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Note 3 - Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2022

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, 2022
Beginning balance	$	448		$	1,454		$	290		$	3,705		$	110		$	671		$	1,010		$	7,688
Charge-offs		—			(31	)		(112	)		-			—			-			—			(143	)
Recoveries		—			2			52			1			—			1			—			56
Provision		(61	)		327			74			(16	)		(73	)		(83	)		(168	)		-
Ending balance	$	387		$	1,752		$	304		$	3,690		$	37		$	589		$	842		$	7,601


Individually evaluated for impairment	$	253		$	116		$	3		$	9		$	—		$	167		$	—		$	548

Collectively evaluated for impairment	$	134		$	1,636		$	301		$	3,681		$	37		$	422		$	842		$	7,053

Loans
March 31, 2022
Individually evaluated for impairment	$	2,542		$	356		$	32		$	157		$	—		$	1,853					$	4,940
Collectively evaluated for impairment		59,076			194,024			36,108			527,743			15,669			174,206						1,006,826
Acquired with deteriorated credit quality		—			4,534			11			9,352			—			1,743						15,640
Ending balance	$	61,618		$	198,914		$	36,151		$	537,252		$	15,669		$	177,802					$	1,027,406

			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
December 31, 2021
Individually evaluated for impairment	$	251	$	95	$	2	$	9	$	-	$	146	$	-	$	503

Collectively evaluated for impairment	$	197	$	1,359	$	288	$	3,696	$	110	$	525	$	1,010	$	7,185


Loans
December 31, 2021
Individually evaluated for impairment	$	2,616	$	339	$	14	$	273	$	-	$	2,191			$	5,433
Collectively evaluated for impairment		62,203		197,656		35,148		515,528		19,066		164,647				994,248
Acquired with deteriorated credit quality		-		5,029		12		10,083		-		2,043				17,167
Ending balance	$	64,819	$	203,024	$	35,174	$	525,884	$	19,066	$	168,881			$	1,016,848

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,
	2022		2021		2022		2021		2022		2021
Pass	$	58,749	$	61,864	$	196,394	$	201,202	$	531,683	$	519,537
Special Mention		327		339		1,190		300		749		778
Substandard		2,542		2,616		1,245		1,266		4,820		5,569
Doubtful		-		-		85		256		-		-
	$	61,618	$	64,819	$	198,914	$	203,024	$	537,252	$	525,884

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,
	2022		2021		2022		2021		2022		2021
Performing	$	36,119	$	35,174	$	15,669	$	19,066	$	177,186	$	168,031
Nonperforming		-		-		-		-		-		-
Nonaccrual		32		-		-		-		616		850
	$	36,151	$	35,174	$	15,669	$	19,066	$	177,802	$	168,881

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three months ended March 31, 2022 and March 31, 2021.

Three Months Ended March 31, 2022

Pre-

Post-

Modification

Outstanding

(Dollars in thousands)

Number of

Recorded

Loans

Investment

Agricultural

258

Total

258

	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

There were no TDRs as of March 31, 2022 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, 2022, 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 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.

	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

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
March 31, 2022
With no related allowance recorded
Agricultural	$	314	$	428	$	-
Commercial and industrial		92		123		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		-		-		-
Residential real estate		-		-		-
Subtotal		406		551		-
With an allowance recorded
Agricultural		2,228		2,228		253
Commercial and industrial		264		279		116
Consumer		32		32		3
Construction real estate		-		-		-
Commercial real estate		157		157		8
Residential real estate		1,853		1,907		167
Subtotal		4,534		4,603		547
Total
Agricultural		2,542		2,656		253
Commercial and industrial		356		402		116
Consumer		32		32		3
Construction real estate		-		-		-
Commercial real estate		157		157		8
Residential real estate		1,853		1,907		167
Total	$	4,940	$	5,154	$	547

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2021
With no related allowance recorded
Agricultural	$	314	$	428	$	-
Commercial and industrial		-		-		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		94		94		-
Residential real estate		164		172		-
Subtotal		572		694		-
With an allowance recorded
Agricultural		2,302		2,302		251
Commercial and industrial		339		363		95
Consumer		14		15		2
Construction real estate		-		-		-
Commercial real estate		179		179		9
Residential real estate		2,027		2,084		146
Subtotal		4,861		4,943		503
Total
Agricultural		2,616		2,730		251
Commercial and industrial		339		363		95
Consumer		14		15		2
Construction real estate		-		-		-
Commercial real estate		273		273		9
Residential real estate		2,191		2,256		146
Total	$	5,433	$	5,637	$	503

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three months ended March 31, 2022 and March 31, 2021:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended March 31, 2022
With no related allowance recorded
Agricultural	$	314	$	-
Commercial and industrial		46		1
Consumer		-		-
Construction real estate		-		-
Commercial real estate		47		-
Residential real estate		82		-
Subtotal		489		1
With an allowance recorded
Agricultural		2,265		42
Commercial and industrial		301		2
Consumer		23		-
Construction real estate		-		-
Commercial real estate		168		3
Residential real estate		1,940		17
Subtotal		4,697		64
Total
Agricultural		2,579		42
Commercial and industrial		347		3
Consumer		23		-
Construction real estate		-		-
Commercial real estate		215		3
Residential real estate		2,022		17
Total	$	5,186	$	65

	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

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, 2022
Agricultural	$	-	$	-	$	-	$	-	$	61,618	$	61,618	$	-
Commercial and industrial		-		93		85		178		198,736		198,914		-
Consumer		66		-		32		98		36,053		36,151		-
Commercial real estate		-		-		-		-		537,252		537,252		-
Construction real estate		-		-		-		-		15,669		15,669		-
Residential real estate		2,032		28		-		2,060		175,742		177,802		-
	$	2,098	$	121	$	117	$	2,336	$	1,025,070	$	1,027,406	$	-

December 31, 2021
Agricultural	$	-	$	-	$	-	$	-	$	64,819	$	64,819	$	-
Commercial and industrial		21		-		88		109		202,915		203,024		-
Consumer		70		15		-		85		35,089		35,174		-
Commercial real estate		422		13		279		714		525,170		525,884		-
Construction real estate		1,149		1,235		-		2,384		16,682		19,066		-
Residential real estate		1,489		306		454		2,249		166,632		168,881		-
	$	3,151	$	1,569	$	821	$	5,541	$	1,011,307	$	1,016,848	$	-

(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)	March 31,		December 31,
	2022		2021
Agricultural	$	314	$	313
Commercial and industrial		205		285
Consumer		32		-
Commercial real estate		-		279
Residential real estate		616		850
	$	1,167	$	1,727

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 the County Bank Corp. acquired loan portfolio for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 and the three months ended March 31, 2022 (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 January 1, 2021		135			1,524			1,659
Accretion January 1, 2021 through December 31, 2021		(247	)		(95	)		(342	)
Transfer from non-accretable to accretable yield		400			-			400
Balance January 1, 2022		288			1,429			1,717
Transfer from non-accretable to accretable yield		400			-			400
Accretion January 1, 2022 through March 31, 2022		(102	)		(151	)		(253	)
Balance, March 31, 2022	$	586		$	1,278		$	1,864

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 years ended December 31, 2020 and December 31, 2021 and the three months ended March 31, 2022 (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, January 1, 2021		843			455			1,298
Accretion January 1, 2021 through December 31, 2021		(321	)		(258	)		(579	)
Balance January 1, 2022		522			197			719
Transfer from non-accretable to accretable yield		874			-			874
Accretion January 1, 2022 through March 31, 2022		(302	)		-			(302	)
Balance, March 31, 2022	$	1,094		$	197		$	1,291