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Note 3 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 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 September 30, 2022
Beginning balance	$	132		$	1,613		$	309		$	4,224	$	45		$	691	$	402		$	7,416
Charge-offs		—			(47	)		(128	)		-		—			—		—			(175	)
Recoveries		—			59			56			1		—			—		—			116
Provision		8			(252	)		66			384		14			178		(298	)		100
Ending balance	$	140		$	1,373		$	303		$	4,609	$	59		$	869	$	104		$	7,457

Allowance for Loan Losses Nine Months Ended September 30, 2022
Beginning balance	$	448		$	1,454		$	290		$	3,705	$	110		$	671	$	1,010		$	7,688
Charge-offs		—			(177	)		(383	)		—		—			—		—			(560	)
Recoveries		—			62			162			3		—			2		—			229
Provision		(308	)		34			234			901		(51	)		196		(906	)		100
Ending balance	$	140		$	1,373		$	303		$	4,609	$	59		$	869	$	104		$	7,457

Individually evaluated for impairment	$	1		$	6		$	1		$	6	$	—		$	143	$	—		$	157

Collectively evaluated for impairment	$	139		$	1,367		$	302		$	4,603	$	59		$	726	$	104		$	7,300

Loans
September 30, 2022
Individually evaluated for impairment	$	312		$	108		$	7		$	140	$	—		$	2,070	$	—		$	2,637
Collectively evaluated for impairment		63,035			204,686			38,340			584,274		14,299			210,867		—			1,115,501
Acquired with deteriorated credit quality		—			3,796			9			8,781		—			1,677		—			14,263
Ending balance	$	63,347		$	208,590		$	38,356		$	593,195	$	14,299		$	214,614				$	1,132,401

			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
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
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2022		2021		2022		2021		2022		2021
Pass	$	62,733	$	61,864	$	208,087	$	201,202	$	588,066	$	519,537
Special Mention		302		339		344		300		729		778
Substandard		312		2,616		159		1,266		4,400		5,569
Doubtful		-		-		-		256		-		-
	$	63,347	$	64,819	$	208,590	$	203,024	$	593,195	$	525,884

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,
	2022		2021		2022		2021		2022		2021
Performing	$	38,349	$	35,174	$	14,299	$	19,066	$	213,777	$	168,031
Nonperforming		-		-		-		-		-		-
Nonaccrual		7		-		-		-		837		850
	$	38,356	$	35,174	$	14,299	$	19,066	$	214,614	$	168,881

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, 2022 and September 30, 2021.

	Three Months Ended September 30, 2022						Nine Months Ended September 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	$	253	$	253
Commercial and industrial		-		-		-		1		18		18
Total		-	$	-	$	-		2	$	271	$	271

	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

There were no TDRs 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, 2022, or September 30, 2021, which loans had been modified and classified as TDRs during the year prior to the default.

Impaired loans by loan category follow:

			Unpaid
(Dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
September 30, 2022
With no related allowance recorded
Agricultural	$	307	$	428	$	-
Commercial and industrial		-		-		-
Consumer		-		-		-
Construction real estate		-		-		-
Commercial real estate		-		-		-
Residential real estate		-		-		-
Subtotal		307		428		-
With an allowance recorded
Agricultural		5		5		1
Commercial and industrial		108		185		6
Consumer		7		7		1
Construction real estate		-		-		-
Commercial real estate		140		140		6
Residential real estate		2,070		2,149		143
Subtotal		2,330		2,486		157
Total
Agricultural		312		433		1
Commercial and industrial		108		185		6
Consumer		7		7		1
Construction real estate		-		-		-
Commercial real estate		140		140		6
Residential real estate		2,070		2,149		143
Total	$	2,637	$	2,914	$	157

			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 nine months ended September 30, 2022 and September 30, 2021:

	Average		Interest
(Dollars in thousands)	Recorded		Income
	Investment		Recognized
Three Months Ended September 30, 2022
With no related allowance recorded
Agricultural	$	310	$	-
Commercial and industrial		-		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		-		-
Residential real estate		220		-
Subtotal		530		-
With an allowance recorded
Agricultural		6		-
Commercial and industrial		134		1
Consumer		7		-
Construction real estate		-		-
Commercial real estate		145		2
Residential real estate		1,842		16
Subtotal		2,134		19
Total
Agricultural		316		-
Commercial and industrial		134		1
Consumer		7		-
Construction real estate		-		-
Commercial real estate		145		2
Residential real estate		2,062		16
Total	$	2,664	$	19

	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
Nine Months Ended September 30, 2022
With no related allowance recorded
Agricultural	$	312	$	-
Commercial and industrial		23		-
Consumer		-		-
Construction real estate		-		-
Commercial real estate		23		-
Residential real estate		151		-
Subtotal		509		-
With an allowance recorded
Agricultural		1,136		-
Commercial and industrial		217		3
Consumer		15		-
Construction real estate		-		-
Commercial real estate		156		7
Residential real estate		1,891		49
Subtotal		3,415		59
Total
Agricultural		1,448		-
Commercial and industrial		240		3
Consumer		15		-
Construction real estate		-		-
Commercial real estate		179		7
Residential real estate		2,042		49
Total	$	3,924	$	59

	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

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, 2022
Agricultural	$	-	$	-	$	-	$	-	$	63,347	$	63,347	$	-
Commercial and industrial		1,065		-		46		1,111		207,479		208,590		-
Consumer		17		-		-		17		38,339		38,356		-
Commercial real estate		-		-		-		-		593,195		593,195		-
Construction real estate		-		-		-		-		14,299		14,299		-
Residential real estate		48		615		31		694		213,920		214,614
	$	1,130	$	615	$	77	$	1,822	$	1,130,579	$	1,132,401	$	-

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)	September 30,		December 31,
	2022		2021
Agricultural	$	307	$	313
Commercial and industrial		46		285
Consumer		7		-
Commercial real estate		-		279
Residential real estate		837		850
	$	1,197	$	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 nine months ended September 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		2,192			-			2,192
Accretion January 1, 2022 through September 30, 2022		(396	)		(32	)		(428	)
Balance, September 30, 2022	$	2,084		$	1,144		$	3,228

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 nine months ended September 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		1,086			-			1,086
Accretion January 1, 2022 through September 30, 2022		(837	)		(197	)		(1,034	)
Balance, September 30, 2022	$	771		$	-		$	771