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 applicable 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 applicable 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.

The table below details the acquisition balances of the County Bank Corp acquired portfolio and the acquisition fair value adjustments at acquisition date:

The table below presents a roll-forward of the accretable yield on acquired loans for the year end December 31, 2019:

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

(Dollars in thousands)				Commercial						Commercial			Construction		Residential
	Agricultural			and Industrial			Consumer			Real Estate			Real Estate		Real Estate			Unallocated			Total
2019
Allowance for Loan Losses
Beginning balance	$	481		$	892		$	254		$	1,926		$	38	$	537		$	545		$	4,673
Charge-offs		—			(83	)		(292	)		(589	)		—		(25	)		—			(989	)
Recoveries		65			22			136			26			—		124			—			373
Provision		(75	)		(176	)		172			300			38		4			(263	)		—
Ending balance	$	471		$	655		$	270		$	1,663		$	76	$	640		$	282		$	4,057

Individually evaluated for impairment	$	103		$	—		$	4		$	13		$	—	$	235		$	—		$	355

Collectively evaluated for impairment	$	368		$	655		$	266		$	1,650		$	76	$	405		$	282		$	3,702

Loans
Individually evaluated for impairment	$	924		$	259		$	17		$	2,288		$	—	$	2,434					$	5,922
Collectively evaluated for impairment		56,415			141,583			38,524			323,358			13,411		215,106						788,397
Acquired with deteriorated credit quality		—			6,241			313			733			—		442						7,729
Ending balance	$	57,339		$	148,083		$	38,854		$	326,379		$	13,411	$	217,982					$	802,048

(Dollars in thousands)				Commercial						Commercial		Construction		Residential
	Agricultural			and Industrial			Consumer			Real Estate		Real Estate		Real Estate			Unallocated		Total
2018
Allowance for Loan Losses
Beginning balance	$	506		$	1,001		$	262		$	1,761	$	35	$	726		$	286	$	4,577
Charge-offs		—			(58	)		(282	)		—		—		(25	)		—		(365	)
Recoveries		33			107			112			61		—		113			—		426
Provision		(58	)		(158	)		162			104		3		(277	)		259		35
Ending balance	$	481		$	892		$	254		$	1,926	$	38	$	537		$	545	$	4,673

Individually evaluated for impairment	$	94		$	3		$	13		$	20	$	—	$	167		$	—	$	297

Collectively evaluated for impairment	$	387		$	889		$	241		$	1,906	$	38	$	370		$	545	$	4,376

Loans
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

(Dollars in thousands)			Commercial						Commercial		Construction			Residential
	Agricultural		and Industrial			Consumer			Real Estate		Real Estate			Real Estate			Unallocated			Total
2017
Allowance for Loan Losses
Beginning balance	$	433	$	688		$	305		$	1,438	$	62		$	1,013		$	338		$	4,277
Charge-offs		—		(439	)		(253	)		—		—			(43	)		—			(735	)
Recoveries		—		21			169			258		40			62			—			550
Provision		73		731			41			65		(67	)		(306	)		(52	)		485
Ending balance	$	506	$	1,001		$	262		$	1,761	$	35		$	726		$	286		$	4,577

Individually evaluated for impairment	$	—	$	26		$	3		$	49	$	—		$	224		$	—		$	302

Collectively evaluated for impairment	$	506	$	975		$	259		$	1,712	$	35		$	502		$	286		$	4,275

Loans
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 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. No loans are classified as risk rating 7 and the category has been omitted from the table below.

Risk rating 8: These loans are considered loss credits. They are considered uncollectible and will be charged off against the allowance for loan losses. No loans are classified as risk rating 8 and the category has been omitted from the table below.

Information regarding the Banks’ credit exposure as of December 31 was as follows:

Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2019 and 2018, loans in the process of foreclosure totaled $173,000 and $156,000, respectively.

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.

There were no loans that were considered troubled debt restructurings (“TDRs”) that were modified during the twelve months ended December 31, 2019 and December 31, 2018. The Banks may agree to modify the terms of a loan in order to improve the Banks’ ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the loan term, or in some cases, reduction of the principal balance.

As of December 31, 2019 and December 31, 2018 there were no instances of a borrower who was past due with respect to principal and/or interest for 30 days or more during the twelve months ended December 31, 2019 and December 31, 2018 that had been modified during the 12-month period prior to the default. Loans modified in a TDR may already be on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Banks may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate. Management exercises significant judgment in developing these estimates. At December 31, 2019 the Banks had no commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.