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Note 3 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 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 September 30, 2020
Beginning balance	$	252		$	1,398		$	243		$	2,833		$	79	$	945		$	-	$	5,750
Charge-offs		—			(29	)		(58	)		(255	)		—		(1	)		—		(343	)
Recoveries		—			1			46			4			—		2			—		53
Provision		17			(285	)		48			961			31		122			331		1,225
Ending balance	$	269		$	1,085		$	279		$	3,543		$	110	$	1,068		$	331	$	6,685


Allowance for Loan Losses Nine Months Ended September 30, 2020
Beginning balance	$	471		$	655		$	270		$	1,663		$	76	$	640		$	282	$	4,057
Charge-offs		—			(46	)		(242	)		(255	)		—		(8	)		—		(551	)
Recoveries		—			2			156			4			—		17			—		179
Provision		(202	)		474			95			2,131			34		419			49		3,000
Ending balance	$	269		$	1,085		$	279		$	3,543		$	110	$	1,068		$	331	$	6,685

Individually evaluated for impairment	$	—		$	1		$	1		$	13		$	—	$	218		$	—	$	233

Collectively evaluated for impairment	$	269		$	1,084		$	278		$	3,530		$	110	$	850		$	331	$	6,452

Loans
September 30, 2020
Individually evaluated for impairment	$	373		$	345		$	19		$	2,149		$	—	$	2,203				$	5,089
Collectively evaluated for impairment		53,130			297,886			34,104			449,041			16,489		199,930					1,050,580
Acquired with deteriorated credit quality		—			7,889			30			12,116			—		3,092					23,127
Ending balance	$	53,503		$	306,120		$	34,153		$	463,306		$	16,489	$	205,225				$	1,078,796

				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 September 30, 2019
Beginning balance	$	362		$	818		$	335		$	2,398		$	43	$	522		$	323	$	4,801
Charge-offs		-			(81	)		(71	)		(589	)		-		(11	)		-		(752	)
Recoveries		-			1			25			16			-		5			-		47
Provision		111			(87	)		(27	)		(182	)		5		(80	)		260		-
Ending balance	$	473		$	651		$	262		$	1,643		$	48	$	436		$	583	$	4,096

Allowance for Loan Losses Nine Months Ended September 30, 2019
Beginning balance	$	481		$	892		$	254		$	1,926		$	38	$	537		$	545	$	4,673
Charge-offs		-			(83	)		(222	)		(589	)		-		(25	)		-		(919	)
Recoveries		65			21			113			22			-		121			-		342
Provision		(73	)		(179	)		117			284			10		(197	)		38		-
Ending balance	$	473		$	651		$	262		$	1,643		$	48	$	436		$	583	$	4,096

Individually evaluated for impairment	$	85		$	2		$	4		$	14		$	-	$	186		$	-	$	291

Collectively evaluated for impairment	$	388		$	649		$	258		$	1,629		$	48	$	250		$	583	$	3,805


Loans
September 30, 2019
Individually evaluated for impairment	$	389		$	279		$	20		$	2,331		$	-	$	2,646				$	5,665
Collectively evaluated for impairment		49,668			81,252			24,388			141,975			11,188		92,670					401,141
Acquired with deteriorated credit quality		-			-			-			-			-		-					-
Ending balance	$	50,057		$	81,531		$	24,408		$	144,306		$	11,188	$	95,316				$	406,806

			Commercial
(Dollars in thousands)			and				Commercial		Construction		Residential
	Agricultural		Industrial		Consumer		Real Estate		Real Estate		Real Estate		Unallocated		Total
Allowance for Loan Losses
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 $1,225,000 in the third quarter of 2020, compared to $0 in the same period in the prior year. The third 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 estimates these losses have been incurred as of September 30, 2020, and 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 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 ChoiceOne 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
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019		2020		2019
Pass	$	49,855	$	55,866	$	293,858	$	146,728	$	448,053	$	322,105
Special Mention		3,275		1,094		4,526		1,081		5,275		1,332
Substandard		373		379		7,736		274		8,505		2,942
Doubtful		-		-		-		-		1,473		-
	$	53,503	$	57,339	$	306,120	$	148,083	$	463,306	$	326,379

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019		2020		2019
Performing	$	34,134	$	38,838	$	16,489	$	13,411	$	204,293	$	216,651
Nonperforming		-		-		-		-		157		-
Nonaccrual		19		16		-		-		775		1,331
	$	34,153	$	38,854	$	16,489	$	13,411	$	205,225	$	217,982

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

	Three Months Ended September 30, 2020						Nine Months Ended September 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	$	67	$	67
Commercial Real Estate		-		-		-		2		1,666		1,666
Total		-	$	-	$	-		3	$	1,733	$	1,733

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

	Three Months Ended				Nine Months Ended
	September 30, 2020				September 30, 2020
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Agricultural		1	$	67		1	$	67
Commercial Real Estate		2		1,666		2		1,666
Total		3	$	1,733		3	$	1,733

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 September 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. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferments in accordance with the CARES act; however, significantly fewer customers requested further deferment. Less than 50 deferments remained active with loan balances totaling $10.3 million at September 30, 2020 with all other previous deferments resuming their payments in accordance with loan terms. ChoiceOne will continue to attempt to assist borrowers as needed in the remainder of 2020.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
September 30, 2020
With no related allowance recorded
Agricultural	$	373	$	440	$	-
Commercial and industrial		284		395		-
Consumer		4		5		-
Construction real estate		-		-		-
Commercial real estate		1,859		2,664		-
Residential real estate		196		200		-
Subtotal		2,716		3,704		-
With an allowance recorded
Agricultural		-		-		-
Commercial and industrial		61		64		1
Consumer		15		16		1
Construction real estate		-		-		-
Commercial real estate		290		290		13
Residential real estate		2,007		2,068		218
Subtotal		2,373		2,438		233
Total
Agricultural		373		440		-
Commercial and industrial		345		459		1
Consumer		19		21		1
Construction real estate		-		-		-
Commercial real estate		2,149		2,954		13
Residential real estate		2,203		2,268		218
Total	$	5,089	$	6,142	$	233

			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 nine-month periods ended September 30, 2020 and 2019:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended September 30, 2020
With no related allowance recorded
Agricultural	$	376	$	-
Commercial and industrial		142		-
Consumer		2		-
Construction real estate		-		-
Commercial real estate		929		3
Residential real estate		109		1
Subtotal		1,558		4
With an allowance recorded
Agricultural		-		-
Commercial and industrial		191		-
Consumer		20		-
Construction real estate		-		-
Commercial real estate		1,268		4
Residential real estate		2,163		17
Subtotal		3,642		21
Total
Agricultural		376		-
Commercial and industrial		333		-
Consumer		22		-
Construction real estate		-		-
Commercial real estate		2,197		7
Residential real estate		2,272		18
Total	$	5,200	$	25

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended September 30, 2019
With no related allowance recorded
Agricultural	$	-	$	-
Commercial and industrial		129		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		941		-
Residential real estate		109		1
Subtotal		1,179		1
With an allowance recorded
Agricultural		389		-
Commercial and industrial		191		-
Consumer		37		1
Construction real estate		-		-
Commercial real estate		1,693		13
Residential real estate		2,521		48
Subtotal		4,831		62
Total
Agricultural		389		-
Commercial and industrial		320		-
Consumer		37		1
Construction real estate		-		-
Commercial real estate		2,634		13
Residential real estate		2,630		49
Total	$	6,010	$	63

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Nine Months Ended September 30, 2020
With no related allowance recorded
Agricultural	$	324	$	-
Commercial and industrial		201		-
Consumer		1		-
Construction real estate		-		-
Commercial real estate		1,405		11
Residential real estate		84		5
Subtotal		2,015		16
With an allowance recorded
Agricultural		190		-
Commercial and industrial		102		-
Consumer		18		-
Construction real estate		-		-
Commercial real estate		826		16
Residential real estate		2,273		71
Subtotal		3,409		87
Total
Agricultural		514		-
Commercial and industrial		303		-
Consumer		19		-
Construction real estate		-		-
Commercial real estate		2,231		27
Residential real estate		2,357		76
Total	$	5,424	$	103

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Nine Months Ended September 30, 2019
With no related allowance recorded
Agricultural	$	46	$	-
Commercial and industrial		65		9
Consumer		-		-
Construction real estate		-		-
Commercial real estate		507		61
Residential real estate		156		4
Subtotal		774		74
With an allowance recorded
Agricultural		390		-
Commercial and industrial		107		2
Consumer		56		1
Construction real estate		-		-
Commercial real estate		1,117		27
Residential real estate		2,510		112
Subtotal		4,180		142
Total
Agricultural		436		-
Commercial and industrial		172		11
Consumer		56		1
Construction real estate		-		-
Commercial real estate		1,624		88
Residential real estate		2,666		116
Total	$	4,954	$	216

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
September 30, 2020
Agricultural	$	-	$	-	$	373	$	373	$	53,130	$	53,503	$	-
Commercial and industrial		369		-		666		1,035		305,085		306,120		-
Consumer		75		-		-		75		34,078		34,153		-
Commercial real estate		1,164		16		1,884		3,064		460,242		463,306		-
Construction real estate		-		663		-		663		15,826		16,489		-
Residential real estate		152		609		235		996		204,229		205,225		157
	$	1,760	$	1,288	$	3,158	$	6,206	$	1,072,590	$	1,078,796	$	157

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)	September 30,		December 31,
	2020		2019
Agricultural	$	373	$	379
Commercial and industrial		727		776
Consumer		20		16
Commercial real estate		3,186		2,185
Construction real estate		-		-
Residential real estate		775		1,331
	$	5,081	$	4,687

The table below details the outstanding balances of the County Bank Corp. acquired loan portfolio and the acquisition fair value adjustments at acquisition date (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	)		(1,894	)		(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 loan portfolio for the nine months ended September 30, 2020 (dollars in thousands):

(Dollars in thousands)	*Acquired*			*Acquired*			*Acquired*
	*Impaired*			*Non-impaired*			*Total*
Balance, January 1, 2020	$	(185	)	$	(1,819	)	$	(2,004	)
Accretion January 1, 2020 through June 30, 2020		45			61			106
Balance, June 30, 2020		(140	)		(1,758	)		(1,898	)
Accretion July 1, 2020 through September 30, 2020		2			194			196
Balance, September 30, 2020	$	(138	)	$	(1,564	)	$	(1,702	)

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			Acquired
	Impaired			Non-impaired			Total
Loans acquired - contractual payments	$	20,491		$	158,495		$	178,986
Nonaccretable difference		(3,547	)		-			(3,547	)
Expected cash flows		16,944			158,495			175,439
Accretable yield		(869	)		(596	)		(1,465	)
Carrying balance at acquisition date	$	16,075		$	157,899		$	173,974

The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the nine months ended September 30, 2020 (dollars in thousands):

	Acquired			Acquired			Acquired
	Impaired			Non-impaired			Total
Balance, July 1, 2020	$	(869	)	$	(596	)	$	(1,465	)
Accretion July 1, 2020 through September 30, 2020		20			82			102
Balance, September 30, 2020	$	(849	)	$	(514	)	$	(1,363	)