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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2014

Receivables [Abstract]

Loans And Allowance For Loan Losses

Note 3 – Loans and Allowance for Loan Losses

The Bank’s loan portfolio as of December 31 was as follows:

(Dollars in thousands)
			2014				2013
Agricultural		$	41,098			$	37,048
Commercial and industrial			88,062				68,530
Consumer			20,752				19,931
Real estate - commercial			99,807				96,987
Real estate - construction			2,691				890
Real estate - residential			93,703				92,580
Loans, gross			346,113				315,966
Allowance for loan losses			(4,173	)			(4,735	)
Loans, net		$	341,940			$	311,231

ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee.

Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 5, 6, or 7. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio.

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
2014
Allowance for Loan Losses
Beginning balance		$	178			$	562			$	192			$	1,842			$	12			$	1,626			$	323			$	4,735
Charge-offs			—				(1	)			(273	)			(665	)			—				(133	)			—				(1,072	)
Recoveries			20				119				179				48				—				44				—				410
Provision			(12	)			(153	)			86				416				(3	)			(344	)			110				100
Ending balance		$	186			$	527			$	184			$	1,641			$	9			$	1,193			$	433			$	4,173

Individually evaluated for impairment		$	—			$	—			$	4			$	745			$	—			$	365			$	—			$	1,114

Collectively evaluated for impairment		$	186			$	527			$	180			$	896			$	9			$	828			$	433			$	3,059


Loans
Individually evaluated for impairment		$	—			$	38			$	36			$	3,853			$	—			$	2,958							$	6,885
Collectively evaluated for impairment			41,098				88,024				20,716				95,954				2,691				90,745								339,228
Ending balance		$	41,098			$	88,062			$	20,752			$	99,807			$	2,691			$	93,703							$	346,113


(Dollars in thousands)		Agricultural				Commercial and Industrial				Consumer		Commercial Real Estate				Construction Real Estate				Residential Real Estate				Unallocated		Total
2013
Allowance for Loan Losses
Beginning balance		$	140			$	381		$	250		$	2,596			$	15			$	1,923		$	547		$	5,852
Charge-offs			(88	)			(122	)		(351	)		(858	)			—				(732	)		—			(2,151	)
Recoveries			6				337			175			84				—				132			—			734
Provision			120				(34	)		118			20				(3	)			303			(224	)		300
Ending balance		$	178			$	562		$	192		$	1,842			$	12			$	1,626		$	323		$	4,735

Individually evaluated for impairment		$	—			$	53		$	3		$	699			$	—			$	308		$	—		$	1,063

Collectively evaluated for impairment		$	178			$	509		$	189		$	1,143			$	12			$	1,318		$	323		$	3,672

Loans
Individually evaluated for impairment		$	452			$	776		$	37		$	4,195			$	—			$	2,827					$	8,287
Collectively evaluated for impairment			36,596				67,754			19,894			92,792				890				89,753						307,679
Ending balance		$	37,048			$	68,530		$	19,931		$	96,987			$	890			$	92,580					$	315,966


(Dollars in thousands)		Agricultural				Commercial and Industrial				Consumer		Commercial Real Estate				Construction Real Estate				Residential Real Estate				Unallocated		Total
2012
Allowance for Loan Losses
Beginning balance		$	55			$	609		$	197		$	2,299			$	34			$	1,847		$	172		$	5,213
Charge-offs			—				(405	)		(338	)		(869	)			—				(887	)		—			(2,499	)
Recoveries			5				61			214			224				—				119			—			623
Provision			80				116			177			942				(19	)			844			375			2,515
Ending balance		$	140			$	381		$	250		$	2,596			$	15			$	1,923		$	547		$	5,852

Individually evaluated for impairment		$	1			$	112		$	—		$	449			$	—			$	138		$	—		$	700

Collectively evaluated for impairment		$	139			$	269		$	250		$	2,147			$	15			$	1,785		$	547		$	5,152

Loans
Individually evaluated for impairment		$	166			$	198		$	32		$	3,723			$	—			$	1,820					$	5,939
Collectively evaluated for impairment			31,624				67,167			19,335			89,589				1,056				96,758						305,529
Ending balance		$	31,790			$	67,365		$	19,367		$	93,312			$	1,056			$	98,578					$	311,468

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 watch credits. 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 as of December 31 was as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)		Agricultural								Commercial and Industrial								Commercial Real Estate
		2014				2013				2014				2013				2014				2013
Risk ratings 1 and 2		$	9,596			$	8,339			$	11,590			$	7,333			$	3,576			$	3,000
Risk rating 3			24,294				23,036				59,470				46,943				58,600				53,681
Risk rating 4			6,462				4,330				15,764				12,557				28,557				27,610
Risk rating 5			683				1,193				976				1,025				4,490				6,813
Risk rating 6			63				150				262				608				4,584				5,818
Risk rating 7			—				—				—				64				—				65
		$	41,098			$	37,048			$	88,062			$	68,530			$	99,807			$	96,987

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)		Consumer								Construction Real Estate								Residential Real Estate
		2014				2013				2014				2013				2014				2013
Performing		$	20,752			$	19,931			$	2,691			$	890			$	92,974			$	91,877
Nonperforming			—				—				—				—				58				12
Nonaccrual			—				—				—				—				671				691
		$	20,752			$	19,931			$	2,691			$	890			$	93,703			$	92,580

The following schedule provides information on loans that were considered troubled debt restructurings (“TDRs”) that were modified during the twelve months ended December 31, 2014 and December 31, 2013:

		December 31, 2014												December 31, 2013
(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
Agricultural			—			$	—			$	—				—			$	—			$	—
Commercial and industrial			1				32				32				1				216				216
Consumer			—				—				—				—				—				—
Commercial real estate			5				1,596				1,596				4				948				948
Residential real estate			2				281				281				2				112				112
			8			$	1,909			$	1,909				7			$	1,276			$	1,276

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 December 31, 2014 and December 31, 2013 where the borrower was past due with respect to principal and/or interest for 30 days or more during the twelve months ended December 31, 2014 and December 31, 2013 that had been modified during the 12-month period prior to the default:

		With Payment Default During the following Periods
		December 31, 2014								December 31, 2013
(Dollars in thousands)		Number				Recorded				Number				Recorded
		of Loans				Investment				of Loans				Investment
Agricultural			—			$	—				—			$	—
Commercial and industrial			—				—				—				—
Consumer			—				—				1				29
Commercial real estate			6				1,592				3				573
Residential real estate			2				110				1				71
			8			$	1,702				5			$	673

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 December 31 follow:

						Unpaid								Average				Interest
(Dollars in thousands)		Recorded				Principal				Related				Recorded				Income
		Investment				Balance				Allowance				Investment				Recognized
2014
With no related allowance recorded
Agricultural		$	—			$	—			$	—			$	90			$	—
Commercial and industrial			38				43				—				81				—
Consumer			8				8				—				3				—
Commercial real estate			413				419				—				352				6
Residential real estate			502				502				—				492				9
Subtotal			961				972				—				1,018				15
With an allowance recorded
Agricultural			—				—				—				130				—
Commercial and industrial			—				—				—				292				4
Consumer			28				28				4				31				3
Commercial real estate			3,440				4,498				745				3,932				81
Residential real estate			2,456				2,474				365				2,323				91
Subtotal			5,924				7,000				1,114				6,708				179
Total
Agricultural			—				—				—				220				—
Commercial and industrial			38				43				—				373				4
Consumer			36				36				4				34				3
Commercial real estate			3,853				4,917				745				4,284				87
Residential real estate			2,958				2,976				365				2,815				100
Total		$	6,885			$	7,972			$	1,114			$	7,726			$	194

2013
With no related allowance recorded
Agricultural		$	452			$	455			$	—			$	204			$	7
Commercial and industrial			229				300				—				85				—
Consumer			2				3				—				3				—
Commercial real estate			782				843				—				693				25
Residential real estate			891				1,128				—				456				7
Subtotal			2,356				2,729				—				1,441				39
With an allowance recorded
Agricultural			—				—				—				112				1
Commercial and industrial			547				554				53				377				11
Consumer			35				35				3				43				3
Commercial real estate			3,413				3,997				699				4,126				217
Residential real estate			1,936				1,936				308				2,207				81
Subtotal			5,931				6,522				1,063				6,865				313
Total
Agricultural			452				455				—				316				8
Commercial and industrial			776				854				53				462				11
Consumer			37				38				3				46				3
Commercial real estate			4,195				4,840				699				4,819				242
Residential real estate			2,827				3,064				308				2,663				88
Total		$	8,287			$	9,251			$	1,063			$	8,306			$	352

An aging analysis of loans by loan category as of December 31 follows:

(Dollars in thousands)		Loans Past Due 30 to 59 Days (1)				Loans Past Due 60 to 89 Days (1)				Loans Past Due Greater Than 90 Days (1)				Total (1)				Loans Not Past Due				Total Loans				Loans 90 Days Past Due and Accruing

2014
Agricultural		$	—			$	—			$	—			$	—			$	41,098			$	41,098			$	—
Commercial and industrial			33				260				—				293				87,769				88,062				—
Consumer			66				10				—				76				20,676				20,752				—
Commercial real estate			172				51				699				922				98,885				99,807				—
Construction real estate			—				—				—				—				2,691				2,691				—
Residential real estate			1,376				404				363				2,143				91,560				93,703				58
Total		$	1,647			$	725			$	1,062			$	3,434			$	342,679			$	346,113			$	58

2013
Agricultural		$	9			$	1			$	428			$	438			$	36,610			$	37,048			$	—
Commercial and industrial			93				352				73				518				68,012				68,530				—
Consumer			60				7				—				67				19,864				19,931				—
Commercial real estate			901				884				242				2,027				94,960				96,987				—
Construction real estate			—				—				—				—				890				890				—
Residential real estate			673				186				167				1,026				91,554				92,580				11
Total		$	1,736			$	1,430			$	910			$	4,076			$	311,890			$	315,966			$	11

(1) Includes nonaccrual loans

Nonaccrual loans by loan category as of December 31 follow:

(Dollars in thousands)
			2014				2013
Agricultural		$	—			$	452
Commercial and industrial			38				372
Consumer			—				2
Commercial real estate			2,652				1,606
Construction real estate			—				—
Residential real estate			671				691
Total		$	3,361			$	3,123