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Note 3 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 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 September 30, 2021
Beginning balance	$	374	$	1,523		$	243		$	4,377		$	74	$	860		$	499		$	7,950
Charge-offs		-		(96	)		(98	)		(63	)		-		-			-			(257	)
Recoveries		-		7			54			-			-		1			-			62
Provision		144		168			33			(154	)		39		80			(310	)		-
Ending balance	$	518	$	1,602		$	232		$	4,160		$	113	$	941		$	189		$	7,755



Allowance for Loan Losses Nine Months Ended September 30, 2021
Beginning balance	$	257	$	1,327		$	317		$	4,178		$	97	$	1,300		$	117		$	7,593
Charge-offs		-		(195	)		(244	)		(111	)		-		-			-			(550	)
Recoveries		-		80			168			43			-		5			-			296
Provision		261		390			(9	)		50			16		(364	)		72			416
Ending balance	$	518	$	1,602		$	232		$	4,160		$	113	$	941		$	189		$	7,755

Individually evaluated for impairment	$	124	$	174		$	-		$	8		$	-	$	177		$	-		$	483

Collectively evaluated for impairment	$	394	$	1,428		$	232		$	4,152		$	113	$	764		$	189		$	7,272

Loans
September 30, 2021
Individually evaluated for impairment	$	3,051	$	296		$	-		$	418		$	-	$	2,191					$	5,956
Collectively evaluated for impairment		60,394		211,695			33,793			474,425			18,238		165,913						964,458
Acquired with deteriorated credit quality		-		5,251			13			10,489			-		2,190						17,943
Ending balance	$	63,445	$	217,242		$	33,806		$	485,332		$	18,238	$	170,294					$	988,357

				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
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 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,
	2021		2020		2021		2020		2021		2020
Pass	$	60,042	$	50,185	$	214,493	$	294,614	$	477,227	$	453,080
Special Mention		352		3,202		1,133		4,101		2,105		6,006
Substandard		3,051		348		1,320		4,812		5,758		8,925
Doubtful		-		-		296		-		242		1,236
	$	63,445	$	53,735	$	217,242	$	303,527	$	485,332	$	469,247

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,
	2021		2020		2021		2020		2021		2020
Performing	$	33,806	$	34,006	$	18,238	$	16,559	$	169,443	$	191,125
Nonperforming		-		-		-		-		-		-
Nonaccrual		-		8		-		80		851		1,381
	$	33,806	$	34,014	$	18,238	$	16,639	$	170,294	$	192,506

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, 2021 and September 30, 2020.

	Three Months Ended September 30, 2021						Nine Months Ended September 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	$	2,210	$	2,210
Commercial Real Estate		1		493		493		2		931		931
Total		1	$	493	$	493		8	$	3,141	$	3,141

	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

There were no TDRs as of September 30, 2021 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, 2021, which loans had been modified and classified as TDRs during the year prior to the default. 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.

	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

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 September 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
September 30, 2021
With no related allowance recorded
Agricultural	$	341	$	434	$	-
Commercial and industrial		-		-		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		242		242		-
Residential real estate		171		175		-
Subtotal		754		851		-
With an allowance recorded
Agricultural		2,710		2,709		124
Commercial and industrial		296		312		174
Consumer		-		-		-
Construction real estate		-		176		-
Commercial real estate		176		-		8
Residential real estate		2,020		2,075		177
Subtotal		5,202		5,272		483
Total
Agricultural		3,051		3,143		124
Commercial and industrial		296		312		174
Consumer		-		-		-
Construction real estate		-		176		-
Commercial real estate		418		242		8
Residential real estate		2,191		2,250		177
Total	$	5,956	$	6,123	$	483

			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 nine month periods ended September 30, 2021 and 2020:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended September 30, 2021
With no related allowance recorded
Agricultural	$	989	$	-
Commercial and industrial		-		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		507		2
Residential real estate		320		-
Subtotal		1,816		2
With an allowance recorded
Agricultural		2,119		36
Commercial and industrial		240		2
Consumer		-		-
Construction real estate		-		-
Commercial real estate		272		2
Residential real estate		1,943		14
Subtotal		4,574		54
Total
Agricultural		3,108		36
Commercial and industrial		240		2
Consumer		-		-
Construction real estate		-		-
Commercial real estate		779		4
Residential real estate		2,263		14
Total	$	6,390	$	56

	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
Nine Months Ended September 30, 2021
With no related allowance recorded
Agricultural	$	669	$	52
Commercial and industrial		745		-
Consumer		-		-
Construction real estate		20		-
Commercial real estate		1,372		34
Residential real estate		243		-
Subtotal		3,049		86
With an allowance recorded
Agricultural		1,766		71
Commercial and industrial		198		3
Consumer		2		-
Construction real estate		-		-
Commercial real estate		525		8
Residential real estate		2,215		47
Subtotal		4,706		129
Total
Agricultural		2,435		123
Commercial and industrial		943		3
Consumer		2		-
Construction real estate		20		-
Commercial real estate		1,897		42
Residential real estate		2,458		47
Total	$	7,755	$	215

	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

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, 2021
Agricultural	$	-	$	-	$	-	$	-	$	63,445	$	63,445	$	-
Commercial and industrial		83		305		296		684		216,558		217,242		-
Consumer		5		-		-		5		33,801		33,806		-
Commercial real estate		94		-		243		337		484,995		485,332		-
Construction real estate		-		-		-		-		18,238		18,238		-
Residential real estate		12		276		182		470		169,824		170,294		-
	$	194	$	581	$	721	$	1,496	$	986,861	$	988,357	$	-

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)	September 30,		December 31,
	2021		2020
Agricultural	$	342	$	348
Commercial and industrial		296		1,802
Consumer		-		8
Commercial real estate		242		3,088
Construction real estate		-		80
Residential real estate		851		1,381
	$	1,731	$	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 of October 1, 2019 (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 year ended December 31, 2020 and the nine months ended September 30, 2021 (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 December 31, 2020		(50	)		(295	)		(345	)
Balance, December 31, 2020		135			1,524			1,659
Accretion January 1, 2021 through September 30, 2021		-			(233	)		(233	)
Transfer from non-accretable to accretable yield		400			-			400
Balance, September 30, 2021	$	535		$	1,291		$	1,826

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 of July 1, 2020 (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 year ended December 31, 2020 and the nine months ended September 30, 2021 (dollars in thousands):

	Acquired			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
Accretion January 1, 2021 through September 30, 2021		(298	)		(258	)		(556	)
Balance, September 30, 2021	$	545		$	197		$	742