Note 4 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

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

NOTE

4

– LOANS AND ALLOWANCE FOR LOAN LOSSES

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

not

accrued on loans where collectability is uncertain. Accrued interest is included in other assets in the Consolidated Balance Sheets. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan or loan commitment period as an adjustment to the related loan yield.

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

not

be collected. Acquired loans restructured after acquisition are

not

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

The fair value estimates for acquired loans are based on expected prepayments and the amount and timing of discounted expected principal, interest and other cash flows. Credit discounts 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 acquisition is accreted into interest income over the estimated life of the loan. Contractually required payments represent the total undiscounted amount of all uncollected principal and interest payments. Acquired non-impaired loans are placed on nonaccrual status and reported as nonperforming or past due using the same criteria applied to the originated loan portfolio.

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

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

may

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

not

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

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

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

	December 31, 2018					December 31, 2017					Percent Increase
	Balance		%			Balance		%			(Decrease)
Originated Loans
Commercial:
Commercial and industrial	$	768,698,000		31.3	%	$	680,805,000		31.3	%		12.9	%
Vacant land, land development, and residential construction		39,950,000		1.6			23,682,000		1.1			68.7
Real estate – owner occupied		500,188,000		20.4			456,065,000		21.0			9.7
Real estate – non-owner occupied		745,127,000		30.4			708,824,000		32.7			5.1
Real estate – multi-family and residential rental		98,035,000		4.0			64,852,000		3.0			51.2
Total commercial		2,151,998,000		87.7			1,934,228,000		89.1			11.3
Retail:
Home equity and other		65,023,000		2.7			69,675,000		3.2			(6.7	)
1-4 family mortgages		235,425,000		9.6			166,054,000		7.7			41.8
Total retail		300,448,000		12.3			235,729,000		10.9			27.5
Total originated loans	$	2,452,446,000		100.0	%	$	2,169,957,000		100.0	%		13.0	%

	December 31, 2018					December 31, 2017					Percent Increase
	Balance		%			Balance		%			(Decrease)
Acquired Loans
Commercial:
Commercial and industrial	$	54,025,000		18.0	%	$	72,959,000		18.8	%		(26.0%	)
Vacant land, land development, and residential construction		4,935,000		1.6			6,191,000		1.6			(20.3	)
Real estate – owner occupied		48,431,000		16.1			70,263,000		18.1			(31.1	)
Real estate – non-owner occupied		71,155,000		23.7			82,861,000		21.3			(14.1	)
Real estate – multi-family and residential rental		29,562,000		9.8			37,066,000		9.5			(20.2	)
Total commercial		208,108,000		69.2			269,340,000		69.3			(22.7	)
Retail:
Home equity and other		20,416,000		6.8			30,750,000		7.9			(33.6	)
1-4 family mortgages		72,115,000		24.0			88,505,000		22.8			(18.5	)
Total retail		92,531,000		30.8			119,255,000		30.7			(22.4	)
Total acquired loans	$	300,639,000		100.0	%	$	388,595,000		100.0	%		(22.6%	)

	December 31, 2018					December 31, 2017					Percent Increase
	Balance		%			Balance		%			(Decrease)
Total Loans
Commercial:
Commercial and industrial	$	822,723,000		29.9	%	$	753,764,000		29.4	%		9.1	%
Vacant land, land development, and residential construction		44,885,000		1.6			29,873,000		1.2			50.3
Real estate – owner occupied		548,619,000		19.9			526,328,000		20.6			4.2
Real estate – non-owner occupied		816,282,000		29.7			791,685,000		30.9			3.1
Real estate – multi-family and residential rental		127,597,000		4.6			101,918,000		4.0			25.2
Total commercial		2,360,106,000		85.7			2,203,568,000		86.1			7.1
Retail:
Home equity and other		85,439,000		3.1			100,425,000		3.9			(14.9	)
1-4 family mortgages		307,540,000		11.2			254,559,000		10.0			20.8
Total retail		392,979,000		14.3			354,984,000		13.9			10.7
Total loans	$	2,753,085,000		100.0	%	$	2,558,552,000		100.0	%		7.6	%

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

$8.0

million and

$4.6

million, respectively, as of

December 31, 2018.

The total contractually required payments 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 years ended

December 31, 2018

and

December 31, 2017

were as follows:

	2018
Balance at December 31, 2017	$	1,404,000
Additions		0
Accretion income		(490,000	)
Net reclassification from nonaccretable to accretable		437,000
Reductions (1)		(77,000	)
Balance at December 31, 2018	$	1,274,000

	2017
Balance at December 31, 2016	$	1,726,000
Additions		223,000
Accretion income		(562,000	)
Net reclassification from nonaccretable to accretable		367,000
Reductions (1)		(350,000	)
Balance at December 31, 2017	$	1,404,000

(

1

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

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

	2018					2017
			Percentage of					Percentage of
	Balance		Loan Portfolio			Balance		Loan Portfolio
Commercial real estate loans to lessors of non-residential buildings	$	568,134,000		20.6	%	$	547,841,000		21.4	%

Year-end nonperforming originated loans were as follows:

	2018		2017
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		803,000		3,672,000
Total nonperforming loans	$	803,000	$	3,672,000

Year-end nonperforming acquired loans were as follows:

	2018		2017
Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		3,337,000		3,471,000
Total nonperforming loans	$	3,337,000	$	3,471,000

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

	December 31, 2018		December 31, 2017
Commercial:
Commercial and industrial	$	16,000	$	1,444,000
Vacant land, land development, and residential construction		0		35,000
Real estate – owner occupied		950,000		2,241,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		141,000		178,000
Total commercial		1,107,000		3,898,000
Retail:
Home equity and other		454,000		577,000
1-4 family mortgages		2,579,000		2,668,000
Total retail		3,033,000		3,245,000
Total nonperforming loans	$	4,140,000	$	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

December 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	$	186,000	$	0	$	0	$	186,000	$	768,512,000	$	768,698,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		39,950,000		39,950,000		0
Real estate – owner occupied		0		0		0		0		500,188,000		500,188,000		0
Real estate – non-owner occupied		0		0		0		0		745,127,000		745,127,000		0
Real estate – multi-family and residential rental		0		0		0		0		98,035,000		98,035,000		0
Total commercial		186,000		0		0		186,000		2,151,812,000		2,151,998,000		0
Retail:
Home equity and other		44,000		0		0		44,000		64,979,000		65,023,000		0
1- 4 family mortgages		291,000		0		137,000		428,000		234,997,000		235,425,000		0
Total retail		335,000		0		137,000		472,000		299,976,000		300,448,000		0
Total past due loans	$	521,000	$	0	$	137,000	$	658,000	$	2,451,788,000	$	2,452,446,000	$	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	$	8,000	$	0	$	0	$	8,000	$	54,017,000	$	54,025,000	$	0
Vacant land, land development, and residential construction		19,000		0		0		19,000		4,916,000		4,935,000		0
Real estate – owner occupied		108,000		950,000		0		1,058,000		47,373,000		48,431,000		0
Real estate – non-owner occupied		62,000		0		0		62,000		71,093,000		71,155,000		0
Real estate – multi-family and residential rental		0		0		0		0		29,562,000		29,562,000		0
Total commercial		197,000		950,000		0		1,147,000		206,961,000		208,108,000		0
Retail:
Home equity and other		167,000		31,000		0		198,000		20,218,000		20,416,000		0
1- 4 family mortgages		821,000		347,000		612,000		1,780,000		70,335,000		72,115,000		0
Total retail		988,000		378,000		612,000		1,978,000		90,553,000		92,531,000		0
Total past due loans	$	1,185,000	$	1,328,000	$	612,000	$	3,125,000	$	297,514,000	$	300,639,000	$	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 with

no

related allowance recorded were as follows as of

December 31, 2018:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	8,604,000	$	8,604,000		$	2,096,000
Vacant land, land development and residential construction		94,000		94,000			65,000
Real estate – owner occupied		632,000		632,000			1,145,000
Real estate – non-owner occupied		0		0			0
Real estate – multi-family and residential rental		0		0			187,000
Total commercial		9,330,000		9,330,000			3,493,000
Retail:
Home equity and other		607,000		586,000			691,000
1-4 family mortgages		1,053,000		390,000			414,000
Total retail		1,660,000		976,000			1,105,000
Total with no related allowance recorded	$	10,990,000	$	10,306,000		$	4,598,000

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

December 31, 2018:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	5,011,000	$	5,011,000	$	83,000	$	3,455,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		2,658,000		2,658,000		363,000		2,072,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		140,000		135,000		5,000		112,000
Total commercial		7,809,000		7,804,000		451,000		5,639,000
Retail:
Home equity and other		442,000		431,000		194,000		600,000
1-4 family mortgages		409,000		341,000		44,000		299,000
Total retail		851,000		772,000		238,000		899,000
Total with an allowance recorded	$	8,660,000	$	8,576,000	$	689,000	$	6,538,000
Total impaired loans:
Commercial	$	17,139,000	$	17,134,000	$	451,000	$	9,132,000
Retail		2,511,000		1,748,000		238,000		2,004,000
Total impaired originated loans	$	19,650,000	$	18,882,000	$	689,000	$	11,136,000

Impaired acquired loans with

no

related allowance recorded were as follows as of

December 31, 2018:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	398,000	$	398,000		$	690,000
Vacant land, land development and residential construction		0		0			0
Real estate – owner occupied		1,193,000		1,193,000			749,000
Real estate – non-owner occupied		0		0			182,000
Real estate – multi-family and residential rental		45,000		26,000			73,000
Total commercial		1,636,000		1,617,000			1,694,000
Retail:
Home equity and other		388,000		361,000			615,000
1-4 family mortgages		2,494,000		1,849,000			2,031,000
Total retail		2,882,000		2,210,000			2,646,000
Total with no related allowance recorded	$	4,518,000	$	3,827,000		$	4,340,000

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

December 31, 2018:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	175,000	$	166,000	$	43,000	$	33,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		147,000		147,000		0		349,000
Real estate – non-owner occupied		210,000		210,000		0		42,000
Real estate – multi-family and residential rental		3,000		3,000		0		1,000
Total commercial		535,000		526,000		43,000		425,000
Retail:
Home equity and other		462,000		440,000		178,000		95,000
1-4 family mortgages		418,000		371,000		89,000		74,000
Total retail		880,000		811,000		267,000		169,000
Total with an allowance recorded	$	1,415,000	$	1,337,000	$	310,000	$	594,000
Total impaired loans:
Commercial	$	2,171,000	$	2,143,000	$	43,000	$	2,119,000
Retail		3,762,000		3,021,000		267,000		2,815,000
Total impaired acquired loans	$	5,933,000	$	5,164,000	$	310,000	$	4,934,000

Impaired originated loans with

no

related allowance recorded were as follows as of

December 31, 2017:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	765,000	$	178,000		$	694,000
Vacant land, land development and residential construction		454,000		35,000			65,000
Real estate – owner occupied		1,528,000		1,452,000			442,000
Real estate – non-owner occupied		0		0			36,000
Real estate – multi-family and residential rental		349,000		349,000			221,000
Total commercial		3,096,000		2,014,000			1,458,000
Retail:
Home equity and other		693,000		680,000			526,000
1-4 family mortgages		1,126,000		456,000			596,000
Total retail		1,819,000		1,136,000			1,122,000
Total with no related allowance recorded	$	4,915,000	$	3,150,000		$	2,580,000

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

December 31, 2017:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	3,038,000	$	2,989,000	$	963,000	$	3,314,000
Vacant land, land development and residential construction		0		0		0		449,000
Real estate – owner occupied		1,409,000		1,391,000		239,000		1,663,000
Real estate – non-owner occupied		0		0		0		2,055,000
Real estate – multi-family and residential rental		0		0		0		429,000
Total commercial		4,447,000		4,380,000		1,202,000		7,910,000
Retail:
Home equity and other		1,225,000		1,147,000		652,000		922,000
1-4 family mortgages		165,000		110,000		13,000		122,000
Total retail		1,390,000		1,257,000		665,000		1,044,000
Total with an allowance recorded	$	5,837,000	$	5,637,000	$	1,867,000	$	8,954,000
Total impaired loans:
Commercial	$	7,543,000	$	6,394,000	$	1,202,000	$	9,368,000
Retail		3,209,000		2,393,000		665,000		2,166,000
Total impaired originated loans	$	10,752,000	$	8,787,000	$	1,867,000	$	11,534,000

Impaired acquired loans with

no

related allowance recorded were as follows as of

December 31, 2017:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance	Year-To- Date Average Recorded Principal Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,039,000	$	1,021,000		$	1,039,000
Vacant land, land development and residential construction		0		0			12,000
Real estate – owner occupied		1,027,000		659,000			1,005,000
Real estate – non-owner occupied		238,000		237,000			738,000
Real estate – multi-family and residential rental		237,000		218,000			408,000
Total commercial		2,541,000		2,135,000			3,202,000
Retail:
Home equity and other		694,000		507,000			417,000
1-4 family mortgages		2,703,000		2,153,000			1,885,000
Total retail		3,397,000		2,660,000			2,302,000
Total with no related allowance recorded	$	5,938,000	$	4,795,000		$	5,504,000

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

December 31, 2017:

	Unpaid Contractual Principal Balance		Recorded Principal Balance		Related Allowance		Year-To- Date Average Recorded Principal Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	10,000
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		0		0		0		38,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0
Total commercial		0		0		0		48,000
Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		0		0		0		137,000
Total retail		0		0		0		137,000
Total with an allowance recorded	$	0	$	0	$	0	$	185,000
Total impaired loans:
Commercial	$	2,541,000	$	2,135,000	$	0	$	3,250,000
Retail		3,397,000		2,660,000		0		2,439,000
Total impaired acquired loans	$	5,938,000	$	4,795,000	$	0	$	5,689,000

Impaired loans for which

no

allocation of the allowance for loan losses has been made generally reflect situations whereby the loans have been charged-down to estimated collateral value. Interest income recognized on accruing troubled debt restructurings totaled

$1.1

million,

$0.4

million and

$1.2

million during

2018,

2017

and

2016,

respectively. Interest income recognized on nonaccrual loans totaled less than

$0.1

million in

2018

and

2016,

and

$0.5

million during

2017,

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

$0.3

million in

2018

and

2017,

and

$0.1

million during

2016.

Credit Quality Indicators.

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

ten

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

Loans by credit quality indicators were as follows as of

December 31, 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	$	508,611,000	$	28,170,000	$	325,459,000	$	526,445,000	$	75,051,000
Grades 5 – 7		238,942,000		11,686,000		163,455,000		218,682,000		22,798,000
Grades 8 – 9		21,145,000		94,000		11,274,000		0		186,000
Total commercial	$	768,698,000	$	39,950,000	$	500,188,000	$	745,127,000	$	98,035,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Total retail	$	65,023,000	$	235,425,000

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	$	34,678,000	$	1,246,000	$	21,595,000	$	54,401,000	$	16,050,000
Grades 5 – 7		19,122,000		3,431,000		25,485,000		16,687,000		13,460,000
Grades 8 – 9		225,000		258,000		1,351,000		67,000		52,000
Total commercial	$	54,025,000	$	4,935,000	$	48,431,000	$	71,155,000	$	29,562,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Total retail	$	20,416,000	$	72,115,000

Loans by 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 number system:

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 their continuance as an asset is

not

warranted.

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

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

December 31, 2018

are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	16,456,000		$	2,584,000		$	93,000		$	19,133,000
Provision for loan losses		826,000			(377,000	)		(49,000	)		400,000
Charge-offs		(428,000	)		(761,000	)		0			(1,189,000	)
Recoveries		2,588,000			622,000			0			3,210,000
Ending balance	$	19,442,000		$	2,068,000		$	44,000		$	21,554,000
Ending balance: individually evaluated for impairment	$	451,000		$	237,000		$	0		$	688,000
Ending balance: collectively evaluated for impairment	$	18,991,000		$	1,831,000		$	44,000		$	20,866,000
Total loans:
Ending balance	$	2,151,998,000		$	300,448,000					$	2,452,446,000
Ending balance: individually evaluated for impairment	$	17,134,000		$	1,748,000					$	18,882,000
Ending balance: collectively evaluated for impairment	$	2,134,864,000		$	298,700,000					$	2,433,564,000

The allowance for acquired loan losses for the year-ended

December 31, 2018

is as follows:

	Commercial Loans			Retail Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	291,000		$	77,000		$	0	$	368,000
Provision for loan losses		132,000			568,000			0		700,000
Charge-offs		(246,000	)		(15,000	)		0		(261,000	)
Recoveries		0			19,000			0		19,000
Ending balance	$	177,000		$	649,000		$	0	$	826,000

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

December 31, 2017

are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	16,026,000		$	1,882,000		$	(40,000	)	$	17,868,000
Provision for loan losses		1,148,000			1,360,000			133,000			2,641,000
Charge-offs		(2,292,000	)		(891,000	)		0			(3,183,000	)
Recoveries		1,574,000			233,000			0			1,807,000
Ending balance	$	16,456,000		$	2,584,000		$	93,000		$	19,133,000
Ending balance: individually evaluated for impairment	$	1,202,000		$	665,000		$	0		$	1,867,000
Ending balance: collectively evaluated for impairment	$	15,254,000		$	1,919,000		$	93,000		$	17,266,000
Total loans:
Ending balance	$	1,934,228,000		$	235,729,000					$	2,169,957,000
Ending balance: individually evaluated for impairment	$	6,394,000		$	2,393,000					$	8,787,000
Ending balance: collectively evaluated for impairment	$	1,927,834,000		$	233,336,000					$	2,161,170,000

The allowance for acquired loan losses for the year-ended

December 31, 2017

is as follows:

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

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

December 31, 2016

are as follows:

	Commercial Loans			Retail Loans			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	13,672,000		$	1,421,000		$	140,000		$	15,233,000
Provision for loan losses		2,247,000			1,031,000			(180,000	)		3,098,000
Charge-offs		(980,000	)		(1,153,000	)		0			(2,133,000	)
Recoveries		1,087,000			583,000			0			1,670,000
Ending balance	$	16,026,000		$	1,882,000		$	(40,000	)	$	17,868,000
Ending balance: individually evaluated for impairment	$	1,303,000		$	269,000		$	0		$	1,572,000
Ending balance: collectively evaluated for impairment	$	14,723,000		$	1,613,000		$	(40,000	)	$	16,296,000
Total loans:
Ending balance	$	1,728,898,000		$	155,650,000					$	1,884,548,000
Ending balance: individually evaluated for impairment	$	12,070,000		$	1,313,000					$	13,383,000
Ending balance: collectively evaluated for impairment	$	1,716,828,000		$	154,337,000					$	1,871,165,000

The allowance for acquired loan losses for the year-ended

December 31, 2016

is as follows:

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

The negative loan recoveries reflected for acquired loans during

2016

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

2016,

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

Loans modified as troubled debt restructurings during the year-ended

December 31, 2018

were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated Loans
Commercial:
Commercial and industrial		9	$	12,297,000	$	12,263,000
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 commercial		10		14,581,000		14,547,000
Retail:
Home equity and other		2		63,000		63,000
1-4 family mortgages		0		0		0
Total retail		2		63,000		63,000
Total		12	$	14,644,000	$	14,610,000
Acquired Loans
Commercial:
Commercial and industrial		0	$	0	$	0
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 commercial		1		150,000		150,000
Retail:
Home equity and other		16		414,000		416,000
1-4 family mortgages		4		91,000		90,000
Total retail		20		505,000		506,000
Total		21	$	655,000	$	656,000

Loans modified as troubled debt restructurings during the year-ended

December 31, 2017

were as follows:

			Pre-		Post-
			Modification		Modification
			Recorded		Recorded
	Number of		Principal		Principal
	Contracts		Balance		Balance
Originated Loans
Commercial:
Commercial and industrial		8	$	3,771,000	$	3,831,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		4		1,195,000		1,195,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total commercial		12		4,966,000		5,026,000
Retail:
Home equity and other		8		670,000		671,000
1-4 family mortgages		0		0		0
Total retail		8		670,000		671,000
Total		20	$	5,636,000	$	5,697,000
Acquired Loans
Commercial:
Commercial and industrial		2	$	399,000	$	399,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		1		33,000		33,000
Real estate – non-owner occupied		0		0		0
Real estate – multi-family and residential rental		0		0		0
Total commercial		3		432,000		432,000
Retail:
Home equity and other		7		192,000		195,000
1-4 family mortgages		4		200,000		200,000
Total retail		11		392,000		395,000
Total		14	$	824,000	$	827,000

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

twelve

months, became over

30

days past due during the year-ended

December 31, 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

30

days past due during the year-ended

December 31, 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

30

days past due during the year-ended

December 31, 2017 (

amounts as of period end):

	Number of Contracts		Recorded Principal Balance
Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		0		0
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		0		0
Retail:
Home equity and other		0		0
1-4 family mortgages		0		0
Total retail		0		0
Total		0	$	0

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

twelve

months, became over

30

days past due during the year-ended

December 31, 2017 (

amounts as of period end):

	Number of Contracts		Recorded Principal Balance
Commercial:
Commercial and industrial		1	$	114,000
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		0		0
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		114,000
Retail:
Home equity and other		2		102,000
1-4 family mortgages		0		0
Total retail		2		102,000
Total		3	$	216,000

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

December 31, 2018

is as follows:

	Commercial and			Commercial Vacant Land, Land Development, and Residential			Commercial Real Estate - Owner			Commercial Real Estate - Non-Owner		Commercial Real Estate - Multi-Family and Residential
	Industrial			Construction			Occupied			Occupied		Rental
Commercial Loan Portfolio:
Beginning Balance	$	2,989,000		$	383,000		$	1,599,000		$	0	$	0
Charge-Offs		(230,000	)		0			0			0		0
Payments		(692,000	)		(383,000	)		(4,999,000	)		0		0
Transfers to ORE		0			0			0			0		0
Net Additions/Deletions		11,523,000			0			6,082,000			0		0
Ending Balance	$	13,590,000		$	0		$	2,682,000		$	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		(251,000	)		(4,000	)
Transfers to ORE		0			0
Net Additions/Deletions		62,000			0
Ending Balance	$	938,000		$	142,000

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

December 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		(100,000	)		0		(1,664,000	)		(27,000	)		(17,000	)
Transfers to ORE		0			0		(93,000	)		0			0
Net Additions/Deletions		(78,000	)		0		1,748,000			0			0
Ending Balance	$	548,000		$	0	$	418,000		$	210,000		$	24,000

	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		(72,000	)		(37,000	)
Transfers to ORE		(82,000	)		0
Net Additions/Deletions		429,000			80,000
Ending Balance	$	464,000		$	436,000

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

December 31, 2017

is as follows:

	Commercial and			Commercial Vacant Land, Land Development, and Residential			Commercial Real Estate - Owner			Commercial Real Estate - Non-Owner			Commercial Real Estate - Multi-Family and Residential
	Industrial			Construction			Occupied			Occupied			Rental
Commercial Loan Portfolio:
Beginning Balance	$	1,503,000		$	1,488,000		$	906,000		$	5,110,000		$	716,000
Charge-Offs		0			0			0			0			0
Payments		(2,021,000	)		(1,105,000	)		(242,000	)		(232,000	)		(405,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		3,507,000			0			935,000			(4,878,000	)		(311,000	)
Ending Balance	$	2,989,000		$	383,000		$	1,599,000		$	0		$	0

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	385,000		$	157,000
Charge-Offs		0			0
Payments		(57,000	)		(11,000	)
Transfers to ORE		0			0
Net Additions/Deletions		799,000			0
Ending Balance	$	1,127,000		$	146,000

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

December 31, 2017

is as follows:

	Commercial and Industrial			Commercial Vacant Land, Land Development, and Residential Construction			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance	$	1,125,000		$	0		$	900,000		$	728,000		$	60,000
Charge-Offs		0			0			(249,000	)		0			0
Payments		(550,000	)		(33,000	)		(257,000	)		(922,000	)		(1,084,000	)
Transfers to ORE		0			0			0			(291,000	)		0
Net Additions/Deletions		426,000			33,000			33,000			722,000			1,065,000
Ending Balance	$	1,001,000		$	0		$	427,000		$	237,000		$	41,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	208,000		$	326,000
Charge-Offs		(25,000	)		0
Payments		(121,000	)		(188,000	)
Transfers to ORE		0			0
Net Additions/Deletions		157,000			255,000
Ending Balance	$	219,000		$	393,000

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

December 31, 2016

is as follows:

	Commercial and			Commercial Vacant Land, Land Development, and Residential			Commercial Real Estate - Owner			Commercial Real Estate - Non-Owner			Commercial Real Estate - Multi-Family and Residential
	Industrial			Construction			Occupied			Occupied			Rental
Commercial Loan Portfolio:
Beginning Balance	$	2,028,000		$	2,086,000		$	1,400,000		$	10,657,000		$	476,000
Charge-Offs		0			0			0			0			0
Payments		(555,000	)		(598,000	)		(591,000	)		(6,004,000	)		(30,000	)
Transfers to ORE		0			0			0			0			0
Net Additions/Deletions		30,000			0			97,000			457,000			270,000
Ending Balance	$	1,503,000		$	1,488,000		$	906,000		$	5,110,000		$	716,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	146,000		$	128,000
Charge-Offs		0			0
Payments		(1,000	)		(11,000	)
Transfers to ORE		0			0
Net Additions/Deletions		240,000			40,000
Ending Balance	$	385,000		$	157,000

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

December 31, 2016

is as follows:

	Commercial and Industrial			Commercial Vacant Land, Land Development, and Residential Construction		Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Commercial Real Estate - Multi-Family and Residential Rental
Commercial Loan Portfolio:
Beginning Balance	$	1,686,000		$	0	$	1,652,000		$	647,000		$	331,000
Charge-Offs		(48,000	)		0		0			0			0
Payments		(513,000	)		0		(1,514,000	)		(110,000	)		(278,000	)
Transfers to ORE		0			0		0			0			0
Net Additions/Deletions		0			0		762,000			191,000			7,000
Ending Balance	$	1,125,000		$	0	$	900,000		$	728,000		$	60,000

	Retail Home Equity and Other			Retail 1-4 Family Mortgages
Retail Loan Portfolio:
Beginning Balance	$	141,000		$	316,000
Charge-Offs		0			0
Payments		(30,000	)		(9,000	)
Transfers to ORE		0			0
Net Additions/Deletions		97,000			19,000
Ending Balance	$	208,000		$	326,000

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

	December 31, 2018		December 31, 2017
Commercial:
Commercial and industrial	$	126,000	$	107,000
Vacant land, land development, and residential construction		0		0
Real estate – owner occupied		363,000		141,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		489,000		248,000
Retail:
Home equity and other		337,000		196,000
1-4 family mortgages		110,000		0
Total retail		447,000		196,000
Total related allowance	$	936,000	$	444,000

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

8

- or

9

-rated commercial loan meets the criteria of a troubled debt restructuring, although we review and consider all renewed and modified loans as part of our troubled debt restructuring assessment procedures. Loan relationships rated

8

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

9

reflect vital financial weaknesses, resulting in a highly questionable ability on our part to collect principal. We believe borrowers warranting such ratings would have difficulty obtaining financing from other market participants. Thus, due to the lack of comparable market rates for loans with similar risk characteristics, we believe

8

- or

9

-rated loans renewed or modified were done so at below market rates. Loans that are identified as troubled debt restructurings are considered impaired and are individually evaluated for impairment when assessing these credits in our allowance for loan losses calculation.