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Note 3 - Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2022

Note 3 – Loans and Allowance for Loan Losses

The Bank’s loan portfolio as of December 31 was as follows:

(Dollars in thousands)
	2022			2021
Agricultural	$	64,159		$	64,819
Commercial and industrial		210,210			203,024
Consumer		39,808			35,174
Real estate - commercial		630,953			525,884
Real estate - construction		14,736			19,066
Real estate - residential		229,916			168,881
Loans, gross	$	1,189,782		$	1,016,848
Allowance for Loan Losses		(7,619	)		(7,688	)
Loans, net	$	1,182,163		$	1,009,160

ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee.

Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 6, 7, or 8. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the applicable Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio.

The table below details the outstanding balances of the County Bank Corp. acquired 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 loans for the year ended December 31, 2022:

(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 December 31, 2022		(553	)		(98	)		(651	)
Balance, December 31, 2022	$	1,927		$	1,078		$	3,005

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 loans for the year ended December 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		1,086			-			1,086
Accretion January 1, 2022 through December 31, 2022		(993	)		(197	)		(1,190	)
Balance, December 31, 2022	$	615		$	-		$	615

Activity in the allowance for loan losses and balances in the loan portfolio was 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 Year Ended December 31, 2022
Beginning balance	$	448		$	1,454		$	290		$	3,705	$	110		$	671	$	1,010		$	7,688
Charge-offs		—			(177	)		(496	)		—		—			—		—			(673	)
Recoveries		—			143			206			3		—			2		—			354
Provision		(304	)		(59	)		310			1,114		(47	)		233		(997	)		250
Ending balance	$	144		$	1,361		$	310		$	4,822	$	63		$	906	$	13		$	7,619

Individually evaluated for impairment	$	2		$	14		$	1		$	5	$	—		$	131	$	—		$	153

Collectively evaluated for impairment	$	142		$	1,347		$	309		$	4,817	$	63		$	775	$	13		$	7,466

Loans
December 31, 2022
Individually evaluated for impairment	$	23		$	177		$	7		$	165	$	—		$	2,474				$	2,846
Collectively evaluated for impairment		64,136			206,074			39,793			622,131		14,736			225,792					1,172,662
Acquired with deteriorated credit quality		—			3,959			8			8,657		—			1,650					14,274
Ending balance	$	64,159		$	210,210		$	39,808		$	630,953	$	14,736		$	229,916				$	1,189,782

			Commercial
(Dollars in thousands)			and						Commercial			Construction		Residential
	Agricultural		Industrial			Consumer			Real Estate			Real Estate		Real Estate			Unallocated		Total
Allowance for Loan Losses Year Ended December 31, 2021
Beginning balance	$	257	$	1,327		$	317		$	4,178		$	97	$	1,300		$	117	$	7,593
Charge-offs		—		(195	)		(370	)		(111	)		—		—			—		(676	)
Recoveries		—		86			214			48			—		7			—		355
Provision		191		236			129			(410	)		13		(636	)		893		416
Ending balance	$	448	$	1,454		$	290		$	3,705		$	110	$	671		$	1,010	$	7,688

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

				Commercial
(Dollars in thousands)				and						Commercial			Construction		Residential
	Agricultural			Industrial			Consumer			Real Estate			Real Estate		Real Estate			Unallocated			Total
Allowance for Loan Losses Year Ended December 31, 2020
Beginning balance	$	471		$	655		$	270		$	1,663		$	76	$	640		$	282		$	4,057
Charge-offs		(15	)		(148	)		(329	)		(254	)		-		(8	)		-			(754	)
Recoveries		-			57			204			10			-		19			-			290
Provision		(199	)		763			172			2,759			21		649			(165	)		4,000
Ending balance	$	257		$	1,327		$	317		$	4,178		$	97	$	1,300		$	117		$	7,593

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 the Bank’s credit exposure as of December 31 was as follows:

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

(Dollars in thousands)	Agricultural				Commercial and Industrial				Commercial Real Estate
	December 31,		December 31,		December 31,		December 31,		December 31,		December 31,
	2022		2021		2022		2021		2022		2021
Pass	$	63,867	$	61,864	$	209,700	$	201,202	$	624,555	$	519,537
Special Mention		289		339		400		300		2,048		778
Substandard		3		2,616		110		1,266		4,350		5,569
Doubtful		-		-		-		256		-		-
Loss		-		-		-		-		-		-
	$	64,159	$	64,819	$	210,210	$	203,024	$	630,953	$	525,884

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

(Dollars in thousands)	Consumer				Construction Real Estate				Residential Real Estate
	December 31,		December 31,		December 31,		December 31,		December 31,		December 31,
	2022		2021		2022		2021		2022		2021
Performing	$	39,808	$	35,174	$	14,736	$	19,066	$	228,653	$	168,031
Nonperforming		-		-		-		-		-		-
Nonaccrual		-		-		-		-		1,263		850
	$	39,808	$	35,174	$	14,736	$	19,066	$	229,916	$	168,881

Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2022 and 2021, loans in the process of foreclosure totaled $1.1 million and $813,000, respectively.

Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring.

The following schedule provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the years ended December 31, 2022 and 2021:

	Year Ended December 31, 2022						Year Ended December 31, 2021						Year Ended December 31, 2020
			Pre-		Post-				Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding				Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Loans		Investment		Investment		Loans		Investment		Investment		Loans		Investment		Investment
Agricultural		-	$	-	$	-		5	$	1,803	$	1,803		5	$	1,803	$	1,803
Commercial and Industrial		1		15		15		4		270		270		4		270		270
Commercial Real Estate		-		-		-		2		619		619		2		619		619
Total		1	$	15	$	15		11	$	2,692	$	2,692		11	$	2,692	$	2,692

There were no TDRs as of December 31, 2022 where the borrower was past due with respect to principal and interest for 30 days or more during the year ended December 31, 2022. The following schedule provides information on TDRs as of December 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the year ended December 31, 2021 that had been modified during the year prior to the default:

	Year Ended				Year Ended				Year Ended
	December 31, 2022				December 31, 2021				December 31, 2020
(Dollars in thousands)	Number		Recorded		Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment		of Loans		Investment
Commercial Real Estate		-		-		1		185		-		-
Total		-	$	-		1	$	185		-	$	-

Impaired loans by loan category as of December 31 were as follows:

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2022
With no related allowance recorded
Agricultural	$	-	$	-	$	-	$	250	$	-
Commercial and industrial		-		-		-		18		-
Consumer		-		-		-		-		-
Construction real estate		-		-		-		-		-
Commercial real estate		-		-		-		19		-
Residential real estate		550		595		-		231		1
Subtotal		550		595		-		518		1
With an allowance recorded
Agricultural		23		27		2		913		2
Commercial and industrial		177		177		14		209		13
Consumer		7		7		1		14		1
Construction real estate		-		-		-		-		-
Commercial real estate		165		165		5		158		13
Residential real estate		1,924		1,954		131		1,897		93
Subtotal		2,296		2,330		153		3,191		122
Total
Agricultural		23		27		2		1,163		2
Commercial and industrial		177		177		14		227		13
Consumer		7		7		1		14		1
Construction real estate		-		-		-		-		-
Commercial real estate		165		165		5		177		13
Residential real estate		2,474		2,549		131		2,128		94
Total	$	2,846	$	2,925	$	153	$	3,709	$	123

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2021
With no related allowance recorded
Agricultural	$	314	$	428	$	-	$	598	$	-
Commercial and industrial		-		-		-		596		-
Consumer		-		-		-		-		-
Construction real estate		-		-		-		16		-
Commercial real estate		94		94		-		1,117		5
Residential real estate		164		172		-		228		-
Subtotal		572		694		-		2,555		5
With an allowance recorded
Agricultural		2,302		2,302		251		1,873		139
Commercial and industrial		339		363		95		226		5
Consumer		14		15		2		4		-
Construction real estate		-		-		-		-		-
Commercial real estate		179		179		9		456		10
Residential real estate		2,027		2,084		146		2,177		64
Subtotal		4,861		4,943		503		4,736		218
Total
Agricultural		2,616		2,730		251		2,471		139
Commercial and industrial		339		363		95		822		5
Consumer		14		15		2		4		-
Construction real estate		-		-		-		16		-
Commercial real estate		273		273		9		1,573		15
Residential real estate		2,191		2,256		146		2,405		64
Total	$	5,433	$	5,637	$	503	$	7,291	$	223

			Unpaid				Average		Interest
(Dollars in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
December 31, 2020
With no related allowance recorded
Agricultural	$	348	$	434	$	-	$	329	$	-
Commercial and industrial		1,516		1,629		-		464		2
Consumer		-		-		-		1		-
Construction real estate		80		80		-		16		-
Commercial real estate		1,852		2,664		-		1,495		14
Residential real estate		162		162		-		99		3
Subtotal		3,958		4,969		-		2,404		19
With an allowance recorded
Agricultural		-		-		-		152		-
Commercial and industrial		147		147		19		111		12
Consumer		8		8		1		16		-
Construction real estate		-		-		-		-		-
Commercial real estate		1,180		1,180		157		897		35
Residential real estate		2,558		2,651		254		2,330		87
Subtotal		3,893		3,986		431		3,506		134
Total
Agricultural		348		434		-		481		-
Commercial and industrial		1,663		1,776		19		575		14
Consumer		8		8		1		17		-
Construction real estate		80		80		-		16		-
Commercial real estate		3,032		3,844		157		2,392		49
Residential real estate		2,720		2,813		254		2,429		90
Total	$	7,851	$	8,955	$	431	$	5,910	$	153

An aging analysis of loans by loan category as of December 31 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
December 31, 2022
Agricultural	$	-	$	-	$	-	$	-	$	64,159	$	64,159	$	-
Commercial and industrial		-		171		-		171		210,039		210,210		-
Consumer		39		7		-		46		39,762		39,808		-
Commercial real estate		-		-		-		-		630,953		630,953		-
Construction real estate		-		-		-		-		14,736		14,736		-
Residential real estate		682		-		842		1,524		228,392		229,916		-
	$	721	$	178	$	842	$	1,741	$	1,188,041	$	1,189,782	$	-

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 as of December 31 as follows:

(Dollars in thousands)
	2022		2021
Agricultural	$	-	$	313
Commercial and industrial		-		285
Consumer		-		-
Commercial real estate		-		279
Construction real estate		-		-
Residential real estate		1,263		850
	$	1,263	$	1,727