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Note 3 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2020

Note 3 – Loans and Allowance for Loan Losses

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

(Dollars in thousands)
	2020			2019
Agricultural	$	53,735		$	57,339
Commercial and industrial		303,527			148,083
Consumer		34,014			38,854
Real estate - commercial		469,247			326,379
Real estate - construction		16,639			13,411
Real estate - residential		192,506			217,982
Loans, gross	$	1,069,668		$	802,048
Allowance for Loan Losses		(7,593	)		(4,057	)
Loans, net	$	1,062,075		$	797,991

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 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, 2020:

(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, December 31, 2020	$	135		$	1,524		$	1,659

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		(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 loans for the year ended December 31, 2020:

(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, December 31, 2020	$	843		$	455		$	1,298

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, 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

				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, 2018
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
December 31, 2018
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

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,
	2020		2019		2020		2019		2020		2019
Pass	$	50,185	$	55,866	$	294,614	$	146,728	$	453,080	$	322,105
Special Mention		3,202		1,094		4,101		1,081		6,006		1,332
Substandard		348		379		4,812		274		8,925		2,942
Doubtful		-		-		-		-		1,236		-
	$	53,735	$	57,339	$	303,527	$	148,083	$	469,247	$	326,379

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,
	2020		2019		2020		2019		2020		2019
Performing	$	34,006	$	38,838	$	16,559	$	13,411	$	191,125	$	216,651
Nonperforming		-		-		-		-		-		-
Nonaccrual		8		16		80		-		1,381		1,331
	$	34,014	$	38,854	$	16,639	$	13,411	$	192,506	$	217,982

Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2020 and 2019, loans in the process of foreclosure totaled $337,000 and $173,000, 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, 2020. There were no new TDRs in 2019.

	Year Ended December 31, 2020
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded
	Loans		Investment		Investment
Agricultural		1	$	62	$	62
Commercial and Industrial		1		53		53
Commercial Real Estate		3		1,852		1,852
Total		5	$	1,967	$	1,967

The following schedule provides information on TDRs as of December 31, 2020 where the borrower was past due with respect to principal and/or interest for 30 days during the year ended December 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default. There were no TDRs as of December 31, 2019 where the borrower was past due with respect to principal and/or interest for 30 days or more during year ended December 31, 2019, which loans had been modified and classified as TDRs during the year prior to the default.

	Year Ended
	December 31, 2020
(Dollars in thousands)	Number		Recorded
	of Loans		Investment
Commercial Real Estate		2	$	1,666
Total		2	$	1,666

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 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. 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. 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.

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, 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

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2018
With no related allowance recorded
Agricultural	$	185	$	185	$	-	$	291	$	-
Commercial and industrial		-		-		-		29		2
Consumer		1		1		-		2		8
Construction real estate		-		-		-		54		-
Commercial real estate		74		109		-		78		30
Residential real estate		250		261		-		177		114
Subtotal		510		556		-		631		154
With an allowance recorded
Agricultural		393		440		94		161		13
Commercial and industrial		21		21		3		296		-
Consumer		88		88		13		59		-
Construction real estate		-		-		-		-		-
Commercial real estate		550		609		20		692		-
Residential real estate		2,462		2,494		167		2,523		6
Subtotal		3,514		3,652		297		3,731		19
Total
Agricultural		578		625		94		452		13
Commercial and industrial		21		21		3		325		2
Consumer		90		90		13		61		8
Construction real estate		-		-		-		54		-
Commercial real estate		623		718		20		770		30
Residential real estate		2,712		2,755		167		2,700		120
Total	$	4,024	$	4,209	$	297	$	4,362	$	173

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, 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	$	-

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 as of December 31 as follows:

(Dollars in thousands)
	2020		2019
Agricultural	$	348	$	379
Commercial and industrial		1,802		776
Consumer		8		16
Commercial real estate		3,088		2,185
Construction real estate		80		-
Residential real estate		1,381		1,331
	$	6,707	$	4,687