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Note 3 - Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 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 June 30, 2022
Beginning balance	$	387		$	1,752		$	304		$	3,690	$	37		$	589	$	842		$	7,601
Charge-offs		—			(100	)		(144	)		-		—			-		—			(244	)
Recoveries		—			2			55			1		—			1		—			59
Provision		(255	)		(41	)		94			533		8			101		(440	)		-
Ending balance	$	132		$	1,613		$	309		$	4,224	$	45		$	691	$	402		$	7,416

Allowance for Loan Losses Six Months Ended June 30, 2022
Beginning balance	$	448		$	1,454		$	290		$	3,705	$	110		$	671	$	1,010		$	7,688
Charge-offs					(131	)		(255	)		—		—			—		—			(386	)
Recoveries					4			106			2		—			2		—			114
Provision		(316	)		286			168			517		(65	)		18		(608	)		-
Ending balance	$	132		$	1,613		$	309		$	4,224	$	45		$	691	$	402		$	7,416

Individually evaluated for impairment	$	1		$	52		$	1		$	7	$	—		$	154	$	—		$	215

Collectively evaluated for impairment	$	131		$	1,561		$	308		$	4,217	$	45		$	537	$	402		$	7,201

Loans
June 30, 2022
Individually evaluated for impairment	$	320		$	159		$	7		$	149	$	—		$	2,052				$	2,687
Collectively evaluated for impairment		58,743			204,149			38,359			555,787		17,950			188,257					1,063,245
Acquired with deteriorated credit quality		—			4,549			10			9,227		—			1,671					15,457
Ending balance	$	59,063		$	208,857		$	38,376		$	565,163	$	17,950		$	191,980				$	1,081,389

			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
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
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2022		2021		2022		2021		2022		2021
Pass	$	58,429	$	61,864	$	206,399	$	201,202	$	559,653	$	519,537
Special Mention		313		339		1,342		300		739		778
Substandard		321		2,616		1,116		1,266		4,771		5,569
Doubtful		-		-		-		256		-		-
	$	59,063	$	64,819	$	208,857	$	203,024	$	565,163	$	525,884

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,
	2022		2021		2022		2021		2022		2021
Performing	$	38,368	$	35,174	$	17,950	$	19,066	$	191,152	$	168,031
Nonperforming		-		-		-		-		-		-
Nonaccrual		8		-		-		-		828		850
	$	38,376	$	35,174	$	17,950	$	19,066	$	191,980	$	168,881

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, 2022 and June 30, 2021.

	Three Months Ended June 30, 2022						Six Months Ended June 30, 2022
			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	$	258	$	258
Commercial and industrial		1		19		19		1		19		19
Total		1	$	19	$	19		2	$	277	$	277

	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

There were no TDRs as of June 30, 2022 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, 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 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, 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

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
June 30, 2022
With no related allowance recorded
Agricultural	$	314	$	428	$	-
Commercial and industrial		-		-		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		-		-		-
Residential real estate		439		469		-
Subtotal		753		897		-
With an allowance recorded
Agricultural		6		7		1
Commercial and industrial		159		190		52
Consumer		7		8		1
Construction real estate		149		149		-
Commercial real estate		-		-		7
Residential real estate		1,613		1,644		154
Subtotal		1,934		1,998		215
Total
Agricultural		320		435		1
Commercial and industrial		159		190		52
Consumer		7		8		1
Construction real estate		149		149		-
Commercial real estate		-		-		7
Residential real estate		2,052		2,113		154
Total	$	2,687	$	2,895	$	215

			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 and six months ended June 30, 2022 and June 30, 2021:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended June 30, 2022
With no related allowance recorded
Agricultural	$	314	$	-
Commercial and industrial		46		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		-		-
Residential real estate		220		-
Subtotal		580		-
With an allowance recorded
Agricultural		1,117		-
Commercial and industrial		211		1
Consumer		20		-
Construction real estate		-		-
Commercial real estate		153		2
Residential real estate		1,733		12
Subtotal		3,234		15
Total
Agricultural		1,431		-
Commercial and industrial		257		1
Consumer		20		-
Construction real estate		-		-
Commercial real estate		153		2
Residential real estate		1,953		12
Total	$	3,814	$	15

	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
Six Months Ended June 30, 2022
With no related allowance recorded
Agricultural	$	314	$	-
Commercial and industrial		31		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		31		-
Residential real estate		201		-
Subtotal		577		-
With an allowance recorded
Agricultural		1,512		-
Commercial and industrial		254		2
Consumer		18		-
Construction real estate		-		-
Commercial real estate		162		5
Residential real estate		1,831		29
Subtotal		3,777		36
Total
Agricultural		1,826		-
Commercial and industrial		285		2
Consumer		18		-
Construction real estate		-		-
Commercial real estate		193		5
Residential real estate		2,032		29
Total	$	4,354	$	36

	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

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, 2022
Agricultural	$	-	$	-	$	-	$	-	$	59,063	$	59,063	$	-
Commercial and industrial		142		-		93		235		208,622		208,857		-
Consumer		-		-		-		-		38,376		38,376		-
Commercial real estate		-		-		-		-		565,163		565,163		-
Construction real estate		-		-		-		-		17,950		17,950		-
Residential real estate		29		197		580		806		191,174		191,980		-
	$	171	$	197	$	673	$	1,041	$	1,080,348	$	1,081,389	$	-

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)	June 30,		December 31,
	2022		2021
Agricultural	$	314	$	313
Commercial and industrial		92		285
Consumer		8		-
Commercial real estate		-		279
Residential real estate		828		850
	$	1,242	$	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 six months ended June 30, 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	)		(348	)		(595	)
Transfer from non-accretable to accretable yield		400			-			400
Balance January 1, 2022		288			1,176			1,464
Transfer from non-accretable to accretable yield		1,150			-			1,150
Accretion January 1, 2022 through June 30, 2022		(222	)		34			(188	)
Balance, June 30, 2022	$	1,216		$	1,210		$	2,426

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 six months ended June 30, 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 June 30, 2022		(578	)		(197	)		(775	)
Balance, June 30, 2022	$	818		$	-		$	818