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Note 4 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2014

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 are those purchased in the Firstbank merger (see Note 2 – Business Combination for further information). These loans were recorded at estimated fair value at the Merger Date with no carryover of the related allowance. The acquired loans were segregated between those considered to be performing (“acquired non-impaired loans”) and those with evidence of credit deterioration (“acquired impaired loans”). Acquired loans are considered impaired if there is evidence of credit deterioration and if it is probable, at acquisition, all contractually required payments will not be collected. Acquired loans restructured after acquisition are not considered or reported as troubled debt restructurings if the loans evidenced credit deterioration as of the Merger Date and are accounted for in pools.

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

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

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

We evaluate quarterly the remaining contractually required payments receivable and estimate cash flows expected to be collected over the lives of the impaired loans. Contractually required payments receivable may increase or decrease for a variety of reasons, for example, when the contractual terms of the loan agreement are modified, when interest rates on variable rate loans change, or when principal and/or interest payments are received. Cash flows expected to be collected on acquired impaired loans are estimated by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, loss given default, and the amount of actual prepayments after the Merger Date. Prepayments affect the estimated lives of loans and could change the amount of interest income, and possibly principal, expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary. The adjustments are based, in part, on actual loss severities recognized for each loan type, as well as changes in the probability of default. For periods in which estimated cash flows are not re-forecasted, the prior reporting period’s estimated cash flows are adjusted to reflect the actual cash received and credit events that transpired during the current reporting period.

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

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

											Percent
	December 31, 2014					December 31, 2013					Increase
	Balance		%			Balance		%			(Decrease)
Originated Loans
Commercial:
Commercial and industrial	$	384,570,000		30.8	%	$	286,373,000		27.2	%		34.3	%
Vacant land, land development, and residential construction		29,826,000		2.4			36,741,000		3.5			(18.8	)
Real estate – owner occupied		291,758,000		23.4			261,877,000		24.9			11.4
Real estate – non-owner occupied		410,977,000		33.0			364,066,000		34.6			12.9
Real estate – multi-family and residential rental		36,058,000		2.9			37,639,000		3.5			(4.2	)
Total commercial		1,153,189,000		92.5			986,696,000		93.7			16.9

Retail:
Home equity and other		50,059,000		4.0			35,080,000		3.3			42.7
1-4 family mortgages		42,868,000		3.5			31,467,000		3.0			36.2
Total retail		92,927,000		7.5			66,547,000		6.3			39.6

Total originated loans	$	1,246,116,000		100.0	%	$	1,053,243,000		100.0	%		18.3	%

										Percent
	December 31, 2014					December 31, 2013				Increase
	Balance		%			Balance		%		(Decrease)
Acquired Loans
Commercial:
Commercial and industrial	$	166,037,000		19.7	%	$	0		NA		NM
Vacant land, land development, and residential construction		22,148,000		2.6			0		NA		NM
Real estate – owner occupied		138,630,000		16.4			0		NA		NM
Real estate – non-owner occupied		148,597,000		17.6			0		NA		NM
Real estate – multi-family and residential rental		86,702,000		10.3			0		NA		NM
Total commercial		562,114,000		66.6			0		NA		NM

Retail:
Home equity and other		109,219,000		13.0			0		NA		NM
1-4 family mortgages		171,828,000		20.4			0		NA		NM
Total retail		281,047,000		33.4			0		NA		NM

Total acquired loans	$	843,161,000		100.0	%	$	0		NA		NM

											Percent
	December 31, 2014					December 31, 2013					Increase
	Balance		%			Balance		%			(Decrease)
Total Loans
Commercial:
Commercial and industrial	$	550,607,000		26.4	%	$	286,373,000		27.2	%		92.3	%
Vacant land, land development, and residential construction		51,974,000		2.5			36,741,000		3.5			41.5
Real estate – owner occupied		430,388,000		20.5			261,877,000		24.9			64.3
Real estate – non-owner occupied		559,574,000		26.8			364,066,000		34.6			53.7
Real estate – multi-family and residential rental		122,760,000		5.9			37,639,000		3.5			226.2
Total commercial		1,715,303,000		82.1			986,696,000		93.7			73.8

Retail:
Home equity and other		159,278,000		7.6			35,080,000		3.3			354.0
1-4 family mortgages		214,696,000		10.3			31,467,000		3.0			582.3
Total retail		373,974,000		17.9			66,547,000		6.3			462.0

Total loans	$	2,089,277,000		100.0	%	$	1,053,243,000		100.0	%		98.4	%

The total contractually required payments and carrying value of acquired impaired loans was $31.4 million and $18.6 million, respectively, as of December 31, 2014. Changes in the accretable yield for acquired impaired loans for the seven-month period ended December 31, 2014 were as follows:

	2014
Balance at May 31, 2014	$	0
Additions		2,514,000
Accretion		(786,000	)
Net reclassification from nonaccretable to accretable		3,537,000
Disposals		(40,000	)
Other activity		(227,000	)
Balance at December 31, 2014	$	4,998,000

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

	2014					2013
			Percentage of					Percentage of
	Balance		Loan Portfolio			Balance		Loan Portfolio
Commercial real estate loans to lessors of non-residential buildings	$	480,170,000		23.0	%	$	299,446,000		28.4	%

Year-end nonperforming originated loans were as follows:

	2014		2013

Loans past due 90 days or more still accruing interest	$	0	$	0
Nonaccrual loans		26,048,000		6,718,000

Total nonperforming loans	$	26,048,000	$	6,718,000

Year-end nonperforming acquired loans were as follows:

	2014		2013

Loans past due 90 days or more still accruing interest	$	26,000	$	NA
Nonaccrual loans		3,358,000		NA

Total nonperforming loans	$	3,384,000	$	NA

The recorded principal balance of nonperforming loans was as follows:

	December 31,		December 31,
	2014		2013

Commercial:
Commercial and industrial	$	6,478,000	$	1,501,000
Vacant land, land development, and residential construction		209,000		785,000
Real estate – owner occupied		18,062,000		389,000
Real estate – non-owner occupied		378,000		168,000
Real estate – multi-family and residential rental		106,000		208,000
Total commercial		25,233,000		3,051,000

Retail:
Home equity and other		800,000		788,000
1-4 family mortgages		3,399,000		2,879,000
Total retail		4,199,000		3,667,000

Total nonperforming loans	$	29,432,000	$	6,718,000

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, 2014:

					Greater								Recorded
	30 – 59		60 – 89		Than 89								Balance > 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing

Originated Loans

Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0	$	384,570,000	$	384,570,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		29,826,000		29,826,000		0
Real estate – owner occupied		0		0		120,000		120,000		291,638,000		291,758,000		0
Real estate – non-owner occupied		0		0		116,000		116,000		410,861,000		410,977,000		0
Real estate – multi-family and residential rental		0		0		0		0		36,058,000		36,058,000		0
Total commercial		0		0		236,000		236,000		1,152,953,000		1,153,189,000		0

Retail:
Home equity and other		38,000		3,000		0		41,000		50,018,000		50,059,000		0
1- 4 family mortgages		0		0		366,000		366,000		42,502,000		42,868,000		0
Total retail		38,000		3,000		366,000		407,000		92,520,000		92,927,000		0

Total past due loans	$	38,000	$	3,000	$	602,000	$	643,000	$	1,245,473,000	$	1,246,116,000	$	0

					Greater								Recorded
	30 – 59		60 – 89		Than 89								Balance > 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Acquired Loans

Commercial:
Commercial and industrial	$	29,000	$	32,000	$	76,000	$	137,000	$	165,900,000	$	166,037,000	$	0
Vacant land, land development, and residential construction		0		38,000		0		38,000		22,110,000		22,148,000		0
Real estate – owner occupied		51,000		425,000		1,625,000		2,101,000		136,529,000		138,630,000		0
Real estate – non-owner occupied		68,000		598,000		395,000		1,061,000		147,536,000		148,597,000		0
Real estate – multi-family and residential rental		37,000		0		105,000		142,000		86,560,000		86,702,000		0
Total commercial		185,000		1,093,000		2,201,000		3,479,000		558,635,000		562,114,000		0

Retail:
Home equity and other		445,000		419,000		155,000		1,019,000		108,200,000		109,219,000		26,000
1- 4 family mortgages		1,087,000		408,000		750,000		2,245,000		169,583,000		171,828,000		0
Total retail		1,532,000		827,000		905,000		3,264,000		277,783,000		281,047,000		26,000

Total past due loans	$	1,717,000	$	1,920,000	$	3,106,000	$	6,743,000	$	836,418,000	$	843,161,000	$	26,000

An age analysis of past due loans is as follows as of December 31, 2013:

					Greater								Recorded
	30 – 59		60 – 89		Than 89								Balance > 89
	Days		Days		Days		Total				Total		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing
Originated Loans

Commercial:
Commercial and industrial	$	0	$	0	$	309,000	$	309,000	$	286,064,000	$	286,373,000	$	0
Vacant land, land development, and residential construction		0		0		0		0		36,741,000		36,741,000		0
Real estate – owner occupied		65,000		0		50,000		115,000		261,762,000		261,877,000		0
Real estate – non-owner occupied		0		0		0		0		364,066,000		364,066,000		0
Real estate – multi-family and residential rental		0		0		64,000		64,000		37,575,000		37,639,000		0
Total commercial		65,000		0		423,000		488,000		986,208,000		986,696,000		0

Retail:
Home equity and other		14,000		0		0		14,000		35,066,000		35,080,000		0
1- 4 family mortgages		21,000		44,000		375,000		440,000		31,027,000		31,467,000		0
Total retail		35,000		44,000		375,000		454,000		66,093,000		66,547,000		0

Total past due loans	$	100,000	$	44,000	$	798,000	$	942,000	$	1,052,301,000	$	1,053,243,000	$	0

Impaired originated loans with no related allowance recorded were as follows as of December 31, 2014:

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,170,000	$	1,164,000			$	652,000
Vacant land, land development and residential construction		540,000		209,000				227,000
Real estate – owner occupied		3,609,000		1,901,000				4,365,000
Real estate – non-owner occupied		1,210,000		1,210,000				971,000
Real estate – multi-family and residential rental		375,000		317,000				64,000
Total commercial		6,904,000		4,801,000				6,279,000
Retail:
Home equity and other		207,000		191,000				517,000
1-4 family mortgages		1,144,000		560,000				585,000
Total retail		1,351,000		751,000				1,102,000

Total with no related allowance recorded	$	8,255,000	$	5,552,000		0	$	7,381,000

Impaired originated loans with an allowance recorded and total impaired loans were as follows as of December 31, 2014:

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	5,299,000	$	5,226,000	$	1,578,000	$	2,759,000
Vacant land, land development and residential construction		2,000,000		2,000,000		151,000		3,229,000
Real estate – owner occupied		15,745,000		15,674,000		2,200,000		4,630,000
Real estate – non-owner occupied		16,033,000		15,949,000		4,779,000		18,245,000
Real estate – multi-family and residential rental		1,371,000		1,371,000		666,000		1,700,000
Total commercial		40,448,000		40,220,000		9,374,000		30,563,000
Retail:
Home equity and other		115,000		84,000		84,000		128,000
1-4 family mortgages		2,194,000		2,000,000		694,000		2,115,000
Total retail		2,309,000		2,084,000		778,000		2,243,000

Total with an allowance recorded	$	42,757,000	$	42,304,000	$	10,152,000	$	32,806,000

Total impaired loans:
Commercial	$	47,352,000	$	45,021,000	$	9,374,000	$	36,842,000
Retail		3,660,000		2,835,000		778,000		3,345,000
Total impaired loans	$	51,012,000	$	47,856,000	$	10,152,000	$	40,187,000

Impaired acquired loans with no related allowance recorded were as follows as of December 31, 2014:

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	1,586,000	$	1,579,000			$	563,000
Vacant land, land development and residential construction		0		0				0
Real estate – owner occupied		113,000		113,000				52,000
Real estate – non-owner occupied		326,000		326,000				260,000
Real estate – multi-family and residential rental		487,000		487,000				166,000
Total commercial		2,512,000		2,505,000				1,041,000
Retail:
Home equity and other		641,000		639,000				262,000
1-4 family mortgages		866,000		866,000				458,000
Total retail		1,507,000		1,505,000				720,000

Total with no related allowance recorded	$	4,019,000	$	4,010,000		0	$	1,761,000

Impaired acquired loans with an allowance recorded and total impaired loans were as follows as of December 31, 2014:

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With an allowance recorded:
Commercial:
Commercial and industrial	$	0	$	0	$	0	$	0
Vacant land, land development and residential construction		0		0		0		0
Real estate – owner occupied		1,516,000		1,502,000		605,000		501,000
Real estate – non-owner occupied		0		0		0		0
Real estate – multi-family and residential rental		0		0		0		0
Total commercial		1,516,000		1,502,000		605,000		501,000
Retail:
Home equity and other		0		0		0		0
1-4 family mortgages		0		0		0		0
Total retail		0		0		0		0

Total with an allowance recorded	$	1,516,000	$	1,502,000	$	605,000	$	501,000

Total impaired loans:
Commercial	$	4,028,000	$	4,007,000	$	605,000	$	1,542,000
Retail		1,507,000		1,505,000		0		720,000
Total impaired loans	$	5,535,000	$	5,512,000	$	605,000	$	2,262,000

Impaired originated loans with no related allowance recorded were as follows as of December 31, 2013:

							Year-To-Date
	Unpaid						Average
	Contractual		Recorded				Recorded
	Principal		Principal		Related		Principal
	Balance		Balance		Allowance		Balance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	2,229,000	$	511,000			$	1,205,000
Vacant land, land development and residential construction		475,000		362,000				991,000
Real estate – owner occupied		1,270,000		785,000				1,084,000
Real estate – non-owner occupied		895,000		733,000				4,049,000
Real estate – multi-family and residential rental		41,000		1,000				390,000
Total commercial		4,910,000		2,392,000				7,719,000
Retail:
Home equity and other		507,000		461,000				471,000
1-4 family mortgages		1,272,000		647,000				727,000
Total retail		1,779,000		1,108,000				1,198,000

Total with no related allowance recorded	$	6,689,000	$	3,500,000		0	$	8,917,000

Impaired originated loans with an allowance recorded and total impaired loans were as follows as of December 31, 2013:

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

With an allowance recorded:
Commercial:
Commercial and industrial	$	1,517,000	$	1,440,000	$	792,000	$	1,880,000
Vacant land, land development and residential construction		4,436,000		4,139,000		844,000		3,354,000
Real estate – owner occupied		1,513,000		1,513,000		528,000		2,550,000
Real estate – non-owner occupied		21,088,000		21,072,000		7,969,000		28,388,000
Real estate – multi-family and residential rental		3,219,000		2,684,000		1,127,000		2,915,000
Total commercial		31,773,000		30,848,000		11,260,000		39,087,000
Retail:
Home equity and other		320,000		289,000		96,000		329,000
1-4 family mortgages		2,274,000		2,231,000		1,030,000		1,628,000
Total retail		2,594,000		2,520,000		1,126,000		1,957,000

Total with an allowance recorded	$	34,367,000	$	33,368,000	$	12,386,000	$	41,044,000

Total impaired loans:
Commercial	$	36,683,000	$	33,240,000	$	11,260,000	$	46,806,000
Retail		4,373,000		3,628,000		1,126,000		3,155,000
Total impaired loans	$	41,056,000	$	36,868,000	$	12,386,000	$	49,961,000

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 $1.8 million, $2.5 million and $2.0 million during 2014, 2013 and 2012, respectively. Interest income recognized on nonaccrual loans totaled $1.9 million during 2013, reflecting the collection of interest at the time of principal pay-off. No such significant collections of interest income were recorded during 2014 or 2012. Lost interest income on nonaccrual loans totaled $0.1 million, $0.4 million and $0.8 million during 2014, 2013 and 2012, respectively.

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

Loans by credit quality indicators were as follows as of December 31, 2014:

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	$	266,631,000	$	11,242,000	$	190,656,000	$	285,035,000	$	12,394,000
Grades 5 – 7		109,639,000		16,375,000		83,123,000		113,982,000		22,282,000
Grades 8 – 9		8,300,000		2,209,000		17,979,000		11,960,000		1,382,000
Total commercial	$	384,570,000	$	29,826,000	$	291,758,000	$	410,977,000	$	36,058,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	50,059,000	$	42,868,000

Acquired Loans

Commercial credit exposure – credit risk profiled by internal credit risk grades:

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

Internal credit risk grade groupings:
Grades 1 – 4	$	72,411,000	$	5,875,000	$	39,496,000	$	65,886,000	$	35,858,000
Grades 5 – 7		90,320,000		14,472,000		92,212,000		78,103,000		49,781,000
Grades 8 – 9		3,306,000		1,801,000		6,922,000		4,608,000		1,063,000
Total commercial	$	166,037,000	$	22,148,000	$	138,630,000	$	148,597,000	$	86,702,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	109,219,000	$	171,828,000

Loans by credit quality indicators were as follows as of December 31, 2013:

Originated Loans

Commercial credit exposure – credit risk profiled by internal credit risk grades:

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

Internal credit risk grade groupings:
Grades 1 – 4	$	208,151,000	$	6,973,000	$	156,230,000	$	219,325,000	$	15,465,000
Grades 5 – 7		76,237,000		25,535,000		103,066,000		122,717,000		19,469,000
Grades 8 – 9		1,985,000		4,233,000		2,581,000		22,024,000		2,705,000
Total commercial	$	286,373,000	$	36,741,000	$	261,877,000	$	364,066,000	$	37,639,000

Retail credit exposure – credit risk profiled by collateral type:

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

Total retail	$	35,080,000	$	31,467,000

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, 2014 are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated		Total

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

Ending balance: individually evaluated for impairment	$	9,374,000		$	777,000		$	0	$	10,151,000

Ending balance: collectively evaluated for impairment	$	8,362,000		$	710,000		$	76,000	$	9,148,000

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

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

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

The allowance for acquired loan losses for the year-ended December 31, 2014 is as follows:

	Commercial			Retail
	Loans			Loans			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	0		$	0		$	0	$	0
Provision for loan losses		734,000			59,000			0		793,000
Charge-offs		(55,000	)		(16,000	)		0		(71,000	)
Recoveries		2,000			18,000			0		20,000
Ending balance	$	681,000		$	61,000		$	0	$	742,000

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

The allowance for loan losses and recorded investments in loans for the year-ended December 31, 2013 are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	26,043,000		$	2,645,000		$	(11,000	)	$	28,677,000
Provision for loan losses		(6,730,000	)		(489,000	)		19,000			(7,200,000	)
Charge-offs		(5,120,000	)		(170,000	)		0			(5,290,000	)
Recoveries		6,262,000			372,000			0			6,634,000
Ending balance	$	20,455,000		$	2,358,000		$	8,000		$	22,821,000

Ending balance: individually evaluated for impairment	$	11,260,000		$	1,126,000		$	0		$	12,386,000

Ending balance: collectively evaluated for impairment	$	9,195,000		$	1,232,000		$	8,000		$	10,435,000

Total loans:
Ending balance	$	986,696,000		$	66,547,000					$	1,053,243,000

Ending balance: individually evaluated for impairment	$	33,240,000		$	3,628,000					$	36,868,000

Ending balance: collectively evaluated for impairment	$	953,456,000		$	62,919,000					$	1,016,375,000

The allowance for loan losses and recorded investments in loans for the year-ended December 31, 2012 are as follows:

	Commercial			Retail
	Loans			Loans			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	33,431,000		$	3,019,000		$	82,000		$	36,532,000
Provision for loan losses		(2,800,000	)		(207,000	)		(93,000	)		(3,100,000	)
Charge-offs		(12,075,000	)		(569,000	)		0			(12,644,000	)
Recoveries		7,487,000			402,000			0			7,889,000
Ending balance	$	26,043,000		$	2,645,000		$	(11,000	)	$	28,677,000

Ending balance: individually evaluated for impairment	$	16,860,000		$	329,000		$	0		$	17,189,000

Ending balance: collectively evaluated for impairment	$	9,183,000		$	2,316,000		$	(11,000	)	$	11,488,000

Total loans:
Ending balance	$	968,506,000		$	72,683,000					$	1,041,189,000

Ending balance: individually evaluated for impairment	$	55,138,000		$	2,141,000					$	57,279,000

Ending balance: collectively evaluated for impairment	$	913,368,000		$	70,542,000					$	983,910,000

Loans modified as troubled debt restructurings during 2014 were as follows:

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

Commercial:
Commercial and industrial		2	$	5,994,000	$	6,094,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		2		16,787,000		16,787,000
Real estate – non-owner occupied		1		146,000		146,000
Real estate – multi-family and residential rental		0		0		0
Total commercial		5		22,927,000		23,027,000

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

Total		5	$	22,927,000	$	23,027,000

Acquired Loans

Commercial:
Commercial and industrial		7	$	1,604,000	$	1,604,000
Vacant land, land development and residential construction		0		0		0
Real estate – owner occupied		2		1,619,000		1,619,000
Real estate – non-owner occupied		1		65,000		65,000
Real estate – multi-family and residential rental		4		394,000		394,000
Total commercial		14		3,682,000		3,682,000

Retail:
Home equity and other		1		26,000		26,000
1-4 family mortgages		1		179,000		179,000
Total retail		2		205,000		205,000

Total		16	$	3,887,000	$	3,887,000

Originated loans modified as troubled debt restructurings during 2013 were as follows:

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

Commercial:
Commercial and industrial		3	$	741,000	$	741,000
Vacant land, land development and residential construction		2		3,610,000		3,610,000
Real estate – owner occupied		2		715,000		715,000
Real estate – non-owner occupied		1		45,000		45,000
Real estate – multi-family and residential rental		1		241,000		241,000
Total commercial		9		5,352,000		5,352,000

Retail:
Home equity and other		0		0		0
1-4 family mortgages		1		1,879,000		1,879,000
Total retail		1		1,879,000		1,879,000

Total		10	$	7,231,000	$	7,231,000

The following originated loans, modified as troubled debt restructurings within the previous twelve months, became over 30 days past due during the twelve months ended December 31, 2014 (amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance

Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		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 seven months, became over 30 days past due during the seven months ended December 31, 2014 (amounts as of period end):

			Recorded
	Number of		Principal
	Contracts		Balance

Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		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 twelve months ended December 31, 2013 (amounts as of period end):

	Number of		Principal
	Contracts		Balance

Commercial:
Commercial and industrial		0	$	0
Vacant land, land development and residential construction		0		0
Real estate – owner occupied		1		65,000
Real estate – non-owner occupied		0		0
Real estate – multi-family and residential rental		0		0
Total commercial		1		65,000

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

Total		1	$	65,000

Activity for originated loans categorized as troubled debt restructurings during 2014 is as follows:

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

Commercial Loan Portfolio:
Beginning Balance	$	1,656,000		$	4,501,000		$	1,816,000		$	22,311,000		$	2,620,000
Charge-Offs		(67,000	)		0			(11,000	)		0			(420,000	)
Payments		(871,000	)		(4,719,000	)		(2,343,000	)		(5,190,000	)		(1,695,000	)
Transfers to ORE		(21,000	)		0			(48,000	)		0			0
Net Additions/Deletions		6,329,000			2,898,000			17,746,000			318,000			0
Ending Balance	$	7,026,000		$	2,680,000		$	17,160,000		$	17,439,000		$	505,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	0	$	1,987,000
Charge-Offs		0		0
Payments		0		(224,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		204,000
Ending Balance	$	0	$	1,967,000

Activity for acquired loans categorized as troubled debt restructurings during the last seven months of 2014 is as follows:

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

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

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages

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

Activity for loans categorized as troubled debt restructurings during 2013 is as follows:

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

Commercial Loan Portfolio:
Beginning Balance	$	2,720,000		$	3,071,000		$	4,116,000		$	37,671,000		$	3,027,000
Charge-Offs		(35,000	)		(725,000	)		(70,000	)		(2,537,000	)		(15,000	)
Payments		(2,781,000	)		(1,596,000	)		(2,151,000	)		(13,795,000	)		(735,000	)
Transfers to ORE		(74,000	)		0			(363,000	)		(1,153,000	)		0
Net Additions/Deletions		1,826,000			3,751,000			284,000			2,126,000			343,000
Ending Balance	$	1,656,000		$	4,501,000		$	1,816,000		$	22,312,000		$	2,620,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	0	$	155,000
Charge-Offs		0		0
Payments		0		(46,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		1,878,000
Ending Balance	$	0	$	1,987,000

Activity for loans categorized as troubled debt restructurings during 2012 is as follows:

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

Commercial Loan Portfolio:
Beginning Balance	$	4,553,000		$	5,100,000		$	6,183,000		$	12,036,000		$	12,626,000
Charge-Offs		(540,000	)		(63,000	)		(426,000	)		(720,000	)		(2,180,000	)
Payments		(2,584,000	)		(2,013,000	)		(3,443,000	)		(2,482,000	)		(7,422,000	)
Transfers to ORE		(96,000	)		0			(65,000	)		(1,045,000	)		(186,000	)
Net Additions/Deletions		1,387,000			47,000			1,867,000			29,882,000			189,000
Ending Balance	$	2,720,000		$	3,071,000		$	4,116,000		$	37,671,000		$	3,027,000

	Retail		Retail
	Home Equity		1-4 Family
	and Other		Mortgages
Retail Loan Portfolio:
Beginning Balance	$	0	$	164,000
Charge-Offs		0		0
Payments		0		(9,000	)
Transfers to ORE		0		0
Net Additions/Deletions		0		0
Ending Balance	$	0	$	155,000

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

	December 31,		December 31,
	2014		2013

Commercial:
Commercial and industrial	$	16,000	$	187,000
Vacant land, land development, and residential construction		151,000		798,000
Real estate – owner occupied		182,000		528,000
Real estate – non-owner occupied		4,778,000		7,828,000
Real estate – multi-family and residential rental		666,000		1,010,000
Total commercial		5,793,000		10,351,000

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

Total related allowance	$	5,793,000	$	10,399,000

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.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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