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LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2018

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
September 30, 2018
Beginning balance	$	359		$	970		$	205		$	1,911		$	16		$	620		$	578		$	4,659
Charge-offs		—			—			(62	)		—			—			(13	)		—			(75	)
Recoveries		—			4			22			2			—			10			—			38
Provision		5			(25	)		59			37			15			—			(91	)		—
Ending balance	$	364		$	949		$	224		$	1,950		$	31		$	617		$	487		$	4,622

Nine Months Ended
September 30, 2018
Beginning balance	$	506		$	1,001		$	262		$	1,761		$	35		$	726		$	286		$	4,577
Charge-offs		—			(58	)		(180	)		—			—			(25	)		—			(263	)
Recoveries		—			57			73			61			—			82			—			273
Provision		(142	)		(51	)		69			128			(4	)		(166	)		201			35
Ending balance	$	364		$	949		$	224		$	1,950		$	31		$	617		$	487		$	4,622

Individually evaluated for impairment	$	13		$	18		$	19		$	27		$	—		$	180		$	—		$	257

Collectively evaluated for impairment	$	351		$	931		$	205		$	1,923		$	31		$	437		$	487		$	4,365


Three Months Ended
September 30, 2017
Beginning balance	$	395		$	904		$	294		$	1,551		$	25		$	748		$	181		$	4,098
Charge-offs		—			(12	)		(52	)		—			—			(9	)		—			(73	)
Recoveries		—			4			16			65			—			11			—			96
Provision		(1	)		(98	)		1			(152	)		1			(140	)		484			95
Ending balance	$	394		$	798		$	259		$	1,464		$	26		$	610		$	665		$	4,216

Nine Months Ended
September 30, 2017
Beginning balance	$	433		$	688		$	305		$	1,438		$	62		$	1,014		$	337		$	4,277
Charge-offs		—			(374	)		(189	)		—			—			(44	)		—			(607	)
Recoveries		—			4			107			226			40			49			—			426
Provision		(39	)		480			36			(200	)		(76	)		(409	)		328			120
Ending balance	$	394		$	798		$	259		$	1,464		$	26		$	610		$	665		$	4,216

Individually evaluated for impairment	$	—		$	5		$	4		$	54		$	—		$	228		$	—		$	291

Collectively evaluated for impairment	$	394		$	793		$	255		$	1,410		$	26		$	382		$	665		$	3,925

Loans
September 30, 2018
Individually evaluated for impairment	$	413		$	896		$	78		$	792		$	268		$	2,480					$	4,927
Collectively evaluated for impairment		43,984			91,261			24,285			137,280			6,962			93,217						396,989
Ending balance	$	44,397		$	92,157		$	24,363		$	138,072		$	7,230		$	95,697					$	401,916

December 31, 2017
Individually evaluated for impairment	$	423		$	124		$	36		$	778		$	—		$	2,779					$	4,140
Collectively evaluated for impairment		48,041			104,262			24,477			122,709			6,613			88,543						394,645
Ending balance	$	48,464		$	104,386		$	24,513		$	123,487		$	6,613		$	91,322					$	398,785

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)	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2018		2017		2018		2017		2018		2017
Risk ratings 1 and 2	$	12,331	$	14,813	$	12,665	$	13,491	$	8,126	$	8,227
Risk rating 3		22,299		22,721		53,958		63,366		93,626		78,868
Risk rating 4		8,952		10,199		20,944		26,943		32,485		33,429
Risk rating 5		403		308		4,500		491		2,554		1,533
Risk rating 6		412		423		90		95		1,281		1,430
Risk rating 7		—		—		—		—		—		—
	$	44,397	$	48,464	$	92,157	$	104,386	$	138,072	$	123,487

Corporate Credit Exposure - Credit Risk Profile Based On Payment Activity

	Consumer				Construction Real Estate				Residential Real Estate
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2018		2017		2018		2017		2018		2017
Performing	$	24,358	$	24,497	$	6,962	$	6,613	$	95,242	$	90,629
Nonperforming		—		1		—		—		—		257
Nonaccrual		5		15		268		—		455		436
	$	24,363	$	24,513	$	7,230	$	6,613	$	95,697	$	91,322

There were no loans that were considered troubled debt restructurings (“TDRs”) that were modified during the three- and nine-month periods ended September 30, 2018 and September 30, 2017. There were no TDRs as of September 30, 2018 or September 30, 2017 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months and nine months ended September 30, 2018 and September 30, 2017 that had been modified during the year prior to the default.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
September 30, 2018
With no related allowance recorded
Agricultural	$	—	$	—	$	—
Commercial and industrial		86		86		—
Consumer		—		—		—
Commercial real estate		77		110		—
Construction real estate		268		268		—
Residential real estate		226		234		—
Total		657		698		—
With an allowance recorded
Agricultural		413		455		13
Commercial and industrial		810		810		18
Consumer		78		78		19
Commercial real estate		715		774		27
Construction real estate		—		—		—
Residential real estate		2,254		2,285		180
Total		4,270		4,402		257

Agricultural		413		455		13
Commercial and industrial		896		896		18
Consumer		78		78		19
Commercial real estate		792		884		27
Construction real estate		268		268		—
Residential real estate		2,480		2,519		180
Total	$	4,927	$	5,100	$	257

December 31, 2017
With no related allowance recorded
Agricultural	$	423	$	455	$	—
Commercial and industrial		—		—		—
Consumer		—		—		—
Commercial real estate		127		258		—
Residential real estate		115		126		—
Total		665		839		—
With an allowance recorded
Agricultural		—		—		—
Commercial and industrial		124		124		26
Consumer		36		36		3
Commercial real estate		651		734		49
Residential real estate		2,664		2,690		224
Total		3,475		3,584		302

Agricultural		423		455		—
Commercial and industrial		124		124		26
Consumer		36		36		3
Commercial real estate		778		992		49
Residential real estate		2,779		2,816		224
Total	$	4,140	$	4,423	$	302

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the nine months ended September 30, 2018 and 2017:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
September 30, 2018
With no related allowance recorded
Agricultural	$	317	$	—
Commercial and industrial		37		23
Consumer		2		2
Commercial real estate		67		42
Construction real estate		79		—
Residential real estate		159		112
Total		661		179
With an allowance recorded
Agricultural		103		—
Commercial and industrial		364		6
Consumer		52		—
Commercial real estate		728		—
Construction real estate		—		—
Residential real estate		2,539		2
Total		3,786		8

Agricultural		420		—
Commercial and industrial		401		29
Consumer		54		2
Commercial real estate		795		42
Construction real estate		79		—
Residential real estate		2,698		114
Total	$	4,447	$	187

September 30, 2017
With no related allowance recorded
Agricultural	$	288	$	—
Commercial and industrial		137		—
Consumer		—		—
Commercial real estate		104		—
Residential real estate		103		—
Total		632		—
With an allowance recorded
Agricultural		161		—
Commercial and industrial		195		1
Consumer		33		1
Commercial real estate		884		26
Residential real estate		2,475		75
Total		3,748		103

Agricultural		449		—
Commercial and industrial		332		1
Consumer		33		1
Commercial real estate		988		26
Residential real estate		2,578		75
Total	$	4,380	$	103

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		Total		Due and
	Days		Days		Days (1)		Total		Past Due		Loans		Accruing
September 30, 2018
Agricultural	$	—	$	—	$	—	$	—	$	44,397	$	44,397	$	—
Commercial and industrial		50		—		—		50		92,107		92,157		—
Consumer		25		53		—		78		24,285		24,363		—
Commercial real estate		—		—		77		77		137,995		138,072		—
Construction real estate		—		—		268		268		6,962		7,230		—
Residential real estate		729		36		180		945		94,752		95,697		—
	$	804	$	89	$	525	$	1,418	$	400,498	$	401,916	$	—

December 31, 2017
Agricultural	$	—	$	—	$	83	$	83	$	48,381	$	48,464	$	—
Commercial and industrial		20		—		—		20		104,366		104,386		—
Consumer		142		38		1		181		24,332		24,513		—
Commercial real estate		95		58		69		222		123,265		123,487		—
Construction real estate		—		—		—		—		6,613		6,613		—
Residential real estate		585		272		296		1,153		90,169		91,322		258
	$	842	$	368	$	449	$	1,659	$	397,126	$	398,785	$	258

(1)

Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	September 30,		December 31,
	2018		2017
Agricultural	$	413	$	423
Commercial and industrial		—		—
Consumer		5		15
Commercial real estate		130		222
Construction real estate		268		—
Residential real estate		455		436
	$	1,271	$	1,096