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Note 3 - Loans and Allowance for Loan Losses
12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Financing Receivables [Text Block]

Note 3 – Loans and Allowance for Loan Losses

 

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

 

(Dollars in thousands)

        
  

2021

  

2020

 

Agricultural

 $64,819  $53,735 

Commercial and industrial

  203,024   303,527 

Consumer

  35,174   34,014 

Real estate - commercial

  525,884   469,247 

Real estate - construction

  19,066   16,639 

Real estate - residential

  168,881   192,506 

Loans, gross

 $1,016,848  $1,069,668 

Allowance for Loan Losses

  (7,688)  (7,593)

Loans, net

 $1,009,160  $1,062,075 

 

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 6, 7, or 8. 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 outstanding balances of the County Bank Corp. acquired portfolio and the acquisition fair value adjustments at acquisition date:

 

(Dollars in thousands)

 Acquired  Acquired    
  

Impaired

  

Non-impaired

  

Total

 

Loans acquired - contractual payments

 $7,729  $387,394  $395,123 

Nonaccretable difference

  (2,928)  -   (2,928)

Expected cash flows

  4,801   387,394   392,195 

Accretable yield

  (185)  (1,894)  (2,079)

Carrying balance at acquisition date

 $4,616  $385,500  $390,116 

 

The table below presents a roll-forward of the accretable yield on County Bank Corp. acquired loans for the year ended December 31, 2021:

 

(Dollars in thousands)

 

Acquired

  

Acquired

    
  

Impaired

  

Non-impaired

  

Total

 

Balance, January 1, 2019

 $-  $-  $- 

Merger with County Bank Corp on October 1, 2019

  185   1,894   2,079 

Accretion October 1, 2019 through December 31, 2019

  -   (75)  (75)

Balance, January 1, 2020

  185   1,819   2,004 

Accretion January 1, 2020 through December 31, 2020

  (50)  (295)  (345)

Balance, January 1, 2021

  135   1,524   1,659 

Transfer from non-accretable to accretable yield

  400   -   400 

Accretion January 1, 2021 through December 31, 2021

  (247)  (95)  (342)

Balance, December 31, 2021

 $288  $1,429  $1,717 

 

 

The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date:

(Dollars in thousands)

 Acquired  Acquired    
  

Impaired

  

Non-impaired

  

Total

 

Loans acquired - contractual payments

 $20,491  $158,495  $178,986 

Nonaccretable difference

  (2,719)  -   (2,719)

Expected cash flows

  17,772   158,495   176,267 

Accretable yield

  (869)  (596)  (1,465)

Carrying balance at acquisition date

 $16,903  $157,899  $174,802 

 

 

The table below presents a roll-forward of the accretable yield on Community Shores Bank Corporation acquired loans for the year ended December 31, 2021:

 

(Dollars in thousands)

 Acquired  Acquired    
  

Impaired

  

Non-impaired

  

Total

 

Balance, January 1, 2020

 $-  $-  $- 

Merger with Community Shores Bank Corporation on July 1, 2020

  869   596   1,465 

Accretion July 1, 2020 through December 31, 2020

  (26)  (141)  (167)

Balance, January 1, 2020

  843   455   1,298 

Accretion January 1, 2021 through December 31, 2021

  (321)  (258)  (579)

Balance, December 31, 2021

 $522  $197  $719 

 

Activity in the allowance for loan losses and balances in the loan portfolio was 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 Year Ended December 31, 2021

                                

Beginning balance

 $257  $1,327  $317  $4,178  $97  $1,300  $117  $7,593 

Charge-offs

     (195)  (370)  (111)           (676)

Recoveries

     86   214   48      7      355 

Provision

  191   236   129   (410)  13   (636)  893   416 

Ending balance

 $448  $1,454  $290  $3,705  $110  $671  $1,010  $7,688 
                                 

Individually evaluated for impairment

 $251  $95  $2  $9  $  $146  $  $503 
                                 

Collectively evaluated for impairment

 $197  $1,359  $288  $3,696  $110  $525  $1,010  $7,185 
                                 

Loans

                                

December 31, 2021

                                

Individually evaluated for impairment

 $2,616  $339  $14  $273  $  $2,191      $5,433 

Collectively evaluated for impairment

  62,203   197,656   35,148   515,528   19,066   164,647       994,248 

Acquired with deteriorated credit quality

     5,029   12   10,083      2,043       17,167 

Ending balance

 $64,819  $203,024  $35,174  $525,884  $19,066  $168,881      $1,016,848 

 

      

Commercial

                         

(Dollars in thousands)

     

and

      

Commercial

  

Construction

  

Residential

         
  

Agricultural

  

Industrial

  

Consumer

  

Real Estate

  

Real Estate

  

Real Estate

  

Unallocated

  

Total

 

Allowance for Loan Losses Year Ended December 31, 2020

                                

Beginning balance

 $471  $655  $270  $1,663  $76  $640  $282  $4,057 

Charge-offs

  (15)  (148)  (329)  (254)  -   (8)  -   (754)

Recoveries

  -   57   204   10   -   19   -   290 

Provision

  (199)  763   172   2,759   21   649   (165)  4,000 

Ending balance

 $257  $1,327  $317  $4,178  $97  $1,300  $117  $7,593 
                                 

Individually evaluated for impairment

 $-  $19  $1  $157  $-  $254  $-  $431 
                                 

Collectively evaluated for impairment

 $257  $1,308  $316  $4,021  $97  $1,046  $117  $7,162 
                                 
                                 

Loans

                                

December 31, 2020

                                

Individually evaluated for impairment

 $348  $1,663  $8  $3,032  $80  $2,720      $7,851 

Collectively evaluated for impairment

  53,387   295,154   33,982   453,681   16,559   186,982       1,039,745 

Acquired with deteriorated credit quality

  -   6,710   24   12,534   -   2,804       22,072 

Ending balance

 $53,735  $303,527  $34,014  $469,247  $16,639  $192,506      $1,069,668 

 

      

Commercial

                         

(Dollars in thousands)

     

and

      

Commercial

  

Construction

  

Residential

         
  

Agricultural

  

Industrial

  

Consumer

  

Real Estate

  

Real Estate

  

Real Estate

  

Unallocated

  

Total

 

Allowance for Loan Losses Year Ended December 31, 2019

                                

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

                                

December 31, 2019

                                

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 

 

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 9. A description of the characteristics of the ratings follows:

 

Risk Rating 1 through 5 or pass: 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 6 or special mention: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move.


Risk rating 7 or substandard: Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”.


Risk rating 8 or doubtful: Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.


Risk rating 9 or loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

 

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

 
  

December 31,

  

December 31,

  

December 31,

  

December 31,

  

December 31,

  

December 31,

 
  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 

Pass

 $61,864  $50,185  $201,202  $294,614  $519,537  $453,080 

Special Mention

  339   3,202   300   4,101   778   6,006 

Substandard

  2,616   348   1,266   4,812   5,569   8,925 

Doubtful

  -   -   256   -   -   1,236 
  $64,819  $53,735  $203,024  $303,527  $525,884  $469,247 

 

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

 

(Dollars in thousands)

 

Consumer

  

Construction Real Estate

  

Residential Real Estate

 
  

December 31,

  

December 31,

  

December 31,

  

December 31,

  

December 31,

  

December 31,

 
  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 

Performing

 $35,174  $34,006  $19,066  $16,559  $168,031  $191,125 

Nonperforming

  -   -   -   -   -   - 

Nonaccrual

  -   8   -   80   850   1,381 
  $35,174  $34,014  $19,066  $16,639  $168,881  $192,506 

 

Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2021 and 2020, loans in the process of foreclosure totaled $813,000 and $337,000, 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.

 

 

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the year ended December 31, 2021. There were no new TDRs in 2020.

 

  

Year Ended December 31, 2021

 
      

Pre-

  

Post-

 
      

Modification

  

Modification

 
      

Outstanding

  

Outstanding

 

(Dollars in thousands)

 

Number of

  

Recorded

  

Recorded

 
  

Loans

  

Investment

  

Investment

 

Agricultural

  5  $1,803  $1,803 

Commercial and Industrial

  4   270   270 

Commercial Real Estate

  2   619   619 

Total

  11  $2,692  $2,692 

 

The following schedule provides information on TDRs as of December 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days during the year ended December 31, 2021, which loans had been modified and classified as TDRs during the year prior to the default.  There were no TDRs as of December 31, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during year ended December 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default.  

 

  

Year Ended

 
  

December 31, 2021

 

(Dollars in thousands)

 

Number

  

Recorded

 
  

of Loans

  

Investment

 

Commercial Real Estate

  1   185 

Total

  1  $185 

 

The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID-19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the CARES Act states that COVID-19 related modifications made during 2020 and 2021 on loans that were current as of December 31, 2019 are not TDRs. As of December 31, 2020, ChoiceOne had granted deferments on approximately 750 loans with loan balances totaling $148 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report.  All deferments had resumed payments in accordance with loan terms as of June 30, 2021.

 

Impaired loans by loan category as of December 31 were as follows:

 

      

Unpaid

      

Average

  

Interest

 

(Dollars in thousands)

 

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 
  

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 

December 31, 2021

                    

With no related allowance recorded

                    

Agricultural

 $314  $428  $-  $598  $- 

Commercial and industrial

  -   -   -   596   - 

Consumer

  -   -   -   -   - 

Construction real estate

  -   -   -   16   - 

Commercial real estate

  94   94   -   1,117   5 

Residential real estate

  164   172   -   228   - 

Subtotal

  572   694   -   2,555   5 

With an allowance recorded

                    

Agricultural

  2,302   2,302   251   1,873   139 

Commercial and industrial

  339   363   95   226   5 

Consumer

  14   15   2   4   - 

Construction real estate

  -   -   -   -   - 

Commercial real estate

  179   179   9   456   10 

Residential real estate

  2,027   2,084   146   2,177   64 

Subtotal

  4,861   4,943   503   4,736   218 

Total

                    

Agricultural

  2,616   2,730   251   2,471   139 

Commercial and industrial

  339   363   95   822   5 

Consumer

  14   15   2   4   - 

Construction real estate

  -   -   -   16   - 

Commercial real estate

  273   273   9   1,573   15 

Residential real estate

  2,191   2,256   146   2,405   64 

Total

 $5,433  $5,637  $503  $7,291  $223 

 

      

Unpaid

      

Average

  

Interest

 

(Dollars in thousands)

 

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 
  

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 

December 31, 2020

                    

With no related allowance recorded

                    

Agricultural

 $348  $434  $-  $329  $- 

Commercial and industrial

  1,516   1,629   -   464   2 

Consumer

  -   -   -   1   - 

Construction real estate

  80   80   -   16   - 

Commercial real estate

  1,852   2,664   -   1,495   14 

Residential real estate

  162   162   -   99   3 

Subtotal

  3,958   4,969   -   2,404   19 

With an allowance recorded

                    

Agricultural

  -   -   -   152   - 

Commercial and industrial

  147   147   19   111   12 

Consumer

  8   8   1   16   - 

Construction real estate

  -   -   -   -   - 

Commercial real estate

  1,180   1,180   157   897   35 

Residential real estate

  2,558   2,651   254   2,330   87 

Subtotal

  3,893   3,986   431   3,506   134 

Total

                    

Agricultural

  348   434   -   481   - 

Commercial and industrial

  1,663   1,776   19   575   14 

Consumer

  8   8   1   17   - 

Construction real estate

  80   80   -   16   - 

Commercial real estate

  3,032   3,844   157   2,392   49 

Residential real estate

  2,720   2,813   254   2,429   90 

Total

 $7,851  $8,955  $431  $5,910  $153 

 

      

Unpaid

      

Average

  

Interest

 

(Dollars in thousands)

 

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 
  

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 

December 31, 2019

                    

With no related allowance recorded

                    

Agricultural

 $545  $545  $-  $146  $10 

Commercial and industrial

  259   340   -   104   9 

Consumer

  -   -   -   -   - 

Construction real estate

  -   -   -   -   - 

Commercial real estate

  1,882   2,471   -   782   30 

Residential real estate

  42   42   -   133   4 

Subtotal

  2,728   3,398   -   1,165   53 

With an allowance recorded

                    

Agricultural

  379   439   103   388   - 

Commercial and industrial

  -   -   -   86   1 

Consumer

  17   18   4   48   - 

Construction real estate

  -   -   -   -   - 

Commercial real estate

  406   406   13   975   32 

Residential real estate

  2,392   2,460   235   2,486   83 

Subtotal

  3,194   3,323   355   3,983   116 

Total

                    

Agricultural

  924   984   103   534   10 

Commercial and industrial

  259   340   -   190   10 

Consumer

  17   18   4   48   - 

Construction real estate

  -   -   -   -   - 

Commercial real estate

  2,288   2,877   13   1,757   62 

Residential real estate

  2,434   2,502   235   2,619   87 

Total

 $5,922  $6,721  $355  $5,148  $169 

 

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

 

          

Loans

                 
  

Loans

  

Loans

  

Past Due

              

Loans

 
  

Past Due

  

Past Due

  

Greater

              

90 Days Past

 

(Dollars in thousands)

 

30 to 59

  

60 to 89

  

Than 90

      

Loans Not

  

Total

  

Due and

 
  

Days (1)

  

Days (1)

  

Days (1)

  

Total (1)

  

Past Due

  

Loans

  

Accruing

 

December 31, 2021

                            

Agricultural

 $-  $-  $-  $-  $64,819  $64,819  $- 

Commercial and industrial

  21   -   88   109   202,915   203,024   - 

Consumer

  70   15   -   85   35,089   35,174   - 

Commercial real estate

  422   13   279   714   525,170   525,884   - 

Construction real estate

  1,149   1,235   -   2,384   16,682   19,066   - 

Residential real estate

  1,489   306   454   2,249   166,632   168,881   - 
  $3,151  $1,569  $821  $5,541  $1,011,307  $1,016,848  $- 
                             

December 31, 2020

                            

Agricultural

 $-  $-  $-  $-  $53,735  $53,735  $- 

Commercial and industrial

  -   109   515   624   302,903   303,527   - 

Consumer

  39   -   -   39   33,975   34,014   - 

Commercial real estate

  532   44   1,744   2,320   466,927   469,247   - 

Construction real estate

  1,076   180   80   1,336   15,303   16,639   - 

Residential real estate

  1,563   256   352   2,171   190,335   192,506   - 
  $3,210  $589  $2,691  $6,490  $1,063,178  $1,069,668  $- 

 

(1) Includes nonaccrual loans

 

Nonaccrual loans by loan category as of December 31 as follows:

 

(Dollars in thousands)

      
  

2021

  

2020

 

Agricultural

 $313  $348 

Commercial and industrial

  285   1,802 

Consumer

  -   8 

Commercial real estate

  279   3,088 

Construction real estate

  -   80 

Residential real estate

  850   1,381 
  $1,727  $6,707