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Note 3 - Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

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 June 30, 2020
Beginning balance	$	347		$	853		$	220		$	1,960	$	124		$	1,061		$	225		$	4,790
Charge-offs		-			(17	)		(95	)		-		-			(7	)		-			(119	)
Recoveries		-			-			66			-		-			13			-			79
Provision		(95	)		562			52			873		(45	)		(122	)		(225	)		1,000
Ending balance	$	252		$	1,398		$	243		$	2,833	$	79		$	945		$	-		$	5,750


Six Months Ended
June 30, 2020
Beginning balance	$	471		$	655		$	270		$	1,663	$	76		$	640		$	282		$	4,057
Charge-offs		—			(17	)		(184	)		—		—			(7	)		—			(208	)
Recoveries		—			1			110			—		—			15			—			126
Provision		(219	)		759			47			1,170		3			297			(282	)		1,775
Ending balance	$	252		$	1,398		$	243		$	2,833	$	79		$	945		$	-		$	5,750

Individually evaluated for impairment	$	—		$	31		$	6		$	235	$	—		$	225		$	—		$	497

Collectively evaluated for impairment	$	252		$	1,367		$	236		$	2,599	$	79		$	720		$	—		$	5,253

Loans
June 30, 2020
Individually evaluated for impairment	$	379		$	321		$	24		$	2,246	$	—		$	2,326					$	5,296
Collectively evaluated for impairment		50,556			237,852			33,745			359,696		15,576			200,104						897,529
Acquired with deteriorated credit quality		—			3,839			—			1,121		—			208						5,168
Ending balance	$	50,935		$	242,012		$	33,769		$	363,063	$	15,576		$	202,638					$	907,993

				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 June 30, 2019
Beginning balance	$	424		$	857		$	336		$	1,863	$	40	$	558		$	652		$	4,730
Charge-offs		-			(1	)		(45	)		-		-		(15	)		-			(61	)
Recoveries		65			3			39			4		-		21			-			132
Provision		(127	)		(41	)		5			531		3		(42	)		(329	)		-
Ending balance	$	362		$	818		$	335		$	2,398	$	43	$	522		$	323		$	4,801

Allowance for Loan Losses Six Months Ended June 30, 2019
Beginning balance	$	481		$	892		$	254		$	1,926	$	38	$	537		$	545		$	4,673
Charge-offs		-			(2	)		(151	)		-		-		(14	)		-			(167	)
Recoveries		65			20			88			6		-		116			-			295
Provision		(184	)		(92	)		144			466		5		(117	)		(222	)		-
Ending balance	$	362		$	818		$	335		$	2,398	$	43	$	522		$	323		$	4,801

Individually evaluated for impairment	$	80		$	84		$	10		$	605	$	-	$	159		$	-		$	938

Collectively evaluated for impairment	$	282		$	734		$	325		$	1,793	$	43	$	363		$	323		$	3,863


Loans
June 30, 2019
Individually evaluated for impairment	$	389		$	362		$	54		$	2,937	$	-	$	2,613					$	6,355
Collectively evaluated for impairment		40,492			84,720			24,628			138,005		9,948		93,079						390,872
Acquired with deteriorated credit quality		-			-			-			-		-		-						-
Ending balance	$	40,881		$	85,082		$	24,682		$	140,942	$	9,948	$	95,692					$	397,227

			Commercial
(Dollars in thousands)			and				Commercial		Construction		Residential
	Agricultural		Industrial		Consumer		Real Estate		Real Estate		Real Estate		Unallocated		Total
December 31, 2019
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 provision for loan losses was $1,000,000 in the second quarter of 2020, compared to $0 in the same period in the prior year. The second quarter of 2020 provision was deemed prudent due to growth in ChoiceOne’s loan portfolio and the uncertainty of the impact of the global coronavirus (COVID-19) pandemic upon ChoiceOne’s borrowers and their ability to repay loans. While it is difficult to predict the impact that COVID-19 will have in future quarters, ChoiceOne expects increased levels of past due loans, nonperforming loans and loan losses.

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 the 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 the 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 was as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2020		2019		2020		2019		2020		2019
Pass	$	46,822	$	55,866	$	236,874	$	146,728	$	356,813	$	322,105
Special Mention		3,734		1,094		1,040		1,081		2,537		1,332
Substandard		379		379		4,098		274		3,492		2,942
Doubtful		-		-		-		-		221		-
	$	50,935	$	57,339	$	242,012	$	148,083	$	363,063	$	326,379

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2020		2019		2020		2019		2020		2019
Performing	$	33,746	$	38,838	$	15,576	$	13,411	$	201,809	$	216,651
Nonperforming		-		-		-		-		-		-
Nonaccrual		23		16		-		-		829		1,331
	$	33,769	$	38,854	$	15,576	$	13,411	$	202,638	$	217,982

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three months and six months ended June 30, 2020. There were no new TDRs in 2019.

	Three Months Ended June 30, 2020						Six Months Ended June 30, 2020
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment
Agricultural		1	$	68	$	68		1	$	68	$	68
Commercial Real Estate		2		1,882		1,882		2		1,882		1,882
Total		3	$	1,950	$	1,950		3	$	1,950	$	1,950

The following schedule provides information on TDRs as of June 30, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months and six months ended June 30, 2020, which loans had been modified and classified as TDRs during the year prior to the default. There were no TDRs as of June 30, 2019 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months and six months ended June 30, 2019, which loans had been modified and classified as TDRs during the year prior to the default.

	Three Months Ended				Six Months Ended
	June 30, 2020				June 30, 2020
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Agricultural		1	$	68		1	$	68
Commercial Real Estate		2		1,882		2		1,882
Total		3	$	1,950		3	$	1,950

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 Coronavirus Aid, Relief and Economic Security (“CARES”) Act, passed by Congress on March 27, 2020, states that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. ChoiceOne offered an initial 90-day deferment beginning in March 2020 to both commercial and retail borrowers where the borrower could defer either the principal portion of their payments or both the principal and interest portions. As of June 30, 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. ChoiceOne will continue to assist borrowers through different means, including a second round of deferrals for which management is seeing significantly fewer requests.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
June 30, 2020
With no related allowance recorded
Agricultural	$	379	$	440	$	-
Commercial and industrial		-		-		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		-		-		-
Residential real estate		22		25		-
Subtotal		401		465		-
With an allowance recorded
Agricultural		-		-		-
Commercial and industrial		321		404		31
Consumer		24		24		6
Construction real estate		-		-		-
Commercial real estate		2,246		2,836		235
Residential real estate		2,304		2,392		225
Subtotal		4,895		5,656		497
Total
Agricultural		379		440		-
Commercial and industrial		321		404		31
Consumer		24		24		6
Construction real estate		-		-		-
Commercial real estate		2,246		2,836		235
Residential real estate		2,326		2,417		225
Total	$	5,296	$	6,121	$	497

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2019
With no related allowance recorded
Agricultural	$	545	$	545	$	-
Commercial and industrial		259		340		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		1,882		2,471		-
Residential real estate		42		42		-
Subtotal		2,728		3,398		-
With an allowance recorded
Agricultural		379		439		103
Commercial and industrial		-		-		-
Consumer		17		18		4
Construction real estate		-		-		-
Commercial real estate		406		406		13
Residential real estate		2,392		2,460		235
Subtotal		3,194		3,323		355
Total
Agricultural		924		984		103
Commercial and industrial		259		340		-
Consumer		18		18		4
Construction real estate		-		-		-
Commercial real estate		2,287		2,877		13
Residential real estate		2,434		2,502		235
Total	$	5,922	$	6,721	$	355

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three- and six-month periods ended June 30, 2020 and 2019:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended June 30, 2020
With no related allowance recorded
Agricultural	$	190	$	-
Commercial and industrial		129		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		941		-
Residential real estate		49		-
Subtotal		1,309		-
With an allowance recorded
Agricultural		190		-
Commercial and industrial		167		-
Consumer		19		-
Construction real estate		-		-
Commercial real estate		1,312		5
Residential real estate		2,339		22
Subtotal		4,027		27
Total
Agricultural		380		-
Commercial and industrial		296		-
Consumer		19		-
Construction real estate		-		-
Commercial real estate		2,253		5
Residential real estate		2,388		22
Total	$	5,336	$	27

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended June 30, 2019
With no related allowance recorded
Agricultural	$	-	$	-
Commercial and industrial		-		6
Consumer		-		-
Construction real estate		-		-
Commercial real estate		506		32
Residential real estate		1,336		25
Subtotal		1,842		63
With an allowance recorded
Agricultural		389		-
Commercial and industrial		193		-
Consumer		58		-
Construction real estate		-		-
Commercial real estate		882		-
Residential real estate		2,517		-
Subtotal		4,039		-
Total
Agricultural		389		-
Commercial and industrial		193		6
Consumer		59		-
Construction real estate		-		-
Commercial real estate		1,387		32
Residential real estate		3,853		25
Total	$	5,881	$	63

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Six Months Ended June 30, 2020
With no related allowance recorded
Agricultural	$	308	$	-
Commercial and industrial		173		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		1,255		-
Residential real estate		46		-
Subtotal		1,782		-
With an allowance recorded
Agricultural		253		-
Commercial and industrial		116		-
Consumer		19		-
Construction real estate		-		-
Commercial real estate		1,005		12
Residential real estate		2,356		52
Subtotal		3,749		64
Total
Agricultural		561		-
Commercial and industrial		289		-
Consumer		19		-
Construction real estate		-		-
Commercial real estate		2,260		12
Residential real estate		2,402		52
Total	$	5,531	$	64

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Six Months Ended June 30, 2019
With no related allowance recorded
Agricultural	$	62	$	-
Commercial and industrial		-		10
Consumer		-		-
Construction real estate		-		-
Commercial real estate		49		75
Residential real estate		174		54
Subtotal		285		139
With an allowance recorded
Agricultural		390		-
Commercial and industrial		136		-
Consumer		69		-
Construction real estate		-		-
Commercial real estate		1,340		-
Residential real estate		2,498		-
Subtotal		4,433		-
Total
Agricultural		452		-
Commercial and industrial		136		10
Consumer		70		-
Construction real estate		-		-
Commercial real estate		1,388		75
Residential real estate		2,672		54
Total	$	4,718	$	139

An aging analysis of loans by loan category 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
June 30, 2020
Agricultural	$	-	$	-	$	379	$	379	$	50,556	$	50,935	$	-
Commercial and industrial		103		-		680		783		241,229		242,012		-
Consumer		5		-		10		15		33,754		33,769		-
Commercial real estate		1,955		8		2,103		4,066		358,997		363,063		-
Construction real estate		-		-		-		-		15,576		15,576		-
Residential real estate		246		412		81		739		201,899		202,638		-
	$	2,309	$	420	$	3,253	$	5,982	$	902,011	$	907,993	$	-

December 31, 2019
Agricultural	$	-	$	68	$	-	$	68	$	57,271	$	57,339	$	-
Commercial and industrial		542		15		259		816		147,267		148,083		-
Consumer		121		19		11		151		38,703		38,854		-
Commercial real estate		-		-		1,882		1,882		324,497		326,379		-
Construction real estate		-		-		-		-		13,411		13,411		-
Residential real estate		2,466		582		393		3,441		214,541		217,982		-
	$	3,129	$	684	$	2,545	$	6,358	$	795,690	$	802,048	$	-

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	June 30,		December 31,
	2020		2019
Agricultural	$	379	$	379
Commercial and industrial		758		776
Consumer		23		16
Commercial real estate		2,146		2,185
Construction real estate		-		-
Residential real estate		829		1,331
	$	4,135	$	4,687

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):

(Dollars in thousands)	Acquired			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	)		(1,656	)		(1,841	)
Carrying balance at acquisition date	$	4,616		$	385,738		$	390,354

The table below presents a roll forward of the accretable yield on acquired loans for the six months ended June 30, 2020 (dollars in thousands):

(Dollars in thousands)	*Acquired*			*Acquired*			*Acquired*
	*Impaired*			*Non-impaired*			*Total*
Balance, January 1, 2020	$	(185	)	$	(1,581	)	$	(1,766	)
Accretion January 1, 2020 through March 31, 2020		-			50			50
Balance, March 31, 2020	$	(185	)	$	(1,531	)	$	(1,716	)
Accretion April 1, 2020 through June 30, 2020		45			11			56
Balance, June 30, 2020	$	(140	)	$	(1,520	)	$	(1,660	)