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LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2017

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses and balances in the loan portfolio was 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 June 30, 2017
Beginning balance	$	406		$	745		$	286		$	1,414		$	23		$	727		$	724		$	4,325
Charge-offs		—			(352	)		(57	)		—			—			—			—			(409	)
Recoveries		—			—			39			49			40			29			—			157
Provision		(11	)		511			26			88			(39	)		(7	)		(543	)		25
Ending balance	$	395		$	904		$	294		$	1,551		$	24		$	749		$	181		$	4,098

Six Months Ended June 30, 2017
Beginning balance	$	433		$	688		$	305		$	1,438		$	62		$	1,014		$	337		$	4,277
Charge-offs		—			(362	)		(137	)		—			—			(34	)		—			(533	)
Recoveries		—			—			91			161			40			37			—			329
Provision		(38	)		578			35			(48	)		(78	)		(268	)		(156	)		25
Ending balance	$	395		$	904		$	294		$	1,551		$	24		$	749		$	181		$	4,098

Individually evaluated for impairment	$	—		$	27		$	4		$	65		$	—		$	271		$	—		$	367

Collectively evaluated for impairment	$	395		$	877		$	290		$	1,486		$	24		$	478		$	181		$	3,731

Three Months Ended June 30, 2016
Beginning balance	$	382		$	691		$	272		$	1,138		$	43		$	1,350		$	249		$	4,124
Charge-offs		—			—			(29	)		—			—			—			—			(29	)
Recoveries		—			8			28			23			—			142			—			201
Provision		18			(42	)		6			(28	)		2			(270	)		315			0
Ending balance	$	400		$	657		$	277		$	1,133		$	45		$	1,222		$	563		$	4,296

Six Months Ended June 30, 2016
Beginning balance	$	420		$	586		$	297		$	1,030		$	46		$	1,388		$	427		$	4,194
Charge-offs		—			(33	)		(68	)		—			—			(69	)		—			(170	)
Recoveries		—			23			69			31			—			149			—			272
Provision		(20	)		81			(21	)		72			(2	)		(246	)		136			0
Ending balance	$	400		$	657		$	277		$	1,133		$	45		$	1,222		$	563		$	4,296

Individually evaluated for impairment	$	11		$	11		$	1		$	177		$	—		$	364		$	—		$	564

Collectively evaluated for impairment	$	389		$	646		$	276		$	956		$	45		$	858		$	563		$	3,732

Loans June 30, 2017
Individually evaluated for impairment	$	442		$	309		$	30		$	887		$	—		$	2,715					$	4,383
Collectively evaluated for impairment		41,303			101,185			23,373			116,065			5,437			87,702						375,065
Ending balance	$	41,745		$	101,494		$	23,403		$	116,952		$	5,437		$	90,417					$	379,448

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)	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2017		2016		2017		2016		2017		2016
Risk ratings 1 and 2	$	11,046	$	12,005	$	12,442	$	12,135	$	6,741	$	8,013
Risk rating 3		22,173		23,852		60,843		56,714		69,070		59,343
Risk rating 4		7,715		7,505		27,402		25,895		37,610		39,641
Risk rating 5		369		726		515		1,267		1,904		1,867
Risk rating 6		442		526		292		77		1,627		1,898
Risk rating 7		—		—		—		—		—		—
	$	41,745	$	44,614	$	101,494	$	96,088	$	116,952	$	110,762

Corporate Credit Exposure - Credit Risk Profile Based On Payment Activity

	Consumer				Construction Real Estate				Residential Real Estate
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2017		2016		2017		2016		2017		2016
Performing	$	23,392	$	21,590	$	5,437	$	6,153	$	89,469	$	88,767
Nonperforming		6		—		—		—		504		229
Nonaccrual		5		6		—		—		444		791
	$	23,403	$	21,596	$	5,437	$	6,153	$	90,417	$	89,787

The following schedule provides information on loans that were considered TDRs that were modified during the three and six month periods ended June 30, 2016. There were no loans that were considered TDRs that were modified during the three and six month periods ended June 30, 2017.

	Three Months Ended June 30, 2016						Six Months Ended June 30, 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		2		150		150	3		179		179
Total		2	$	150	$	150	4	$	307	$	307

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.

Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring.

Impaired loans by loan category as of June 30, 2017 and 2016 were as follows:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
June 30, 2017
With no related allowance recorded
Agricultural	$	442	$	461	$	—
Commercial and industrial		176		176		—
Consumer		—		—		—
Commercial real estate		97		227		—
Residential real estate		173		173		—
Subtotal		888		1,037		—
With an allowance recorded
Agricultural		—		—		—
Commercial and industrial		133		374		27
Consumer		30		30		4
Commercial real estate		790		868		65
Residential real estate		2,542		2,564		271
Subtotal		3,495		3,836		367
Total
Agricultural		442		461		—
Commercial and industrial		309		550		27
Consumer		30		30		4
Commercial real estate		887		1,095		65
Residential real estate		2,715		2,737		271
Total	$	4,383	$	4,873	$	367

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

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
June 30, 2017
Agricultural	$	—	$	—	$	—	$	—	$	41,745	$	41,745	$	—
Commercial and industrial		73		—		235		308		101,186		101,494		—
Consumer		30		49		6		85		23,318		23,403		6
Commercial real estate		106		—		24		130		116,822		116,952		—
Construction real estate		—		—		—		—		5,437		5,437		—
Residential real estate		172		579		619		1,370		89,047		90,417		504
	$	381	$	628	$	884	$	1,893	$	377,555	$	379,448	$	510

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)	June 30,		December 31,
	2017		2016
Agricultural	$	442	$	482
Commercial and industrial		285		245
Consumer		5		6
Commercial real estate		250		458
Construction real estate		—		—
Residential real estate		443		792
	$	1,425	$	1,983