Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2023

NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans by type as a percentage of the portfolio were as follows:


	March 31, 2023					December 31, 2022
(Dollars in thousands)	Balance		%			Balance		%			Percent Increase (Decrease)
Agricultural	$	55,995		4.63	%		64,159		5.39	%		(12.72	)	%
Commercial and Industrial		217,063		17.93	%		210,210		17.67	%		3.26		%
Commercial Real Estate		648,202		53.54	%		630,953		53.03	%		2.73		%
Consumer		38,891		3.21	%		39,808		3.35	%		(2.30	)	%
Construction Real Estate		13,939		1.15	%		14,736		1.24	%		(5.41	)	%
Residential Real Estate		236,493		19.54	%		229,916		19.32	%		2.86		%
Gross Loans	$	1,210,583				$	1,189,782

Allowance for credit losses		15,065		1.24	%		7,619		0.64	%

Net loans	$	1,195,518				$	1,182,163

Activity in the allowance for credit 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 Credit Losses Three Months Ended March 31, 2023
Beginning balance	$	144		$	1,361	$	310		$	4,822		$	63		$	906	$	13		$	7,619
Cumulative effect of change in accounting principle		14			1,587		541			3,006			20			2,010		(13	)		7,165
Charge-offs		—			—		(140	)		—			—			—		—			(140	)
Recoveries		—			27		69			13			—			3		—			112
Provision		(23	)		45		133			(4	)		(10	)		168		—			309
Ending balance	$	135		$	3,020	$	913		$	7,837		$	73		$	3,087	$	—		$	15,065

Individually evaluated for credit loss	$	1		$	7	$	1		$	1		$	—		$	42	$	—		$	52

Collectively evaluated for credit loss	$	134		$	3,013	$	912		$	7,836		$	73		$	3,045	$	—		$	15,013

Loans
March 31, 2023
Individually evaluated for credit loss	$	18		$	180	$	27		$	32		$	—		$	1,894				$	2,151
Collectively evaluated for credit loss		55,977			216,883		38,864			648,170			13,939			234,599					1,208,432
Ending balance	$	55,995		$	217,063	$	38,891		$	648,202		$	13,939		$	236,493				$	1,210,583


				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
December 31, 2022
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

The provision for credit losses on loans was $309,000 in the first quarter of 2023, compared to $0 in the same period in the prior year. Provision expense was deemed necessary to reserve for core loan growth of $20.8 million in the first quarter of 2023. There was very little change to forecasted economic conditions and no changes to qualitative factors from the CECL implementation date of January 1, 2023 to March 31, 2023.

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 asset 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.

The following table reflects the amortized cost basis of loans as of March 31, 2023 based on year of origination (dollars in thousands):


Commercial:	2023		2022		2021		2020		2019		Prior		Term Loans Total		Revolving Loans		Grand Total
Agricultural
Pass	$	19	$	19,463	$	3,285	$	1,905	$	7,853	$	18,052	$	50,577	$	5,149	$	55,726
Special mention		-		-		-		-		184		85		269		-		269
Substandard		-		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	19	$	19,463	$	3,285	$	1,905	$	8,037	$	18,137	$	50,846	$	5,149	$	55,995
Current year-to-date gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial and Industrial
Pass	$	9,644	$	49,508	$	31,241	$	14,120	$	16,186	$	16,174	$	136,873	$	79,836	$	216,709
Special mention		-		-		38		161		110		38		347		-		347
Substandard		-		-		-		-		-		7		7		-		7
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	9,644	$	49,508	$	31,279	$	14,281	$	16,296	$	16,219	$	137,227	$	79,836	$	217,063
Current year-to-date gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial Real Estate
Pass	$	20,489	$	136,340	$	129,054	$	85,247	$	49,365	$	158,159	$	578,654	$	64,573	$	643,227
Special mention		-		-		-		-		-		761		761		-		761
Substandard		-		-		-		-		-		4,214		4,214		-		4,214
Doubtful		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-
Total	$	20,489	$	136,340	$	129,054	$	85,247	$	49,365	$	163,134	$	583,629	$	64,573	$	648,202


Retail:	2023		2022		2021		2020		2019		Prior		Term Loans Total		Revolving Loans		Grand Total
Consumer
Performing	$	2,786	$	17,480	$	9,478	$	4,431	$	2,094	$	2,034	$	38,303	$	588	$	38,891
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		-		-		-		-		-		-		-
Total	$	2,786	$	17,480	$	9,478	$	4,431	$	2,094	$	2,034	$	38,303	$	588	$	38,891
Current year-to-date gross write-offs	$	-	$	12	$	7	$	1	$	-	$	-	$	20	$	-	$	20

Construction real estate
Performing	$	-	$	1,599	$	1,001	$	-	$	-	$	-	$	2,600	$	11,339	$	13,939
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		-		-		-		-		-		-		-		-
Total	$	-	$	1,599	$	1,001	$	-	$	-	$	-	$	2,600	$	11,339	$	13,939
Current year-to-date gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential real estate
Performing	$	9,793	$	70,595	$	30,957	$	18,271	$	14,386	$	46,875	$	190,877	$	44,020	$	234,897
Nonperforming		-		-		-		-		-		-		-		-		-
Nonaccrual		-		420		214		-		-		885		1,519		77		1,596
Total	$	9,793	$	71,015	$	31,171	$	18,271	$	14,386	$	47,760	$	192,396	$	44,097	$	236,493

Corporate Credit Exposure - Credit risk profile by credit worthiness category


(Dollars in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate
	December 31,		December 31,		December 31,
	2022		2022		2022
Pass	$	63,867	$	209,700	$	624,555
Special Mention		289		400		2,048
Substandard		3		110		4,350
Doubtful		—		-		—
Loss		-		-		-
	$	64,159	$	210,210	$	630,953

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,
	2022		2022		2022
Performing	$	39,808	$	14,736	$	228,653
Nonperforming		—		—		—
Nonaccrual		—		—		1,263
	$	39,808	$	14,736	$	229,916

The following table provides information on loans that were considered troubled loan modification ("TLMs") that were modified during the three months ended March 31, 2023


	Three Months Ended March 31, 2023

	Term extension
			% of total
			class of
(Dollars in thousands)	Amortized		financing
	Cost basis		receivable
Residential real estate	$	129		0	%
Total		129


	Three Months Ended March 31, 2023
	Term extension
Residential real estate	Provided twelve month payment plan to catch up past due amount through our standard program.


	Three Months Ended March 31, 2023
(Dollars in thousands)	Term extension

Residential real estate	$	129
Total	$	129


	Three Months Ended March 31, 2023
(Dollars in thousands)	Current		30-89 days		Greater than 90 days		Total

Residential real estate	$	129		—		—		—
Total	$	129	$	-	$	-	$	-

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.


	Three Months Ended March 31, 2022
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded
	Loans		Investment		Investment
Agricultural		1	$	258	$	258
Total		1	$	258	$	258

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 months ended March 31, 2022, which loans had been modified and classified as TDRs during the year prior to the default.

Nonaccrual loans by loan category as of March 31, 2023 were as follows:


(Dollars in thousands)	Nonaccrual loans with no ACL		Total nonaccrual loans		Interest income recognized during the period on nonaccrual loans
Residential real estate	$	1,432	$	1,596	$	—
Total nonaccrual loans	$	1,432	$	1,596	$	—

Nonaccrual loans by loan category as of December 31, 2022 were as follows:


(Dollars in thousands)	Total nonaccrual loans
Residential real estate	$	1,263
	$	1,263

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


					Interest
(Dollars in thousands)	Recorded		Related		Income
	Investment		Allowance		Recognized
December 31, 2022
With no related allowance recorded
Agricultural	$	—	$	—	$	—
Commercial and industrial		—		—		—
Consumer		—		—		—
Construction real estate		—		—		—
Commercial real estate		—		—		—
Residential real estate		550		—		1
Subtotal		550		—		1
With an allowance recorded
Agricultural		23		2		2
Commercial and industrial		177		14		13
Consumer		7		1		1
Construction real estate		—		—		—
Commercial real estate		165		5		13
Residential real estate		1,924		131		93
Subtotal		2,296		153		122
Total
Agricultural		23		2		2
Commercial and industrial		177		14		13
Consumer		7		1		1
Construction real estate		—		—		—
Commercial real estate		165		5		13
Residential real estate		2,474		131		94
Total	$	2,846	$	153	$	123


					Interest
(Dollars in thousands)	Recorded		Related		Income
	Investment		Allowance		Recognized
March 31, 2022
With no related allowance recorded
Agricultural	$	314	$	—	$	—
Commercial and industrial		92		—		1
Consumer		—		—		—
Construction real estate		—		—		—
Commercial real estate		—		—		—
Residential real estate		-		—		—
Subtotal		406		—		1
With an allowance recorded
Agricultural		2,228		253		42
Commercial and industrial		264		116		2
Consumer		32		3		—
Construction real estate		—		—		—
Commercial real estate		157		8		3
Residential real estate		1,853		167		17
Subtotal		4,534		547		64
Total
Agricultural		2,542		253		42
Commercial and industrial		356		116		3
Consumer		32		3		—
Construction real estate		—		—		—
Commercial real estate		157		8		3
Residential real estate		1,853		167		17
Total	$	4,940	$	547	$	65

An aging analysis of loans by loan category follows:


					Loans								Loans
	Loans		Loans		Past Due								90 Days
	Past Due		Past Due		Greater								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, 2023
Agricultural	$	—	$	—	$	—	$	—	$	55,995	$	55,995	$	—
Commercial and industrial		174		—		—		174		216,889		217,063		—
Consumer		3		27		—		30		38,861		38,891		—
Commercial real estate		—		—		—		—		648,202		648,202		—
Construction real estate		267		—		—		267		13,672		13,939		—
Residential real estate		2,416		290		153		2,859		233,634		236,493
	$	2,860	$	317	$	153	$	3,330	$	1,207,253	$	1,210,583	$	—


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	$	—

(1) Includes nonaccrual loans.

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, 2022 and the three months ended March 31, 2023 (dollars in thousands):


(Dollars in thousands)	Purchased with credit deterioration			Purchased without credit deterioration			Acquired
							Total
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 January 1, 2023		1,927			1,078			3,005
Transfer from non-accretable to accretable yield								-
Accretion January 1, 2023 through March 31, 2023		(133	)		(135	)		(268	)
Balance, March 31, 2023	$	1,794		$	943		$	2,737

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, 2022 and the three months ended March 31, 2023 (dollars in thousands):


	Purchased with credit deterioration			Purchased without credit deterioration			Acquired
							Total
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 January 1, 2023		615			-			615
Transfer from non-accretable to accretable yield		622						622
Accretion January 1, 2023 through March 31, 2023		(203	)					(203	)
Balance, March 31, 2023	$	1,034		$	-		$	1,034