NOTE

– LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans originated for investment are stated at their principal amount out

standing 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 were recorded at estimated fair value at

acquisition. 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 re

presenting 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

acquisition 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.

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 acquisition. 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

acquisition 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, 201 7					December 31, 201 6					Percent Increase
	Balance		%			Balance		%			(Decrease)
Originated Loans
Commercial:
Commercial and industrial	$	680,805,000		31.3	%	$	636,771,000		33.8	%		6.9	%
Vacant land, land development, and residential construction		23,682,000		1.1			26,519,000		1.4			(10.7	)
Real estate – owner occupied		456,065,000		21.0			363,509,000		19.3			25.5
Real estate – non-owner occupied		708,824,000		32.7			652,054,000		34.6			8.7
Real estate – multi-family and residential rental		64,852,000		3.0			50,045,000		2.6			29.6
Total commercial		1,934,228,000		89.1			1,728,898,000		91.7			11.9

Retail:
Home equity and other		69,675,000		3.2			69,831,000		3.7			(0.2	)
1-4 family mortgages		166,054,000		7.7			85,819,000		4.6			93.5
Total retail		235,729,000		10.9			155,650,000		8.3			51.4

Total originated loans	$	2,169,957,000		100.0	%	$	1,884,548,000		100.0	%		15.1	%

	December 31, 201 7					December 31, 201 6					Percent Increase
	Balance		%			Balance		%			(Decrease)
Acquired Loans
Commercial:
Commercial and industrial	$	72,959,000		18.8	%	$	77,132,000		15.6	%		(5.4%	)
Vacant land, land development, and residential construction		6,191,000		1.6			8,309,000		1.7			(25.5	)
Real estate – owner occupied		70,263,000		18.1			86,955,000		17.6			(19.2	)
Real estate – non-owner occupied		82,861,000		21.3			96,215,000		19.5			(13.9	)
Real estate – multi-family and residential rental		37,066,000		9.5			67,838,000		13.7			(45.4	)
Total commercial		269,340,000		69.3			336,449,000		68.1			(19.9	)

Retail:
Home equity and other		30,750,000		7.9			48,216,000		9.8			(36.2	)
1-4 family mortgages		88,505,000		22.8			109,407,000		22.1			(19.1	)
Total retail		119,255,000		30.7			157,623,000		31.9			(24.3	)

Total acquired loans	$	388,595,000		100.0	%	$	494,072,000		100.0	%		(21.3%	)

	December 31, 201 7					December 31, 201 6					Percent Increase
	Balance		%			Balance		%			(Decrease)
Total Loans
Commercial:
Commercial and industrial	$	753,764,000		29.4	%	$	713,903,000		30.0	%		5.6	%
Vacant land, land development, and residential construction		29,873,000		1.2			34,828,000		1.5			(14.2	)
Real estate – owner occupied		526,328,000		20.6			450,464,000		18.9			16.8
Real estate – non-owner occupied		791,685,000		30.9			748,269,000		31.5			5.8
Real estate – multi-family and residential rental		101,918,000		4.0			117,883,000		4.9			(13.5	)
Total commercial		2,203,568,000		86.1			2,065,347,000		86.8			6.7

Retail:
Home equity and other		100,425,000		3.9			118,047,000		5.0			(14.9	)
1-4 family mortgages		254,559,000		10.0			195,226,000		8.2			30.4
Total retail		354,984,000		13.9			313,273,000		13.2			13.3

Total loans	$	2,558,552,000		100.0	%	$	2,378,620,000		100.0	%		7.6	%

The total contractually required payments and carrying value of a

cquired impaired loans were

$11.9

million and

$5.2

million, respectively, as of

December 31, 2017.

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.

Changes in the accretable yield for acquired impaired loans for the years ended

December 31, 2017

and

December 31, 2016

were as follows:

	201 7
Balance at December 31, 201 6	$	1,726,000
Additions		223,000
Accretion income		(562,000	)
Net reclassification from nonaccretable to accretable		367,000
Reductions (1)		(350,000	)
Balance at December 31, 201 7	$	1,404,000

	201 6
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, 201 6	$	1,726,000

(

)

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

(

)

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

longer being recognized

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

	201 7					201 6
			Percentage of					Percentage of
	Balance		Loan Portfolio			Balance		Loan Portfolio
Commercial real estate loans to lessors of non-residential buildings	$	547,841,000		21.4	%	$	562,902,000		23.7	%

Year-end nonperforming originated loans were as follows:

	201 7		201 6

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		3,672,000		3,328,000
Total nonperforming loans	$	3,672,000	$	3,328,000

Year-end nonperforming acquired loans were as follows:

	201 7		201 6

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		3,471,000		2,611,000
Total nonperforming loans	$	3,471,000	$	2,611,000

The recorded principal balance of

all nonperforming loans was as follows:

	December 31, 201 7		December 31, 201 6
Commercial:
Commercial and industrial	$	1,444,000	$	2,296,000
Vacant land, land development, and residential construction		35,000		95,000
Real estate – owner occupied		2,241,000		285,000
Real estate – non-owner occupied		0		488,000
Real estate – multi-family and residential rental		178,000		17,000
Total commercial		3,898,000		3,181,000

Retail:
Home equity and other		577,000		496,000
1-4 family mortgages		2,668,000		2,262,000
Total retail		3,245,000		2,758,000

Total nonperforming loans	$	7,143,000	$	5,939,000

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 origin

ated loan portfolio.

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

December 31,

201

	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	$	178,000	$	178,000	$	680,627,000	$	680,805,000	$	0
Vacant land, land development, and residential construction		0		0		35,000		35,000		23,647,000		23,682,000		0
Real estate – owner occupied		0		0		1,244,000		1,244,000		454,821,000		456,065,000		0
Real estate – non-owner occupied		0		0		0		0		708,824,000		708,824,000		0
Real estate – multi-family and residential rental		0		0		0		0		64,852,000		64,852,000		0
Total commercial		0		0		1,457,000		1,457,000		1,932,771,000		1,934,228,000		0

Retail:
Home equity and other		647,000		11,000		86,000		744,000		68,931,000		69,675,000		0
1- 4 family mortgages		0		0		250,000		250,000		165,804,000		166,054,000		0
Total retail		647,000		11,000		336,000		994,000		234,735,000		235,729,000		0

Total past due loans	$	647,000	$	11,000	$	1,793,000	$	2,451,000	$	2,167,506,000	$	2,169,957,000	$	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	$	40,000	$	0	$	114,000	$	154,000	$	72,805,000	$	72,959,000	$	0
Vacant land, land development, and residential construction		14,000		0		0		14,000		6,177,000		6,191,000		0
Real estate – owner occupied		634,000		0		271,000		905,000		69,358,000		70,263,000		0
Real estate – non-owner occupied		0		0		0		0		82,861,000		82,861,000		0
Real estate – multi-family and residential rental		0		0		108,000		108,000		36,958,000		37,066,000		0
Total commer cial		688,000		0		493,000		1,181,000		268,159,000		269,340,000		0

Retail:
Home equity and other		408,000		52,000		154,000		614,000		30,136,000		30,750,000		0
1- 4 family mortgages		690,000		333,000		661,000		1,684,000		86,821,000		88,505,000		0
Total retail		1,098,000		385,000		815,000		2,298,000		116,957,000		119,255,000		0

Total past due loans	$	1,786,000	$	385,000	$	1,308,000	$	3,479,000	$	385,116,000	$	388,595,000	$	0

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

December 31,

201

	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 com mercial		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

Impaired originated loans with

related allowance recorded were as follows as of

December 31,

201

	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	$	765,000	$	178,000		$	694,000
Vacant land, land development and residential construction		454,000		35,000			65,000
Real estate – owner occupied		1,528,000		1,452,000			442,000
Real estate – non-owner occupied		0		0			36,000
Real estate – multi-family and residential rental		349,000		349,000			221,000
Total commercial		3,096,000		2,014,000			1,458,000
Retail:
Home equity and other		693,000		680,000			526,000
1-4 family mortgages		1,126,000		456,000			596,000
Total retail		1,819,000		1,136,000			1,122,000

Total with no related allowance recorded	$	4,915,000	$	3,150,000		$	2,580,000

Impaired originated loans with an allowance recorded and total impaired

originated loans were as follows as of

December 31, 2017:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	3,038,000	$	2,989,000	$	963,000	$	3,314,000
Vacant land, land development and residential construction		0		0		0		449,000
Real estate – owner occupied		1,409,000		1,391,000		239,000		1,663,000
Real estate – non-owner occupied		0		0		0		2,055,000
Real estate – multi-family and residential rental		0		0		0		429,000
Total commercial		4,447,000		4,380,000		1,202,000		7,910,000
Retail:
Home equity and other		1,225,000		1,147,000		652,000		922,000
1-4 family mortgages		165,000		110,000		13,000		122,000
Total retail		1,390,000		1,257,000		665,000		1,044,000

Total with an allowance recorded	$	5,837,000	$	5,637,000	$	1,867,000	$	8,954,000

Total impaired loans:
Commercial	$	7,543,000	$	6,394,000	$	1,202,000	$	9,368,000
Retail		3,209,000		2,393,000		665,000		2,166,000
Total impaired originated loans	$	10,752,000	$	8,787,000	$	1,867,000	$	11,534,000

Impaired acquired loans with

related allowance recorded were as follows as of

December 31,

201

	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	$	1,039,000	$	1,021,000		$	1,039,000
Vacant land, land development and residential construction		0		0			12,000
Real estate – owner occupied		1,027,000		659,000			1,005,000
Real estate – non-owner occupied		238,000		237,000			738,000
Real estate – multi-family and residential rental		237,000		218,000			408,000
Total commercial		2,541,000		2,135,000			3,202,000
Retail:
Home equity and other		694,000		507,000			417,000
1-4 family mortgages		2,703,000		2,153,000			1,885,000
Total retail		3,397,000		2,660,000			2,302,000

Total with no related allowance recorded	$	5,938,000	$	4,795,000		$	5,504,000

Impaired acquired loans with an allowance recorded and total impaired

acquired loans were as follows as of

December 31, 2017:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	10,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		0		0		0		38,000
Real est ate – non-owner occupied		0		0		0		0
Real est ate – multi-family and residential rental		0		0		0		0
Total commercial		0		0		0		48,000
Retail:
Home equity and other		0		0		0		0
1-4 fami ly mortgages		0		0		0		137,000
Total retail		0		0		0		137,000

Total with an allowance recorded	$	0	$	0	$	0	$	185,000

Total impaired loans:
Commercial	$	2,541,000	$	2,135,000	$	0	$	3,250,000
Retail		3,397,000		2,660,000		0		2,439,000
Total impaired acquired loans	$	5,938,000	$	4,795,000	$	0	$	5,689,000

Impaired originated loans with

related allowance recorded were as follows as of

December 31,

201

	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

related allowance recorded were as follows as of

December 31,

201

	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 est ate – non-owner occupied		0		0		0		0
Real est ate – 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 fami ly 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 loans for which

allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated

collateral value. Interest income recognized on accruing troubled debt restructurings totaled

$0.4

million,

$1.2

million and

$2.4

million during

2017,

2016

and

2015,

respectively. Interest income recognized on nonaccrual loans totaled

$0.5

million, less than

$0.1

million, and

$1.7

million during

2017,

2016

and

2015,

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

$0.3

million,

$0.1

million and

$0.3

million during

2017,

2016

and

2015,

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,

201

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	$	469,537,000	$	15,090,000	$	326,700,000	$	559,388,000	$	42,951,000
Grades 5 – 7		189,851,000		8,557,000		123,024,000		149,135,000		21,552,000
Grades 8 – 9		21,417,000		35,000		6,341,000		301,000		349,000
Total commercial	$	680,805,000	$	23,682,000	$	456,065,000	$	708,824,000	$	64,852,000

Retail credit exposure

– credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	69,675,000	$	166,054,000

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	$	46,263,000	$	1,446,000	$	28,706,000	$	52,674,000	$	17,499,000
Grades 5 – 7		25,654,000		4,745,000		39,565,000		30,102,000		19,212,000
Grades 8 – 9		1,042,000		0		1,992,000		85,000		355,000
Total commercial	$	72,959,000	$	6,191,000	$	70,263,000	$	82,861,000	$	37,066,000

Retail credit exposure

– credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	30,750,000	$	88,505,000

Loans by credit quality indicators were as follows as of

December 31,

201

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

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 a

nd 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,

201

are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	16,026,000		$	1,882,000		$	(40,000	)	$	17,868,000
Provision for loan losses		1,148,000			1,360,000			133,000			2,641,000
Charge-offs		(2,292,000	)		(891,000	)		0			(3,183,000	)
Recoveries		1,574,000			233,000			0			1,807,000
Ending balance	$	16,456,000		$	2,584,000		$	93,000		$	19,133,000

Ending balance: individually evaluated for impairment	$	1,202,000		$	665,000		$	0		$	1,867,000

Ending balance: collectively evaluated for impairment	$	15,254,000		$	1,919,000		$	93,000		$	17,266,000

Total loans:
Ending balance	$	1,934,228,000		$	235,729,000					$	2,169,957,000

Ending balance: individually evaluated for impairment	$	6,394,000		$	2,393,000					$	8,787,000

Ending balance: collectively evaluated for impairment	$	1,927,834,000		$	233,336,000					$	2,161,170,000

The allowance for

acquired loan losses for the year-ended

December 31, 2017

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	75,000		$	18,000		$	0	$	93,000
Provision for loan losses		210,000			99,000			0		309,000
Charge-offs		(12,000	)		(40,000	)		0		(52,000	)
Recoveries		18,000			0			0		18,000
Ending balance	$	291,000		$	77,000		$	0	$	368,000

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,

201

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	420,000		$	28,000		$	0	$	448,000
Provi sion for loan losses		(303,000	)		105,000			0		(198,000	)
Charg e-offs		0			(72,000	)		0		(72,000	)
Recov eries		(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 impair

ed 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,

201

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,

201

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	738,000		$	4,000		$	0	$	742,000
Provision f or 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

Loans modified as troubled debt restructurings during

the year-ended

December 31, 2017

were as follows:

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

Commercial:
Commercial and industrial		8	$	3,771,000	$	3,831,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		4		1,195,000		1,195,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total commercial		12		4,966,000		5,026,000

Retail:
Home equity and other		8		670,000		671,000
1-4 family mortgages		0		0		0
Total retail		8		670,000		671,000

Total		20	$	5,636,000	$	5,697,000

Acquired Loans

Commercial:
Commercial and industrial		2	$	399,000	$	399,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		1		33,000		33,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total c ommercial		3		432,000		432,000

Retail:
Home equity and other		7		192,000		195,000
1-4 family mortgages		4		200,000		200,000
Total r etail		11		392,000		395,000

Total		14	$	824,000	$	827,000

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 c ommercial		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 r etail		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 c ommercial		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 r etail		5		112,000		113,000

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

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, 2017 (

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, 2017 (

amounts as of period end):

	Number of Contracts		Recorded Principal Balance
Commercial:
Commercial and industrial		1	$	114,000
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		1		114,000

Retail:
Home equity and other		2		102,000
1-4 family mortgages		0		0
Total retail		2		102,000

Total		3	$	216,000

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

Activity for originated loans categorized as troubled debt restructurings during

the year-ended

December 31, 2017

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	$	1,503,000		$	1,488,000		$	906,000		$	5,110,000		$	716,000
Charge-Offs		0			0			0			0			0
Payments		(2,021,000	)		(1,105,000	)		(242,000	)		(232,000	)		(405,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		3,507,000			0			935,000			(4,878,000	)		(311,000	)
Ending Balance	$	2,989,000		$	383,000		$	1,599,000		$	0		$	0

	Retail Home Equity and Other			Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	385,000		$	157,000
Charge-Offs		0			0
Payments		(57,000	)		(11,000	)
Transfers to ORE		0			0
Net Additions/Deletions		799,000			0
Ending Balance	$	1,127,000		$	146,000

Activity for acquired loans categorized as troubled debt restructurings during

the year-ended

December 31, 2017

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

Comme rcial Loan Portfolio:
Be ginning Balance	$	1,125,000		$	0		$	900,000		$	728,000		$	60,000
Charge-Offs		0			0			(249,000	)		0			0
Payments		(550,000	)		(33,000	)		(257,000	)		(922,000	)		(1,084,000	)
Transfers to ORE		0			0			0			(291,000	)		0
Net Additions/Deletions		426,000			33,000			33,000			722,000			1,065,000
Ending Balance	$	1,001,000		$	0		$	427,000		$	237,000		$	41,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages

Retail Loan Portfolio:
Beginning Balance	$	208,000		$	326,000
Charge-Offs		(25,000	)		0
Payments		(121,000	)		(188,000	)
Transfers to ORE		0			0
Net Additions/Deletions		157,000			255,000
Ending Balance	$	219,000		$	393,000

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

Commerci al Loan Portfolio:
Begin ning 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			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	$	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

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

	December 31, 201 7		December 31, 201 6
Commercial:
Commercial and industrial	$	107,000	$	9,000
Vacant land, land development, and residential construction		0		28,000
Real estate – owner occupied		141,000		100,000
Real estate – non-owner occupied		0		247,000
Real estate – multi-family and residential rental		0		258,000
Total commercial		248,000		642,000

Retail:
Home equity and other		196,000		48,000
1-4 family mortgages		0		4,000
Total retail		196,000		52,000

Total related allowance	$	444,000	$	694,000

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.