3.	LOANS AND ALLOWANCE FOR LOAN LOSSES

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

not

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

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

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 nonaccretable difference. The nonaccretable 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

September 30, 2018

were

$2.70

billion compared to

$2.56

billion at

December 31, 2017,

an increase of

$139

million, or

5.4%.

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

September 30, 2018

and

December 31, 2017,

and the percentage change in loans from the end of

2017

to the end of the

third

quarter of

2018,

are as follows:

							Percent
	September 30, 2018			December 31, 2017			Increase
	Balance		%	Balance		%	(Decrease)
Originated loans
Commercial:
Commercial and industrial	$	766,159,000	32.1%	$	680,805,000	31.3%	12.5%
Vacant land, land development, and residential construction		33,714,000	1.4		23,682,000	1.1	42.4
Real estate – owner occupied		490,130,000	20.6		456,065,000	21.0	7.5
Real estate – non-owner occupied		737,316,000	30.9		708,824,000	32.7	4.0
Real estate – multi-family and residential rental		63,157,000	2.7		64,852,000	3.0	(2.6)
Total commercial		2,090,476,000	87.7		1,934,228,000	89.1	8.1

Retail:
Home equity and other		67,412,000	2.8		69,675,000	3.2	(3.2)
1-4 family mortgages		225,216,000	9.5		166,054,000	7.7	35.6
Total retail		292,628,000	12.3		235,729,000	10.9	24.1

Total originated loans	$	2,383,104,000	100.0%	$	2,169,957,000	100.0%	9.8%

							Percent
	September 30, 2018			December 31, 2017			Increase
	Balance		%	Balance		%	(Decrease)
Acquired loans
Commercial:
Commercial and industrial	$	51,953,000	16.5%	$	72,959,000	18.8%	(28.8%)
Vacant land, land development, and residential construction		5,682,000	1.8		6,191,000	1.6	(8.2)
Real estate – owner occupied		52,601,000	16.7		70,263,000	18.1	(25.1)
Real estate – non-owner occupied		74,451,000	23.7		82,861,000	21.3	(10.1)
Real estate – multi-family and residential rental		30,944,000	9.9		37,066,000	9.5	(16.5)
Total commercial		215,631,000	68.6		269,340,000	69.3	(19.9)

Retail:
Home equity and other		22,133,000	7.0		30,750,000	7.9	(28.0)
1-4 family mortgages		76,549,000	24.4		88,505,000	22.8	(13.5)
Total retail		98,682,000	31.4		119,255,000	30.7	(17.3)

Total acquired loans	$	314,313,000	100.0%	$	388,595,000	100.0%	(19.1%)

							Percent
	September 30, 2018			December 31, 2017			Increase
	Balance		%	Balance		%	(Decrease)
Total loans
Commercial:
Commercial and industrial	$	818,112,000	30.3%	$	753,764,000	29.4%	8.5%
Vacant land, land development, and residential construction		39,396,000	1.5		29,873,000	1.2	31.9
Real estate – owner occupied		542,731,000	20.1		526,328,000	20.6	3.1
Real estate – non-owner occupied		811,767,000	30.1		791,685,000	30.9	2.5
Real estate – multi-family and residential rental		94,101,000	3.5		101,918,000	4.0	(7.7)
Total commercial		2,306,107,000	85.5		2,203,568,000	86.1	4.7

Retail:
Home equity and other		89,545,000	3.3		100,425,000	3.9	(10.8)
1-4 family mortgages		301,765,000	11.2		254,559,000	10.0	18.5
Total retail		391,310,000	14.5		354,984,000	13.9	10.2

Total loans	$	2,697,417,000	100.0%	$	2,558,552,000	100.0%	5.4%

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

$8.1

million and

$4.6

million, respectively, as of

September 30, 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

and

nine

months ended

September 30, 2018

and

September 30, 2017

were as follows:

Balance at June 30, 2018	$	1,247,000
Additions		0
Accretion income		(118,000	)
Net reclassification from nonaccretable to accretable		118,000
Reductions (1)		(2,000	)

Balance at September 30, 2018	$	1,245,000


Balance at December 31, 2017	$	1,404,000
Additions		0
Accretion income		(372,000	)
Net reclassification from nonaccretable to accretable		289,000
Reductions (1)		(76,000	)

Balance at September 30, 2018	$	1,245,000


Balance at June 30, 2017	$	1,658,000
Additions		2,000
Accretion income		(141,000	)
Net reclassification from nonaccretable to accretable		83,000
Reductions (1)		(23,000	)

Balance at September 30, 2017	$	1,579,000


Balance at December 31, 2016	$	1,726,000
Additions		223,000
Accretion income		(429,000	)
Net reclassification from nonaccretable to accretable		330,000
Reductions (1)		(271,000	)

Balance at September 30, 2017	$	1,579,000

(

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

Nonperforming originated loans as of

September 30, 2018

and

December 31, 2017

were as follows:

	September 30, 2018		December 31, 2017

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		2,297,000		3,672,000

Total nonperforming originated loans	$	2,297,000	$	3,672,000

Nonperforming acquired loans as of

September 30, 2018

and

December 31, 2017

were as follows:

	September 30, 2018		December 31, 2017

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		2,555,000		3,471,000

Total nonperforming acquired loans	$	2,555,000	$	3,471,000

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

	September 30, 2018		December 31, 2017
Commercial:
Commercial and industrial	$	331,000	$	1,444,000
Vacant land, land development, and residential construction		0		35,000
Real estate – owner occupied		1,005,000		2,241,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		147,000		178,000
Total commercial		1,483,000		3,898,000

Retail:
Home equity and other		834,000		577,000
1-4 family mortgages		2,535,000		2,668,000
Total retail		3,369,000		3,245,000

Total nonperforming loans	$	4,852,000	$	7,143,000

Acquired impaired loans are generally

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

September 30, 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	$	17,000	$	0	$	0	$	17,000	$	766,142,000	$	766,159,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		33,714,000		33,714,000		0
Real estate – owner occupied		0		0		195,000		195,000		489,935,000		490,130,000		0
Real estate – non-owner occupied		0		0		0		0		737,316,000		737,316,000		0
Real estate – multi-family and residential rental		0		0		0		0		63,157,000		63,157,000		0
Total commercial		17,000		0		195,000		212,000		2,090,264,000		2,090,476,000		0

Retail:
Home equity and other		21,000		18,000		236,000		275,000		67,137,000		67,412,000		0
1-4 family mortgages		237,000		0		197,000		434,000		224,782,000		225,216,000		0
Total retail		258,000		18,000		433,000		709,000		291,919,000		292,628,000		0

Total past due loans	$	275,000	$	18,000	$	628,000	$	921,000	$	2,382,183,000	$	2,383,104,000	$	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	$	0	$	0	$	0	$	51,953,000	$	51,953,000	$	0
Vacant land, land development, and residential construction		18,000		0		0		18,000		5,664,000		5,682,000		0
Real estate – owner occupied		110,000		0		102,000		212,000		52,389,000		52,601,000		0
Real estate – non-owner occupied		0		0		0		0		74,451,000		74,451,000		0
Real estate – multi-family and residential rental		0		0		7,000		7,000		30,937,000		30,944,000		0
Total commercial		128,000		0		109,000		237,000		215,394,000		215,631,000		0

Retail:
Home equity and other		238,000		149,000		38,000		425,000		21,708,000		22,133,000		0
1-4 family mortgages		1,164,000		289,000		372,000		1,825,000		74,724,000		76,549,000		0
Total retail		1,402,000		438,000		410,000		2,250,000		96,432,000		98,682,000		0

Total past due loans	$	1,530,000	$	438,000	$	519,000	$	2,487,000	$	311,826,000	$	314,313,000	$	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 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 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

September 30, 2018,

and average originated impaired loans for the

three

and

nine

months ended

September 30, 2018,

were as follows:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance

With no related allowance recorded
Commercial:
Commercial and industrial	$	1,294,000	$	951,000	$	0	$	732,000	$	469,000
Vacant land, land development and residential construction		96,000		96,000		0		98,000		58,000
Real estate – owner occupied		783,000		735,000		0		383,000		1,273,000
Real estate – non-owner occupied		0		0		0		0		0
Real estate – multi-family and residential rental		22,000		22,000		0		125,000		234,000
Total commercial		2,195,000		1,804,000		0		1,338,000		2,034,000
Retail:
Home equity and other		853,000		821,000		0		719,000		717,000
1-4 family mortgages		1,091,000		414,000		0		402,000		420,000
Total retail		1,944,000		1,235,000		0		1,121,000		1,137,000

Total with no related allowance recorded	$	4,139,000	$	3,039,000	$	0	$	2,459,000	$	3,171,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial	$	5,102,000	$	5,099,000	$	348,000	$	3,572,000	$	3,067,000
Vacant land, land development and residential construction		0		0		0		0		0
Real estate – owner occupied		2,903,000		2,887,000		386,000		2,320,000		1,926,000
Real estate – non-owner occupied		0		0		0		0		0
Real estate – multi-family and residential rental		142,000		139,000		16,000		140,000		106,000
Total commercial		8,147,000		8,125,000		750,000		6,032,000		5,099,000
Retail:
Home equity and other		447,000		436,000		199,000		463,000		643,000
1-4 family mortgages		410,000		345,000		49,000		346,000		289,000
Total retail		857,000		781,000		248,000		809,000		932,000

Total with an allowance recorded	$	9,004,000	$	8,906,000	$	998,000	$	6,841,000	$	6,031,000

Total impaired loans:
Commercial	$	10,342,000	$	9,929,000	$	750,000	$	7,370,000	$	7,133,000
Retail		2,801,000		2,016,000		248,000		1,930,000		2,069,000
Total impaired loans	$	13,143,000	$	11,945,000	$	998,000	$	9,300,000	$	9,202,000

Impaired acquired loans as of

September 30, 2018,

and average impaired acquired loans for the

three

and

nine

months ended

September 30, 2018,

were as follows:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance

With no related allowance recorded
Commercial:
Commercial and industrial	$	598,000	$	589,000	$	0	$	648,000	$	763,000
Vacant land, land development and residential construction		0		0		0		0		0
Real estate – owner occupied		538,000		538,000		0		588,000		638,000
Real estate – non-owner occupied		217,000		217,000		0		221,000		228,000
Real estate – multi-family and residential rental		55,000		36,000		0		38,000		85,000
Total commercial		1,408,000		1,380,000		0		1,495,000		1,714,000
Retail:
Home equity and other		830,000		785,000		0		778,000		678,000
1-4 family mortgages		2,681,000		2,153,000		0		2,073,000		2,077,000
Total retail		3,511,000		2,938,000		0		2,851,000		2,755,000

Total with no related allowance recorded	$	4,919,000	$	4,318,000	$	0	$	4,346,000	$	4,469,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0	$	0
Vacant land, land development and residential construction		0		0		0		0		0
Real estate – owner occupied		0		0		0		0		400,000
Real estate – non-owner occupied		0		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0		0
Total commercial		0		0		0		0		400,000
Retail:
Home equity and other		0		0		0		34,000		12,000
1-4 family mortgages		0		0		0		0		0
Total retail		0		0		0		34,000		12,000

Total with an allowance recorded	$	0	$	0	$	0	$	34,000	$	412,000

Total impaired loans:
Commercial	$	1,408,000	$	1,380,000	$	0	$	1,495,000	$	2,114,000
Retail		3,511,000		2,938,000		0		2,885,000		2,767,000
Total impaired loans	$	4,919,000	$	4,318,000	$	0	$	4,380,000	$	4,881,000

Impaired originated loans as of

December 31, 2017,

and average impaired originated loans for the

three

and

nine

months ended

September 30, 2017,

were as follows:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance

With no related allowance recorded
Commercial:
Commercial and industrial	$	765,000	$	178,000	$	0	$	56,000	$	823,000
Vacant land, land development and residential construction		454,000		35,000		0		58,000		73,000
Real estate – owner occupied		1,528,000		1,452,000		0		266,000		189,000
Real estate – non-owner occupied		0		0		0		89,000		45,000
Real estate – multi-family and residential rental		349,000		349,000		0		180,000		189,000
Total commercial		3,096,000		2,014,000		0		649,000		1,319,000
Retail:
Home equity and other		693,000		680,000		0		729,000		488,000
1-4 family mortgages		1,126,000		456,000		0		614,000		632,000
Total retail		1,819,000		1,136,000		0		1,343,000		1,120,000

Total with no related allowance recorded	$	4,915,000	$	3,150,000	$	0	$	1,992,000	$	2,439,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial	$	3,038,000	$	2,989,000	$	963,000	$	4,100,000	$	3,395,000
Vacant land, land development and residential construction		0		0		0		374,000		561,000
Real estate – owner occupied		1,409,000		1,391,000		239,000		2,319,000		1,731,000
Real estate – non-owner occupied		0		0		0		392,000		2,569,000
Real estate – multi-family and residential rental		0		0		0		321,000		536,000
Total commercial		4,447,000		4,380,000		1,202,000		7,506,000		8,792,000
Retail:
Home equity and other		1,225,000		1,147,000		652,000		1,035,000		866,000
1-4 family mortgages		165,000		110,000		13,000		113,000		125,000
Total retail		1,390,000		1,257,000		665,000		1,148,000		991,000

Total with an allowance recorded	$	5,837,000	$	5,637,000	$	1,867,000	$	8,654,000	$	9,783,000

Total impaired loans:
Commercial	$	7,543,000	$	6,394,000	$	1,202,000	$	8,155,000	$	10,111,000
Retail		3,209,000		2,393,000		665,000		2,491,000		2,111,000
Total impaired loans	$	10,752,000	$	8,787,000	$	1,867,000	$	10,646,000	$	12,222,000

Impaired acquired loans as of

December 31, 2017,

and average impaired acquired loans for the

three

and

nine

months ended

September 30, 2017,

were as follows:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance

With no related allowance recorded
Commercial:
Commercial and industrial	$	1,039,000	$	1,021,000	$	0	$	1,196,000	$	1,044,000
Vacant land, land development and residential construction		0		0		0		31,000		15,000
Real estate – owner occupied		1,027,000		659,000		0		1,031,000		1,091,000
Real estate – non-owner occupied		238,000		237,000		0		975,000		863,000
Real estate – multi-family and residential rental		237,000		218,000		0		750,000		455,000
Total commercial		2,541,000		2,135,000		0		3,983,000		3,468,000
Retail:
Home equity and other		694,000		507,000		0		453,000		394,000
1-4 family mortgages		2,703,000		2,153,000		0		1,974,000		1,818,000
Total retail		3,397,000		2,660,000		0		2,427,000		2,212,000

Total with no related allowance recorded	$	5,938,000	$	4,795,000	$	0	$	6,410,000	$	5,680,000

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Third Quarter Average Recorded Principal Balance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	6,000	$	12,000
Vacant land, land development and residential construction		0		0		0		0		0
Real estate – owner occupied		0		0		0		47,000		47,000
Real estate – non-owner occupied		0		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0		0
Total commercial		0		0		0		53,000		59,000
Retail:
Home equity and other		0		0		0		0		0
1-4 family mortgages		0		0		0		170,000		171,000
Total retail		0		0		0		170,000		171,000

Total with an allowance recorded	$	0	$	0	$	0	$	223,000	$	230,000

Total impaired loans:
Commercial	$	2,541,000	$	2,135,000	$	0	$	4,036,000	$	3,527,000
Retail		3,397,000		2,660,000		0		2,597,000		2,383,000
Total impaired loans	$	5,938,000	$	4,795,000	$	0	$	6,633,000	$	5,910,000

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

$0.2

million and

$0.1

million during the

third

quarters of

2018

and

2017,

respectively, and

$0.7

million and

$0.4

million during the

first

nine

months of

2018

and

2017,

respectively.

interest income was recognized on nonaccrual loans during the

third

quarter and

first

nine

months of

2018

or during the respective

2017

periods. Lost interest income on nonaccrual loans totaled

$0.1

million during the

third

quarter of

2018

and

$0.2

million during the

first

nine

months of

2018.

Lost interest income on nonaccrual loans totaled

$0.1

million during the

third

quarter of

2017

and

$0.2

million during the

first

nine

months of

2017.

Credit Quality Indicators.

We utilize a comprehensive grading system for our commercial loans. All commercial loans are graded on a

ten

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

Credit quality indicators were as follows as of

September 30, 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	$	508,667,000	$	21,549,000	$	322,611,000	$	526,008,000	$	40,585,000
Grades 5 – 7		236,629,000		12,069,000		155,712,000		211,308,000		22,360,000
Grades 8 – 9		20,863,000		96,000		11,807,000		0		212,000
Total commercial	$	766,159,000	$	33,714,000	$	490,130,000	$	737,316,000	$	63,157,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages

Total retail	$	67,412,000	$	225,216,000

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	$	30,226,000	$	1,388,000	$	24,841,000	$	56,387,000	$	16,615,000
Grades 5 – 7		21,434,000		4,146,000		25,970,000		17,992,000		14,268,000
Grades 8 – 9		293,000		148,000		1,790,000		72,000		61,000
Total commercial	$	51,953,000	$	5,682,000	$	52,601,000	$	74,451,000	$	30,944,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail Home Equity and Other		Retail 1-4 Family Mortgages

Total retail	$	22,133,000	$	76,549,000

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 Home Equity and Other		Retail 1-4 Family 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 Home Equity and Other		Retail 1-4 Family Mortgages

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

All commercial loans are graded using the following criteria:

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 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

and

nine

months ended

September 30, 2018

are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total

Allowance for loan losses:
Balance at June 30, 2018	$	18,326,000		$	2,216,000		$	(60,000	)	$	20,482,000
Provision for loan losses		371,000			(41,000	)		143,000			473,000
Charge-offs		0			(169,000	)		0			(169,000	)
Recoveries		63,000			227,000			0			290,000
Ending balance	$	18,760,000		$	2,233,000		$	83,000		$	21,076,000


Allowance for loan losses:
Balance at December 31, 2017	$	16,456,000		$	2,584,000		$	93,000		$	19,133,000
Provision for loan losses		922,000			(307,000	)		(10,000	)		605,000
Charge-offs		(342,000	)		(493,000	)		0			(835,000	)
Recoveries		1,724,000			449,000			0			2,173,000
Ending balance	$	18,760,000		$	2,233,000		$	83,000		$	21,076,000

Ending balance: individually evaluated for impairment	$	750,000		$	248,000		$	0		$	998,000

Ending balance: collectively evaluated for impairment	$	18,010,000		$	1,985,000		$	83,000		$	20,078,000


Total loans:
Ending balance	$	2,090,476,000		$	292,628,000					$	2,383,104,000

Ending balance: individually evaluated for impairment	$	9,929,000		$	2,016,000					$	11,945,000

Ending balance: collectively evaluated for impairment	$	2,080,547,000		$	290,612,000					$	2,371,159,000

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

three

and

nine

months ended

September 30, 2018

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total

Allowance for loan losses:
Balance at June 30, 2018	$	105,000		$	580,000		$	0	$	685,000
Provision for loan losses		9,000			(82,000	)		0		(73,000	)
Charge-offs		0			0			0		0
Recoveries		0			4,000			0		4,000
Ending balance	$	114,000		$	502,000		$	0	$	616,000


Allowance for loan losses:
Balance at December 31, 2017	$	291,000		$	77,000		$	0	$	368,000
Provision for loan losses		69,000			426,000			0		495,000
Charge-offs		(246,000	)		(15,000	)		0		(261,000	)
Recoveries		0			14,000			0		14,000
Ending balance	$	114,000		$	502,000				$	616,000

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

three

and

nine

months ended

September 30, 2017

and the recorded investments in originated loans as of

December 31, 2017

are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total

Allowance for loan losses:
Balance at June 30, 2017	$	15,363,000		$	2,433,000		$	159,000		$	17,955,000
Provision for loan losses		452,000			415,000			46,000			913,000
Charge-offs		(347,000	)		(320,000	)		0			(667,000	)
Recoveries		565,000			41,000			0			606,000
Ending balance	$	16,033,000		$	2,569,000		$	205,000		$	18,807,000


Allowance for loan losses:
Balance at December 31, 2016	$	16,026,000		$	1,882,000		$	(40,000	)	$	17,868,000
Provision for loan losses		600,000			1,178,000			245,000			2,023,000
Charge-offs		(1,579,000	)		(683,000	)		0			(2,262,000	)
Recoveries		986,000			192,000			0			1,178,000
Ending balance	$	16,033,000		$	2,569,000		$	205,000		$	18,807,000

Ending balance: individually evaluated for impairment	$	1,856,000		$	738,000		$	0		$	2,594,000

Ending balance: collectively evaluated for impairment	$	14,177,000		$	1,831,000		$	205,000		$	16,213,000


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

three

and

nine

months ended

September 30, 2017

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total

Allowance for loan losses:
Balance at June 30, 2017	$	324,000		$	16,000		$	0	$	340,000
Provision for loan losses		(18,000	)		105,000			0		87,000
Charge-offs		(1,000	)		(41,000	)		0		(42,000	)
Recoveries		1,000			0			0		1,000
Ending balance	$	306,000		$	80,000		$	0	$	386,000


Allowance for loan losses:
Balance at December 31, 2016	$	75,000		$	18,000		$	0	$	93,000
Provision for loan losses		224,000			103,000			0		327,000
Charge-offs		(12,000	)		(41,000	)		0		(53,000	)
Recoveries		19,000			0			0		19,000
Ending balance	$	306,000		$	80,000		$	0	$	386,000

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

September 30, 2018

were as follows:

	Number of Contracts	Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial	5	$	3,118,000	$	2,964,000
Vacant land, land development and residential construction	0		0		0
Real estate – owner occupied	1		2,284,000		2,284,000
Real estate – non-owner occupied	0		0		0
Real estate – multi-family and residential rental	0		0		0
Total originated commercial	6		5,402,000		5,248,000

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

Total originated loans	6	$	5,402,000	$	5,248,000

Acquired loans
Commercial:
Commercial and industrial	1	$	33,000	$	29,000
Vacant land, land development and residential construction	0		0		0
Real estate – owner occupied	1		150,000		150,000
Real estate – non-owner occupied	0		0		0
Real estate – multi-family and residential rental	0		0		0
Total acquired commercial	2		183,000		179,000

Retail:
Home equity and other	0		0		0
1-4 family mortgages	1		12,000		12,000
Total acquired retail	1		12,000		12,000

Total acquired loans	3	$	195,000	$	191,000

Loans modified as troubled debt restructurings during the

nine

months ended

September 30, 2018

were as follows:

	Number of Contracts	Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial	9	$	4,186,000	$	4,126,000
Vacant land, land development and residential construction	0		0		0
Real estate – owner occupied	2		3,261,000		3,261,000
Real estate – non-owner occupied	0		0		0
Real estate – multi-family and residential rental	0		0		0
Total originated commercial	11		7,447,000		7,387,000

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	12	$	7,497,000	$	7,437,000

Acquired loans
Commercial:
Commercial and industrial	1	$	33,000	$	29,000
Vacant land, land development and residential construction	0		0		0
Real estate – owner occupied	1		150,000		150,000
Real estate – non-owner occupied	0		0		0
Real estate – multi-family and residential rental	0		0		0
Total acquired commercial	2		183,000		179,000

Retail:
Home equity and other	10		217,000		218,000
1-4 family mortgages	2		37,000		36,000
Total acquired retail	12		254,000		254,000

Total acquired loans	14	$	437,000	$	433,000

Loans modified as troubled debt restructurings during the

three

months ended

September 30, 2017

were as follows:

	Number of Contracts	Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial	3	$	1,362,000	$	1,362,000
Vacant land, land development and residential construction	0		0		0
Real estate – owner occupied	2		477,000		477,000
Real estate – non-owner occupied	0		0		0
Real estate – multi-family and residential rental	0		0		0
Total originated commercial	5		1,839,000		1,839,000

Retail:
Home equity and other	1		68,000		68,000
1-4 family mortgages	0		0		0
Total originated retail	1		68,000		68,000

Total originated loans	6	$	1,907,000	$	1,907,000

Acquired loans
Commercial:
Commercial and industrial	1	$	282,000	$	282,000
Vacant land, land development and residential construction	0		0		0
Real estate – owner occupied	0		0		0
Real estate – non-owner occupied	1		64,000		64,000
Real estate – multi-family and residential rental	1		1,064,000		1,064,000
Total acquired commercial	3		1,410,000		1,410,000

Retail:
Home equity and other	2		90,000		90,000
1-4 family mortgages	1		51,000		51,000
Total acquired retail	3		141,000		141,000

Total acquired loans	6	$	1,551,000	$	1,551,000

Loans modified as troubled debt restructurings during the

nine

months ended

September 30, 2017

were as follows:

	Number of Contracts	Pre- Modification Recorded Principal Balance		Post- Modification Recorded Principal Balance
Originated loans
Commercial:
Commercial and industrial	9	$	4,114,000	$	4,293,000
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 originated commercial	13		5,309,000		5,488,000

Retail:
Home equity and other	7		657,000		658,000
1-4 family mortgages	0		0		0
Total originated retail	7		657,000		658,000

Total originated loans	20	$	5,966,000	$	6,146,000

Acquired loans
Commercial:
Commercial and industrial	2	$	399,000	$	399,000
Vacant land, land development and residential construction	1		38,000		38,000
Real estate – owner occupied	0		0		0
Real estate – non-owner occupied	2		745,000		744,000
Real estate – multi-family and residential rental	1		1,064,000		1,064,000
Total acquired commercial	6		2,246,000		2,245,000

Retail:
Home equity and other	7		256,000		258,000
1-4 family mortgages	3		185,000		185,000
Total acquired retail	10		441,000		443,000

Total acquired loans	16	$	2,687,000	$	2,688,000

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

twelve

months, became over

days past due within the

three

months ended

September 30, 2018 (

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 within the

nine

months ended

September 30, 2018 (

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 within the

three

months ended

September 30, 2018 (

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 within the

nine

months ended

September 30, 2018 (

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 within the

three

months ended

September 30, 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 originated loans, modified as troubled debt restructurings within the previous

twelve

months, became over

days past due within the

nine

months ended

September 30, 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 within the

three

months ended

September 30, 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	1		99,000
1-4 family mortgages	0		0
Total retail	1		99,000

Total	2	$	213,000

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

twelve

months, became over

days past due within the

nine

months ended

September 30, 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	1		99,000
1-4 family mortgages	0		0
Total retail	1		99,000

Total	2	$	213,000

Activity for originated loans categorized as troubled debt restructurings during the

three

months ended

September 30, 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	$	2,425,000	$	229,000		$	1,784,000		$	0	$	0
Charge-Offs		0		0			0			0		0
Payments		0		(207,000	)		(439,000	)		0		0
Transfers to ORE		0		0			0			0		0
Net Additions/Deletions		3,315,000		0			2,278,000			0		0
Ending Balance	$	5,740,000	$	22,000		$	3,623,000		$	0	$	0

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	1,019,000		$	143,000
Charge-Offs		0			0
Payments		(81,000	)		(1,000	)
Transfers to ORE		0			0
Net Additions/Deletions		0			0
Ending Balance	$	938,000		$	142,000

Activity for acquired loans categorized as troubled debt restructurings during the

three

months ended

September 30, 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	$	694,000		$	0	$	393,000		$	225,000		$	32,000
Charge-Offs		0			0		0			0			0
Payments		(36,000	)		0		(15,000	)		(8,000	)		(3,000	)
Transfers to ORE		0			0		(93,000	)		0			0
Net Additions/Deletions		(80,000	)		0		151,000			0			0
Ending Balance	$	578,000		$	0	$	436,000		$	217,000		$	29,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	302,000		$	400,000
Charge-Offs		0			0
Payments		(2,000	)		(9,000	)
Transfers to ORE		0			0
Net Additions/Deletions		0			13,000
Ending Balance	$	300,000		$	404,000

Activity for originated loans categorized as troubled debt restructurings during the

nine

months ended

September 30, 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		(934,000	)		(361,000	)		(4,057,000	)		0		0
Transfers to ORE		0			0			0			0		0
Net Additions/Deletions		3,915,000			0			6,081,000			0		0
Ending Balance	$	5,740,000		$	22,000		$	3,623,000		$	0	$	0

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	1,127,000		$	146,000
Charge-Offs		0			0
Payments		(238,000	)		(4,000	)
Transfers to ORE		0			0
Net Additions/Deletions		49,000			0
Ending Balance	$	938,000		$	142,000

Activity for acquired loans categorized as troubled debt restructurings during the

nine

months ended

September 30, 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		(69,000	)		0		(1,645,000	)		(20,000	)		(12,000	)
Transfers to ORE		0			0		(92,000	)		0			0
Net Additions/Deletions		(79,000	)		0		1,746,000			0			0
Ending Balance	$	578,000		$	0	$	436,000		$	217,000		$	29,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	219,000		$	393,000
Charge-Offs		(30,000	)		0
Payments		(40,000	)		(26,000	)
Transfers to ORE		(82,000	)		0
Net Additions/Deletions		233,000			37,000
Ending Balance	$	300,000		$	404,000

Activity for originated loans categorized as troubled debt restructurings during the

three

months ended

September 30, 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	$	2,775,000		$	934,000		$	1,658,000		$	564,000		$	131,000
Charge-Offs		0			0			0			0			0
Payments		(572,000	)		(276,000	)		(144,000	)		(24,000	)		(131,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		858,000			0			477,000			0			0
Ending Balance	$	3,061,000		$	658,000		$	1,991,000		$	540,000		$	0

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	1,050,000		$	151,000
Charge-Offs		0			0
Payments		(17,000	)		(3,000	)
Transfers to ORE		0			0
Net Additions/Deletions		69,000			0
Ending Balance	$	1,102,000		$	148,000

Activity for acquired loans categorized as troubled debt restructurings during the

three

months ended

September 30, 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	$	992,000		$	33,000		$	980,000		$	914,000		$	63,000
Charge-Offs		0			0			(227,000	)		0			0
Payments		(239,000	)		(4,000	)		(253,000	)		(33,000	)		(19,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		280,000			0			0			62,000			1,064,000
Ending Balance	$	1,033,000		$	29,000		$	500,000		$	943,000		$	1,108,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	202,000		$	510,000
Charge-Offs		0			0
Payments		(8,000	)		(6,000	)
Transfers to ORE		0			0
Net Additions/Deletions		92,000			50,000
Ending Balance	$	286,000		$	554,000

Activity for originated loans categorized as troubled debt restructurings during the

nine

months ended

September 30, 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		(1,950,000	)		(830,000	)		(196,000	)		(167,000	)		(404,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		3,508,000			0			1,281,000			(4,403,000	)		(312,000	)
Ending Balance	$	3,061,000		$	658,000		$	1,991,000		$	540,000		$	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		(69,000	)		(9,000	)
Transfers to ORE		0			0
Net Additions/Deletions		786,000			0
Ending Balance	$	1,102,000		$	148,000

Activity for acquired loans categorized as troubled debt restructurings during the

nine

months ended

September 30, 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			(239,000	)		0			0
Payments		(518,000	)		(4,000	)		(161,000	)		(218,000	)		(16,000	)
Transfers to ORE		0			0			0			(291,000	)		0
Net Additions/Deletions		426,000			33,000			0			724,000			1,064,000
Ending Balance	$	1,033,000		$	29,000		$	500,000		$	943,000		$	1,108,000

	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		(49,000	)		(12,000	)
Transfers to ORE		0			0
Net Additions/Deletions		152,000			240,000
Ending Balance	$	286,000		$	554,000

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

	September 30, 2018		December 31, 2017

Commercial:
Commercial and industrial	$	104,000	$	107,000
Vacant land, land development, and residential construction		0		0
Real estate – owner occupied		383,000		141,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		487,000		248,000

Retail:
Home equity and other		163,000		196,000
1-4 family mortgages		21,000		0
Total retail		184,000		196,000

Total related allowance	$	671,000	$	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.