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LOANS AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2019

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

				Commercial
(Dollars in thousands)				and						Commercial			Construction			Residential
	Agricultural			Industrial			Consumer			Real Estate			Real Estate			Real Estate			Unallocated		Total
Allowance for Loan Losses
Three Months Ended
March 31, 2019
Beginning balance	$	481		$	892		$	254		$	1,926		$	38		$	537		$	545	$	4,673
Charge-offs		—			—			(106	)		—			—			0			—		(106	)
Recoveries		—			17			143			2			—			1			—		163
Provision		(57	)		(52	)		45			(65	)		2			20			107		—
Ending balance	$	424		$	857		$	336		$	1,863		$	40		$	558		$	652	$	4,730

Individually evaluated for impairment	$	85		$	4		$	12		$	19		$	—		$	179		$	—	$	299

Collectively evaluated for impairment	$	339		$	853		$	324		$	1,844		$	40		$	379		$	652	$	4,431

December 31, 2018
Individually evaluated for impairment	$	94		$	3		$	13		$	20		$	—		$	167		$	—	$	297
Collectively evaluated for impairment	$	387		$	889		$	241		$	1,906		$	38		$	370		$	545	$	4,376

Three Months Ended
March 31, 2018
Beginning balance	$	506		$	1,001		$	262		$	1,761		$	35		$	726		$	286	$	4,577
Charge-offs		—			—			(69	)		—			—			(3	)		—		(72	)
Recoveries		—			53			37			55			—			24			—		169
Provision		(156	)		(49	)		15			(30	)		(17	)		(122	)		394		35
Ending balance	$	350		$	1,005		$	245		$	1,786		$	18		$	625		$	680	$	4,709

Individually evaluated for impairment	$	—		$	93		$	9		$	46		$	—		$	217		$	—	$	365

Collectively evaluated for impairment	$	350		$	912		$	236		$	1,740		$	18		$	408		$	680	$	4,344

Loans
March 31, 2019
Individually evaluated for impairment	$	389		$	25		$	63		$	605		$	—		$	2,691				$	3,773
Collectively evaluated for impairment		41,656			92,575			24,130			136,442			9,294			94,174					398,271
Ending balance	$	42,045		$	92,600		$	24,193		$	137,047		$	9,294		$	96,865				$	402,044

December 31, 2018
Individually evaluated for impairment	$	578		$	21		$	90		$	623		$	—		$	2,712				$	4,024
Collectively evaluated for impairment		48,531			91,385			24,292			138,830			8,843			93,168					405,049
Ending balance	$	49,109		$	91,406		$	24,382		$	139,453		$	8,843		$	95,880				$	409,073

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,
	2019		2018		2019		2018		2019		2018
Risk ratings 1 and 2	$	11,638	$	15,300	$	12,278	$	11,972	$	7,577	$	7,962
Risk rating 3		20,031		23,938		47,063		50,266		87,791		89,173
Risk rating 4		9,761		9,082		28,856		23,961		36,353		36,193
Risk rating 5		227		211		4,393		5,204		4,116		4,850
Risk rating 6		388		578		10		3		1,210		1,275
	$	42,045	$	49,109	$	92,600	$	91,406	$	137,047	$	139,453

Corporate Credit Exposure - Credit Risk Profile Based On Payment Activity

	Consumer				Construction Real Estate				Residential Real Estate
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2019		2018		2019		2018		2019		2018
Performing	$	24,143	$	24,320	$	9,294	$	8,843	$	95,840	$	94,925
Nonperforming		—		—		—		—		—		—
Nonaccrual		50		62		—		—		1,025		955
	$	24,193	$	24,382	$	9,294	$	8,843	$	96,865	$	95,880

The following schedule provides information on loans that were considered TDRs that were modified during the three months ended March 31, 2019 and March 31, 2018:

	Three Months Ended March 31, 2019						Three Months Ended March 31, 2018
(Dollars in thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial real estate		—	$	—	$	—		1	$	58	$	58
Commercial and industrial		—		—		—		2		97		97
Total		—	$	—	$	—		3	$	155	$	155

The pre-modification and post-modification outstanding recorded investments represent 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, 2019 and 2018 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, 2019 and March 31, 2018 that had been modified during the year prior to the default:

	Three Months Ended				Three Months Ended
	March 31, 2019				March 31, 2018
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Commercial and industrial		—	$	—		2	$	97
Commercial real estate		—		—		1		58
		—	$	—		3	$	155

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
March 31, 2019
With no related allowance recorded
Agricultural	$	—	$	—	$	—
Commercial and industrial		—		—		—
Consumer		—		—		—
Commercial real estate		72		108		—
Construction real estate		—		—		—
Residential real estate		156		171		—
Total		228		279		—
With an allowance recorded
Agricultural		389		440		85
Commercial and industrial		25		25		4
Consumer		63		63		12
Commercial real estate		533		538		19
Construction real estate		—		—		—
Residential real estate		2,535		2,582		179
Total		3,545		3,648		299
Total
Agricultural		389		440		85
Commercial and industrial		25		25		4
Consumer		63		63		12
Commercial real estate		605		646		19
Construction real estate		—		—		—
Residential real estate		2,691		2,753		179
Total	$	3,773	$	3,927	$	299

December 31, 2018
With no related allowance recorded
Agricultural	$	185	$	185	$	—
Commercial and industrial		—		—		—
Consumer		1		1		—
Construction real estate		—		—		—
Commercial real estate		73		109		—
Residential real estate		250		261		—
Total		509		556		—
With an allowance recorded
Agricultural		393		440		94
Commercial and industrial		21		21		3
Consumer		89		89		13
Construction real estate		—		—		—
Commercial real estate		550		609		20
Residential real estate		2,462		2,494		167
Total		3,515		3,653		297
Total
Agricultural		578		625		94
Commercial and industrial		21		21		3
Consumer		90		90		13
Construction real estate		—		—		—
Commercial real estate		623		718		20
Residential real estate		2,712		2,755		167
Total	$	4,024	$	4,209	$	297

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three months ended March 31, 2019 and 2018:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
March 31, 2019
With no related allowance recorded
Agricultural	$	92	$	—
Commercial and industrial		—		—
Consumer		1		—
Commercial real estate		73		7
Residential real estate		203		23
Total		369		30
With an allowance recorded
Agricultural		391		—
Commercial and industrial		23		—
Consumer		76		—
Commercial real estate		541		—
Residential real estate		2,499		1
Total		3,530		1
Total
Agricultural		483		—
Commercial and industrial		23		—
Consumer		77		—
Commercial real estate		614		7
Residential real estate		2,702		24
Total	$	3,899	$	31

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
March 31, 2018
With no related allowance recorded
Agricultural	$	428	$	—
Commercial and industrial		59		—
Consumer		2		—
Commercial real estate		99		—
Residential real estate		152		—
Total		740		—
With an allowance recorded
Agricultural		—		—
Commercial and industrial		170		8
Consumer		34		—
Commercial real estate		762		—
Residential real estate		2,549		26
Total		3,515		34
Total
Agricultural		428		—
Commercial and industrial		229		8
Consumer		36		—
Commercial real estate		861		—
Residential real estate		2,701		26
Total	$	4,255	$	34

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, 2019
Agricultural	$	—	$	—	$	—	$	—	$	42,045	$	42,045	$	—
Commercial and industrial		353		—		2		355		92,245		92,600		—
Consumer		39		3		45		87		24,106		24,193		—
Commercial real estate		96		—		72		168		136,879		137,047		—
Construction real estate		—		—		—		—		9,294		9,294		—
Residential real estate		742		209		99		1,050		95,815		96,865		—
	$	1,230	$	212	$	218	$	1,660	$	400,384	$	402,044	$	—

December 31, 2018
Agricultural	$	—	$	—	$	—	$	—	$	49,109	$	49,109	$	—
Commercial and industrial		5		—		—		5		91,401		91,406		—
Consumer		149		40		11		200		24,182		24,382		—
Commercial real estate		—		—		73		73		139,380		139,453		—
Construction real estate		—		—		—		—		8,843		8,843		—
Residential real estate		1,493		486		648		2,627		93,253		95,880		—
	$	1,647	$	526	$	732	$	2,905	$	406,168	$	409,073	$	—

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	March 31,		December 31,
	2019		2018
Agricultural	$	389	$	393
Commercial and industrial		1		—
Consumer		50		62
Commercial real estate		119		123
Construction real estate		—		—
Residential real estate		1,025		954
	$	1,584	$	1,532