LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the allowance, and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans primarily using the simple interest method based on the principal balance outstanding. Interest is

not

accrued on loans where collectability is uncertain. Accrued interest is presented separately in the consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

Acquired loans are those purchased in the Firstbank merger. These loans were recorded at estimated fair value at the merger date with

carryover of the related allowance. The acquired loans were segregated between those considered to be performing (“acquired non-impaired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will

not

be collected. Acquired loans restructured after acquisition are

not

considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the merger date and are accounted for in pools.

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

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

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

We evaluate quarterly the remaining contractual required payments receivable and estimate cash flows expected to be collected over the lives of the impaired loans. Contractually required payments receivable

may

increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the merger date. Prepayments affect the estimated lives of loans and could change the amount of interest income, and possibly principal, expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary. The adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are

not

re-forecasted, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

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

Our total loans at

March 31, 2018

were

$2.55

billion compared to

$2.56

billion at

December 31, 2017,

a decrease of

$7.3

million, or

0.3%.

The components of our loan portfolio disaggregated by class of loan within the loan portfolio segments at

March 31, 2018

and

December 31, 2017,

and the percentage change in loans from the end of

2017

to the end of the

first

quarter of

2018,

are as follows:

											Percent
	March 31, 2018					December 31, 2017					Increase
	Balance		%			Balance		%			(Decrease)
Originated loans
Commercial:
Commercial and industrial	$	675,188,000		30.8	%	$	680,805,000		31.3	%		(0.8	%)
Vacant land, land development, and residential construction		25,514,000		1.2			23,682,000		1.1			7.7
Real estate – owner occupied		468,777,000		21.4			456,065,000		21.0			2.8
Real estate – non-owner occupied		715,725,000		32.6			708,824,000		32.7			1.0
Real estate – multi-family and residential rental		61,762,000		2.8			64,852,000		3.0			(4.8	)
Total commercial		1,946,966,000		88.8			1,934,228,000		89.1			0.7

Retail:
Home equity and other		65,604,000		3.0			69,675,000		3.2			(5.8	)
1-4 family mortgages		179,281,000		8.2			166,054,000		7.7			8.0
Total retail		244,885,000		11.2			235,729,000		10.9			3.9

Total originated loans	$	2,191,851,000		100.0	%	$	2,169,957,000		100.0	%		1.0	%

											Percent
	March 31, 2018					December 31, 2017					Increase
	Balance		%			Balance		%			(Decrease)
Acquired loans
Commercial:
Commercial and industrial	$	64,617,000		18.0	%	$	72,959,000		18.8	%		(11.4	%)
Vacant land, land development, and residential construction		5,924,000		1.6			6,191,000		1.6			(4.3	)
Real estate – owner occupied		62,375,000		17.5			70,263,000		18.1			(11.2	)
Real estate – non-owner occupied		78,481,000		21.8			82,861,000		21.3			(5.3	)
Real estate – multi-family and residential rental		34,666,000		9.6			37,066,000		9.5			(6.5	)
Total commercial		246,063,000		68.5			269,340,000		69.3			(8.6	)

Retail:
Home equity and other		27,575,000		7.7			30,750,000		7.9			(10.3	)
1-4 family mortgages		85,715,000		23.8			88,505,000		22.8			(3.2	)
Total retail		113,290,000		31.5			119,255,000		30.7			(5.0	)

Total acquired loans	$	359,353,000		100.0	%	$	388,595,000		100.0	%		(7.5	%)

											Percent
	March 31, 2018					December 31, 2017					Increase
	Balance		%			Balance		%			(Decrease)
Total loans
Commercial:
Commercial and industrial	$	739,805,000		29.0	%	$	753,764,000		29.4	%		(1.9	%)
Vacant land, land development, and residential construction		31,438,000		1.2			29,873,000		1.2			5.2
Real estate – owner occupied		531,152,000		20.8			526,328,000		20.6			0.9
Real estate – non-owner occupied		794,206,000		31.2			791,685,000		30.9			0.3
Real estate – multi-family and residential rental		96,428,000		3.8			101,918,000		4.0			(5.4	)
Total commercial		2,193,029,000		86.0			2,203,568,000		86.1			(0.5	)

Retail:
Home equity and other		93,179,000		3.6			100,425,000		3.9			(7.2	)
1-4 family mortgages		264,996,000		10.4			254,559,000		10.0			4.1
Total retail		358,175,000		14.0			354,984,000		13.9			0.9

Total loans	$	2,551,204,000		100.0	%	$	2,558,552,000		100.0	%		(0.3	%)

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

$9.2

million and

$5.0

million, respectively, as of

March 31, 2018.

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

$11.9

million and

$5.2

million, respectively, as of

December 31, 2017.

Changes in the accretable yield for acquired impaired loans for the

three

months ended

March 31, 2018

and

March 31, 2017

were as follows:

Balance at December 31, 2017	$	1,404,000
Additions		0
Accretion income		(131,000	)
Net reclassification from nonaccretable to accretable		86,000
Reductions (1)		(40,000	)

Balance at March 31, 2018	$	1,319,000

Balance at December 31, 2016	$	1,726,000
Additions		1,000
Accretion income		(147,000	)
Net reclassification from nonaccretable to accretable		63,000
Reductions (1)		(179,000	)

Balance at March 31, 2017	$	1,464,000

(

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

Nonperforming originated loans as of

March 31, 2018

and

December 31, 2017

were as follows:

	March 31,		December 31,
	2018		2017

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		2,763,000		3,672,000

Total nonperforming originated loans	$	2,763,000	$	3,672,000

Nonperforming acquired loans as of

March 31, 2018

and

December 31, 2017

were as follows:

	March 31,		December 31,
	2018		2017

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		2,979,000		3,471,000

Total nonperforming acquired loans	$	2,979,000	$	3,471,000

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

	March 31,		December 31,
	2018		2017
Commercial:
Commercial and industrial	$	619,000	$	1,444,000
Vacant land, land development, and residential construction		0		35,000
Real estate – owner occupied		1,831,000		2,241,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		154,000		178,000
Total commercial		2,604,000		3,898,000

Retail:
Home equity and other		512,000		577,000
1-4 family mortgages		2,626,000		2,668,000
Total retail		3,138,000		3,245,000

Total nonperforming loans	$	5,742,000	$	7,143,000

Acquired impaired loans are

not

reported as nonperforming loans based on acquired impaired loan accounting. Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

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

March 31, 2018:

	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	$	1,350,000	$	929,000	$	0	$	2,279,000	$	672,909,000	$	675,188,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		25,514,000		25,514,000		0
Real estate – owner occupied		0		0		251,000		251,000		468,526,000		468,777,000		0
Real estate – non-owner occupied		0		0		0		0		715,725,000		715,725,000		0
Real estate – multi-family and residential rental		0		0		0		0		61,762,000		61,762,000		0
Total commercial		1,350,000		929,000		251,000		2,530,000		1,944,436,000		1,946,966,000		0

Retail:
Home equity and other		65,000		0		0		65,000		65,539,000		65,604,000		0
1-4 family mortgages		0		246,000		220,000		466,000		178,815,000		179,281,000		0
Total retail		65,000		246,000		220,000		531,000		244,354,000		244,885,000		0

Total past due loans	$	1,415,000	$	1,175,000	$	471,000	$	3,061,000	$	2,188,790,000	$	2,191,851,000	$	0

	30 – 59		60 – 89		Greater Than 89								Recorded Balance > 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Acquired loans
Commercial:
Commercial and industrial	$	0	$	0	$	113,000	$	113,000	$	64,504,000	$	64,617,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		5,924,000		5,924,000		0
Real estate – owner occupied		0		156,000		243,000		399,000		61,976,000		62,375,000		0
Real estate – non-owner occupied		0		0		0		0		78,481,000		78,481,000		0
Real estate – multi-family and residential rental		27,000		0		9,000		36,000		34,630,000		34,666,000		0
Total commercial		27,000		156,000		365,000		548,000		245,515,000		246,063,000		0

Retail:
Home equity and other		163,000		44,000		42,000		249,000		27,326,000		27,575,000		0
1-4 family mortgages		645,000		231,000		475,000		1,351,000		84,364,000		85,715,000		0
Total retail		808,000		275,000		517,000		1,600,000		111,690,000		113,290,000		0

Total past due loans	$	835,000	$	431,000	$	882,000	$	2,148,000	$	357,205,000	$	359,353,000	$	0

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

December 31, 2017:

	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		60 – 89		Greater Than 89								Recorded Balance > 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Acquired Loans
Commercial:
Commercial and industrial	$	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 commercial		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

Impaired originated loans as of

March 31, 2018,

and average originated impaired loans for the

three

months ended

March 31, 2018,

were as follows:

						First Quarter
	Unpaid					Average
	Contractual		Recorded			Recorded
	Principal		Principal		Related	Principal
	Balance		Balance		Allowance	Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	234,000	$	234,000		$	206,000
Vacant land, land development and residential construction		0		0			17,000
Real estate – owner occupied		2,937,000		2,875,000			2,164,000
Real estate – non-owner occupied		0		0			0
Real estate – multi-family and residential rental		337,000		337,000			343,000
Total commercial		3,508,000		3,446,000			2,730,000

Retail:
Home equity and other		768,000		751,000			716,000
1-4 family mortgages		1,106,000		419,000			437,000
Total retail		1,874,000		1,170,000			1,153,000

Total with no related allowance recorded	$	5,382,000	$	4,616,000		$	3,883,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,623,000	$	2,133,000	$	304,000	$	2,561,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		1,717,000		1,674,000		226,000		1,532,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		145,000		145,000		17,000		72,000
Total commercial		4,485,000		3,952,000		547,000		4,165,000

Retail:
Home equity and other		508,000		498,000		258,000		823,000
1-4 family mortgages		412,000		354,000		58,000		232,000
Total retail		920,000		852,000		316,000		1,055,000

Total with an allowance recorded	$	5,405,000	$	4,804,000	$	863,000	$	5,220,000

Total impaired loans:
Commercial	$	7,993,000	$	7,398,000	$	547,000	$	6,895,000
Retail		2,794,000		2,022,000		316,000		2,208,000
Total impaired loans	$	10,787,000	$	9,420,000	$	863,000	$	9,103,000

Impaired acquired loans as of

March 31, 2018,

and average impaired acquired loans for the

three

months ended

March 31, 2018,

were as follows:

						First Quarter
	Unpaid					Average
	Contractual		Recorded			Recorded
	Principal		Principal		Related	Principal
	Balance		Balance		Allowance	Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	743,000	$	733,000		$	877,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		1,110,000		715,000			687,000
Real estate – non-owner occupied		232,000		232,000			235,000
Real estate – multi-family and residential rental		62,000		44,000			131,000
Total commercial		2,147,000		1,724,000			1,930,000

Retail:
Home equity and other		690,000		649,000			578,000
1-4 family mortgages		2,586,000		2,007,000			2,080,000
Total retail		3,276,000		2,656,000			2,658,000

Total with no related allowance recorded	$	5,423,000	$	4,380,000		$	4,588,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		1,597,000		1,597,000		307,000		799,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0
Total commercial		1,597,000		1,597,000		307,000		799,000

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

Total with an allowance recorded	$	1,597,000	$	1,597,000	$	307,000	$	799,000

Total impaired loans:
Commercial	$	3,744,000	$	3,321,000	$	307,000	$	2,729,000
Retail		3,276,000		2,656,000		0		2,658,000
Total impaired loans	$	7,020,000	$	5,977,000	$	307,000	$	5,387,000

Impaired originated loans as of

December 31, 2017,

and average impaired originated loans for the

three

months ended

March 31, 2017,

were as follows:

						First Quarter
	Unpaid					Average
	Contractual		Recorded			Recorded
	Principal		Principal		Related	Principal
	Balance		Balance		Allowance	Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	765,000	$	178,000		$	1,589,000
Vacant land, land development and residential construction		454,000		35,000			88,000
Real estate – owner occupied		1,528,000		1,452,000			113,000
Real estate – non-owner occupied		0		0			0
Real estate – multi-family and residential rental		349,000		349,000			197,000
Total commercial		3,096,000		2,014,000			1,987,000

Retail:
Home equity and other		693,000		680,000			247,000
1-4 family mortgages		1,126,000		456,000			649,000
Total retail		1,819,000		1,136,000			896,000

Total with no related allowance recorded	$	4,915,000	$	3,150,000		$	2,883,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	3,038,000	$	2,989,000	$	963,000	$	2,690,000
Vacant land, land development and residential construction		0		0		0		749,000
Real estate – owner occupied		1,409,000		1,391,000		239,000		1,144,000
Real estate – non-owner occupied		0		0		0		4,745,000
Real estate – multi-family and residential rental		0		0		0		751,000
Total commercial		4,447,000		4,380,000		1,202,000		10,079,000

Retail:
Home equity and other		1,225,000		1,147,000		652,000		697,000
1-4 family mortgages		165,000		110,000		13,000		137,000
Total retail		1,390,000		1,257,000		665,000		834,000

Total with an allowance recorded	$	5,837,000	$	5,637,000	$	1,867,000	$	10,913,000

Total impaired loans:
Commercial	$	7,543,000	$	6,394,000	$	1,202,000	$	12,066,000
Retail		3,209,000		2,393,000		665,000		1,730,000
Total impaired loans	$	10,752,000	$	8,787,000	$	1,867,000	$	13,796,000

Impaired acquired loans as of

December 31, 2017,

and average impaired acquired loans for the

three

months ended

March 31, 2017,

were as follows:

						First Quarter
	Unpaid					Average
	Contractual		Recorded			Recorded
	Principal		Principal		Related	Principal
	Balance		Balance		Allowance	Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,039,000	$	1,021,000		$	892,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		1,027,000		659,000			1,151,000
Real estate – non-owner occupied		238,000		237,000			751,000
Real estate – multi-family and residential rental		237,000		218,000			160,000
Total commercial		2,541,000		2,135,000			2,954,000

Retail:
Home equity and other		694,000		507,000			336,000
1-4 family mortgages		2,703,000		2,153,000			1,662,000
Total retail		3,397,000		2,660,000			1,998,000

Total with no related allowance recorded	$	5,938,000	$	4,795,000		$	4,952,000

							First Quarter
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	19,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		0		0		0		48,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0
Total commercial		0		0		0		67,000

Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		0		0		0		172,000
Total retail		0		0		0		172,000

Total with an allowance recorded	$	0	$	0	$	0	$	239,000

Total impaired loans:
Commercial	$	2,541,000	$	2,135,000	$	0	$	3,021,000
Retail		3,397,000		2,660,000		0		2,170,000
Total impaired loans	$	5,938,000	$	4,795,000	$	0	$	5,191,000

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

$0.3

million and

$0.2

million during the

first

quarters of

2018

and

2017,

respectively.

interest income was recognized on nonaccrual loans during either the

first

quarter of

2018

2017.

Lost interest income on nonaccrual loans totaled

$0.1

million during both the

first

quarter of

2018

and the respective

2017

period.

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.

Credit quality indicators were as follows as of

March 31, 2018:

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	$	468,826,000	$	17,645,000	$	313,933,000	$	564,093,000	$	39,571,000
Grades 5 – 7		187,118,000		7,767,000		140,088,000		151,632,000		21,709,000
Grades 8 – 9		19,244,000		102,000		14,756,000		0		482,000
Total commercial	$	675,188,000	$	25,514,000	$	468,777,000	$	715,725,000	$	61,762,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	65,604,000	$	179,281,000

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	$	39,543,000	$	1,412,000	$	28,823,000	$	54,951,000	$	17,376,000
Grades 5 – 7		24,591,000		4,512,000		30,940,000		23,448,000		17,132,000
Grades 8 – 9		483,000		0		2,612,000		82,000		158,000
Total commercial	$	64,617,000	$	5,924,000	$	62,375,000	$	78,481,000	$	34,666,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	27,575,000	$	85,715,000

Credit quality indicators were as follows as of

December 31, 2017:

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

	All commercial loans are graded using the following criteria:

	Grade 1.	Excellent credit rating that contain very little, if any, risk of loss.

	Grade 2.	Strong sources of repayment and have low repayment risk.

	Grade 3.	Good sources of repayment and have limited repayment risk.

	Grade 4.	Adequate sources of repayment and acceptable repayment risk; however, characteristics are present that render the credit more vulnerable to a negative event.

	Grade 5.	Marginally acceptable sources of repayment and exhibit defined weaknesses and negative characteristics.

	Grade 6.	Well defined weaknesses which may include negative current cash flow, high leverage, or operating losses. Generally, if the credit does not stabilize or if further deterioration is observed in the near term, the loan will likely be downgraded and placed on the Watch List (i.e., list of lending relationships that receive increased scrutiny and review by the Board of Directors and senior management).

	Grade 7.	Defined weaknesses or negative trends that merit close monitoring through Watch List status.

	Grade 8.	Inadequately protected by current sound net worth, paying capacity of the obligor, or pledged collateral, resulting in a distinct possibility of loss requiring close monitoring through Watch List status.

	Grade 9.	Vital weaknesses exist where collection of principal is highly questionable.

	Grade 10.	Considered uncollectable and of such little value that continuance as an asset is not warranted.

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

Activity in the allowance for loan losses and the recorded investments in originated loans as of and during the

three

months ended

March 31, 2018

are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	16,456,000		$	2,584,000		$	93,000	$	19,133,000
Provision for loan losses		(341,000	)		(563,000	)		122,000		(782,000	)
Charge-offs		(258,000	)		(135,000	)		0		(393,000	)
Recoveries		1,008,000			115,000			0		1,123,000
Ending balance	$	16,865,000		$	2,001,000		$	215,000	$	19,081,000

Ending balance: individually evaluated for impairment	$	547,000		$	316,000		$	0	$	863,000

Ending balance: collectively evaluated for impairment	$	16,318,000		$	1,685,000		$	215,000	$	18,218,000


Total loans:
Ending balance	$	1,946,966,000		$	244,885,000				$	2,191,851,000

Ending balance: individually evaluated for impairment	$	7,398,000		$	2,022,000				$	9,420,000

Ending balance: collectively evaluated for impairment	$	1,939,568,000		$	242,863,000				$	2,182,431,000

Activity in the allowance for loan losses for acquired loans during the

three

months ended

March 31, 2018

is as follows:

	Commercial			Retail
	Loans			Loans			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	291,000		$	77,000		$	0	$	368,000
Provision for loan losses		314,000			468,000			0		782,000
Charge-offs		(246,000	)		(15,000	)		0		(261,000	)
Recoveries		0			4,000			0		4,000
Ending balance	$	359,000		$	534,000		$	0	$	893,000

Activity in the allowance for loan losses and the recorded investments in originated loans as of and during the

twelve

months ended

December 31, 2017

are as follows:

	Commercial			Retail
	Loans			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

Activity in the allowance for loan losses for acquired loans during the

twelve

months ended

December 31, 2017

is as follows:

	Commercial			Retail
	Loans			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

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

Loans modified as troubled debt restructurings during the

three

months ended

March 31, 2018

were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated loans
Commercial:
Commercial and industrial		3	$	107,000	$	96,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		4		3,865,000		3,854,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total originated commercial		7		3,972,000		3,950,000

Retail:
Home equity and other		1		50,000		50,000
1-4 family mortgages		0		0		0
Total originated retail		1		50,000		50,000

Total originated loans		8	$	4,022,000	$	4,000,000

Acquired loans
Commercial:
Commercial and industrial		0	$	0	$	0
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		3		1,597,000		1,597,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total acquired commercial		3		1,597,000		1,597,000

Retail:
Home equity and other		6		118,000		119,000
1-4 family mortgages		0		0		0
Total acquired retail		6		118,000		119,000

Total acquired loans		9	$	1,715,000	$	1,716,000

Loans modified as troubled debt restructurings during the

three

months ended

March 31, 2017

were as follows:

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

Retail:
Home equity and other		4		328,000		329,000
1-4 family mortgages		0		0		0
Total originated retail		4		328,000		329,000

Total originated loans		4	$	328,000	$	329,000

Acquired loans
Commercial:
Commercial and industrial		1	$	31,000	$	31,000
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 acquired commercial		1		31,000		31,000

Retail:
Home equity and other		2		6,000		7,000
1-4 family mortgages		1		57,000		57,000
Total acquired retail		3		63,000		64,000

Total acquired loans		4	$	94,000	$	95,000

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

twelve

months, became over

days past due within the

three

months ended

March 31, 2018 (

amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		1		251,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		251,000

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

Total		1	$	251,000

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

twelve

months, became over

days past due within the

three

months ended

March 31, 2018 (

amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		1	$	113,000
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		113,000

Retail:
Home equity and other		2		20,000
1-4 family mortgages		0		0
Total retail		2		20,000

Total		3	$	133,000

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

twelve

months, became over

days past due within the

three

months ended

March 31, 2017 (

amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		2	$	34,000
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		1		130,000
Total commercial		3		164,000

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

Total		3	$	164,000

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

twelve

months, became over

days past due within the

three

months ended

March 31, 2017 (

amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance
Commercial:
Commercial and industrial		1	$	24,000
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		24,000

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

Total		1	$	24,000

Activity for originated loans categorized as troubled debt restructurings during the

three

months ended

March 31, 2018

is as follows:

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

Commercial Loan Portfolio:
Beginning Balance	$	2,989,000		$	383,000		$	1,599,000		$	0	$	0
Charge-Offs		(230,000	)		0			0			0		0
Payments		(882,000	)		(45,000	)		(855,000	)		0		0
Transfers to ORE		0			0			0			0		0
Net Additions/Deletions		105,000			0			3,804,000			0		0
Ending Balance	$	1,982,000		$	338,000		$	4,548,000		$	0	$	0

	Retail			Retail
	Home Equity			1-4 Family
	and Other			Mortgages
Retail Loan Portfolio:
Beginning Balance	$	1,127,000		$	146,000
Charge-Offs		0			0
Payments		(8,000	)		(2,000	)
Transfers to ORE		0			0
Net Additions/Deletions		50,000			0
Ending Balance	$	1,169,000		$	144,000

Activity for acquired loans categorized as troubled debt restructurings during the

three

months ended

March 31, 2018

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	$	1,001,000		$	0	$	427,000		$	237,000		$	41,000
Charge-Offs		(275,000	)		0		0			0			0
Payments		(10,000	)		0		(17,000	)		(5,000	)		(5,000	)
Transfers to ORE		0			0		0			0			0
Net Additions/Deletions		0			0		1,597,000			0			0
Ending Balance	$	716,000		$	0	$	2,007,000		$	232,000		$	36,000

	Retail			Retail
	Home Equity			1-4 Family
	and Other			Mortgages
Retail Loan Portfolio:
Beginning Balance	$	219,000		$	393,000
Charge-Offs		(15,000	)		0
Payments		(1,000	)		(9,000	)
Transfers to ORE		(82,000	)		0
Net Additions/Deletions		119,000			0
Ending Balance	$	240,000		$	384,000

Activity for originated loans categorized as troubled debt restructurings during the

three

months ended

March 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

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		(125,000	)		(529,000	)		(27,000	)		(123,000	)		(113,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		159,000			0			0			(436,000	)		(312,000	)
Ending Balance	$	1,537,000		$	959,000		$	879,000		$	4,551,000		$	291,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	385,000	$	157,000
Charge-Offs		0		0
Payments		0		(3,000	)
Transfers to ORE		0		0
Net Additions/Deletions		321,000		0
Ending Balance	$	706,000	$	154,000

Activity for acquired loans categorized as troubled debt restructurings during the

three

months ended

March 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

Commercial Loan Portfolio:
Beginning Balance	$	1,125,000		$	0	$	900,000		$	728,000		$	60,000
Charge-Offs		0			0		(12,000	)		0			0
Payments		(233,000	)		0		0			(145,000	)		0
Transfers to ORE		0			0		0			0			0
Net Additions/Deletions		30,000			0		108,000			0			8,000
Ending Balance	$	922,000		$	0	$	996,000		$	583,000		$	68,000

	Retail			Retail
	Home Equity			1-4 Family
	and Other			Mortgages
Retail Loan Portfolio:
Beginning Balance	$	208,000		$	326,000
Charge-Offs		0			0
Payments		(9,000	)		(4,000	)
Transfers to ORE		0			0
Net Additions/Deletions		7,000			54,000
Ending Balance	$	206,000		$	376,000

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

	March 31,		December 31,
	2018		2017

Commercial:
Commercial and industrial	$	85,000	$	107,000
Vacant land, land development, and residential construction		0		0
Real estate – owner occupied		375,000		141,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		460,000		248,000

Retail:
Home equity and other		215,000		196,000
1-4 family mortgages		21,000		0
Total retail		236,000		196,000

Total related allowance	$	696,000	$	444,000

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.