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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2017

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses and balances in the loan portfolio were as follows:

(Dollars in thousands)	Agricultural			Commercial and Industrial			Consumer			Commercial Real Estate			Construction Real Estate			Residential Real Estate			Unallocated			Total
Allowance for Loan Losses Three Months Ended March 31, 2017
Beginning balance	$	433		$	688		$	305		$	1,438		$	62		$	1,014		$	337		$	4,277
Charge-offs		—			(10	)		(80	)		—			—			(35	)		—			(125	)
Recoveries		—			—			52			112			—			9			—			173
Provision		(27	)		67			9			(136	)		(39	)		(261	)		387			—
Ending balance	$	406		$	745		$	286		$	1,414		$	23		$	727		$	724		$	4,325

Individually evaluated for impairment	$	36		$	25		$	6		$	98		$	—		$	276		$	—		$	441

Collectively evaluated for impairment	$	370		$	720		$	280		$	1,316		$	23		$	451		$	724		$	3,884

December 31, 2016
Individually evaluated for impairment	$	3		$	11		$	2		$	91		$	—		$	296		$	—		$	403
Collectively evaluated for impairment	$	430		$	677		$	303		$	1,347		$	62		$	717		$	338		$	3,874

Three Months Ended March 31, 2016
Beginning balance	$	420		$	586		$	297		$	1,030		$	46		$	1,388		$	427		$	4,194
Charge-offs		—			(33	)		(39	)		—			—			(69	)		—			(141	)
Recoveries		—			15			42			8			—			7			—			72
Provision		(38	)		123			(28	)		100			(3	)		24			(178	)		—
Ending balance	$	382		$	691		$	272		$	1,138		$	43		$	1,350		$	249		$	4,125

Individually evaluated for impairment	$	2		$	9		$	2		$	219		$	—		$	343		$	—		$	575

Collectively evaluated for impairment	$	380		$	682		$	270		$	919		$	43		$	1,007		$	249		$	3,550

Loans March 31, 2017
Individually evaluated for impairment	$	482		$	495		$	34		$	1,141		$	—		$	2,546					$	4,698
Collectively evaluated for impairment		38,046			100,559			22,324			115,191			5,035			87,438						368,593
Ending balance	$	38,528		$	101,054		$	22,358		$	116,332		$	5,035		$	89,984					$	373,291

December 31, 2016
Individually evaluated for impairment	$	526		$	301		$	28		$	1,073		$	—		$	2,983					$	4,911
Collectively evaluated for impairment		44,088			95,787			21,568			109,689			6,153			86,804						364,089
Ending balance	$	44,614		$	96,088		$	21,596		$	110,762		$	6,153		$	89,787					$	369,000

The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 8. A description of the characteristics of the ratings follows:

Risk ratings 1 and 2: These loans are considered pass credits. They exhibit good to exceptional credit risk and demonstrate the ability to repay the loan from normal business operations.

Risk rating 3: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations.

Risk rating 4: These loans are considered pass credits. However, they have potential developing weaknesses that, if not corrected, may cause deterioration in the ability of the borrower to repay the loan. While a loss is possible for a loan with this rating, it is not anticipated.

Risk rating 5: These loans are considered special mention credits. Loans in this risk rating are considered to be inadequately protected by the net worth and debt service coverage of the borrower or of any pledged collateral. These loans have well defined weaknesses that may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, loss of principal and interest could be probable.

Risk rating 6: These loans are considered substandard credits. These loans have well defined weaknesses, the severity of which makes collection of principal and interest in full questionable. Loans in this category may be placed on nonaccrual status.

Risk rating 7: These loans are considered doubtful credits. Some loss of principal and interest has been determined to be probable. The estimate of the amount of loss could be affected by factors such as the borrower’s ability to provide additional capital or collateral. Loans in this category are on nonaccrual status.

Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance for loan losses.

Information regarding the Bank’s credit exposure is as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

	Agricultural				Commercial and Industrial				Commercial Real Estate
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2017		2016		2017		2016		2017		2016
Risk ratings 1 and 2	$	10,581	$	12,005	$	13,642	$	12,135	$	7,880	$	8,013
Risk rating 3		21,057		23,852		60,523		56,714		66,400		59,343
Risk rating 4		5,647		7,505		25,650		25,895		38,616		39,641
Risk rating 5		761		726		857		1,267		1,795		1,867
Risk rating 6		482		526		382		77		1,641		1,898
Risk rating 7		—		—		—		—		—		—
	$	38,528	$	44,614	$	101,054	$	96,088	$	116,332	$	110,762

Corporate Credit Exposure - Credit Risk Profile Based On Payment Activity

	Consumer				Construction Real Estate				Residential Real Estate
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2017		2016		2017		2016		2017		2016
Performing	$	22,345	$	21,590	$	5,035	$	6,153	$	89,620	$	88,767
Nonperforming		8		—		—		—		50		229
Nonaccrual		5		6		—		—		314		791
	$	22,358	$	21,596	$	5,035	$	6,153	$	89,984	$	89,787

The following schedule provides information on loans that were considered TDRs that were modified during the three months ended March 31, 2017 and March 31, 2016:

	March 31, 2017						March 31, 2016
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Commercial real estate		—	$	—	$	—		1	$	128	$	128
Residential real estate		—		—		—		1		30		30
		—	$	—	$	—		2	$	158	$	158

The pre-modification and post-modification outstanding recorded investment represents amounts as of the date of loan modification. If a difference exists between the pre-modification and post-modification outstanding recorded investment, it represents impairment recognized through the provision for loan losses computed based on a loan’s post-modification present value of expected future cash flows discounted at the loan’s original effective interest rate. If no difference exists, a loss is not expected to be incurred based on an assessment of the borrower’s expected cash flows.

The following schedule provides information on TDRs as of March 31, 2017 and 2016 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three-month periods ended March 31, 2017 and March 31, 2016 that had been modified during the year prior to the default:

	Three Months Ended				Three Months Ended
	March 31, 2017				March 31, 2016
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Agricultural		1	$	105		1	$	128
Residential real estate		1		126		—		—
		2	$	231		1	$	128

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
March 31, 2017
With no related allowance recorded
Agricultural	$	—	$	—	$	—
Commercial and industrial		177		316		—
Consumer		—		—		—
Commercial real estate		102		205		—
Residential real estate		—		—		—
Subtotal		279		521		—
With an allowance recorded
Agricultural		482		486		36
Commercial and industrial		318		179		25
Consumer		34		34		6
Commercial real estate		1,039		1,207		98
Residential real estate		2,546		2,495		276
Subtotal		4,419		4,401		441
Total
Agricultural		482		486		36
Commercial and industrial		495		495		25
Consumer		34		34		6
Commercial real estate		1,141		1,412		98
Residential real estate		2,546		2,495		276
Total	$	4,698	$	4,922	$	441

December 31, 2016
With no related allowance recorded
Agricultural	$	482	$	485	$	—
Commercial and industrial		206		207		—
Consumer		—		—		—
Commercial real estate		342		939		—
Residential real estate		301		292		—
Subtotal		1,331		1,923		—
With an allowance recorded
Agricultural		44		44		3
Commercial and industrial		95		95		11
Consumer		28		28		2
Commercial real estate		731		804		91
Residential real estate		2,682		2,711		296
Subtotal		3,580		3,682		403
Total
Agricultural		526		529		3
Commercial and industrial		301		302		11
Consumer		28		28		2
Commercial real estate		1,073		1,743		91
Residential real estate		2,983		3,003		296
Total	$	4,911	$	5,605	$	403

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three months ended March 31, 2017 and 2016:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
March 31, 2017
With no related allowance recorded
Agricultural	$	241	$	—
Commercial and industrial		191		1
Consumer		—		—
Commercial real estate		222		—
Residential real estate		151		—
Subtotal		805		1
With an allowance recorded
Agricultural		263		—
Commercial and industrial		207		3
Consumer		31		1
Commercial real estate		885		14
Residential real estate		2,614		26
Subtotal		4,000		44
Total
Agricultural		504		—
Commercial and industrial		398		4
Consumer		31		1
Commercial real estate		1,107		14
Residential real estate		2,765		26
Total	$	4,805	$	45

March 31, 2016
With no related allowance recorded
Agricultural	$	64	$	2
Commercial and industrial		37		—
Consumer		—		—
Commercial real estate		1,400		4
Residential real estate		49		1
Subtotal		1,550		7
With an allowance recorded
Agricultural		49		—
Commercial and industrial		214		(3	)
Consumer		23		0
Commercial real estate		1,536		10
Residential real estate		2,545		24
Subtotal		4,367		31
Total
Agricultural		113		2
Commercial and industrial		251		(3	)
Consumer		23		0
Commercial real estate		2,936		14
Residential real estate		2,594		25
Total	$	5,917	$	39

An aging analysis of loans by loan category follows:

					Greater								90 Days Past
(Dollars in thousands)	30 to 59		60 to 89		Than 90				Loans Not				Due and
	Days		Days		Days (1)		Total		Past Due		Total Loans		Accruing
March 31, 2017
Agricultural	$	—	$	—	$	482	$	482	$	38,046	$	38,528	$	—
Commercial and industrial		—		—		235		235		100,819		101,054		—
Consumer		92		16		13		121		22,237		22,358		8
Commercial real estate		191		24		—		215		116,117		116,332		—
Construction real estate		—		—		—		—		5,035		5,035		—
Residential real estate		3,070		157		82		3,309		86,675		89,984		50
	$	3,353	$	197	$	812	$	4,362	$	368,929	$	373,291	$	58

December 31, 2016
Agricultural	$	—	$	—	$	—	$	—	$	44,614	$	44,614	$	—
Commercial and industrial		—		30		245		275		95,813		96,088		—
Consumer		99		2		6		107		21,489		21,596		—
Commercial real estate		—		—		260		260		110,502		110,762		—
Construction real estate		—		—		—		—		6,153		6,153		—
Residential real estate		1,027		109		646		1,782		88,005		89,787		229
	$	1,126	$	141	$	1,157	$	2,424	$	366,576	$	369,000	$	229

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	March 31,		December 31,
	2017		2016
Agricultural	$	482	$	482
Commercial and industrial		374		245
Consumer		5		6
Commercial real estate		261		458
Construction real estate		—		—
Residential real estate		314		792
	$	1,436	$	1,983