3,641,000
Real estate – multi-family and residential rental		1,040,000		1,040,000		258,000		812,000
Total commercial		10,370,000		10,347,000		1,303,000		8,276,000
Retail:
Home equity and other		434,000		412,000		203,000		449,000
1-4 family mortgages		204,000		157,000		66,000		144,000
Total retail		638,000		569,000		269,000		593,000

Total with an allowance recorded	$	11,008,000	$	10,916,000	$	1,572,000	$	8,869,000

Total impaired loans:
Commercial	$	12,485,000	$	12,070,000	$	1,303,000	$	13,947,000
Retail		2,022,000		1,313,000		269,000		1,505,000
Total impaired originated loans	$	14,507,000	$	13,383,000	$	1,572,000	$	15,452,000

Impaired acquired loans with no related allowance recorded were as follows as of

December

31,

2016:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	853,000	$	826,000		$	1,074,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		1,281,000		1,210,000			1,145,000
Real estate – non-owner occupied		928,000		789,000			932,000
Real estate – multi-family and residential rental		152,000		89,000			303,000
Total commercial		3,214,000		2,914,000			3,454,000
Retail:
Home equity and other		531,000		351,000			389,000
1-4 family mortgages		2,081,000		1,629,000			1,562,000
Total retail		2,612,000		1,980,000			1,951,000

Total with no related allowance recorded	$	5,826,000	$	4,894,000		$	5,405,000

Impaired acquired loans with an allowance recorded and total impaired acquired loans were as follows as of

December

31,

2016:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	19,000	$	19,000	$	2,000	$	207,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		48,000		48,000		3,000		38,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		5,000
Total commercial		67,000		67,000		5,000		250,000
Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		172,000		172,000		4,000		120,000
Total retail		172,000		172,000		4,000		120,000

Total with an allowance recorded	$	239,000	$	239,000	$	9,000	$	370,000

Total impaired loans:
Commercial	$	3,281,000	$	2,981,000	$	5,000	$	3,704,000
Retail		2,784,000		2,152,000		4,000		2,071,000
Total impaired acquired loans	$	6,065,000	$	5,133,000	$	9,000	$	5,775,000

Impaired originated loans with no related allowance recorded were as follows as of

December

31,

2015:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,509,000	$	1,501,000		$	1,683,000
Vacant land, land development and residential construction		0		0			81,000
Real estate – owner occupied		712,000		505,000			927,000
Real estate – non-owner occupied		5,696,000		5,696,000			3,703,000
Real estate – multi-family and residential rental		0		0			186,000
Total commercial		7,917,000		7,702,000			6,580,000
Retail:
Home equity and other		14,000		5,000			153,000
1-4 family mortgages		1,328,000		657,000			637,000
Total retail		1,342,000		662,000			790,000

Total with no related allowance recorded	$	9,259,000	$	8,364,000		$	7,370,000

Impaired originated loans with an allowance recorded and total impaired originated loans were as follows as of

December

31,

2015:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	352,000	$	305,000	$	165,000	$	2,314,000
Vacant land, land development and residential construction		2,017,000		1,655,000		245,000		1,952,000
Real estate – owner occupied		5,867,000		1,314,000		242,000		7,285,000
Real estate – non-owner occupied		4,841,000		4,841,000		201,000		9,265,000
Real estate – multi-family and residential rental		1,028,000		1,028,000		365,000		1,219,000
Total commercial		14,105,000		9,143,000		1,218,000		22,035,000
Retail:
Home equity and other		600,000		562,000		209,000		227,000
1-4 family mortgages		165,000		128,000		47,000		538,000
Total retail		765,000		690,000		256,000		765,000

Total with an allowance recorded	$	14,870,000	$	9,833,000	$	1,474,000	$	22,800,000

Total impaired loans:
Commercial	$	22,022,000	$	16,845,000	$	1,218,000	$	28,615,000
Retail		2,107,000		1,352,000		256,000		1,555,000
Total impaired originated loans	$	24,129,000	$	18,197,000	$	1,474,000	$	30,170,000

Impaired acquired loans with no related allowance recorded were as follows as of

December

31,

2015:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,528,000	$	1,494,000		$	1,444,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		2,233,000		1,952,000			818,000
Real estate – non-owner occupied		880,000		880,000			565,000
Real estate – multi-family and residential rental		452,000		404,000			1,520,000
Total commercial		5,093,000		4,730,000			4,347,000
Retail:
Home equity and other		471,000		310,000			400,000
1-4 family mortgages		1,804,000		1,548,000			994,000
Total retail		2,275,000		1,858,000			1,394,000

Total with no related allowance recorded	$	7,368,000	$	6,588,000		$	5,741,000

Impaired acquired loans with an allowance recorded and total impaired acquired loans were as follows as of

December

31,

2015:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	383,000	$	376,000	$	102,000	$	127,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		51,000		51,000		4,000		823,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		23,000		23,000		0		21,000
Total commercial		457,000		450,000		106,000		971,000
Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		175,000		175,000		6,000		185,000
Total retail		175,000		175,000		6,000		185,000

Total with an allowance recorded	$	632,000	$	625,000	$	112,000	$	1,156,000

Total impaired loans:
Commercial	$	5,550,000	$	5,180,000	$	106,000	$	5,318,000
Retail		2,450,000		2,033,000		6,000		1,579,000
Total impaired acquired loans	$	8,000,000	$	7,213,000	$	112,000	$	6,897,000

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

$1.2

million,

$2.4

million and

$1.8

million during

2016,

2015

and

2014,

respectively. Interest income recognized on nonaccrual loans totaled less than

$0.1

million,

$1.7

million and less than

$0.1

million during

2016,

2015

and

2014,

respectively, reflecting the collection of interest at the time of principal pay-off. Lost interest income on nonaccrual loans totaled less than

$0.1

million,

$0.3

million and

$0.1

million during

2016,

2015

and

2014,

respectively.

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.

Loans by credit quality indicators were as follows as of

December

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	$	440,219,000	$	16,378,000	$	238,890,000	$	542,294,000	$	29,793,000
Grades 5 – 7		190,170,000		10,046,000		123,517,000		109,304,000		19,082,000
Grades 8 – 9		6,382,000		95,000		1,102,000		456,000		1,170,000
Total commercial	$	636,771,000	$	26,519,000	$	363,509,000	$	652,054,000	$	50,045,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	69,831,000	$	85,819,000

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	$	40,911,000	$	1,887,000	$	36,246,000	$	57,671,000	$	39,574,000
Grades 5 – 7		35,233,000		6,164,000		49,255,000		37,040,000		28,015,000
Grades 8 – 9		988,000		258,000		1,454,000		1,504,000		249,000
Total commercial	$	77,132,000	$	8,309,000	$	86,955,000	$	96,215,000	$	67,838,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	48,216,000	$	109,407,000

Loans by 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 number system:

Grade

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

Grade

Strong sources of repayment and have low repayment risk.

Grade

Good sources of repayment and have limited repayment risk.

Grade

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

Grade

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

Grade

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

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

Grade

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

Vital weaknesses exist where collection of principal is highly questionable.

Grade

10.

Considered uncollectable and of such little value that their 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.

The allowance for originated loan losses and recorded investments in originated loans for the year-ended

December

31,

2016

are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	13,672,000		$	1,421,000		$	140,000		$	15,233,000
Provision for loan losses		2,247,000			1,031,000			(180,000	)		3,098,000
Charge-offs		(980,000	)		(1,153,000	)		0			(2,133,000	)
Recoveries		1,087,000			583,000			0			1,670,000
Ending balance	$	16,026,000		$	1,882,000		$	(40,000	)	$	17,868,000

Ending balance: individually evaluated for impairment	$	1,303,000		$	269,000		$	0		$	1,572,000

Ending balance: collectively evaluated for impairment	$	14,723,000		$	1,613,000		$	(40,000	)	$	16,296,000

Total loans:
Ending balance	$	1,728,898,000		$	155,650,000					$	1,884,548,000

Ending balance: individually evaluated for impairment	$	12,070,000		$	1,313,000					$	13,383,000

Ending balance: collectively evaluated for impairment	$	1,716,828,000		$	154,337,000					$	1,871,165,000

The allowance for acquired loan losses for the year-ended

December

31,

2016

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	420,000		$	28,000		$	0	$	448,000
Provision for loan losses		(303,000	)		105,000			0		(198,000	)
Charge-offs		0			(72,000	)		0		(72,000	)
Recoveries		(42,000	)		(43,000	)		0		(85,000	)
Ending balance	$	75,000		$	18,000		$	0	$	93,000

The negative loan recoveries reflected for acquired loans during

2016

resulted from reversals of prior period recoveries associated with certain purchased credit impaired loans that were subject to pre-acquisition charge-offs. Post-acquisition payments received on these loans were previously reported as loan loss recoveries in prior periods; during

2016

these recoveries were reversed and reported as recovery income if associated with specifically reviewed purchase credit impaired loans or retained gains if associated with purchase credit impaired pooled loans.

The allowance for originated loan losses and recorded investments in originated loans for the year-ended

December

31,

2015

are as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	17,736,000		$	1,487,000		$	76,000	$	19,299,000
Provision for loan losses		(1,771,000	)		1,006,000			64,000		(701,000	)
Charge-offs		(4,915,000	)		(1,280,000	)		0		(6,195,000	)
Recoveries		2,622,000			208,000			0		2,830,000
Ending balance	$	13,672,000		$	1,421,000		$	140,000	$	15,233,000

Ending balance: individually evaluated for impairment	$	1,218,000		$	256,000		$	0	$	1,474,000

Ending balance: collectively evaluated for impairment	$	12,454,000		$	1,165,000		$	140,000	$	13,759,000

Total loans:
Ending balance	$	1,493,516,000		$	123,071,000				$	1,616,587,000

Ending balance: individually evaluated for impairment	$	16,845,000		$	1,352,000				$	18,197,000

Ending balance: collectively evaluated for impairment	$	1,476,671,000		$	121,719,000				$	1,598,390,000

The allowance for acquired loan losses for the year-ended

December

31,

2015

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	738,000		$	4,000		$	0	$	742,000
Provision for loan losses		(286,000	)		(13,000	)		0		(299,000	)
Charge-offs		(77,000	)		(7,000	)		0		(84,000	)
Recoveries		45,000			44,000			0		89,000
Ending balance	$	420,000		$	28,000		$	0	$	448,000

The allowance for originated loan losses and recorded investments in originated loans for the year-ended

December

31,

2014

are as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	20,455,000		$	2,358,000		$	8,000	$	22,821,000
Provision for loan losses		(3,140,000	)		(721,000	)		68,000		(3,793,000	)
Charge-offs		(876,000	)		(554,000	)		0		(1,430,000	)
Recoveries		1,297,000			404,000			0		1,701,000
Ending balance	$	17,736,000		$	1,487,000		$	76,000	$	19,299,000

Ending balance: individually evaluated for impairment	$	9,374,000		$	778,000		$	0	$	10,152,000

Ending balance: collectively evaluated for impairment	$	8,362,000		$	709,000		$	76,000	$	9,147,000

Total loans:
Ending balance	$	1,153,189,000		$	92,927,000				$	1,246,116,000

Ending balance: individually evaluated for impairment	$	45,021,000		$	2,835,000				$	47,856,000

Ending balance: collectively evaluated for impairment	$	1,108,168,000		$	90,092,000				$	1,198,260,000

The allowance for acquired loan losses for the year-ended

December

31,

2014

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	0		$	0		$	0	$	0
Provision for loan losses		791,000			2,000			0		793,000
Charge-offs		(55,000	)		(16,000	)		0		(71,000	)
Recoveries		2,000			18,000			0		20,000
Ending balance	$	738,000		$	4,000		$	0	$	742,000

In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Firstbank’s previously established allowance for loan losses.

Loans modified as troubled debt restructurings during the year-ended

December

31,

2016

were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated Loans

Commercial:
Commercial and industrial		8	$	1,445,000	$	2,103,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		1		167,000		167,000
Real estate – non-owner occupied		1		462,000		462,000
Real estate – multi-family and residential rental		4		165,000		276,000
Total commercial		14		2,239,000		3,008,000

Retail:
Home equity and other		3		240,000		240,000
1-4 family mortgages		1		33,000		40,000
Total retail		4		273,000		280,000

Total		18	$	2,512,000	$	3,288,000

Acquired Loans

Commercial:
Commercial and industrial		0	$	0	$	0
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		3		739,000		739,000
Real estate – non-owner occupied		2		209,000		209,000
Real estate – multi-family and residential rental		1		7,000		7,000
Total commercial		6		955,000		955,000

Retail:
Home equity and other		4		93,000		94,000
1-4 family mortgages		1		19,000		19,000
Total retail		5		112,000		113,000

Total		11	$	1,067,000	$	1,068,000

Loans modified as troubled debt restructurings during the year-ended

December

31,

2015

were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated Loans

Commercial:
Commercial and industrial		9	$	1,876,000	$	1,901,000
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 commercial		9		1,876,000		1,901,000

Retail:
Home equity and other		1		146,000		146,000
1-4 family mortgages		0		0		0
Total retail		1		146,000		146,000

Total		10	$	2,022,000	$	2,047,000


Acquired Loans

Commercial:
Commercial and industrial		3	$	624,000	$	624,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		7		494,000		494,000
Real estate – non-owner occupied		5		714,000		714,000
Real estate – multi-family and residential rental		4		287,000		287,000
Total commercial		19		2,119,000		2,119,000

Retail:
Home equity and other		0		0		0
1-4 family mortgages		1		143,000		143,000
Total retail		1		143,000		143,000

Total		20	$	2,262,000	$	2,262,000

The following originated loans, modified as troubled debt restructurings within the previous

twelve

months, became over

days past due during the year-ended

December

31,

2016

(amounts as of period end):

	Number of Contracts		Recorded Principal 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

days past due during the year-ended

December

31,

2016

(amounts as of period end):

	Number of Contracts		Recorded Principal 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

days past due during the year-ended

December

31,

2015

(amounts as of period end):

	Number of Contracts		Recorded Principal 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

days past due during the year-ended

December

31,

2015

(amounts as of period end):

	Number of Contracts		Recorded Principal Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		1		18,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		18,000

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

Total		1	$	18,000

Activity for originated loans categorized as troubled debt restructurings during the year-ended

December

31,

2016

is as follows:

	Commercial and			Commercial Vacant Land, Land Development, and Residential			Commercial Real Estate - Owner			Commercial Real Estate - Non-Owner			Commercial Real Estate - Multi-Family and Residential
	Industrial			Construction			Occupied			Occupied			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		(555,000	)		(598,000	)		(591,000	)		(6,004,000	)		(30,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		30,000			0			97,000			457,000			270,000
Ending Balance	$	1,503,000		$	1,488,000		$	906,000		$	5,110,000		$	716,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	146,000		$	128,000
Charge-Offs		0			0
Payments		(1,000	)		(11,000	)
Transfers to ORE		0			0
Net Additions/Deletions		240,000			40,000
Ending Balance	$	385,000		$	157,000

Activity for acquired loans categorized as troubled debt restructurings during the year-ended

December

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	$	1,686,000		$	0	$	1,652,000		$	647,000		$	331,000
Charge-Offs		(48,000	)		0		0			0			0
Payments		(513,000	)		0		(1,514,000	)		(110,000	)		(278,000	)
Transfers to ORE		0			0		0			0			0
Net Additions/Deletions		0			0		762,000			191,000			7,000
Ending Balance	$	1,125,000		$	0	$	900,000		$	728,000		$	60,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	141,000		$	316,000
Charge-Offs		0			0
Payments		(30,000	)		(9,000	)
Transfers to ORE		0			0
Net Additions/Deletions		97,000			19,000
Ending Balance	$	208,000		$	326,000

Activity for originated loans categorized as troubled debt restructurings during the year-ended

December

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	$	7,026,000		$	2,680,000		$	17,160,000		$	17,439,000		$	505,000
Charge-Offs		0			0			(4,198,000	)		0			0
Payments		(6,648,000	)		(594,000	)		(11,562,000	)		(6,782,000	)		(29,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		1,650,000			0			0			0			0
Ending Balance	$	2,028,000		$	2,086,000		$	1,400,000		$	10,657,000		$	476,000

	Retail Home Equity and Other		Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	0	$	1,967,000
Charge-Offs		0		(148,000	)
Payments		0		(1,691,000	)
Transfers to ORE		0		0
Net Additions/Deletions		146,000		0
Ending Balance	$	146,000	$	128,000

Activity for acquired loans categorized as troubled debt restructurings during the year-ended

December

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		(31,000	)		0			(42,000	)
Payments		(444,000	)		0		(590,000	)		(9,000	)		(342,000	)
Transfers to ORE		0			0		0			0			0
Net Additions/Deletions		691,000			0		704,000			592,000			334,000
Ending Balance	$	1,686,000		$	0	$	1,652,000		$	647,000		$	331,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	26,000		$	178,000
Charge-Offs		0			0
Payments		(39,000	)		(3,000	)
Transfers to ORE		0			0
Net Additions/Deletions		154,000			141,000
Ending Balance	$	141,000		$	316,000

Activity for originated loans categorized as troubled debt restructurings during the year-ended

December

31,

2014

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	$	1,656,000		$	4,501,000		$	1,816,000		$	22,312,000		$	2,620,000
Charge-Offs		(67,000	)		0			(11,000	)		0			(420,000	)
Payments		(871,000	)		(4,719,000	)		(2,343,000	)		(5,191,000	)		(1,695,000	)
Transfers to ORE		(21,000	)		0			(48,000	)		0			0
Net Additions/Deletions		6,329,000			2,898,000			17,746,000			318,000			0
Ending Balance	$	7,026,000		$	2,680,000		$	17,160,000		$	17,439,000		$	505,000

	Retail Home Equity and Other		Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	0	$	1,987,000
Charge-Offs		0		0
Payments		0		(224,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		204,000
Ending Balance	$	0	$	1,967,000

Activity for acquired loans categorized as troubled debt restructurings during the last

seven

months of

2014

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	$	0		$	0	$	0	$	0	$	0
Charge-Offs		0			0		0		0		0
Payments		(2,000	)		0		0		0		(18,000	)
Transfers to ORE		0			0		0		0		0
Net Additions/Deletions		1,441,000			0		1,569,000		64,000		399,000
Ending Balance	$	1,439,000		$	0	$	1,569,000	$	64,000	$	381,000

	Retail Home Equity and Other		Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	0	$	0
Charge-Offs		0		0
Payments		0		0
Transfers to ORE		0		0
Net Additions/Deletions		26,000		178,000
Ending Balance	$	26,000	$	178,000

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

	December 31, 2016		December 31, 2015
Commercial:
Commercial and industrial	$	9,000	$	221,000
Vacant land, land development, and residential construction		28,000		186,000
Real estate – owner occupied		100,000		115,000
Real estate – non-owner occupied		247,000		201,000
Real estate – multi-family and residential rental		258,000		365,000
Total commercial		642,000		1,088,000

Retail:
Home equity and other		48,000		14,000
1-4 family mortgages		4,000		6,000
Total retail		52,000		20,000

Total related allowance	$	694,000	$	1,108,000

In general, our policy dictates that a renewal or modification of an

- or

-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

contain significant financial weaknesses, resulting in a distinct possibility of loss, while relationships rated

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

- or

-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.