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Note 3 - Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 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 June 30, 2021
Beginning balance	$	342	$	1,599		$	247		$	4,345		$	74		$	1,024		$	109	$	7,740
Charge-offs		—		(24	)		(76	)		-			—			-			—		(100	)
Recoveries		—		64			35			42			—			3			—		144
Provision		32		(116	)		37			(10	)		-			(167	)		390		166
Ending balance	$	374	$	1,523		$	243		$	4,377		$	74		$	860		$	499	$	7,950



Allowance for Loan Losses Six Months Ended June 30, 2021
Beginning balance	$	257	$	1,327		$	317		$	4,178		$	97		$	1,300		$	117	$	7,593
Charge-offs		—		(98	)		(147	)		(48	)		—			—			—		(293	)
Recoveries		—		73			113			43			—			5			—		234
Provision		117		221			(40	)		204			(23	)		(445	)		382		416
Ending balance	$	374	$	1,523		$	243		$	4,377		$	74		$	860		$	499	$	7,950

Individually evaluated for impairment	$	138	$	20		$	—		$	56		$	—		$	148		$	—	$	362

Collectively evaluated for impairment	$	236	$	1,503		$	243		$	4,321		$	74		$	712		$	499	$	7,588

Loans
June 30, 2021
Individually evaluated for impairment	$	3,167	$	184		$	—		$	1,140		$	—		$	2,333				$	6,824
Collectively evaluated for impairment		43,400		259,034			33,354			461,941			15,440			165,318					978,487
Acquired with deteriorated credit quality		—		5,814			16			10,906			—			2,540					19,276
Ending balance	$	46,567	$	265,032		$	33,370		$	473,987		$	15,440		$	170,191				$	1,004,587

				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

Allowance for Loan Losses 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
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 $166,000 in the second quarter of 2021 and $416,000 in the first half of 2021, compared to $1,000,000 and $1,775,000, respectively, in the same periods in the prior year. The second quarter and first half of 2021 provisions were deemed appropriate due to positive economic indicators in ChoiceOne's local market areas and the national economy compared to the prior year. 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 June 30, 2021, and expects that increased levels of past due loans, nonperforming loans and loan losses may occur.

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
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2021		2020		2021		2020		2021		2020
Pass	$	43,040	$	50,185	$	260,047	$	294,614	$	464,426	$	453,080
Special Mention		360		3,202		3,086		4,101		2,504		6,006
Substandard		3,167		348		1,702		4,812		7,057		8,925
Doubtful		-		-		197		-		-		1,236
	$	46,567	$	53,735	$	265,032	$	303,527	$	473,987	$	469,247

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,
	2021		2020		2021		2020		2021		2020
Performing	$	33,370	$	34,006	$	15,440	$	16,559	$	169,138	$	191,125
Nonperforming		-		-		-		-		-		-
Nonaccrual		-		8		-		80		1,053		1,381
	$	33,370	$	34,014	$	15,440	$	16,639	$	170,191	$	192,506

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and six months ended June 30, 2021 and June 30, 2020.

	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
			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		-	$	-	$	-		6	$	2,320	$	2,320
Commercial Real Estate		-		-		-		2		1,210		1,210
Total		-	$	-	$	-		8	$	3,530	$	3,530

	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, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and six months ended June 30, 2021 and June 30, 2020, which loans had been modified and classified as TDRs during the year prior to the default.

	Three Months Ended				Six Months Ended
	June 30, 2021				June 30, 2021
(Dollars in thousands)	Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment
Commercial and industrial		1	$	52		1	$	52
Commercial Real Estate		1		184		1		184
Total		2	$	236		2	$	236

	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

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, ChoiceOne provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of June 30, 2021, all deferments had resumed payments in accordance with loan terms.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
June 30, 2021
With no related allowance recorded
Agricultural	$	1,637	$	1,637	$	-
Commercial and industrial		-		-		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		772		772		-
Residential real estate		469		480		-
Subtotal		2,878		2,889		-
With an allowance recorded
Agricultural		1,530		1,615		138
Commercial and industrial		184		313		20
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		368		376		56
Residential real estate		1,864		1,901		148
Subtotal		3,946		4,205		362
Total
Agricultural		3,167		3,252		138
Commercial and industrial		184		313		20
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		1,140		1,148		56
Residential real estate		2,333		2,381		148
Total	$	6,824	$	7,094	$	362

			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- and six-month periods ended June 30, 2021 and 2020:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended June 30, 2021
With no related allowance recorded
Agricultural	$	778	$	24
Commercial and industrial		993		-
Consumer		-		-
Construction real estate		27		-
Commercial real estate		1,749		13
Residential real estate		267		-
Subtotal		3,814		37
With an allowance recorded
Agricultural		1,451		16
Commercial and industrial		165		-
Consumer		3		-
Construction real estate		-		-
Commercial real estate		642		3
Residential real estate		2,280		15
Subtotal		4,541		34
Total
Agricultural		2,229		40
Commercial and industrial		1,158		-
Consumer		3		-
Construction real estate		27		-
Commercial real estate		2,391		16
Residential real estate		2,547		15
Total	$	8,355	$	71

	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
Six Months Ended June 30, 2021
With no related allowance recorded
Agricultural	$	993	$	52
Commercial and industrial		731		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		1,698		32
Residential real estate		320		-
Subtotal		3,742		84
With an allowance recorded
Agricultural		2,177		35
Commercial and industrial		174		1
Consumer		-		-
Construction real estate		-		-
Commercial real estate		372		6
Residential real estate		2,141		33
Subtotal		4,864		75
Total
Agricultural		3,170		87
Commercial and industrial		905		1
Consumer		-		-
Construction real estate		-		-
Commercial real estate		2,070		38
Residential real estate		2,461		33
Total	$	8,606	$	159

	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

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, 2021
Agricultural	$	-	$	-	$	-	$	-	$	46,567	$	46,567	$	-
Commercial and industrial		281		21		317		619		264,413		265,032		-
Consumer		15		-		-		15		33,355		33,370		-
Commercial real estate		425		-		184		609		473,378		473,987		-
Construction real estate		-		-		-		-		15,440		15,440		-
Residential real estate		97		118		480		695		169,496		170,191		-
	$	818	$	139	$	981	$	1,938	$	1,002,649	$	1,004,587	$	-

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)	June 30,		December 31,
	2021		2020
Agricultural	$	348	$	348
Commercial and industrial		338		1,802
Consumer		-		8
Commercial real estate		184		3,088
Construction real estate		-		80
Residential real estate		1,053		1,381
	$	1,923	$	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 six months ended June 30, 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 June 30, 2021		(12	)		(127	)		(139	)
Balance, June 30, 2021	$	123		$	1,397		$	1,520

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 six months ended June 30, 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 June 30, 2021		(328	)		(219	)		(547	)
Balance, June 30, 2021	$	515		$	236		$	751