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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2015

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)
			2015				2014
Agricultural		$	40,232			$	41,098
Commercial and industrial			94,347				88,062
Consumer			20,090				20,752
Real estate - commercial			97,736				99,807
Real estate - construction			5,390				2,691
Real estate - residential			91,509				93,703
Loans, gross			349,304				346,113
Allowance for loan losses			(4,194	)			(4,173	)
Loans, net		$	345,110			$	341,940

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
2015
Allowance for Loan Losses
Beginning balance		$	186			$	527			$	184			$	1,641			$	9			$	1,193			$	433			$	4,173
Charge-offs			—				(30	)			(291	)			—				—				(140	)			—				(461	)
Recoveries			1				64				121				47				—				149				—				382
Provision			233				25				283				(658	)			37				186				(6	)			100
Ending balance		$	420			$	586			$	297			$	1,030			$	46			$	1,388			$	427			$	4,194

Individually evaluated for impairment		$	3			$	15			$	1			$	191			$	—			$	296			$	—			$	506

Collectively evaluated for impairment		$	417			$	571			$	296			$	839			$	46			$	1,092			$	427			$	3,687

Loans
Individually evaluated for impairment		$	50			$	192			$	24			$	2,790			$	—			$	2,529							$	5,585
Collectively evaluated for impairment			40,182				94,155				20,066				94,946				5,390				88,980								343,719
Ending balance		$	40,232			$	94,347			$	20,090			$	97,736			$	5,390			$	91,509							$	349,304


(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

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
		2015			2014			2015			2014			2015			2014
Risk ratings 1 and 2		$	10,416		$	9,596		$	10,480		$	11,590		$	3,875		$	3,576
Risk rating 3			25,189			24,294			66,921			59,470			57,540			58,600
Risk rating 4			3,086			6,462			16,169			15,764			29,826			28,557
Risk rating 5			1,491			683			574			976			3,776			4,490
Risk rating 6			50			63			129			262			2,719			4,584
Risk rating 7			—			—			74			—			—			—
		$	40,232		$	41,098		$	94,347		$	88,062		$	97,736		$	99,807

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity


(Dollars in thousands)		Consumer						Construction Real Estate						Residential Real Estate
		2015			2014			2015			2014			2015			2014
Performing		$	20,090		$	20,752		$	5,390		$	2,691		$	90,796		$	92,974
Nonperforming			—			—			—			—			282			58
Nonaccrual			—			—			—			—			431			671
		$	20,090		$	20,752		$	5,390		$	2,691		$	91,509		$	93,703

The following schedule provides information on loans that were considered troubled debt restructurings (“TDRs”) that were modified during the twelve months ended December 31, 2015 and December 31, 2014:

		December 31, 2015													December 31, 2014
(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
Consumer			—				—				—				—				—				—
Commercial real estate			4				439				439				5				1,596				1,596
Residential real estate			2				195				195				2				281				281
			6			$	634			$	634				8			$	1,909			$	1,909

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, 2015 and December 31, 2014 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, 2015 and December 31, 2014 that had been modified during the 12-month period prior to the default:

			With Payment Defaults During the Following Periods
			December 31, 2015							December 31, 2014
(Dollars in thousands)			Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
Agricultural			—			$	—				—			$	—
Commercial and industrial			—				—				—				—
Consumer			—				—				—				—
Commercial real estate			3				400				6				1,592
Residential real estate			—				—				2				110
			3			$	400				8			$	1,702

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 were as follows:

(Dollars in thousands)			Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
2015
With no related allowance recorded
Agricultural		$	—			$	—			$	—			$	—			$	—
Commercial and industrial			74				103				—				25				—
Consumer			—				—				—				2				—
Commercial real estate			1,540				1,540				—				1,061				11
Residential real estate			13				13				—				191				—
Subtotal			1,627				1,656				—				1,279				11
With an allowance recorded
Agricultural			50				50				3				62				(6	)
Commercial and industrial			118				118				15				44				1
Consumer			24				24				1				34				3
Commercial real estate			1,250				1,755				191				2,002				64
Residential real estate			2,516				2,516				296				2,425				86
Subtotal			3,958				4,463				506				4,567				148

Agricultural			50				50				3				62				(6	)
Commercial and industrial			192				221				15				69				1
Consumer			24				24				1				36				3
Commercial real estate			2,790				3,295				191				3,063				75
Residential real estate			2,529				2,529				296				2,616				86
Total		$	5,585			$	6,119			$	506			$	5,846			$	159

(Dollars in thousands)			Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income 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

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

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
2015
Agricultural		$	3			$	—			$	—			$	3			$	40,229			$	40,232			$	—
Commercial and industrial			90				322				77				489				93,858				94,347				—
Consumer			115				—				—				115				19,975				20,090				—
Commercial real estate			505				297				1,233				2,035				95,701				97,736				—
Construction real estate			299				—				—				299				5,091				5,390				—
Residential real estate			1,012				364				200				1,576				89,933				91,509				29
		$	2,024			$	983			$	1,510			$	4,517			$	344,787			$	349,304			$	29

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
		$	1,647			$	725			$	1,062			$	3,434			$	342,679			$	346,113			$	58

(1) Includes nonaccrual loans

Nonaccrual loans by loan category as of December 31 follow:


(Dollars in thousands)			2015				2014
Agricultural		$	50			$	—
Commercial and industrial			77				38
Consumer			—				—
Commercial real estate			1,640				2,652
Construction real estate			—				—
Residential real estate			431				671
		$	2,198			$	3,361