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Note 3 - Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2021

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 March 31, 2021
Beginning balance	$	257	$	1,327		$	317		$	4,178		$	97		$	1,300		$	117		$	7,593
Charge-offs		—		(74	)		(71	)		(48	)		—			-			—			(193	)
Recoveries		—		9			79			-			—			2			—			90
Provision		85		337			(78	)		215			(23	)		(278	)		(8	)		250
Ending balance	$	342	$	1,599		$	247		$	4,345		$	74		$	1,024		$	109		$	7,740

Individually evaluated for impairment	$	114	$	2		$	—		$	10		$	—		$	213		$	—		$	339

Collectively evaluated for impairment	$	227	$	1,596		$	246		$	4,337		$	75		$	811		$	109		$	7,401

Loans
March 31, 2021
Individually evaluated for impairment	$	3,173	$	1,626		$	—		$	3,001		$	—		$	2,589					$	10,389
Collectively evaluated for impairment		43,513		290,140			32,311			448,261			15,670			174,562						1,004,457
Acquired with deteriorated credit quality		—		6,284			19			11,159			—			2,775						20,237
Ending balance	$	46,686	$	298,050		$	32,330		$	462,421		$	15,670		$	179,926					$	1,035,083

				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 March 31, 2020
Beginning balance	$	471		$	655	$	270		$	1,663	$	76	$	640	$	282		$	4,057
Charge-offs		-			-		(89	)		-		-		-		-			(89	)
Recoveries		-			1		44			-		-		2		-			47
Provision		(124	)		197		(5	)		297		48		419		(57	)		775
Ending balance	$	347		$	853	$	220		$	1,960	$	124	$	1,061	$	225		$	4,790

Individually evaluated for impairment	$	98		$	-	$	1		$	13	$	-	$	266	$	-		$	378

Collectively evaluated for impairment	$	249		$	853	$	219		$	1,947	$	124	$	795	$	225		$	4,412


Loans
March 31, 2020
Individually evaluated for impairment	$	379		$	259	$	16		$	2,272	$	-	$	2,449				$	5,375
Collectively evaluated for impairment		50,104			136,989		34,236			348,365		17,525		213,706					800,925
Acquired with deteriorated credit quality		-			3,953		-			1,116		-		208					5,277
Ending balance	$	50,483		$	141,201	$	34,252		$	351,753	$	17,525	$	216,363				$	811,577

			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, 2020
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

The provision for loan losses was $250,000 in the first quarter of 2021, compared to $775,000 in the same period in the prior year. The first quarter of 2021 provision was deemed prudent due to changes in the risk profile of ChoiceOne’s loan portfolio and the economic impact on ChoiceOne's local market areas and the national economy resulting from the 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 March 31, 2021, 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
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2021		2020		2021		2020		2021		2020
Pass	$	43,145	$	50,185	$	289,781	$	294,614	$	449,666	$	453,080
Special Mention		368		3,202		2,109		4,101		3,674		6,006
Substandard		3,173		348		6,160		4,812		9,081		8,925
Doubtful		-		-		-		-		-		1,236
	$	46,686	$	53,735	$	298,050	$	303,527	$	462,421	$	469,247

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2021		2020		2021		2020		2021		2020
Performing	$	32,330	$	34,006	$	15,670	$	16,559	$	178,650	$	191,125
Nonperforming		-		-		-		-		-		-
Nonaccrual		-		8		-		80		1,276		1,381
	$	32,330	$	34,014	$	15,670	$	16,639	$	179,926	$	192,506

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

	Three Months Ended March 31, 2021
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded
	Loans		Investment		Investment
Agricultural		6	$	2,326	$	2,326
Commercial Real Estate		1		958		958
Total		7	$	3,284	$	3,284

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

	Three Months Ended
	March 31, 2021
(Dollars in thousands)	Number		Recorded
	of Loans		Investment
Commercial and industrial		1	$	52
Commercial Real Estate		3		1,850
Total		4	$	1,902

In March of 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID-19 pandemic need not be classified as TDRs. Further, 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, followed by a revised statement on April 7, 2020, providing in part 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. As a result of the pandemic, the Company provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of March 31, 2021, the Company had granted pandemic-related modifications on approximately 17 loans totaling $1.2 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report. A total of 17 deferments with loan balances totaling approximately $1.2 million remained active at March 31, 2021, with all other previous deferments resuming their payments in accordance with loan terms.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
March 31, 2021
With no related allowance recorded
Agricultural	$	348	$	434	$	-
Commercial and industrial		1,463		1,574		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		2,624		3,429		-
Residential real estate		172		176		-
Subtotal		4,607		5,613		-
With an allowance recorded
Agricultural		2,825		2,825		114
Commercial and industrial		163		165		2
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		377		384		10
Residential real estate		2,417		2,495		212
Subtotal		5,782		5,869		338
Total
Agricultural		3,173		3,259		114
Commercial and industrial		1,626		1,739		2
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		3,001		3,813		10
Residential real estate		2,589		2,671		212
Total	$	10,389	$	11,482	$	338

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2020
With no related allowance recorded
Agricultural	$	348	$	434	$	-
Commercial and industrial		1,516		1,629		-
Consumer		-		-		-
Construction real estate		80		80		-
Commercial real estate		1,852		2,664		-
Residential real estate		162		162		-
Subtotal		3,958		4,969		-
With an allowance recorded
Agricultural		-		-		-
Commercial and industrial		147		147		19
Consumer		8		8		1
Construction real estate		-		-		-
Commercial real estate		1,180		1,180		157
Residential real estate		2,558		2,651		254
Subtotal		3,893		3,986		431
Total
Agricultural		348		434		-
Commercial and industrial		1,663		1,776		19
Consumer		9		8		1
Construction real estate		80		80		-
Commercial real estate		3,031		3,844		157
Residential real estate		2,720		2,813		254
Total	$	7,851	$	8,955	$	431

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three-month periods ended March 31, 2021 and 2020:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended March 31, 2021
With no related allowance recorded
Agricultural	$	348	$	-
Commercial and industrial		1,490		-
Consumer		-		-
Construction real estate		40		-
Commercial real estate		2,238		3
Residential real estate		166		1
Subtotal		4,282		4
With an allowance recorded
Agricultural		1,413		-
Commercial and industrial		155		-
Consumer		4		-
Construction real estate		-		-
Commercial real estate		778		4
Residential real estate		2,488		17
Subtotal		4,838		21
Total
Agricultural		1,761		-
Commercial and industrial		1,645		-
Consumer		4		-
Construction real estate		40		-
Commercial real estate		3,016		7
Residential real estate		2,654		18
Total	$	9,120	$	25

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended March 31, 2020
With no related allowance recorded
Agricultural	$	272	$	-
Commercial and industrial		259		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		1,882		-
Residential real estate		59		-
Subtotal		2,472		-
With an allowance recorded
Agricultural		379		-
Commercial and industrial		7		-
Consumer		16		-
Construction real estate		-		-
Commercial real estate		391		7
Residential real estate		2,383		30
Subtotal		3,176		37
Total
Agricultural		651		-
Commercial and industrial		266		-
Consumer		17		-
Construction real estate		-		-
Commercial real estate		2,272		7
Residential real estate		2,442		30
Total	$	5,648	$	37

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
March 31, 2021
Agricultural	$	-	$	-	$	-	$	-	$	46,686	$	46,686	$	-
Commercial and industrial		182		-		413		595		297,455		298,050		-
Consumer		11		-		-		11		32,319		32,330		-
Commercial real estate		184		-		1,666		1,850		460,571		462,421		-
Construction real estate		492		-		-		492		15,178		15,670		-
Residential real estate		1,742		-		79		1,821		178,105		179,926		-
	$	2,611	$	-	$	2,158	$	4,769	$	1,030,314	$	1,035,083	$	-

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 follow:

(Dollars in thousands)	March 31,		December 31,
	2021		2020
Agricultural	$	348	$	348
Commercial and industrial		1,699		1,802
Consumer		-		8
Commercial real estate		1,850		3,088
Construction real estate		-		80
Residential real estate		1,276		1,381
	$	5,173	$	6,707

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 three months ended March 31, 2021 (dollars in thousands):

(Dollars in thousands)	*Acquired*			*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
Accretion January 1, 2021 through March 31, 2021		(5	)		(76	)		(81	)
Balance, March 31, 2021	$	130		$	1,448		$	1,578

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		(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 loan portfolio for the three months ended March 31, 2021 (dollars in thousands):

	*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
Accretion January 1, 2021 through March 31, 2021		(328	)		(198	)		(526	)
Balance, March 31, 2021	$	515		$	257		$	772