UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A10-K
(Amendment No. 1)
☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
For the fiscal year ended December 31 | |||
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
For the transition period from__________________ to __________________ |
Commission File Number: 000-19202
ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
Michigan | 38-2659066 |
109 East Division Street, Sparta, Michigan | 49345 |
(616)(616) 887-7366
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common stock | COFS | NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |
Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020,2023, the aggregate market value of common stock held by non-affiliates of the Registrant was $198.2$159.3 million. This amount is based on an average bid price of $29.56$23.00 per share for the Registrant's stock as of such date.
As of February 28, 2021,29, 2024, the Registrant had 7,801,0847,552,919 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 27, 202129, 2024, are incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
ChoiceOne Financial Services, Inc. (the "Company") is filing this Amendment No. 1 on Form 10-K/A (this "Amendment") to amend its Annual Report on
Form 10-K for the fiscal year ended December 31, 2020, as previously filed with the Securities and Exchange Commission (the "Original 10-K"), solely to make certain technical corrections to the Report of Independent Registered Public Accounting Firm included in Item 8 of the Original 10-K and to correct certain omitted dates in Item 13 and Item 14 of Part III of the Original 10-K.
The Company is filing an updated Consent of Independent Registered Public Accounting Firm as Exhibit 23 to this Form 10-K/A. In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Company is refiling the certifications required pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, as Exhibits 31.1, 31.2, and 32 to this Form 10-K/A.
Except as described above, no changes have been made to the Original Form 10-K and this Amendment does not otherwise update or modify any disclosures made in the Original Form 10-K, change any previously-reported financial results, or reflect any events occurring after the date of the Original Form 10-K.
ANNUAL REPORT
PART II
Contents
Page | ||
PART 1 | ||
Item 1: | 3 | |
Item 1A: | 10 | |
Item 1B: | 16 | |
Item 1C: | ||
Item 2: | 17 | |
Item 3: | 17 | |
Item 4: | 17 | |
PART II | ||
Item 5: | 18 | |
Item 6: | 18 | |
Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
Item 7A: | 37 | |
Item 8: | 38 | |
Item 9: | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 83 |
Item 9A: | 83 | |
Item 9B: | 83 | |
Item 9C: | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 83 |
PART III | ||
Item 10: | 84 | |
Item 11: | 84 | |
Item 12: | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 84 |
Item 13: | Certain Relationships and Related Transactions, and Director Independence | 85 |
Item 14: | 85 | |
PART IV | ||
Item 15: | 86 | |
88 |
Report of Independent Registered Public Accounting Firm
1
FORWARD-LOOKING STATEMENTS
ToThis report and the Stockholdersdocuments incorporated into this report contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and Board of Directors ofprojections about the financial services industry, the economy, and ChoiceOne Financial Services, Inc. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” “look forward,” “continue,” “future,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for credit losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne Financial Services, Inc. undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of this report. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
Opinion on the Consolidated Financial Statements2
PART I
Item 1. Business
We have audited the accompanying consolidated balance sheets of General
ChoiceOne Financial Services, Inc. (the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company was incorporated on February 24, 1986, as a Michigan corporation. The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank, which became a wholly owned subsidiary of the Company on April 6, 1987. Effective November 1, 2006, Valley Ridge Financial Corp., a one-bank holding company for Valley Ridge Bank (“VRB”), merged with and into the Company. In December 2006, VRB was consolidated into ChoiceOne Bank. Effective October 1, 2019, County Bank Corp. ("County"), a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company. Lakestone was consolidated into ChoiceOne Bank in May 2020. On July 1, 2020, Community Shores Bank Corporation ("Community Shores"), a one bank holding company for Community Shores Bank, merged with and into the Company. Community Shores Bank was consolidated into ChoiceOne Bank in October 2020. ChoiceOne Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an independent insurance agency headquartered in Sparta, Michigan (the "Insurance Agency"). On July 18, 2023, the Company organized 109 Technologies, LLC as a wholly owned subsidiary of the Company with the intent of selling a fintech product marketed to other banks and bank holding companies.
The Company's business is primarily concentrated in a single industry segment, banking. ChoiceOne Bank (referred to as the “Bank”) is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to commercial enterprises and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory, and real estate. The Bank’s consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property. In addition, the Bank offers trust and wealth management services. No material part of the business of the Company or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company.
The Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Bank's respective offices are located. The Bank serves these markets through 31 full-service offices and five loan production offices. The Company and the Bank have no foreign assets or income.
At December 31, 2023, the Company had consolidated total assets of $2.6 billion, net loans of $1.4 billion, total deposits of $2.1 billion and total shareholders' equity of $195.6 million. For the year ended December 31, 2023, the Company recognized consolidated net income of $21.3 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 60%, 59%, and 58% of total revenues in 2023, 2022, and 2021, respectively. Interest on securities accounted for 24%, 24%, and 19% of total revenues in 2023, 2022, and 2021, respectively. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes included in Item 8 of this report.
Competition
The Bank’s competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. There are a number of larger commercial banks within the Bank’s primary market areas. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Bank. Many of these competitors have substantially greater resources than the Bank. The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and the fees charged for services) and the convenience and quality of services rendered to customers.
Supervision and Regulation
Banks and bank holding companies are extensively regulated. The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company's activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to
3
acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support it.
The Bank is chartered under state law and is subject to regulation by the Michigan Department of Insurance and Financial Services (“DIFS”). State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements. The Bank is a member of the Federal Reserve System and is also subject to regulation by the Federal Reserve Board. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law. The Bank is a member of the Federal Home Loan Bank system, which provides certain advantages to the Bank, including favorable borrowing rates for certain funds.
The Company is a legal entity separate and distinct from the Bank. The Company's primary source of funds available to pay dividends to shareholders is dividends paid to it by the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Company. In addition, payment of dividends to the Company by the Bank is subject to various state and federal regulatory limitations.
The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all depository institutions. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions.
The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions. These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
The Company and the Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.
Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if DIFS deems the Bank's capital to be impaired, DIFS may require the Bank to restore its capital by a special assessment on the Company as the Bank's sole shareholder. If the Company fails to pay any assessment, the Company’s directors will be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital.
The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categories: “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution's capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include a common equity Tier I risk-based capital ratio, Tier 1 risk-based and total risk-based capital ratio measures and a leverage capital ratio measure. In addition, a capital conservation buffer is required. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately-capitalized, or undercapitalized institution as if the institution were in the next lower capital category.
Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.
Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. The monetary policy of the Federal Reserve Board may influence the growth and
4
distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks.
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments. The Company has elected to be a financial holding company.
In order for the Company to maintain financial holding company status, the Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If the Company or the Bank ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Bank. The Bank was categorized as "well-capitalized" and "well-managed" as of December 31, 20202023.
Bank holding companies may acquire banks and 2019,other bank holding companies located in any state in the relatedUnited States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.
Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.
Banks are subject to the provisions of the Community Reinvestment Act ("CRA"). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, a bank's federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than "satisfactory," a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial holding company and from acquiring any company engaged in such activities. The CRA rating of the Bank was "Satisfactory" as of its most recent examination.
Effects of Compliance With Environmental Regulations
The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Bank, or where compliance with these provisions will adversely affect a borrower's ability to comply with the terms of loan contracts.
5
Employees
As of February 29, 2024, the Company, on a consolidated statementsbasis, employed 389 employees, of income, comprehensive income, stockholders'which 324 were full-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.
Statistical Information
Additional statistical information describing the business of the Company appears on the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report. Average balances used in statistical information are calculated using daily averages, unless otherwise specified.
The Company did not hold investment securities from any one issuer at December 31, 2023, that were greater than 10% of the Company's shareholders' equity, exclusive of U.S. Government and cash flowsU.S. Government agency securities.
Presented below is the fair value of securities available for sale and amortized cost for held to maturity securities as of December 31, 2023, a schedule of maturities of securities as of December 31, 2023, and the weighted average yields of securities as of December 31, 2023. Callable securities in the money are presumed called and matured at the callable date.
| Available for Sale Securities maturing within: |
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value |
| |||||
| Less than |
|
| 1 Year - |
|
| 5 Years - |
|
| More than |
|
| at December 31, |
| |||||
(Dollars in thousands) | 1 Year |
|
| 5 Years |
|
| 10 Years |
|
| 10 Years |
|
| 2023 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Government and federal agency | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
U.S. Treasury notes and bonds |
| - |
|
|
| 63,692 |
|
|
| 16,502 |
|
|
| - |
|
|
| 80,194 |
|
State and municipal |
| 250 |
|
|
| 18,502 |
|
|
| 139,613 |
|
|
| 76,317 |
|
|
| 234,682 |
|
Corporate |
| - |
|
|
| - |
|
|
| 204 |
|
|
| - |
|
|
| 204 |
|
Asset-backed securities |
| - |
|
|
| 8,015 |
|
|
| 3,002 |
|
|
| - |
|
|
| 11,017 |
|
Total debt securities |
| 250 |
|
|
| 90,209 |
|
|
| 159,321 |
|
|
| 76,317 |
|
|
| 326,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Mortgage-backed securities |
| 19,941 |
|
|
| 58,858 |
|
|
| 91,029 |
|
|
| 18,673 |
|
|
| 188,501 |
|
Total Available for Sale | $ | 20,191 |
|
| $ | 149,067 |
|
| $ | 250,350 |
|
| $ | 94,990 |
|
| $ | 514,598 |
|
| Available for Sale weighted average yields: |
|
| |||||||||||||||||
| Less than |
|
| 1 Year - |
|
| 5 Years - |
|
| More than |
|
|
|
|
| |||||
| 1 Year |
|
| 5 Years |
|
| 10 Years |
|
| 10 Years |
|
| Total |
|
| |||||
U.S. Government and federal agency |
| - |
| % |
| - |
| % |
| - |
| % |
| - |
| % |
| - |
| % |
U.S. Treasury notes and bonds |
| - |
|
|
| 1.16 |
|
|
| 1.16 |
|
|
| - |
|
|
| 1.16 |
|
|
State and municipal |
| 3.60 |
|
|
| 2.87 |
|
|
| 2.46 |
|
|
| 2.50 |
|
|
| 2.51 |
|
|
Corporate |
| - |
|
|
| - |
|
|
| 3.75 |
|
|
| - |
|
|
| 3.75 |
|
|
Asset-backed securities |
| - |
|
|
| 5.95 |
|
|
| 6.09 |
|
|
| - |
|
|
| 5.99 |
|
|
Mortgage-backed securities |
| 3.62 |
|
|
| 3.09 |
|
|
| 3.36 |
|
|
| 1.67 |
|
|
| 3.14 |
|
|
Security yields are shown before the impact of interest rate swaps. ChoiceOne holds pay fixed, receive variable swaps with a notional value of $201.0 million which effect the interest earned on securities. Further details can be found in Note 8 - Derivatives and Hedging Activities.
6
| Held to Maturity Securities maturing within: |
|
|
|
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Amortized Cost |
| |||||
| Less than |
|
| 1 Year - |
|
| 5 Years - |
|
| More than |
|
| at December 31, |
| |||||
(Dollars in thousands) | 1 Year |
|
| 5 Years |
|
| 10 Years |
|
| 10 Years |
|
| 2023 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
U.S. Government and federal agency | $ | - |
|
| $ | 2,972 |
|
| $ | - |
|
| $ | - |
|
| $ | 2,972 |
|
U.S. Treasury notes and bonds |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
State and municipal |
| 1,039 |
|
|
| 9,407 |
|
|
| 104,631 |
|
|
| 81,021 |
|
|
| 196,098 |
|
Corporate |
| - |
|
|
| - |
|
|
| 20,013 |
|
|
| - |
|
|
| 20,013 |
|
Asset-backed securities |
| 547 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 547 |
|
Total debt securities |
| 1,586 |
|
|
| 12,379 |
|
|
| 124,644 |
|
|
| 81,021 |
|
|
| 219,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Mortgage-backed securities |
| 18,815 |
|
|
| 24,911 |
|
|
| 144,603 |
|
|
| - |
|
|
| 188,329 |
|
Total Held to Maturity | $ | 20,401 |
|
| $ | 37,290 |
|
| $ | 269,247 |
|
| $ | 81,021 |
|
| $ | 407,959 |
|
| Held to Maturity weighted average yields: |
|
| |||||||||||||||||
| Less than |
|
| 1 Year - |
|
| 5 Years - |
|
| More than |
|
|
|
|
| |||||
| 1 Year |
|
| 5 Years |
|
| 10 Years |
|
| 10 Years |
|
| Total |
|
| |||||
U.S. Government and federal agency |
| - |
| % |
| 1.61 |
| % |
| - |
| % |
| - |
| % |
| 1.61 |
| % |
U.S. Treasury notes and bonds |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
State and municipal |
| 1.59 |
|
|
| 1.93 |
|
|
| 2.10 |
|
|
| 2.44 |
|
|
| 2.23 |
|
|
Corporate |
| - |
|
|
| - |
|
|
| 4.01 |
|
|
| - |
|
|
| 4.01 |
|
|
Asset-backed securities |
| 1.10 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1.10 |
|
|
Mortgage-backed securities |
| 5.89 |
|
|
| 4.23 |
|
|
| 2.24 |
|
|
| - |
|
|
| 2.87 |
|
|
Weighted average yields are calculated based on the fair value of securities available for sale and amortized cost of securities held to maturity which are denoted in the table above. Weighted average yields for tax-exempt securities is computed on a fully tax-equivalent basis at an incremental tax rate of 21% for 2023.
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following schedule presents the maturities of loans as of December 31, 2023. Loans are also classified according to the sensitivity to changes in interest rates as of December 31, 2023.
(Dollars in thousands) | In one year |
|
| After one year |
|
| After five years |
|
| After fifteen |
|
|
|
| |||||
| or less |
|
| through five years |
|
| through fifteen years |
|
| years |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Agricultural | $ | 14,718 |
|
| $ | 18,282 |
|
| $ | 13,881 |
|
| $ | 2,329 |
|
| $ | 49,210 |
|
Commercial and industrial |
| 83,051 |
|
|
| 83,154 |
|
|
| 57,845 |
|
|
| 5,865 |
|
|
| 229,915 |
|
Commercial real estate |
| 52,171 |
|
|
| 479,395 |
|
|
| 247,733 |
|
|
| 7,622 |
|
|
| 786,921 |
|
Construction real estate |
| 19,272 |
|
|
| 1,112 |
|
|
| - |
|
|
| 552 |
|
|
| 20,936 |
|
Consumer |
| 1,354 |
|
|
| 20,538 |
|
|
| 12,472 |
|
|
| 2,177 |
|
|
| 36,541 |
|
Residential real estate |
| 1,997 |
|
|
| 11,898 |
|
|
| 111,325 |
|
|
| 142,510 |
|
|
| 267,730 |
|
Loans to other financial institutions |
| 19,400 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,400 |
|
Totals | $ | 191,963 |
|
| $ | 614,379 |
|
| $ | 443,256 |
|
| $ | 161,055 |
|
| $ | 1,410,653 |
|
(Dollars in thousands) | Fixed or |
|
| Floating or |
|
|
|
| |||
| predetermined rates |
|
| variable rates |
|
| Total |
| |||
Loans maturing after one year: |
|
|
|
|
|
|
|
| |||
Agricultural | $ | 31,506 |
|
| $ | 2,986 |
|
| $ | 34,492 |
|
Commercial and industrial |
| 123,854 |
|
|
| 23,010 |
|
|
| 146,864 |
|
Commercial real estate |
| 574,872 |
|
|
| 159,878 |
|
|
| 734,750 |
|
Construction real estate |
| 1,664 |
|
|
| - |
|
|
| 1,664 |
|
Consumer |
| 34,701 |
|
|
| 486 |
|
|
| 35,187 |
|
Residential real estate |
| 128,867 |
|
|
| 136,866 |
|
|
| 265,733 |
|
Loans to other financial institutions |
| - |
|
|
| - |
|
|
| - |
|
Totals | $ | 895,464 |
|
| $ | 323,226 |
|
| $ | 1,218,690 |
|
7
Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate. The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment history, the borrower’s current financial condition, and other relevant factors.
The following table reflects the composition of our allowance for credit losses, non-accrual loans, and nonperforming loans as a percentage of total loans represented by each class of loans as of the dates indicated:
(Dollars in thousands) | Agricultural |
|
| Commercial and industrial |
|
| Consumer |
|
| Commercial real estate |
|
| Construction real estate |
|
| Residential real estate |
|
| Loans to other financial institutions |
| Totals |
| ||||||||
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
December 31, 2023 | $ | 49,210 |
|
| $ | 229,915 |
|
| $ | 36,541 |
|
| $ | 786,921 |
|
| $ | 20,936 |
|
| $ | 267,730 |
|
| $ | 19,400 |
| $ | 1,410,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Allowance for credit losses year ended December 31, 2023 | $ | 94 |
|
| $ | 2,216 |
|
| $ | 823 |
|
| $ | 8,820 |
|
| $ | 58 |
|
| $ | 3,644 |
|
| $ | 30 |
| $ | 15,685 |
|
Allowance as a percentage of loan category |
| 0.19 | % |
|
| 0.96 | % |
|
| 2.25 | % |
|
| 1.12 | % |
|
| 0.28 | % |
|
| 1.36 | % |
|
| 0.15 | % |
| 1.11 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Nonaccrual loans year ended December 31, 2023 | $ | - |
|
| $ | 1 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 1,722 |
|
| $ | - |
| $ | 1,723 |
|
Nonaccrual as a percentage of loan category |
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.64 | % |
|
| 0.00 | % |
| 0.12 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Allowance as a percentage of nonaccrual loans | NA |
|
| NA |
|
| NA |
|
| NA |
|
| NA |
|
|
| 211.61 | % |
| NA |
|
| 910.33 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Nonperforming loans year ended December 31, 2023 | $ | - |
|
| $ | 61 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 1,851 |
|
| $ | - |
| $ | 1,912 |
|
Nonperforming loans as a percentage of loan category |
| 0.00 | % |
|
| 0.03 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.69 | % |
|
| 0.00 | % |
| 0.14 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net deposit charge-offs during the year ended December 31, 2023 | $ | - |
|
| $ | - |
|
| $ | (226 | ) |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
| $ | (226 | ) |
Net loan charge-offs during the year ended December 31, 2023 | $ | - |
|
| $ | (92 | ) |
| $ | (45 | ) |
| $ | 13 |
|
| $ | - |
|
| $ | (14 | ) |
| $ | - |
| $ | (138 | ) |
Net charge-offs during the year ended December 31, 2023 | $ | - |
|
| $ | (92 | ) |
| $ | (271 | ) |
| $ | 13 |
|
| $ | - |
|
| $ | (14 | ) |
| $ | - |
| $ | (364 | ) |
Net charge-offs during the year to average loans outstanding |
| 0.00 | % |
|
| -0.01 | % |
|
| -0.02 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
| -0.03 | % |
(Dollars in thousands) | Agricultural |
|
| Commercial and industrial |
|
| Consumer |
|
| Commercial real estate |
|
| Construction real estate |
|
| Residential real estate |
|
| Loans to other financial institutions |
| Totals |
| ||||||||
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
December 31, 2022 | $ | 64,159 |
|
| $ | 210,210 |
|
| $ | 39,808 |
|
| $ | 630,953 |
|
| $ | 14,736 |
|
| $ | 229,916 |
|
| $ | - |
| $ | 1,189,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Allowance for loan losses year ended December 31, 2022 (1) | $ | 144 |
|
| $ | 1,361 |
|
| $ | 310 |
|
| $ | 4,822 |
|
| $ | 63 |
|
| $ | 906 |
|
| $ | - |
| $ | 7,619 |
|
Allowance as a percentage of loan category |
| 0.22 | % |
|
| 0.65 | % |
|
| 0.78 | % |
|
| 0.76 | % |
|
| 0.43 | % |
|
| 0.39 | % |
|
| 0.00 | % |
| 0.64 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Nonaccrual loans year ended December 31, 2022 | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 1,263 |
|
| $ | - |
| $ | 1,263 |
|
Nonaccrual as a percentage of loan category |
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.55 | % |
|
| 0.00 | % |
| 0.11 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Allowance as a percentage of nonaccrual loans | NA |
|
| NA |
|
| NA |
|
| NA |
|
| NA |
|
|
| 71.73 | % |
| NA |
|
| 603.25 | % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Nonperforming loans year ended December 31, 2022 | $ | 3 |
|
| $ | 58 |
|
| $ | - |
|
| $ | 131 |
|
| $ | - |
|
| $ | 2,475 |
|
| $ | - |
| $ | 2,667 |
|
Nonperforming loans as a percentage of loan category |
| 0.00 | % |
|
| 0.03 | % |
|
| 0.00 | % |
|
| 0.02 | % |
|
| 0.00 | % |
|
| 1.08 | % |
|
| 0.00 | % |
| 0.22 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net deposit charge-offs during the year ended December 31, 2022 | $ | - |
|
| $ | - |
|
| $ | (246 | ) |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
| $ | (246 | ) |
Net loan charge-offs during the year ended December 31, 2022 | $ | - |
|
| $ | (34 | ) |
| $ | (44 | ) |
| $ | 3 |
|
| $ | - |
|
| $ | 2 |
|
| $ | - |
| $ | (73 | ) |
Net charge-offs during the year ended December 31, 2022 | $ | - |
|
| $ | (34 | ) |
| $ | (290 | ) |
| $ | 3 |
|
| $ | - |
|
| $ | 2 |
|
| $ | - |
| $ | (319 | ) |
Net charge-offs during the year to average loans outstanding |
| 0.00 | % |
|
| 0.00 | % |
|
| -0.03 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
|
| 0.00 | % |
| -0.03 | % |
(1) - The total allowance for loan losses on December 31, 2022 includes $13,000 of unallocated reserve which was zero at December 31, 2023.
NA – No non-accrual loans in the loan category.
Additions to the allowance for credit losses charged to operations during the periods shown were based on management’s judgment after considering the factors laid out in Note 1 “Allowance for Credit Losses” to the consolidated financial statements. ChoiceOne
8
adopted the Financial Accounting Standards Board (the "FASB") Account Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, commonly referred to as "CECL" effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts are reported in accordance with the incurred loss accounting standard. The transition adjustment of the CECL adoption included an increase in the ACL of $7.2 million. The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral, reasonable and supportable forecasts, and other considerations, which, in the opinion of management, deserve current recognition in estimating credit losses.
The following schedule presents an allocation of the allowance for credit losses to the various loan categories as of the years ended December 31:
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Agricultural | $ | 94 |
|
| $ | 144 |
|
| $ | 448 |
|
Commercial and industrial |
| 2,216 |
|
|
| 1,361 |
|
|
| 1,454 |
|
Real estate - commercial |
| 8,820 |
|
|
| 4,822 |
|
|
| 3,705 |
|
Real estate - construction |
| 58 |
|
|
| 63 |
|
|
| 110 |
|
Real estate - residential |
| 3,644 |
|
|
| 906 |
|
|
| 628 |
|
Consumer |
| 823 |
|
|
| 310 |
|
|
| 290 |
|
Loans to other financial institutions |
| 30 |
|
|
| - |
|
|
| 43 |
|
Unallocated |
| - |
|
|
| 13 |
|
|
| 1,010 |
|
Total allowance for loan losses | $ | 15,685 |
|
| $ | 7,619 |
|
| $ | 7,688 |
|
Deposits
The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| 2023 |
| 2022 |
| 2021 | |||||||||||||||||||||
| Average Balance |
|
| Average Rate |
|
|
| Average Balance |
|
| Average Rate |
|
|
| Average Balance |
|
| Average Rate |
|
| ||||||
Noninterest-bearing demand | $ | 546,926 |
|
|
| - |
| % |
| $ | 582,992 |
|
|
| - |
| % |
| $ | 527,876 |
|
|
| - |
| % |
Interest-bearing demand and money market deposits |
| 852,927 |
|
|
| 1.18 |
|
|
|
| 902,090 |
|
|
| 0.39 |
|
|
|
| 791,886 |
|
|
| 0.23 |
|
|
Savings |
| 370,074 |
|
|
| 0.43 |
|
|
|
| 452,542 |
|
|
| 0.16 |
|
|
|
| 398,969 |
|
|
| 0.14 |
|
|
Certificates of deposit |
| 342,043 |
|
|
| 3.46 |
|
|
|
| 196,166 |
|
|
| 0.83 |
|
|
|
| 186,898 |
|
|
| 0.51 |
|
|
Total | $ | 2,111,970 |
|
|
| 1.11 |
| % |
| $ | 2,133,790 |
|
|
| 0.27 |
| % |
| $ | 1,905,629 |
|
|
| 0.17 |
| % |
Amount of time deposits in uninsured accounts (Dollars in thousands) |
|
| |
Maturing in less than 3 months | $ | 43,227 |
|
Maturing in 3 to 6 months |
| 70,248 |
|
Maturing in 6 to 12 months |
| 73,553 |
|
Maturing in more than 12 months |
| 12,655 |
|
Total uninsured time deposits | $ | 199,683 |
|
At December 31, 2023, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 for individual and $500,000 for joint accounts totaled $769.7 million, or 36.3% of total deposits, compared to $823.2 million, or 38.9% of total deposits and $889.3 million, or 43.3% of total deposits at December 31, 2022 and 2021, respectively. Certificate of Deposit Account Registry Service ("CDARs") deposits are excluded from the above table as all CDARs deposits are 100% guaranteed.
Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $1.1 billion or 53.2% of total deposits at December 31, 2023.
At December 31, 2023, the Bank had no material foreign deposits.
9
Return on Equity and Assets
The following schedule presents certain financial ratios of the Company for the years ended December 31:
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||
Return on assets (net income divided by average total assets) |
| 0.85 |
| % |
| 1.00 |
| % |
| 1.02 |
| % |
Return on equity (net income divided by average equity) |
| 12.00 |
| % |
| 13.25 |
| % |
| 9.79 |
| % |
Dividend payout ratio (dividends declared per share divided by net income per share) |
| 37.21 |
| % |
| 32.06 |
| % |
| 32.67 |
| % |
Equity to assets ratio (average equity divided by average total assets) |
| 7.11 |
| % |
| 7.52 |
| % |
| 10.44 |
| % |
Item 1A. Risk Factors
The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially and adversely affected.
Risks Related to the Company’s Business
Asset quality could be less favorable than expected.
A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the three-yearvalue of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination, public health crisis, and other external events.
The Company’s allowance for credit losses may not be adequate to cover actual credit losses.
The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its assumptions are wrong, the allowance for credit losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results and may cause it to increase the allowance in the future. The actual amount of future provisions for credit losses cannot now be determined and may exceed the amounts of past provisions for credit losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for credit losses. These regulatory agencies may require the Company to increase its provision for credit losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for credit losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations.
The Current Expected Credit Loss ("CECL") accounting standard could add volatility to our allowance for credit losses and may have an adverse effect on our financial condition and results of operations.
Effective January 1, 2023, we adopted CECL. CECL changed the allowance for credit losses methodology from an incurred loss impairment methodology to an expected loss methodology, which is more dependent on future economic forecasts, assumptions and models than the incurred loss accounting standard and could result in increases in, and add volatility to, our allowance for credit losses and future provisions for credit losses. These forecasts, assumptions and models are by their nature uncertain and are based upon management’s reasonable judgment in light of information currently available.
General economic conditions in the state of Michigan could have a material adverse effect on the Company’s results of operations or financial condition.
The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan caused by inflation, recession or a recessionary environment, unemployment, changes in financial or capital
10
markets or other factors, could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans.
The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions.
The Company's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company.
If the Company does not adjust to changes in the financial services industry, its financial performance may suffer.
The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s customers and services. Financial services and products are also constantly changing. The Company’s financial performance will also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer competitive financial products and services.
We are subject to significant government regulation, and any regulatory changes may adversely affect us.
We are subject to extensive government regulation under both federal and state law. We are subject to regulation by the Federal Reserve, the FDIC and the DIFS, in addition to other regulatory and self-regulatory organizations. Current laws and applicable regulations are subject to change and any new regulatory change could make compliance more expensive, difficult, or otherwise adversely affect our business. Specifically, regulation changes to overdraft fees could adversely affect our business. We cannot predict the ultimate effect of any changes to regulations affecting us, but such changes could have a material adverse effect on our results of operation or financial condition.
Changes in interest rates could reduce the Company’s income and cash flow.
The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings.
The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations.
Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively affected.
If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material adverse impact on its results of operation and financial condition.
At December 31, 2023, the Company had $128.9 million in unrealized losses on its investment securities, including $69.7 million in unrealized losses on available for sale securities and $59.2 in unrealized losses on held to maturity securities. If the Company were required to sell investment securities in an unrealized loss position to meet liquidity needs and realize losses, that could have a material
11
adverse impact on its results of operations and financial condition, including a negative impact on net income and a permanent reduction in equity capital. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
Evaluation of investment securities for an allowance for credit losses involves subjective determinations and could have a material adverse impact on our results of operations and financial condition.
The fair value evaluation of investment securities is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments require the establishment of an allowance for credit losses. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or future recovery prospects and the effects of changes in interest rates or credit spreads. Estimating future cash flows involves incorporating information received from third-party sources and making internal assumptions and judgments regarding the future performance of the underlying collateral and assessing the probability that an adverse change in future cash flows has occurred. The determination of an allowance for credit losses is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Our management considers a wide range of factors about the security issuer and uses reasonable judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Additions to the allowance for credit losses for our investment securities may need to be taken in the future, which could have a material adverse effect on our results of operations and financial condition.
The Company has significant exposure to risks associated with commercial and residential real estate.
A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans. As of December 31, 2023, the Company had approximately $807.9 million of commercial and construction real estate loans outstanding, which represented approximately 57.3% of its loan portfolio. As of that same date, the Company had approximately $267.7 million in residential real estate loans outstanding, or approximately 19.0% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by the Company or its borrowers.
Commercial loans may expose the Company to greater financial and credit risk than other loans.
The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $229.9 million at December 31, 2023, comprising approximately 16.3% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by the Company’s customers would hurt the Company’s earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.
Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged.
The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance fund, and not to benefit the Company’s shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for credit losses. Future regulatory changes or accounting pronouncements may increase the Company’s regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company or the Bank could require the Company to devote significant time and resources to defending its business and may lead to penalties that materially affect the Company.
The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect its operations.
The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the services of one or more key members of the Company’s management team could adversely affect its operations.
12
The Company’s controls and procedures may fail or be circumvented.
Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. If the Company fails to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis. In addition, any failure or circumvention of the Company’s other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the Company’s financial condition and results of operations.
The Company and the Bank are regularly involved in a variety of litigation arising out of the normal course of business. The Company’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Company’s insurance coverage, they could have a material adverse effect on the Company’s financial condition and results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all.
If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or acquisitions could be materially impaired.
The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all. If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations through organic growth or acquisitions could be materially limited.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Company’s business.
As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company’s reputation, expose it to the risks of litigation and liability, disrupt the Company’s operations and have a material adverse effect on the Company’s business.
The Company's information systems may experience an interruption or breach in security.
The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Company’s information systems or its customers’ information or computer systems would not damage the Company’s reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company’s financial condition and results of operations.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could
13
potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.
Employee misconduct could adversely impact our reputation and results of operations.
Our reputation is crucial to maintaining and developing relationships with our customers. There is a risk our employees could engage in misconduct that adversely affects our business. For example, if an employee were to engage (or be accused of engaging) in fraudulent, illegal, or suspicious activities, including fraud or theft, we could be subject to regulatory sanctions or penalties, or litigation, and suffer significant harm to our reputation, financial position, and customer relationships as a result. Additionally, our business often requires that we deal with sensitive customer information. If our employees were to improperly use or disclose this information, even inadvertently, we could suffer significant harm to our reputation, financial position and current and future business relationships. We may not be able to deter all employee misconduct, and the precautions we take to detect and prevent this misconduct may not be effective in all circumstances. Misconduct or harassment by our employees (or unsubstantiated allegations of the same), or improper use or disclosure of confidential information by our employees, even inadvertently, could result in a material adverse effect on our business, reputation, or results of operations.
Environmental liability associated with commercial lending could result in losses.
In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company’s sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Company’s business, results of operations and financial condition.
The Company depends upon the accuracy and completeness of information about customers.
In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Company’s financial condition and results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading.
Our reliance on third party vendors could cause operational losses or business interruptions.
We rely on third party service providers for certain components of our business activity. If these third party service providers experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. Even if we are able to replace them with another service provider, the replacement may be more expensive or offer an inferior service. Any of these outcomes could have a material adverse effect on our business, financial condition or results of operations.
The Company operates in a highly competitive industry and market area.
The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can.
14
Severe weather, natural disasters, acts of war or terrorism, a public health crisis, and other external events could significantly impact the Company’s business.
Severe weather, natural disasters, acts of war or terrorism, risks posed by an outbreak of a widespread epidemic or pandemic of disease (or widespread fear thereof) or other public health crisis, and other adverse external events could have a significant impact on the Company’s ability to conduct business. Such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses.
The Company relies on dividends from the Bank for most of its revenue.
The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay cash dividends on the Company’s common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank is unable to pay dividends to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Bank have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Bank.
Additional risks and uncertainties could have a negative effect on financial performance.
Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses.
Risks Related to the Company’s Common Stock
Investments in the Company’s common stock involve risk.
The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including:
The Company’s common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market.
The Company’s common stock is listed for trading on the Nasdaq Capital Market. However, the Company’s common stock has less liquidity than the average liquidity for companies listed in the Nasdaq Stock Market. The public trading market for the Company’s common stock depends on a marketplace of willing buyers and sellers at any given time, which in turn depends on factors outside of the Company’s control, including general economic and market conditions and the decisions of individual investors. The limited market for the Company’s common stock may affect a shareholder’s ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock.
15
The Company's common stock is not insured by any government entity.
The Company’s common stock is not insured by the FDIC or any other government entity. Investment in the Company’s common stock is subject to risk and potential loss.
A shareholder’s ownership of common stock may be diluted if the Company issues additional shares of common stock in the future.
The Company’s articles of incorporation authorize the Company’s Board of Directors to issue additional shares of common stock or preferred stock without shareholder approval. To the extent the Company issues additional shares of common stock or preferred stock, or issues options or warrants permitting the holder to purchase or acquire common stock in the future and such warrants or options are exercised, the Company’s shareholders may experience dilution in their ownership of the Company’s common stock. Holders of the Company’s common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company.
The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions.
The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing. This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes. Upon any liquidation of the Company, the Company’s lenders and holders of its debt securities would be entitled to distribution of the Company’s available assets before distributions to the holders of the Company’s common stock, and holders of preferred stock may be granted rights to similarly receive a distribution upon liquidation prior to distribution to holders of the Company’s common stock. The Company cannot predict the amount, timing or nature of any future debt financings or stock offerings, and the decision of whether to incur debt or issue securities will depend on market conditions and other factors beyond the Company’s control. Future offerings could dilute a shareholder’s interests in the Company or reduce the per-share value of the Company’s common stock.
The Company's articles of incorporation and bylaws, and certain provisions of Michigan law, contain provisions that could make a takeover effort more difficult.
The Michigan Business Corporation Act, and the Company’s articles of incorporation and bylaws, include provisions intended to protect shareholders and prohibit, discourage, or delay certain types of hostile takeover activities. In addition, federal law requires the Federal Reserve Board’s prior approval for acquisition of “control” of a bank holding company such as the Company, including acquisition of 10% or more of the Company’s outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). These provisions and requirements could discourage potential acquisition proposals, delay or prevent a change in control, diminish the opportunities for a shareholder to participate in tender offers, prevent transactions in which our shareholders might otherwise receive a premium for their shares, or limit the ability for our shareholders to approve transactions that they may believe to be in their best interests.
An entity or group holding a certain percentage of the Company's outstanding securities could become subject to regulation as a "bank holding company" or may be required to obtain prior approval of the Federal Reserve Board.
Any bank holding company or foreign bank with a presence in the United States may be required to obtain approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of the Company’s outstanding securities. Further, if any entity (including a “group” comprised of individual persons) owns or controls the power to vote 25% or more of the Company’s outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a “controlling influence” over the Company, the entity may become subject to regulation as a “bank holding company” under the BHC Act. An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity’s investment in the Company’s securities or in other investments that are not permitted for a bank holding company.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Our bank faces various cybersecurity threats, including unauthorized access, malware, and phishing attacks. These threats could compromise the security of our information systems and the data we store and process. While we have experienced, and expect to continue to experience, cybersecurity threats, we have not experienced a material cybersecurity incident in the three year period ended December 31, 2020,2023. The potential consequences of a material cybersecurity incident could include reputational damage, litigation with
16
third parties, regulatory criticism or proceedings and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.
We have established an information security third party risk management program to identify and manage these risks. This program includes regular risk assessments, third party risk provider reviews, and implementation of security measures such as encryption and firewalls, and ongoing monitoring of our systems for potential threats. We also engage with industry consultants to assist with our risk assessments.
On a regular basis, the technology steering committee, led by management, receives comprehensive reports summarizing cybersecurity threat monitoring and incident management activities. These reports also include details about remediation efforts to address identified threats and incidents. Additionally, both internal and external assessments of our company’s cybersecurity threat monitoring capabilities are shared with the committee. Meeting minutes from these committee sessions are diligently maintained and provided to the Board of Directors.
The Board of Directors has responsibility for approving and overseeing management’s policies related notes (collectively referred to information system security and cybersecurity threats and incidents. They also supervise management’s overall approach to securing the company’s information systems. The Board of Directors delegates the oversight of cybersecurity risk management to the Information Technology Committee of the Board.
The Information Technology Committee, in turn, reviews reports on our cybersecurity risk management processes. These reports cover assessments of management’s handling of cybersecurity threats and incident management functions. The committee receives periodic updates from the chief information officer, including information on social engineering risks, the effectiveness of cybersecurity training, and results from vulnerability and penetration assessments conducted both internally and by external parties. Audit reports related to information systems and cybersecurity threat monitoring are also part of this reporting process.
Item 2. Properties
The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage.
29 of the Company’s 35 locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. The remaining six locations are comprised of loan production offices and wealth management. Offices generally range in size from 1,200 to 3,200 square feet, based on the “consolidatedlocation and number of employees located at the facility. All of our offices are owned by the Bank except for six that are leased under various operating lease agreements. The Company’s management believes all offices are adequately covered by property insurance.
Item 3. Legal Proceedings
As of December 31, 2023, there were no significant pending legal proceedings to which the Company or the Bank is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial statements”). Incondition of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
17
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Information
The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS.
As of February 29, 2024, there were approximately 1,122 owners of record and approximately 1,093 beneficial owners of our opinion,common stock.
The following table summarizes the quarterly cash dividends declared per share of common stock during 2023 and 2022:
|
| 2023 |
|
| 2022 |
| ||
First Quarter |
| $ | 0.26 |
|
| $ | 0.25 |
|
Second Quarter |
|
| 0.26 |
|
|
| 0.25 |
|
Third Quarter |
|
| 0.26 |
|
|
| 0.25 |
|
Fourth Quarter |
|
| 0.27 |
|
|
| 0.26 |
|
Total |
| $ | 1.05 |
|
| $ | 1.01 |
|
ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 21 – Regulatory Capital to the consolidated financial statements referredfor a description of these restrictions. Based on information presently available, management expects ChoiceOne to above present fairly,declare and pay regular quarterly cash dividends in all material respects,2024, although the financial positionamount of the Companyquarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.
Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference.
ISSUER PURCHASES OF EQUITY SECURITIES
ChoiceOne’s common stock repurchase plan announced in April 2021 and amended in 2022, authorizes the repurchase of up to 375,388 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted. No shares were repurchased under this plan in 2023.
|
|
|
|
|
|
|
| Total Number |
|
| Maximum |
| ||||
|
|
|
|
|
|
|
| of Shares |
|
| Number of |
| ||||
|
| Total |
|
|
|
|
| Purchased as |
|
| Shares that |
| ||||
|
| Number |
|
| Average |
|
| Part of a |
|
| May Yet be |
| ||||
|
| of Shares |
|
| Price Paid |
|
| Publicly |
|
| Purchased |
| ||||
Period |
| Purchased |
|
| per Share |
|
| Announced Plan |
|
| Under the Plan |
| ||||
October 1 - October 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Employee Transactions |
|
| — |
|
| $ | — |
|
|
| — |
|
|
|
| |
Repurchase Plan |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 375,388 |
|
November 1 - November 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Employee Transactions |
|
| — |
|
| $ | — |
|
|
| — |
|
|
|
| |
Repurchase Plan |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 375,388 |
|
December 1 - December 31, 2023 |
|
| — |
|
|
|
|
|
|
|
|
|
| |||
Employee Transactions (1) |
|
| 6,853 |
|
| $ | 31.07 |
|
|
| 6,853 |
|
|
|
| |
Repurchase Plan |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 375,388 |
|
(1) Shares submitted for the purchase of stock options. Stock options were issued out of the ChoiceOne Financial Services, Inc. Stock Incentive Plan of 2012.
As of December 31, 2023, there were 375,388 shares remaining that may yet be repurchased under the plan. There was no stated expiration date.
Item 6. Reserved
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.
We have omitted discussion of 2022 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2022 Annual Report on Form 10-K.
Selected Financial Data
(Dollars in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
| |||
|
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||
For the year |
|
|
|
|
|
|
|
|
|
| |||
Net interest income |
| $ | 65,885 |
|
| $ | 67,314 |
|
| $ | 60,641 |
|
|
Provision for credit losses, net |
|
| 150 |
|
|
| 250 |
|
|
| 416 |
|
|
Noninterest income |
|
| 14,906 |
|
|
| 14,072 |
|
|
| 19,194 |
|
|
Noninterest expense |
|
| 55,074 |
|
|
| 53,478 |
|
|
| 52,921 |
|
|
Income before income taxes |
|
| 25,567 |
|
|
| 27,658 |
|
|
| 26,498 |
|
|
Income tax expense |
|
| 4,306 |
|
|
| 4,018 |
|
|
| 4,456 |
|
|
Net income |
|
| 21,261 |
|
|
| 23,640 |
|
|
| 22,042 |
|
|
Cash dividends declared |
|
| 7,910 |
|
|
| 7,578 |
|
|
| 7,200 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Per share |
|
|
|
|
|
|
|
|
|
| |||
Basic earnings |
| $ | 2.82 |
|
| $ | 3.15 |
|
| $ | 2.87 |
|
|
Diluted earnings |
|
| 2.82 |
|
|
| 3.15 |
|
|
| 2.86 |
|
|
Cash dividends declared |
|
| 1.05 |
|
|
| 1.01 |
|
|
| 0.94 |
|
|
Shareholders' equity (at year end) |
|
| 25.92 |
|
|
| 22.47 |
|
|
| 29.52 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Average for the year |
|
|
|
|
|
|
|
|
|
| |||
Securities |
| $ | 1,042,559 |
|
| $ | 1,094,559 |
|
| $ | 869,788 |
|
|
Gross loans |
|
| 1,265,261 |
|
|
| 1,104,030 |
|
|
| 1,040,430 |
|
|
Deposits |
|
| 2,111,970 |
|
|
| 2,133,790 |
|
|
| 1,905,629 |
|
|
Borrowings |
|
| 141,507 |
|
|
| 13,537 |
|
|
| 5,465 |
|
|
Subordinated debt |
|
| 35,382 |
|
|
| 35,211 |
|
|
| 12,841 |
|
|
Shareholders' equity |
|
| 177,201 |
|
|
| 178,415 |
|
|
| 225,120 |
|
|
Assets |
|
| 2,493,840 |
|
|
| 2,373,374 |
|
|
| 2,156,774 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
At year end |
|
|
|
|
|
|
|
|
|
| |||
Securities |
| $ | 939,576 |
|
| $ | 972,802 |
|
| $ | 1,116,265 |
|
|
Gross loans |
|
| 1,415,363 |
|
|
| 1,194,616 |
|
|
| 1,068,831 |
|
|
Deposits |
|
| 2,122,055 |
|
|
| 2,118,003 |
|
|
| 2,052,294 |
|
|
Borrowings |
|
| 200,000 |
|
|
| 50,000 |
|
|
| 50,000 |
|
|
Subordinated debt |
|
| 35,507 |
|
|
| 35,262 |
|
|
| 35,017 |
|
|
Shareholders' equity |
|
| 195,634 |
|
|
| 168,874 |
|
|
| 221,669 |
|
|
Assets |
|
| 2,576,706 |
|
|
| 2,385,915 |
|
|
| 2,366,682 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Selected financial ratios |
|
|
|
|
|
|
|
|
|
| |||
Return on average assets |
|
| 0.85 |
| % |
| 1.00 |
| % |
| 1.02 |
| % |
Return on average shareholders' equity |
|
| 12.00 |
|
|
| 13.25 |
|
|
| 9.79 |
|
|
Cash dividend payout as a percentage of net income |
|
| 37.21 |
|
|
| 32.06 |
|
|
| 32.67 |
|
|
Shareholders' equity to assets (at year end) |
|
| 7.59 |
|
|
| 7.08 |
|
|
| 9.37 |
|
|
19
RESULTS OF OPERATIONS
Summary
ChoiceOne's net income for 2023 was $21.3 million, compared to $23.6 million in 2022. Diluted earnings per share were $2.82 in the twelve months ended December 31, 2023, compared to $3.15 per share in the twelve months ended December 31, 2022.
ChoiceOne's asset mix has shifted from loans held for investment of 56.2% of deposits at December 31, 2022 to 66.5% of deposits at December 31, 2023. Total assets increased by $190.8 million in the twelve months ended December 31, 2023. As a result of the change in asset mix and increase in total assets, interest income increased $23.9 million in the twelve months ended December 31, 2023, compared to the same period in 2022. This increase was driven by core loan growth of $201.5 million or 16.9%, which was partially offset by a decrease in investment securities of $33.2 million. Loans to other financial institutions, consisting of a warehouse line of credit, increased $19.4 million during the full year 2023.
Deposits, excluding brokered deposits, decreased $17.7 million or 0.8% as of December 31, 2020, and 2019, and the results of its operations and its cash flows for each of the years2023 compared to December 31, 2022. The decrease in deposits since December 31, 2022 was largely concentrated in the three-year periodfirst quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates in money market securities or other investments. Deposits grew in the third and fourth quarters of 2023 due to new business, recapture of deposit losses, and some seasonalityin municipal balances. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the Bank Term Funding Program ("BTFP"), and FHLB advances to ensure ample liquidity. At December 31, 2023, total available borrowing capacity from all sources was $933.3 million.
The increase in short term interest rates has led to higher deposit costs, which rose to 1.14% in 2023 compared to 0.27% in 2022 as deposits reprice and customers shift to CD and other interest bearing products. This trend is likely to persist. ChoiceOne is taking active measures to control these costs and expects to continue to pay lower rates on deposits than the federal funds rate. Interest expense on borrowings for the twelve months ended December 31, 2020, in conformity with accounting principles generally accepted2023, increased $7.2 million, compared to the same period in the United Statesprior year, due to increases in borrowing amounts and interest rates. Borrowings include $170 million from the BTFP and $30 million of America.FHLB borrowings at a weighted average fixed rate of 4.7%. Total cost of funds increased to 1.44% in 2023 compared to 0.35% in 2022.
BasisChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for Opinion
The Company's management is responsibleall financial assets measured at amortized cost and off-balance sheet credit exposures. Results for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. Wereporting periods beginning after January 1, 2023 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) andpresented under CECL while prior period amounts are required to be independent with respect to the Companyreported in accordance with the U.S. federalincurred loss accounting standard. The transition adjustment of the CECL adoption included an increase in the ACL of $7.2 million, which included a $5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $3.3 million, which included a $2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.
The provision for credit losses expense on loans was $1.3 million in the full year 2023, due to the significant growth of core loans. Core loan growth was offset by improvements in the Federal Open Market Committee ("FOMC") forecast and certain payoffs of watch loans during the full year 2023. The ratio of the allowance for credit losses to total loans (excluding loans held for sale) was 1.11% on December 31, 2023 compared to 1.24% on January 1, 2023. Asset quality continues to remain strong, with annualized net loan charge-offs to average loans of 0.03% and nonperforming loans to total loans (excluding loans held for sale) of 0.14% as of December 31, 2023.
Purchased loans carry approximately $2.5 million of accretable yield, which will be recognized into income over the remaining life of the loans, approximately two to four years.
20
Noninterest Income
Noninterest income rose by $834,000 in the twelve months ended December 31, 2023, compared to the same period in the prior year. The increase was largely due to reduced losses on the sale of securities lawsand a decline in the change in market value of equity securities. This was partially offset by the decline in gains on sales of loans in 2023 compared to 2022. With the rapid rise in interest rates, mortgage refinancing activity slowed in 2023 and the applicable rulesrate environment for purchased mortgage loans became increasingly competitive. In addition, ChoiceOne recorded a BOLI claim of $274,000 in December of 2022, which was not repeated in 2023.
Noninterest Expense
Noninterest expense increased $1.6 million or 3.0% in the twelve months ended December 31, 2023 compared to the same period in 2022. The increase in total noninterest expense was largely related to inflationary pressures on employee wages and regulations of the Securitiesbenefits and Exchange Commissionincreases to FDIC insurance, partially offset by lower occupancy and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.data processing costs. As part of its ongoing optimization strategy, ChoiceOne intends to consolidate two of its branches by March 2024. Customers who currently use these branches will be able to access nearby ChoiceOne locations that offer the same level of service and convenience. ChoiceOne anticipates a low impact on customer retention and expects to save around $700,000 annually from this decision. Management continues to seek out ways to manage costs, but also recognizes the value of investing in innovation and attracting the best talent in our audits we are requiredindustry to obtain an understandingcompete effectively in our markets.
Dividends
Cash dividends of internal control over financial reporting but not$7.9 million or $1.05 per common share were declared in 2023 compared to $7.6 million or $1.01 per common share in 2022. The dividend yield for ChoiceOne’s common stock was 3.58% as of the end of 2023, compared to 3.48% as of the end of 2022. The cash dividend payout as a percentage of net income was 37% as of December 31, 2023, compared to 32% as of December 31, 2022.
Income Taxes
Income tax expense was $288,000 higher in 2023 than in 2022. The effective tax rate was 16.8% for the purpose of expressing an opinion onyear ended 2023 compared to 14.5% for the effectivenesssame period in 2022. During 2023, nontaxable municipal interest decreased and disallowed interest expense increased compared to the year ended 2022. For further details, refer to Note 12 - Income Taxes of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses – Current Factor Adjustments – Refer to Notes 1 and 3 to the Consolidated Financial Statements included in Item 8 of this report.
21
Table 1 – Average Balances and Tax-Equivalent Interest Rates
Critical Audit Matter DescriptionTables 1 and 2 on the following pages provide information regarding interest income and expense for the years ended December 31, 2023, 2022, and 2021. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates.
|
| Year Ended December 31, |
|
| |||||||||||||||||||||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||||||||||||||||||||||||||
(Dollars in thousands) |
| Average |
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
| |||||||||
|
| Balance |
|
| Interest |
|
| Rate |
|
| Balance |
|
| Interest |
|
| Rate |
|
| Balance |
|
| Interest |
|
| Rate |
|
| |||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Loans (1) (3)(4)(5)(6) |
| $ | 1,265,261 |
|
| $ | 68,437 |
|
|
| 5.41 |
| % | $ | 1,104,030 |
|
| $ | 52,861 |
|
|
| 4.79 |
| % | $ | 1,040,430 |
|
| $ | 48,672 |
|
|
| 4.62 |
| % |
Taxable securities (2)(6) |
|
| 747,006 |
|
|
| 21,169 |
|
|
| 2.83 |
|
|
| 779,915 |
|
|
| 15,583 |
|
|
| 2.00 |
|
|
| 599,902 |
|
|
| 10,260 |
|
|
| 2.13 |
|
|
Nontaxable securities (1) |
|
| 295,553 |
|
|
| 7,106 |
|
|
| 2.40 |
|
|
| 314,644 |
|
|
| 7,790 |
|
|
| 2.48 |
|
|
| 269,886 |
|
|
| 7,098 |
|
|
| 3.02 |
|
|
Other |
|
| 70,826 |
|
|
| 3,797 |
|
|
| 5.36 |
|
|
| 34,255 |
|
|
| 491 |
|
|
| 1.43 |
|
|
| 68,879 |
|
|
| 84 |
|
|
| 0.37 |
|
|
Interest-earning assets |
|
| 2,378,646 |
|
|
| 100,509 |
|
|
| 4.23 |
|
|
| 2,232,844 |
|
|
| 76,725 |
|
|
| 3.44 |
|
|
| 1,979,097 |
|
|
| 66,114 |
|
|
| 3.83 |
|
|
Noninterest-earning assets |
|
| 115,194 |
|
|
|
|
|
|
|
|
| 140,530 |
|
|
|
|
|
|
|
|
| 177,677 |
|
|
|
|
|
|
|
| ||||||
Total assets |
| $ | 2,493,840 |
|
|
|
|
|
|
|
| $ | 2,373,374 |
|
|
|
|
|
|
|
| $ | 2,156,774 |
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Liabilities and Shareholders' Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Interest-bearing demand deposits |
| $ | 852,927 |
|
| $ | 10,028 |
|
|
| 1.18 |
| % | $ | 902,090 |
|
| $ | 3,514 |
|
|
| 0.39 |
| % | $ | 791,886 |
|
| $ | 1,797 |
|
|
| 0.23 |
| % |
Savings deposits |
|
| 370,074 |
|
|
| 1,609 |
|
|
| 0.43 |
|
|
| 452,542 |
|
|
| 711 |
|
|
| 0.16 |
|
|
| 398,969 |
|
|
| 551 |
|
|
| 0.14 |
|
|
Certificates of deposit |
|
| 306,999 |
|
|
| 10,621 |
|
|
| 3.46 |
|
|
| 196,063 |
|
|
| 1,618 |
|
|
| 0.83 |
|
|
| 186,898 |
|
|
| 957 |
|
|
| 0.51 |
|
|
Brokered deposit |
|
| 35,044 |
|
|
| 1,732 |
|
|
| 4.94 |
|
|
| 103 |
|
|
| 2 |
|
|
| 2.48 |
|
|
| - |
|
|
| - |
|
|
| 0.00 |
|
|
Borrowings |
|
| 141,507 |
|
|
| 6,818 |
|
|
| 4.82 |
|
|
| 13,537 |
|
|
| 410 |
|
|
| 3.02 |
|
|
| 5,465 |
|
|
| 101 |
|
|
| 1.86 |
|
|
Subordinated debentures |
|
| 35,382 |
|
|
| 1,636 |
|
|
| 4.62 |
|
|
| 35,211 |
|
|
| 1,491 |
|
|
| 4.23 |
|
|
| 12,841 |
|
|
| 571 |
|
|
| 4.45 |
|
|
Other |
|
| 12,258 |
|
|
| 651 |
|
|
| 5.31 |
|
|
| - |
|
|
| - |
|
|
| 0.00 |
|
|
| - |
|
|
| - |
|
|
| 0.00 |
|
|
Interest-bearing liabilities |
|
| 1,754,191 |
|
|
| 33,095 |
|
|
| 1.89 |
|
|
| 1,599,546 |
|
|
| 7,746 |
|
|
| 0.48 |
|
|
| 1,396,059 |
|
|
| 3,977 |
|
|
| 0.28 |
|
|
Demand deposits |
|
| 546,926 |
|
|
|
|
|
|
|
|
| 582,992 |
|
|
|
|
|
|
|
|
| 527,876 |
|
|
|
|
|
|
|
| ||||||
Other noninterest-bearing liabilities |
|
| 15,522 |
|
|
|
|
|
|
|
|
| 12,421 |
|
|
|
|
|
|
|
|
| 7,719 |
|
|
|
|
|
|
|
| ||||||
Total liabilities |
|
| 2,316,639 |
|
|
|
|
|
|
|
|
| 2,194,959 |
|
|
|
|
|
|
|
|
| 1,931,654 |
|
|
|
|
|
|
|
| ||||||
Shareholders' equity |
|
| 177,201 |
|
|
|
|
|
|
|
|
| 178,415 |
|
|
|
|
|
|
|
|
| 225,120 |
|
|
|
|
|
|
|
| ||||||
Total liabilities and shareholders' equity |
| $ | 2,493,840 |
|
|
|
|
|
|
|
| $ | 2,373,374 |
|
|
|
|
|
|
|
| $ | 2,156,774 |
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
|
|
|
| $ | 67,415 |
|
|
|
|
|
|
|
| $ | 68,979 |
|
|
|
|
|
|
|
| $ | 62,137 |
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |
|
|
|
|
|
|
|
| 2.83 |
| % |
|
|
|
|
|
|
| 3.09 |
| % |
|
|
|
|
|
|
| 3.14 |
| % | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Reconciliation to Reported Net Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
|
|
|
| $ | 67,415 |
|
|
|
|
|
|
|
| $ | 68,979 |
|
|
|
|
|
|
|
| $ | 62,137 |
|
|
|
|
| ||||||
Adjustment for taxable equivalent interest |
|
|
|
|
| (1,530 | ) |
|
|
|
|
|
|
|
| (1,665 | ) |
|
|
|
|
|
|
|
| (1513 | ) |
|
|
|
| ||||||
Net interest income (GAAP) |
|
|
|
| $ | 65,885 |
|
|
|
|
|
|
|
| $ | 67,314 |
|
|
|
|
|
|
|
| $ | 60,624 |
|
|
|
|
| ||||||
Net interest margin (GAAP) |
|
|
|
|
|
|
|
| 2.77 |
| % |
|
|
|
|
|
|
| 3.01 |
| % |
|
|
|
|
|
|
| 3.08 |
| % |
22
Table 2 – Changes in Tax-Equivalent Net Interest Income
|
| Year Ended December 31, |
| |||||||||||||||||||||
(Dollars in thousands) |
| 2023 Over 2022 |
|
| 2022 Over 2021 |
| ||||||||||||||||||
|
| Total |
|
| Volume |
|
| Rate |
|
| Total |
|
| Volume |
|
| Rate |
| ||||||
Increase (decrease) in interest income (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans (2) |
| $ | 15,576 |
|
| $ | 8,264 |
|
| $ | 7,312 |
|
| $ | 4,189 |
|
| $ | 3,026 |
|
| $ | 1,163 |
|
Taxable securities |
|
| 5,586 |
|
|
| (682 | ) |
|
| 6,268 |
|
|
| 5,323 |
|
|
| 3,410 |
|
|
| 1,913 |
|
Nontaxable securities (2) |
|
| (684 | ) |
|
| (455 | ) |
|
| (229 | ) |
|
| 692 |
|
|
| 1,126 |
|
|
| (434 | ) |
Other |
|
| 3,306 |
|
|
| 925 |
|
|
| 2,381 |
|
|
| 407 |
|
|
| (62 | ) |
|
| 469 |
|
Net change in interest income |
| $ | 23,784 |
|
| $ | 8,052 |
|
| $ | 15,732 |
|
| $ | 10,611 |
|
| $ | 7,500 |
|
| $ | 3,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Increase (decrease) in interest expense (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-bearing demand deposits |
| $ | 6,514 |
|
| $ | (202 | ) |
| $ | 6,716 |
|
| $ | 1,717 |
|
| $ | 279 |
|
| $ | 1,438 |
|
Savings deposits |
|
| 898 |
|
|
| (152 | ) |
|
| 1,050 |
|
|
| 159 |
|
|
| 79 |
|
|
| 80 |
|
Certificates of deposit |
|
| 9,003 |
|
|
| 1,364 |
|
|
| 7,639 |
|
|
| 664 |
|
|
| 50 |
|
|
| 614 |
|
Brokered deposit |
|
| 1,730 |
|
|
| 1,725 |
|
|
| 5 |
|
|
| - |
|
|
| - |
|
|
| - |
|
Borrowings |
|
| 6,408 |
|
|
| 6,029 |
|
|
| 379 |
|
|
| 309 |
|
|
| 217 |
|
|
| 92 |
|
Subordinated debentures |
|
| 145 |
|
|
| 7 |
|
|
| 138 |
|
|
| 920 |
|
|
| 948 |
|
|
| (28 | ) |
Other |
|
| 651 |
|
|
| 651 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Net change in interest expense |
| $ | 25,349 |
|
| $ | 9,422 |
|
| $ | 15,927 |
|
| $ | 3,769 |
|
| $ | 1,573 |
|
| $ | 2,196 |
|
Net change in tax-equivalent net interest income |
| $ | (1,565 | ) |
| $ | (1,370 | ) |
| $ | (195 | ) |
| $ | 6,841 |
|
| $ | 5,927 |
|
| $ | 915 |
|
Net Interest Income
Tax-equivalent net interest income declined $1.6 million for the full year 2023, compared to the same period in 2022. The Federal Reserve increased the federal funds rate by 5.25% from March 31, 2022 to September 30, 2023 in response to published inflation rates. This increased rates on newly originated loans and rates paid on deposits and led to a net decline in tax equivalent net interest margin of 26 basis points in 2023 compared to 2022. GAAP based net interest margin declined 24 basis points in 2023 compared to 2022.
The following table presents the cost of deposits and the cost of funds for the years ended December 31, 2023, December 31, 2022, and December 31, 2021.
|
| Year Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Cost of deposits |
|
| 1.14 | % |
|
| 0.27 | % |
|
| 0.17 | % |
Cost of funds |
|
| 1.44 | % |
|
| 0.35 | % |
|
| 0.21 | % |
ChoiceOne has experienced substantial core loan growth from December 31, 2022 to December 31, 2023, leading to an increase in interest income from loans of $15.6 million in the twelve months ended December 31, 2023, compared to the same period in the prior year. Average core loans grew $161.2 million for the twelve months ended December 31, 2023, compared to the same period in the prior year. In addition, the average rate earned on loans increased 62 basis points for the twelve months ended December 31, 2023, compared to the same period in the prior year. The increase in interest income from loans and the average rate increase on loans was muted by a decline in PPP fees and an increase in expense related to derivatives in the twelve months ended December 31, 2023, compared to the same period in 2022. PPP fee income in 2023 was $0 compared to $1.2 million in 2022. Interest income on loans for 2023 was reduced by $2.1 million due to amortization expense related to the March 2023 sale of the pay floating swap derivative.
The average balance of total securities decreased $52.0 million in 2023, compared to the same period in 2022. The decrease was due to the paydowns, maturities, and redemptions during 2023. The average rate earned on securities increased 58 basis points for the full year
23
2023, compared to the same period in the prior year. Interest income on securities for 2023 was reduced by $709,000 due to amortization expense related to the March 2023 sale of the pay floating swap derivative.
Interest expense increased $25.3 million for the full year 2023, compared to the same period in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 64 basis points in the twelve months ended December 31, 2023, compared to the same period in the prior year. This was offset by the decline in the average balance of interest bearing-demand deposits and savings deposits, of $131.6 million during 2023. The increase in the average balance of certificates of deposit of $110.9 million during 2023, combined with a 263 basis point increase in the rate paid on certificates of deposits during 2023, compared to the same period in the prior year, led to an increase in interest expense of $9.0 million during 2023.
In order to bolster liquidity, ChoiceOne borrowed $170.0 million from the Bank Term Funding Program ("BTFP") during the second and fourth quarter of 2023 and currently holds $23.4 million in brokered deposits and $30.0 million in FHLB advances on December 31, 2023. The net effect of these additional borrowed funds and brokered deposits was an increase in interest expense of $8.1 million for the year ended December 31, 2023, compared to the same period in 2022.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. The average balance of subordinated debentures was relatively flat in 2023 compared to the same period in the prior year.
Provision and Allowance For Credit Losses
Table 3 – Provision and Allowance For Credit Losses
24
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
| |||
|
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||
Allowance for credit losses at beginning of year |
| $ | 7,619 |
|
| $ | 7,688 |
|
| $ | 7,593 |
|
|
Cumulative effect of change in accounting principle |
|
| 7,165 |
|
|
| - |
|
|
| - |
|
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
| |||
Agricultural |
|
| - |
|
|
| - |
|
|
| - |
|
|
Commercial and industrial |
|
| 158 |
|
|
| 177 |
|
|
| 195 |
|
|
Consumer |
|
| 554 |
|
|
| 496 |
|
|
| 370 |
|
|
Real estate - commercial |
|
| - |
|
|
| - |
|
|
| 111 |
|
|
Real estate - construction |
|
| - |
|
|
| - |
|
|
| - |
|
|
Real estate - residential |
|
| 27 |
|
|
| - |
|
|
| - |
|
|
Total |
|
| 739 |
|
|
| 673 |
|
|
| 676 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Recoveries: |
|
|
|
|
|
|
|
|
|
| |||
Agricultural |
|
| - |
|
|
| - |
|
|
| - |
|
|
Commercial and industrial |
|
| 66 |
|
|
| 143 |
|
|
| 86 |
|
|
Consumer |
|
| 283 |
|
|
| 206 |
|
|
| 214 |
|
|
Real estate - commercial |
|
| 13 |
|
|
| 3 |
|
|
| 48 |
|
|
Real estate - construction |
|
| - |
|
|
| - |
|
|
| - |
|
|
Real estate - residential |
|
| 13 |
|
|
| 2 |
|
|
| 7 |
|
|
Total |
|
| 375 |
|
|
| 354 |
|
|
| 355 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net charge-offs (recoveries) |
|
| 364 |
|
|
| 319 |
|
|
| 321 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Provision for credit losses |
|
| 1,265 |
|
|
| 250 |
|
|
| 416 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Allowance for credit losses at end of year |
| $ | 15,685 |
|
| $ | 7,619 |
|
| $ | 7,688 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Allowance for credit losses as a percentage of: |
|
|
|
|
|
|
|
|
|
| |||
Total loans as of year end |
|
| 1.11 |
| % |
| 0.64 |
| % |
| 0.76 |
| % |
Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings |
|
| 820 |
| % |
| 286 |
| % |
| 139 |
| % |
Ratio of net charge-offs during the period to average loans outstanding during the period |
|
| 0.03 |
| % | 0.03 |
| % | 0.03 |
| % | ||
Loan recoveries as a percentage of prior year's charge-offs |
|
| 56 |
| % | 52 |
| % | 47 |
| % |
On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the allowance for credit losses ("ACL") of $7.2 million. The large increase was partially due to the economic environment and the nature of the CECL calculation. Approximately 20% of this increase was related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated Balance Sheet in accordance with FASB guidance.
The ACL consists of general and specific components. The general component of management’s estimate of the allowancecovers loans collectively evaluated for loan losses covers non-classified loanscredit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management’sManagement's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, national and a reasonable and supportable economic trendsforecast described further below.
The determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis.
Loans individually evaluated for credit losses decreased by $767,000 to $2.1 million during the full year ended December 31, 2023, and conditions, industry conditions, trendsthe ACL related to these individually evaluated loans decreased by $93,000 during the same period largely due to the balance change and relationships that paid off in full during the fourth quarter of 2023.
25
Nonperforming loans, which includes Other Real Estate Owned ("OREO") but excludes performing troubled loan modifications ("TLM") and troubled debt restructuring ("TDR") loans, remained historically low during 2023 and were $1.9 million as of December 31, 2023, compared to $1.3 million as of December 31, 2022. The ACL was 1.11% of total loans, excluding loans held for sale, at December 31, 2023, compared to 1.24% as of January 1, 2023 (the CECL adoption date) and 0.64% at December 31, 2022. The liability for expected credit losses on unfunded loans and other commitments was $2.2 million on December 31, 2023, compared to $3.3 million as of January 1, 2023 (the CECL adoption date).
Net charge-offs were $364,000 during the full year 2023, compared to net charge-offs of $319,000 during the same period in 2022. Net charge-offs for checking accounts during the full year 2023 were $226,000 compared to $246,000 for the same period in the prior year. Net charge-offs as a percentage of average loans were 0.03% during the full year 2023 and 2022.
The provision for credit losses was $1.3 million during the full year 2023, compared to $250,000 in the same period in the prior year. The provision expense was deemed necessary due to the impact of substantial core loan growth partially offset by improvements in the FOMC forecast for unemployment and GDP growth. The FOMC forecast for change in real estate values,GDP (2023) improved from 0.5% in December of 2022 to 2.6% in December of 2023 while the unemployment rate forecast (2023) improved from 4.6% in December 2022 to 3.8% in December 2023.
The loan provision expense was offset by the decrease in unfunded commitments provision expense of $1.1 million in the full year 2023 due to changes in mix and expected funding rates during the year. Total unfunded commitments decreased $17.6 million in the full year 2023 compared to January 1, 2023.
Net provision for credit losses was $150,000 for the full year 2023.
26
Financial Condition
Summary
Total assets grew $190.8 million in the twelve months ended December 31, 2023. Core loans grew $201.5 million or 16.9% and were offset by a decline in investment securities of $33.2 million. Deposits, excluding brokered deposits, declined by $17.7 million during 2023, while borrowings increased by $150.0 million to fund loan demand and ensure ample liquidity. Deposit costs rose steadily during the year with larger increases coming in the second and third quarters as competition and rate increases amplified.
Securities
The Company’s securities balances as of December 31 were as follows:
(Dollars in thousands) |
|
|
|
|
| ||
| 2023 |
|
| 2022 |
| ||
Equity securities | $ | 7,505 |
|
| $ | 8,566 |
|
|
|
|
|
|
| ||
Available for Sale Securities at fair value |
|
|
|
|
| ||
U.S. Government and federal agency | $ | - |
|
| $ | - |
|
U.S. Treasury notes and bonds |
| 80,194 |
|
|
| 78,204 |
|
State and municipal |
| 234,682 |
|
|
| 229,938 |
|
Mortgage-backed |
| 188,501 |
|
|
| 208,563 |
|
Corporate |
| 204 |
|
|
| 711 |
|
Asset-backed securities |
| 11,017 |
|
|
| 12,333 |
|
Total | $ | 514,598 |
|
| $ | 529,749 |
|
|
|
|
|
|
| ||
Held to Maturity Securities at amortized cost |
|
|
|
|
| ||
U.S. Government and federal agency | $ | 2,972 |
|
| $ | 2,966 |
|
U.S. Treasury notes and bonds |
| - |
|
|
| - |
|
State and municipal |
| 196,098 |
|
|
| 201,890 |
|
Mortgage-backed |
| 188,329 |
|
|
| 200,473 |
|
Corporate |
| 20,013 |
|
|
| 19,603 |
|
Asset-backed securities |
| 547 |
|
|
| 974 |
|
Total | $ | 407,959 |
|
| $ | 425,906 |
|
Total investment securities declined $34.2 million from December 31, 2022 to December 31, 2023. ChoiceOne purchased $7.1 million of securities in 2023. This was offset by the liquidation of $4.8 million in securities during 2023, resulting in a $71,000 realized loss. Securities totaling $11.5 million were called or matured in 2023. ChoiceOne received principal payments for municipal and mortgage-backed securities totaling $37.4 million during 2023.
At December 31, 2023, the Company had $128.9 million in unrealized losses on its investment securities, including $69.7 million in unrealized losses on available for sale securities and $59.2 million in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. IdentificationThe issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
ChoiceOne utilizes interest rate derivatives as part of factorsits asset liability management strategy to considerhelp manage its interest rate risk position. In order to hedge the risk of rising rates and adjustmentsunrealized losses on securities resulting from the rising rates, ChoiceOne currently holds pay fixed, receive variable interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which partially offsets the reduction in shareholders' equity due to those factors involve management’s judgement. unrealized losses on securities available for sale. Refer to Note 8 - Derivatives and Hedging Activities of the consolidated financial statements for more discussion on ChoiceOne’s derivative position.
GivenEquity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.5 million as of December 31, 2023. As of December 31, 2022, equity securities included a MMP of $1.0 million and common stock of $7.6 million. The decline compared to December 31, 2022 was due to the significant estimatessale of an equity position during the third quarter.
27
Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).
Loans
The Company’s loan portfolio by call report code was as follows:
|
| December 31, 2023 |
|
| December 31, 2022 |
| ||||||||
(Dollars in thousands) | Call Report Codes | Balance |
| % |
|
| Balance |
| % |
| ||||
Construction & Development Loans | 1A2 |
| 112,877 |
|
| 8.0 | % |
|
| 55,426 |
|
| 4.7 | % |
1-4 Family Loans | 1A1, 1C1, 1C2A, 1C2B |
| 347,036 |
|
| 24.6 | % |
|
| 287,208 |
|
| 24.1 | % |
Multifamily Loans | 1D |
| 56,563 |
|
| 4.0 | % |
|
| 44,053 |
|
| 3.7 | % |
Owner Occupied CRE Loans | 1E1 |
| 281,515 |
|
| 20.0 | % |
|
| 266,652 |
|
| 22.4 | % |
Non-Owner Occupied CRE Loans | 1E2 |
| 298,265 |
|
| 21.1 | % |
|
| 220,779 |
|
| 18.6 | % |
Commercial & Industrial Loans | 2A2, 4A |
| 219,849 |
|
| 15.6 | % |
|
| 205,117 |
|
| 17.2 | % |
Farm & Agriculture Loans | 1B, 3 |
| 46,515 |
|
| 3.3 | % |
|
| 59,918 |
|
| 5.0 | % |
Consumer & Other Loans | 6B, 6C, 6D, 8, 9b2,10B |
| 48,033 |
|
| 3.4 | % |
|
| 50,629 |
|
| 4.3 | % |
|
|
|
|
|
|
|
|
|
| |||||
Total Loans |
|
| 1,410,653 |
|
|
|
|
| 1,189,782 |
|
|
|
Core loans, which exclude held for sale loans, and assumptions management makesloans to estimateother financial institutions, grew organically by $201.5 million in 2023. We have expanded our commercial lending team and improved our commercial loan process with automation. This has increased our commercial loan pipeline and growth. Our loan portfolio grew in various segments during 2023: non-owner occupied CRE loans ($77.5 million), 1-4 Family loans ($59.8 million), and construction & development loans ($57.5 million). The growth in non-owner occupied CRE loans came from our loan production offices in Holland, MI, Oakland, MI, Wyoming, MI and Macomb, MI, as experienced lenders were hired there in the past 18 months. CRE growth consisted of increases in seasoned hospitality groups, apartment buildings in the Grand Rapids, Michigan market, and professional office space in suburban areas with long-term leases and low loan to value ratios. 1-4 family loans grew as the 5/1 ARM product became popular as a mortgage option and it is less salable into the secondary market than more traditional mortgage options. The growth in construction and development loans included some apartment projects in Grand Rapids, Michigan, a healthy market with a low vacancy rate of 3.1% in 2023, according to Moody's Analytics REIS. These gains were partly offset by declines in farm & agricultural loans ($13.4 million) and consumer loans ($2.6 million) in the year ended December 31, 2023.
Loans to other financial institutions increased $19.4 million from December 31, 2022 to December 31, 2023. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations, and interest rates fluctuate with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current factor adjustmentsrate environment. ChoiceOne had elected to suspend this program in 2022 and restarted the program in June of 2023. Since restarting the program, ChoiceOne has earned an interest rate of approximately 7.9% on loans to other financial institutions.
ChoiceOne recorded accretion income related to acquired loans in the amount of $1.7 million in 2023 and $2.0 million during 2022. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. ChoiceOne estimates that roughly $2.5 million will accrete into income over the next two to four years.
As part of its review of the allowanceloan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of loans accounted for on a nonaccrual basis, loans not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments, and troubled loan modifications which are accruing and initiated in the past year. It is noted that prior to January 1, 2023, loans classified as troubled debt restructurings that were not performing as of December 31, 2022 are included in the table below.
28
The balances of these nonperforming loans as of December 31 were as follows:
(Dollars in thousands) |
|
|
|
|
| ||
| 2023 |
|
| 2022 |
| ||
Loans accounted for on a nonaccrual basis | $ | 1,723 |
|
| $ | 1,263 |
|
Loans contractually past due 90 days or more as to principal or interest payments |
| - |
|
|
| - |
|
Loans modified to borrowers experiencing financial difficulty at December 31, 2023 and troubled debt restructurings as of December 31, 2022. |
| 189 |
|
|
| 1,404 |
|
Total | $ | 1,912 |
|
| $ | 2,667 |
|
Nonaccrual loans included $1.7 million in residential real estate loans as of December 31, 2023, compared to $1.3 million in residential real estate loans as of December 31, 2022. Loans considered troubled loan modifications which were not on a nonaccrual basis and were not 90 days or more past due as to principal or interest payments consisted of $60,000 in commercial and industrial loans and $129,000 in residential real estate loans at December 31, 2023, compared to troubled debt restructured loans which were not performing were $3,000 in agricultural loans, $58,000 in commercial and industrial loans, $131,000 in commercial real estate loans and $1.2 million in residential real estate loans at December 31, 2022.
Management also maintains a list of loans that are not classified as nonperforming loans but where some concern exists as to the borrowers’ abilities to comply with the original loan terms. There were 22 loans totaling $357,000 fitting this description as of December 31, 2023, and 10 loans totaling $180,000 fitting this description as of December 31, 2022.
Deposits and Other Funding Sources
The Company’s deposit balances as of December 31 were as follows:
(Dollars in thousands) |
|
|
|
|
| ||
| 2023 |
|
| 2022 |
| ||
Noninterest-bearing demand deposits | $ | 547,625 |
|
| $ | 599,579 |
|
Interest-bearing demand deposits |
| 599,681 |
|
|
| 638,641 |
|
Money market deposits |
| 247,602 |
|
|
| 214,026 |
|
Savings deposits |
| 336,851 |
|
|
| 427,583 |
|
Local certificates of deposit |
| 366,851 |
|
|
| 236,431 |
|
Brokered certificates of deposit |
| 23,445 |
|
|
| 1,743 |
|
Total deposits | $ | 2,122,055 |
|
| $ | 2,118,003 |
|
Deposits, excluding brokered deposits, increased by $14.7 million or an annualized 2.8% in the fourth quarter of 2023 and decreased $17.7 million or 0.8% as of December 31, 2023 compared to December 31, 2022. The decrease in deposits since December 31, 2022 was largely concentrated in the first quarter of 2023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates in money market securities or other investments. Deposits grew in the third and fourth quarters of 2023 due to new business, recapture of deposit losses, performing audit proceduresand some seasonalityin municipal balances. ChoiceOne continues to evaluatebe proactive in managing its liquidity position by using brokered deposits, the reasonablenessBank Term Funding Program ("BTFP"), and FHLB advances to ensure ample liquidity.
At December 31, 2023, total available borrowing capacity from all sources was $933.3 million. Total deposits exceeding the FDIC insured limit of management’s estimates$250,000 for individual and assumptions required$500,000 for joint accounts were $769.7 million or 36.3% of deposits at December 31, 2023, compared to $823.2 million, or 38.9% of total deposits at December 31, 2022. Core deposits, which we define as insured branch deposits less certificates of deposit, totaled $823.2 million or 38.8% of total deposits at December 31, 2023.
The increase in short term interest rates has led to higher deposit costs, which rose to 1.57% in the last quarter of 2023, compared to 1.36% in the previous quarter and 0.47% in the fourth quarter of 2022. Deposit costs were 1.14% for the full year 2023, compared to 0.27% for the full year 2022, as deposits reprice and customers shift to CD and other interest bearing products. This trend is likely to persist. ChoiceOne is taking active measures to control these costs and expects to continue to pay lower rates on deposits than the federal funds rate. Interest expense on borrowings for the twelve months ended December 31, 2023, increased $7.2 million, compared to the same period in the prior year, due to increases in borrowing amounts and interest rates. Borrowings include $170 million from the BTFP and $30 million of FHLB borrowings at a high degreeweighted average fixed rate of auditor judgment4.7% at December 31, 2023. Total cost of funds increased to
29
1.91% in the fourth quarter of 2023 compared to 1.70% in the third quarter of 2023 and 0.59% in the fourth quarter of 2022. Total cost of funds was 1.44% for the full year 2023, compared to 0.35% for the full year 2022.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios. ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the mark-to-market adjustment.
Shareholders’ Equity
Shareholders’ equity totaled $195.6 million as of December 31, 2023, up from $168.9 million as of December 31, 2022. This increase is due to retained earnings increasing $5.3 million due to earnings and a reduction in accumulated other compressive loss (AOCI) of $20.2 million. The improvement in AOCI, despite the rise in interest rates, is due to both the shortening duration and maturing (paydowns) of the securities portfolio, as well as an offsetting increase in unrealized gain of the pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 12.4% as of December 31, 2023, compared to 13.0% on December 31, 2022.
ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On December 31, 2023, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, a fair value of $8.9 million and an increased extentaverage contract length of effort.
How8 to 9 years. These derivative instruments increase in value as long-term interest rates rise, which partially offsets the Critical Audit Matter Was Addressedreduction in equity due to unrealized losses on securities available for sale. Included in the Audittotal is $200.0 million of forward starting pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities. These forward starting swaps will pay a fixed coupon of 2.75% while receiving SOFR starting in late April 2024. At the current SOFR rate of 5.38%, these forward starting swaps would contribute approximately $438,000 monthly starting in May 2024 which will partially offset interest expense. In addition, in March 2023, ChoiceOne eliminated all receive-fixed, pay floating swap agreements for a cash payment of $4.2 million. The loss is being amortized in interest income with an expense of approximately $273,000 monthly through April 2024, which was the remaining period of the agreements.
Our audit procedures relatedOn January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million. The increase in the ACL and the cost of the liability resulted in a decrease in retained earnings on our consolidated balance sheet equal to the current factor adjustments usedafter-tax impact, with the tax impact portion being recorded in the estimate of the allowance for loan losses included the following, among others:deferred taxes in our consolidated balance sheet in accordance with FASB guidance.
|
|
|
|
|
|
|
|
Acquisition of Community Shores Bank Corporation – Valuation of Loans – Refer to Notes 1 andNote 21 to the Consolidated Financial Statements
Critical Audit Matter Description
The Company completed the acquisition of Community Shores Bank Corporation (“Community Shores”) on July 1, 2020. The assets acquired and liabilities assumed were recorded at their acquisition date fair values. Management utilized a third-party specialist to assist in the estimation of the fair value of loans at the acquisition date based on a discounted cash flow approach. The fair value adjustments required management to make significant estimates and assumptions, including the probability of default, loss given default, and realizable collateral values of the acquired loans.
Given the significant estimates and assumptions management made to estimate the fair value of acquired loans, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of significant estimates and assumptions used in the valuation of acquired loans included the following, among others:
|
|
|
|
|
|
|
|
|
|
/s/Plante & Moran, PLLC
We have served as the Company’s auditor since 2006.
Auburn Hills, Michigan
March 30, 2021
ChoiceOne Financial Services, Inc.Consolidated Balance Sheets
December 31, | ||||||||
(Dollars in thousands) | 2020 | 2019 | ||||||
Assets | ||||||||
Cash and due from banks | $ | 79,169 | $ | 59,308 | ||||
Time deposits in other financial institutions | 350 | 250 | ||||||
Cash and cash equivalents | 79,519 | 59,558 | ||||||
Equity securities at fair value (Note 2) | 2,896 | 2,851 | ||||||
Securities available for sale (Note 2) | 574,787 | 339,579 | ||||||
Federal Home Loan Bank stock | 3,824 | 3,524 | ||||||
Federal Reserve Bank stock | 4,180 | 2,934 | ||||||
Loans held for sale | 12,921 | 3,095 | ||||||
Loans to other financial institutions | 35,209 | 51,048 | ||||||
Loans (Note 3) | 1,069,668 | 802,048 | ||||||
Allowance for loan losses (Note 3) | (7,593 | ) | (4,057 | ) | ||||
Loans, net | 1,062,075 | 797,991 | ||||||
Premises and equipment, net (Note 5) | 29,489 | 24,265 | ||||||
Other real estate owned, net (Note 7) | 266 | 929 | ||||||
Cash value of life insurance policies | 32,751 | 31,979 | ||||||
Goodwill (Note 6) | 60,506 | 52,870 | ||||||
Core deposit intangible (Note 6) | 5,269 | 6,006 | ||||||
Other assets | 15,650 | 9,499 | ||||||
Total assets | $ | 1,919,342 | $ | 1,386,128 | ||||
Liabilities | ||||||||
Deposits – noninterest-bearing (Note 8) | $ | 477,654 | $ | 287,460 | ||||
Deposits – interest-bearing (Note 8) | 1,196,924 | 867,142 | ||||||
Total deposits | 1,674,578 | 1,154,602 | ||||||
Borrowings (Note 9) | 9,327 | 33,198 | ||||||
Subordinated debentures (Note 10) | 3,089 | 0 | ||||||
Other liabilities (Notes 11 and 13) | 5,080 | 6,189 | ||||||
Total liabilities | 1,692,074 | 1,193,989 | ||||||
Shareholders' Equity | ||||||||
Preferred stock; shares authorized: 100,000; shares outstanding: none | 0 | 0 | ||||||
Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,796,352 at December 31, 2020 and 7,245,088 at December 31, 2019 (Note 14) | 178,750 | 162,610 | ||||||
Retained earnings | 37,490 | 28,051 | ||||||
Accumulated other comprehensive income, net | 11,028 | 1,478 | ||||||
Total shareholders’ equity | 227,268 | 192,139 | ||||||
Total liabilities and shareholders’ equity | $ | 1,919,342 | $ | 1,386,128 |
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.Consolidated Statements of Income
Years Ended | ||||||||||||
(Dollars in thousands, except per share data) | December 31, | |||||||||||
2020 | 2019 | 2018 | ||||||||||
Interest income | ||||||||||||
Loans, including fees | $ | 46,874 | $ | 26,777 | $ | 20,033 | ||||||
Securities: | ||||||||||||
Taxable | 5,891 | 3,956 | 2,896 | |||||||||
Tax exempt | 2,684 | 1,472 | 1,465 | |||||||||
Other | 266 | 268 | 131 | |||||||||
Total interest income | 55,715 | 32,473 | 24,525 | |||||||||
Interest expense | ||||||||||||
Deposits | 4,178 | 4,188 | 2,175 | |||||||||
Advances from Federal Home Loan Bank | 220 | 455 | 235 | |||||||||
Other | 246 | 57 | 51 | |||||||||
Total interest expense | 4,644 | 4,700 | 2,461 | |||||||||
Net interest income | 51,071 | 27,773 | 22,064 | |||||||||
Provision for loan losses | 4,000 | 0 | 35 | |||||||||
Net interest income after provision for loan losses | 47,071 | 27,773 | 22,029 | |||||||||
Noninterest income | ||||||||||||
Customer service charges | 7,252 | 5,277 | 4,525 | |||||||||
Insurance and investment commissions | 541 | 310 | 335 | |||||||||
Mortgage servicing rights (Note 4) | 3,180 | 822 | 441 | |||||||||
Gains on sales of loans (Note 4) | 8,133 | 1,129 | 562 | |||||||||
Net gains on sales of securities (Note 2) | 1,308 | 22 | 34 | |||||||||
Net (losses) gains on sales and write-downs of other assets (Note 7) | (13 | ) | 55 | 83 | ||||||||
Earnings on life insurance policies | 772 | 773 | 385 | |||||||||
Trust income | 739 | 162 | 0 | |||||||||
Change in market value of equity securities | (155 | ) | 0 | 71 | ||||||||
Other | 941 | 618 | 484 | |||||||||
Total noninterest income | 22,698 | 9,168 | 6,920 | |||||||||
Noninterest expense | ||||||||||||
Salaries and benefits (Note 13 and 14) | 26,539 | 14,401 | 10,997 | |||||||||
Occupancy and equipment (Note 5) | 5,783 | 3,557 | 2,722 | |||||||||
Data processing | 6,765 | 3,210 | 2,205 | |||||||||
Professional fees | 3,716 | 3,112 | 1,349 | |||||||||
Supplies and postage | 844 | 407 | 408 | |||||||||
Advertising and promotional | 588 | 528 | 308 | |||||||||
Intangible amortization (Note 6) | 1,498 | 353 | 0 | |||||||||
FDIC insurance | 450 | 45 | 185 | |||||||||
Other | 4,701 | 2,863 | 2,287 | |||||||||
Total noninterest expense | 50,884 | 28,476 | 20,461 | |||||||||
Income before income tax | 18,885 | 8,465 | 8,488 | |||||||||
Income tax expense | 3,272 | 1,294 | 1,155 | |||||||||
Net income | $ | 15,613 | $ | 7,171 | $ | 7,333 | ||||||
Basic earnings per share (Note 15) | $ | 2.08 | $ | 1.58 | $ | 2.03 | ||||||
Diluted earnings per share (Note 15) | $ | 2.07 | $ | 1.58 | $ | 2.02 | ||||||
Dividends declared per share | $ | 0.82 | $ | 1.40 | $ | 0.71 |
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.
Consolidated Statements of Comprehensive Income
Years Ended | ||||||||||||
(Dollars in thousands) | December 31, | |||||||||||
2020 | 2019 | 2018 | ||||||||||
Net income | $ | 15,613 | $ | 7,171 | $ | 7,333 | ||||||
Other comprehensive income: | ||||||||||||
Changes in net unrealized gains (losses) on investment securities available for sale, net of tax expense (benefit) of $2,846, $583, and $(196) for the years ended December 31, 2020, 2019, and 2018, respectively. | 10,708 | 2,246 | (737 | ) | ||||||||
Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $275, $5, and $7 for the years ended December 31, 2020, 2019, and 2018, respectively. | (1,033 | ) | (18 | ) | (27 | ) | ||||||
Change in adjustment for postretirement benefits, net of tax expense (benefit) of $(33), $(5), and $10 for the years ended December 31, 2020, 2019, and 2018, respectively. | (125 | ) | (18 | ) | 39 | |||||||
Other comprehensive income, net of tax | 9,550 | 2,210 | (725 | ) | ||||||||
Comprehensive income | $ | 25,163 | $ | 9,381 | $ | 6,608 |
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.Consolidated Statements of Changes in Shareholders’ Equity
Accumulated | ||||||||||||||||||||
Common | Other | |||||||||||||||||||
Stock and | Comprehensive | |||||||||||||||||||
Number of | Paid in | Retained | Income/(Loss), | |||||||||||||||||
(Dollars in thousands, except per share data) | Shares | Capital | Earnings | Net | Total | |||||||||||||||
Balance, January 1, 2018 | 3,448,569 | $ | 50,290 | $ | 26,023 | $ | 237 | $ | 76,550 | |||||||||||
Net income | 7,333 | 7,333 | ||||||||||||||||||
Other comprehensive loss | (725 | ) | (725 | ) | ||||||||||||||||
Shares issued | 7,904 | 126 | 126 | |||||||||||||||||
Shares repurchased | (20,628 | ) | (523 | ) | (523 | ) | ||||||||||||||
Effect of employee stock purchases | 13 | 13 | ||||||||||||||||||
Stock options exercised and issued (1) | 1,241 | 0 | ||||||||||||||||||
Stock-based compensation expense | 282 | 282 | ||||||||||||||||||
Restricted stock units issued | 7,303 | - | ||||||||||||||||||
Adoption effect of ASU 2016-01 (3) | 244 | (244 | ) | 0 | ||||||||||||||||
Stock dividend declared (5%) | 172,094 | 4,335 | (4,342 | ) | (7 | ) | ||||||||||||||
Cash dividends declared ($0.71 per share) (2) | (2,572 | ) | (2,572 | ) | ||||||||||||||||
Balance, December 31, 2018 | 3,616,483 | $ | 54,523 | $ | 26,686 | $ | (732 | ) | $ | 80,477 | ||||||||||
Net income | 7,171 | 7,171 | ||||||||||||||||||
Other comprehensive income | 2,210 | 2,210 | ||||||||||||||||||
Shares issued | 8,118 | 25 | 25 | |||||||||||||||||
Shares repurchased | (2,228 | ) | (67 | ) | (67 | ) | ||||||||||||||
Effect of employee stock purchases | 14 | 14 | ||||||||||||||||||
Stock options exercised and issued (1) | 3,913 | 78 | 78 | |||||||||||||||||
Stock-based compensation expense | 398 | 398 | ||||||||||||||||||
Restricted stock units issued | 14,930 | 0 | ||||||||||||||||||
Merger with County Bank Corp, net of issuance costs | 3,603,872 | 107,639 | 107,639 | |||||||||||||||||
Cash dividends declared ($1.40 per share) | (5,806 | ) | (5,806 | ) | ||||||||||||||||
Balance, December 31, 2019 | 7,245,088 | $ | 162,610 | $ | 28,051 | $ | 1,478 | $ | 192,139 | |||||||||||
Net income | 15,613 | 15,613 | ||||||||||||||||||
Other comprehensive income | 9,550 | 9,550 | ||||||||||||||||||
Shares issued | 19,583 | 451 | 451 | |||||||||||||||||
Effect of employee stock purchases | 24 | 24 | ||||||||||||||||||
Stock options exercised and issued (1) | 7,261 | 0 | ||||||||||||||||||
Stock-based compensation expense | 171 | 171 | ||||||||||||||||||
Restricted stock units issued | 365 | 0 | ||||||||||||||||||
Merger with Community Shores Bank Corporation | 524,055 | 15,494 | 15,494 | |||||||||||||||||
Cash dividends declared ($0.82 per share) | (6,174 | ) | (6,174 | ) | ||||||||||||||||
Balance, December 31, 2020 | 7,796,352 | $ | 178,750 | $ | 37,490 | $ | 11,028 | $ | 227,268 |
(1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises.
(2) Adjusted for 5% stock dividend issued on May 31, 2018.
(3) ASU 2016-01 is further addressed in Note 1 to the financial statements.
See accompanying notes to consolidated financial statements.
ChoiceOne Financial Services, Inc.Consolidated Statements of Cash Flows
Years Ended | ||||||||||||
(Dollars in thousands) | December 31, | |||||||||||
2020 | 2019 | 2018 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 15,613 | $ | 7,171 | $ | 7,333 | ||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Provision for loan losses | 4,000 | 0 | 35 | |||||||||
Depreciation | 2,721 | 1,610 | 1,183 | |||||||||
Amortization | 4,985 | 1,517 | 893 | |||||||||
Compensation expense on employee and director stock purchases, stock options, and restricted stock units | 512 | 373 | 344 | |||||||||
Net gains on sales of securities | (1,308 | ) | (22 | ) | (34 | ) | ||||||
Net change in market value of equity securities | 155 | 0 | (71 | ) | ||||||||
Gains on sales of loans | (11,313 | ) | (1,951 | ) | (1,003 | ) | ||||||
Loans originated for sale | (326,286 | ) | (63,920 | ) | (33,555 | ) | ||||||
Proceeds from loan sales | 325,306 | 62,763 | 34,872 | |||||||||
Earnings on bank-owned life insurance | (772 | ) | (485 | ) | (385 | ) | ||||||
Proceeds from BOLI policy | 0 | 605 | 0 | |||||||||
Earnings on death benefit from bank-owned life insurance | 0 | (288 | ) | 0 | ||||||||
(Gains) on sales of other real estate owned | (64 | ) | (54 | ) | (79 | ) | ||||||
Write downs of ORE | 80 | 0 | 0 | |||||||||
Proceeds from sales of other real estate owned | 1,384 | 938 | 515 | |||||||||
Costs capitalized to other real estate | (19 | ) | 0 | 0 | ||||||||
Deferred federal income tax expense | 202 | 310 | 209 | |||||||||
Net change in: | ||||||||||||
Other assets | (3,186 | ) | 2,128 | (875 | ) | |||||||
Other liabilities | (3,532 | ) | (1,493 | ) | 573 | |||||||
Net cash provided by operating activities | 8,478 | 9,202 | 9,955 | |||||||||
Cash flows from investing activities: | ||||||||||||
Sales of securities available for sale | 121,942 | 178,450 | 2,634 | |||||||||
Sales of equity securities | 0 | 463 | 91 | |||||||||
Maturities, prepayments and calls of securities available for sale | 48,787 | 47,816 | 13,443 | |||||||||
Purchases of securities available for sale | (375,670 | ) | (209,763 | ) | (31,450 | ) | ||||||
Purchase of Federal Reserve Bank stock | 0 | (1 | ) | 0 | ||||||||
Loan originations and payments, net | (79,594 | ) | (485 | ) | (24,366 | ) | ||||||
Additions to premises and equipment | (1,852 | ) | (766 | ) | (4,207 | ) | ||||||
Cash received from merger with Community Shores Bank Corporation | 35,636 | 0 | 0 | |||||||||
Cash received from merger with County Bank Corp | 0 | 20,638 | 0 | |||||||||
Net cash (used in)/provided by investing activities | (250,751 | ) | 36,352 | (43,855 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
Net change in deposits | 292,145 | 3,986 | 37,162 | |||||||||
Net change in repurchase agreements | 0 | 0 | (7,148 | ) | ||||||||
Net change in fed funds purchased | 0 | (8,600 | ) | 4,800 | ||||||||
Proceeds from borrowings | 10,050 | 115,000 | 128,500 | |||||||||
Payments on borrowings | (33,921 | ) | (110,035 | ) | (143,535 | ) | ||||||
Repurchase of common stock | 0 | (67 | ) | (523 | ) | |||||||
Issuance of common stock | 134 | 142 | 77 | |||||||||
Cash dividends and fractional shares from merger | (6,174 | ) | (5,815 | ) | (2,580 | ) | ||||||
Cash related to equity issuance for merger | 0 | (297 | ) | 0 | ||||||||
Net cash provided by/(used in) financing activities | 262,234 | (5,686 | ) | 16,753 | ||||||||
Net change in cash and cash equivalents | 19,961 | 39,868 | (17,147 | ) | ||||||||
Beginning cash and cash equivalents | 59,558 | 19,690 | 36,837 | |||||||||
Ending cash and cash equivalents | $ | 79,519 | $ | 59,558 | $ | 19,690 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 4,872 | $ | 4,500 | $ | 2,300 | ||||||
Cash paid for income taxes | 5,001 | 1,035 | 850 | |||||||||
Loans transferred to other real estate owned | 372 | 347 | 432 |
See accompanying notes to consolidated financial statements.
Note 1 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements presents regulatory capital information for ChoiceOne and the Bank at the end of 2023 and 2022. Management will monitor these capital ratios during 2024 as they relate to asset growth and earnings retention. ChoiceOne’s Board of Directors and management do not plan to allow capital to decrease below those levels necessary to be considered "well capitalized" by regulatory guidelines.
Table 4 – Contractual Obligations
The following table discloses information regarding the maturity of ChoiceOne’s contractual obligations at December 31, 2023:
| Payment Due by Period |
| |||||||||||||||||
|
|
|
| Less |
|
|
|
|
|
|
|
| More |
| |||||
|
|
|
| than |
|
| 1 - 3 |
|
| 3 - 5 |
|
| than |
| |||||
(Dollars in thousands) | Total |
|
| 1 year |
|
| Years |
|
| Years |
|
| 5 Years |
| |||||
Time deposits | $ | 390,296 |
|
| $ | 351,516 |
|
| $ | 33,659 |
|
| $ | 4,855 |
|
| $ | 266 |
|
Borrowings |
| 200,000 |
|
|
| 170,000 |
|
|
| 30,000 |
|
|
| - |
|
|
| - |
|
ChoiceOne Capital Trust (1) |
| 4,500 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,500 |
|
ChoiceOne Subordinated Debenture (2) |
| 32,500 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32,500 |
|
Operating leases |
| 777 |
|
|
| 314 |
|
|
| 398 |
|
|
| 65 |
|
|
| - |
|
Other obligations |
| 94 |
|
|
| 51 |
|
|
| 20 |
|
|
| 18 |
|
|
| 5 |
|
Total | $ | 628,167 |
|
| $ | 521,881 |
|
| $ | 64,077 |
|
| $ | 4,938 |
|
| $ | 37,271 |
|
30
Liquidity and Interest Rate Risk
Net cash provided by operating activities was $46.5 million in 2023 compared to $45.0 million in 2022. The change was due to lower net proceeds from loan sales and an increase in other assets in 2023 compared to 2022. Net cash used in investing activities was $181.4 million in 2023 compared to $90.5 million in 2022. ChoiceOne had loan originations and payments of $221.2 million in the full year 2023, compared to $130.6 million in the same period in the prior year. Net cash provided by financing activities was $146.4 million in 2023, compared to $57.5 million in 2022. ChoiceOne had net cash from borrowings of $150.0 million in the full year 2023, compared to $0 in the full year 2022.
ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.
Liquidity risk deals with ChoiceOne's ability to meet its wholly-owned subsidiaries,cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $170.0 million in outstanding borrowings from the Federal Reserve’s Bank (the "Bank"),Term Funding Program (BTFP) as of December 31, 2023 and $30.0 million in outstanding borrowings at the FHLB as of December 31, 2023. ChoiceOne Bank’s wholly-owned subsidiaries: elected to restructure the BTFP balance of $170 million in January 2024 in order to take advantage of lower rates and extend the maturity. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At December 31, 2023, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $933.3 million.
ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), Lakestone Financial Services, Inc. ("Lakestone Financial"),continues to review its liquidity management and Community Shores Financial Services, Inc. (“Community Shores Financial”). Intercompany transactionshas taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in 2023, pledging securities to FHLB and balances have been eliminatedthe Federal Reserve Bank in consolidation. order to increase borrowing capacity and using alternative funding sources such as brokered deposits.
31
NON-GAAP FINANCIAL MEASURES
Community Shores Capital Trust I (the “Capital Trust”) owns all of the common securities of this special purpose trust. UnderThis report contains financial measures that are not defined in U.S. generally accepted accounting principles ("GAAP"),. Management believes this non-GAAP financial measure provides additional information that is useful to investors in helping to understand the Capital Trust is not consolidated because it isunderlying financial performance of ChoiceOne.
Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a variable interest entitymanner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.
32
Critical Accounting Policies And Estimates
Management’s discussion and ChoiceOne is not the primary beneficiary.
Recent Mergers
On October 1, 2019, ChoiceOne completed the mergeranalysis of County Bank Corp. (“County”) with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the year ended December 31, 2019 include the impact of the merger, which was effective as of October 1, 2019. For additional details regarding the merger with County, see Note 21 (Business Combination) below.
On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the year ended December 31, 2020 include the impact of the merger, which was effective as of July 1, 2020. For additional details regarding the merger with Community Shores, see Note 21 (Business Combination) below.
The Coronavirus (COVID-19) Outbreak
The coronavirus outbreak (COVID-19) was declared a pandemic by the World Health Organization in March 2020. Since first being reported in China, the coronavirus has spread globally, including in the United States. The coronavirus has had a substantial impact on numerous aspects of life in the United States, including threats to public health, increased volatility in markets, and severe effects on national and local economies.
COVID-19 has already had numerous effects on ChoiceOne. To protect the health of customers, employees, and others in its communities, ChoiceOne closed the lobbies of its branches from late March 2020 to mid- June 2020. During the period that lobbies were closed, ChoiceOne continued to provide its full scope of services to its customers through drive-up branch service, in-person meetings by appointment, and mobile banking.
COVID-19 has also affected ChoiceOne's customers. Although there were 0 material increases in delinquencies or net charge-offs during 2020, ChoiceOne increased its provision for loan losses by $4.0 million in 2020 as compared to 2019 in anticipation of an expected increase in levels of delinquencies and loan losses related to the impact of COVID-19. Consistent with federal banking agencies' revised “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by COVID-19 and has granted approximately 750 payment deferrals on numerous loans to borrowers affected by the pandemic. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferment in accordance with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act; however, significantly fewer customers requested further deferment. Less than 40 deferments remained active with loan balances totaling just $3.2 million at December 31, 2020 with all other previous deferments resuming their payments in accordance with loan terms. ChoiceOne will continue to attempt to assist borrowers using various means in appropriate circumstances, as needed.
In addition, ChoiceOne processed over $126 million in PPP loans through December 31, 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee based on the size of the loan. The initial PPP expired on August 8, 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, providing additional funding for the PPP. This round of the PPP opened on February 24, 2021 and, absent extension, will expire on March 31, 2021 (or such earlier date as funds are exhausted). Gross fees associated with PPP loans originated through December 31, 2020 totaled $5.0 million. Costs associated with these loans were approximately $199,000 and the net of $4.8 million is being recognized over the term of the loans. Upon the SBA forgiveness, unrecognized fees are then recognized into interest income. Fee income, which was included in interest income, recognized in the year ended December 31, 2020 was $3.0 million. $23.4 million in PPP loans were forgiven during the year ended December 31, 2020.
Nature of Operations
The Bank is a full-service community bank that offers commercial, consumer, and real estate loansoperations as well as traditional demand, savings and time deposits to both commercial and consumer clients withindisclosures found elsewhere in this report are based upon the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate.
Community Shores Financial is a wholly-owned subsidiary of the Bank. The primary source of revenue for Community Shores Financial is referral fee income from a local insurance agency, Lakeshore Employee Benefits. Lakeshore Employee Benefits offers, among other things, employer-sponsored benefit plans.
The Insurance Agency is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker. Lakestone Financial is a wholly-owned subsidiary of the Bank, which earns revenues through the sale of annuities and other third party investment products.
Together, the Bank and the other subsidiaries account for substantially all of ChoiceOne’s assets, revenues and operating income.
Use of Estimates
To prepareCompany’s consolidated financial statements, which have been prepared in conformityaccordance with accounting principles generally accepted in the United States of America, ChoiceOne’s management makesAmerica. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the market value of securities, the amount of the allowance for credit losses, loan servicing rights, carrying value of goodwill, and income taxes. Actual results could differ from those estimates.
Allowance for Credit Losses ("ACL")
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the former “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ACL. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. A reasonable and supportable economic forecast is a key component of the CECL methodology.
ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the ACL of $7.2 million, which included a $5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $3.3 million, which included a $2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.
The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne identified an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available information. These estimatesfor any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible.
The ACL consists of general and assumptions affect the amounts reportedspecific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, includingvolume of loans, changes in interest ratesunderwriting standards, trends in loan review findings, the experience and other generalability of lending staff, and a reasonable and supportable economic businessforecast described further below.
The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and political conditions, includingallows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the effectstime frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the COVID-19 pandemic, and its potential effectsforecast period, we revert to historical loan data based on thean ongoing evaluation of each economic environment, our customers and our operations,forecast in relation to then current economic conditions as well as any changesdeveloping loan loss activity and resulting historical data. As of December 31, 2023, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.
33
We are not required to federal, statedevelop and local government laws, regulationsuse our own economic forecast model, and orders in connectionwe elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.
Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with consideration of the pandemic. Actual results may differ from these estimates. Estimatescurrent economic climate. Prepayment speeds and curtailment were updated during the fourth quarter of 2023; however, the effect was insignificant.
We are also required to consider expected credit losses associated with securities availableloan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for sale,off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management's judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan.
Allowance for Loan Losses
Prior to the adoption of CECL on January 1, 2023, management calculated the allowance for loan losses other real estate owned, loan servicing rights, goodwill, and fair values of certain financial instruments are particularly susceptible to change.
Cash and Cash Equivalents
Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less.
Securities
Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Effective January 1, 2018, equity securities are reported at their fair value with changes in market value flowing through net income. Prior to 2018, equity securities were accounted for in a manner similar to available for sale debt securities.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold.
Management evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether ChoiceOne has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether ChoiceOne intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If ChoiceOne intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but ChoiceOne does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.
Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured.
During 2020, the Company funded loans under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") to provide liquidity to small businesses during the COVID-19 pandemic. The loans are guaranteed by the SBA and are forgivable by the SBA if certain criteria are met. The Company originated PPP loans totaling $126.4 million during 2020. PPP processing fees received from the SBA totaling $5.0 million were deferred along with loan origination costs and recognized as interest income using the effective yield method. Upon forgiveness of a loan and resulting repayment by the SBA, any unrecognized net fee for a given loan is recognized as interest income. $3.0 million of fees from the SBA were recognized in 2020.
No allowance for loan loss is recorded for loans acquired in a business combination unless losses are incurred subsequent to the acquisition date.
Acquired loans are considered purchased credit impaired (“PCI”) if as of the acquisition date, management determines the loan has evidence of deterioration in credit quality since origination and it is probable at acquisition the Company will be unable to collect all contractually required payments. The discount related to credit quality for PCI loans is recorded as an adjustment to the loan balance as of the acquisition date and is not accreted into income. Management subsequently estimates expected cash flows on an individual loan basis. If the present value of expected cash flows is less than a loan's carrying amount, an allowance for loan loss is recorded through the provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, the excess may be reclassified to an accretable difference and recognized into income over the loan's remaining life.
For non-PCI loans, the difference between acquisition date fair value and expected cash flows is accreted into income over a pool's expected life using the level yield method.
Loans to Other Financial Institutions
Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Similar to loans held for sale, these loans are excluded from the allowance for loan losses as the risk of default is minimal during the short time period held. Loans to other financial institutions are excluded from Note 3. As of December 31, 2020 and 2019none of the loans to other financial institutions were classified as impaired or nonaccrual.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possibl possible.
The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component of management's estimate of the allowance for loan losses covers non-classifiednon-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions.
A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings (TDR)("TDR"). A loan is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.
Securities
34
Securities Available for Sale – For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In March making this assessment, management considers any changes to the rating of 2020,the CARES Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modificationssecurity by rating agencies and adverse conditions specifically related to the COVID-19 pandemic need not be classified as TDRs. As a resultissuer of the pandemic,security, among other factors. If this assessment indicates that a credit loss exists, the Company providedpresent value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a modification programcredit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to borrowerssell is met. Any impairment that included certain concessions such ashas not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At December 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS. Accrued interest only or payment deferrals.receivable on debt securities was excluded from the estimate of credit losses.
Securities Held to Maturity – Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Company granted pandemic-relatedACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At December 31, 2023, the ACL related to securities HTM is insignificant.
Troubled Loan Modifications
FASB also issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans totaling $148to borrowers experiencing financial difficulty.
Loan Servicing Rights
Loan servicing rights represent the estimated value of servicing loans that are sold with servicing retained by ChoiceOne and are initially recorded at estimated fair value. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Management’s accounting treatment of loan servicing rights is estimated based on current prepayment speeds that are typically market driven.
Management believes the accounting estimate related to loan servicing rights is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of significant changes within long-term interest rates affecting the prepayment speeds for current loans being serviced and (2) the impact of recognizing an impairment loss could have a material effect on ChoiceOne’s net income. Management has obtained a third-party valuation of its loan servicing rights to corroborate its current carrying value at the end of each reporting period.
Goodwill
Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit’s fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County Bank Corp in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.
35
During the prior year, ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.
Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through December 31, 2023, and as a result that it is more likely than not that there was no goodwill impairment as of December 31, 2023.
The below table shows the inputs and assumptions addressed and the weight and nature of the impact to the analysis.
Relevant Events and Circumstances | Inputs and assumptions that most affect fair value | Weight of events and circumstances | Nature of impact (positive / neutral / negative) | Nature of evidence - subjective or objective |
Macroeconomic conditions | ||||
Interest rate increases | Discount rate | High | Neutral | Subjective |
Interest rate increases have driven deposit costs up | Projections - cost | High | Negative | Objective |
Tax rates | Projections - cost | Low | Neutral | Objective |
Industry conditions | ||||
Markets multiples have declined | ||||
Price to TBV | Mod | Negative | Objective | |
Price to TBV (AOCI) | Mod | Negative | Objective | |
Price to Earnings Multiple | Mod | Negative | Objective | |
Core deposit premium | Mod | Positive | Objective | |
Entity Specific events and circumstances | ||||
Growth Rates are higher than anticipated | Projections - Asset growth rate | High | Positive | Objective |
Deferred Tax Assets and Liabilities
Income taxes include both a current and deferred portion. Deferred tax assets and liabilities are recorded to account for differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. Generally accepted accounting principles require that deferred tax assets be reviewed to determine whether a valuation allowance should be established using a “more likely than not” standard. Based on its review of ChoiceOne’s deferred tax assets as of December 31, 2023, management determined that no valuation allowance was necessary. The valuation of current and deferred income tax assets and liabilities is considered critical, as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and the federal tax code.
36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk is related to liquidity because each is affected by maturing assets and sources of funds. ChoiceOne’s Risk Committee attempts to stabilize the interest rate spread and avoid possible adverse effects when unusual or rapid changes in interest rates occur. The Risk Committee uses a simulation model to measure the Bank’s interest rate risk. The model incorporates changes in interest rates on rate-sensitive assets and liabilities. The degree of rate sensitivity is affected by prepayment assumptions that exist in the assets and liabilities. One method the Risk Committee uses of measuring interest rate sensitivity is the ratio of rate-sensitive assets to rate-sensitive liabilities. An asset or liability is considered to be rate-sensitive if it matures or otherwise reprices within a given time frame.
Table 5 documents the maturity or repricing schedule for ChoiceOne’s rate-sensitive assets and liabilities for selected time periods:
Table 5 – Maturities and Repricing Schedule
|
| As of December 31, 2023 |
| |||||||||||||||||
(Dollars in thousands) |
| 0 - 3 |
|
| 3 - 12 |
|
| 1 - 5 |
|
| Over |
|
|
|
| |||||
|
| Months |
|
| Months |
|
| Years |
|
| 5 Years |
|
| Total |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Equity securities at fair value |
| $ | 7,505 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 7,505 |
|
Securities available for sale |
|
| 72,671 |
|
|
| 16,262 |
|
|
| 116,948 |
|
|
| 308,717 |
|
|
| 514,598 |
|
Securities held to maturity |
|
| 23,863 |
|
|
| 7,932 |
|
|
| 28,282 |
|
|
| 347,882 |
|
|
| 407,959 |
|
Federal Home Loan Bank stock |
|
| 4,449 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,449 |
|
Federal Reserve Bank stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,065 |
|
|
| 5,065 |
|
Loans held for sale |
|
| 4,710 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,710 |
|
Loans to other financial institutions |
|
| 19,400 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,400 |
|
Core Loans |
|
| 311,184 |
|
|
| 170,790 |
|
|
| 719,686 |
|
|
| 189,593 |
|
|
| 1,391,253 |
|
Cash surrender value of life insurance policies |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 45,074 |
|
|
| 45,074 |
|
Interest rate derivative contracts |
|
| 716 |
|
|
| 8,164 |
|
|
| - |
|
|
| - |
|
|
| 8,880 |
|
Rate-sensitive assets |
| $ | 444,498 |
|
| $ | 203,148 |
|
| $ | 864,916 |
|
| $ | 896,331 |
|
| $ | 2,408,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest-bearing demand deposits |
| $ | 599,681 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 599,681 |
|
Money market deposits |
|
| 247,602 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 247,602 |
|
Savings deposits |
|
| 336,851 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 336,851 |
|
Certificates of deposit |
|
| 71,688 |
|
|
| 261,019 |
|
|
| 33,878 |
|
|
| 266 |
|
|
| 366,851 |
|
Brokered deposits |
|
| 12,056 |
|
|
| 6,754 |
|
|
| 4,635 |
|
|
| - |
|
|
| 23,445 |
|
Borrowings |
|
| - |
|
|
| 170,000 |
|
|
| 30,000 |
|
|
| - |
|
|
| 200,000 |
|
Subordinated debentures |
|
| 3,392 |
|
|
| - |
|
|
| 32,115 |
|
|
| - |
|
|
| 35,507 |
|
Interest rate derivative contracts |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Rate-sensitive liabilities |
| $ | 1,271,270 |
|
| $ | 437,773 |
|
| $ | 100,628 |
|
| $ | 266 |
|
| $ | 1,809,937 |
|
Rate-sensitive assets less rate-sensitive liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Asset (liability) gap for the period |
| $ | (826,772 | ) |
| $ | (234,625 | ) |
| $ | 764,288 |
|
| $ | 896,065 |
|
| $ | 598,956 |
|
Cumulative asset (liability) gap |
| $ | (826,772 | ) |
| $ | (1,061,397 | ) |
| $ | (297,109 | ) |
| $ | 598,956 |
|
|
|
|
(1) Interest rate derivative contracts include pay fixed, receive variable swaps with a notional value of $401.0 million. Further details can be found in Note 8 – Derivatives and Hedging Activities.
Under this method, the Risk Committee measures interest rate sensitivity by focusing on the one-year repricing gap. ChoiceOne’s ratio of rate-sensitive assets to rate-sensitive liabilities that matured or repriced within a one-year time frame was 38% at December 31, 2023, compared to 36% at December 31, 2022. Table 5 above shows the entire balance of interest-bearing demand deposits, savings deposits, and money market deposits in the shortest repricing term. Although these categories have the ability to reprice immediately, management has some control over the actual timing or extent of the changes in interest rates on these liabilities. The Risk Committee plans to continue to monitor the ratio of rate-sensitive assets to rate-sensitive liabilities on a quarterly basis in 2024. As interest rates change, the Risk Committee will attempt to match its maturing assets with corresponding liabilities to maximize ChoiceOne’s net interest income.
Another method the Risk Committee uses to monitor its interest rate sensitivity is to subject rate-sensitive assets and liabilities to interest rate shocks. At December 31, 2023, management used a simulation model to subject its assets and liabilities up to an immediate 200 basis point increase and decline. The maturities of loans and mortgage-backed securities were affected by certain prepayment assumptions. Maturities for interest-bearing core deposits were based on an estimate of the period over which they would be outstanding. The maturities of advances from the borrowings were based on their contractual maturity dates. In the case of variable rate assets and
37
liabilities, repricing dates were used to determine their values. The simulation model measures the effect of immediate interest rate changes on both net interest income and shareholders’ equity.
Table 6 provides an illustration of hypothetical interest rate changes as of December 31, 2023 and 2022:
Table 6 – Sensitivity to Changes in Interest Rates
|
| 2023 | |||||||||||||||
|
| Net |
|
|
|
|
| Market |
|
|
| ||||||
(Dollars in thousands) |
| Interest |
|
| Percent |
|
| Value of |
|
| Percent | ||||||
|
| Income |
|
| Change |
|
| Equity |
|
| Change | ||||||
Change in Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
200 basis point rise |
|
| 67,650 |
|
|
| -2 |
| % |
| 480,950 |
|
|
| 8 |
| % |
100 basis point rise |
|
| 68,430 |
|
|
| -1 |
| % |
| 469,920 |
|
|
| 5 |
| % |
Base rate scenario |
|
| 69,100 |
|
|
| - |
| % |
| 446,210 |
|
|
| - |
| % |
100 basis point decline |
|
| 66,660 |
|
|
| -4 |
| % |
| 407,940 |
|
|
| -9 |
| % |
200 basis point decline |
|
| 66,120 |
|
|
| -4 |
| % |
| 350,800 |
|
|
| -21 |
| % |
|
| 2022 | |||||||||||||||
|
| Net |
|
|
|
|
| Market |
|
|
|
|
| ||||
(Dollars in thousands) |
| Interest |
|
| Percent |
|
| Value of |
|
| Percent |
|
| ||||
|
| Income |
|
| Change |
|
| Equity |
|
| Change |
|
| ||||
Change in Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
200 basis point rise |
|
| 61,826 |
|
|
| -11 |
| % |
| 355,701 |
|
|
| 15 |
| % |
100 basis point rise |
|
| 66,025 |
|
|
| -5 |
| % |
| 338,913 |
|
|
| 9 |
| % |
Base rate scenario |
|
| 69,734 |
|
|
| - |
| % |
| 309,801 |
|
|
| - |
| % |
100 basis point decline |
|
| 71,788 |
|
|
| 3 |
| % |
| 260,889 |
|
|
| -16 |
| % |
200 basis point decline |
|
| 71,276 |
|
|
| 2 |
| % |
| 181,078 |
|
|
| -42 |
| % |
As of December 31, 2020, there2023, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios for the market value of shareholders’ equity. The Bank’s percent change in the 100 and 200 basis points down scenarios for the market value of shareholders’ equity was higher than the policy guidelines. As of December 31, 2022, the Bank was within its guidelines for immediate rate shocks up and down for all net interest income scenarios and for the up rate scenarios and the down 100 and down 200 basis points scenarios for the market value of shareholders’ equity. The Risk Committee plans to continue to monitor the effect of changes in interest rates on both net interest income and shareholders’ equity and will make changes in the duration of its rate-sensitive assets and rate-sensitive liabilities where necessary.
Item 8. Financial Statements and Supplementary Data
38
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of ChoiceOne Financial Services, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of ChoiceOne Financial Services, Inc. (the “Company”) as of December 31, 2023 and 2022, the related statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes(collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Accounting Standards Codification Topic 326: Financial Instruments – Credit Losses (“ASC 326”). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The subsequent application of Topic 326 is also communicated as a critical audit matter below.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were $3.2we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Qualitative Adjustment
As described in Notes 1 and 3 to the financial statements, management’s estimate of the allowance for credit losses (ACL) at December 31, 2023, includes a reserve on collectively evaluated loans. The reserve on collectively evaluated loans is based on an historical average loss rates of peer banks, adjusted for current and forecasted factors, applied over the remaining life of loans. Management applies an adjustment for qualitative factors based on internal and external qualitative and credit market risk factors as described in Note 1 and 3 to the financial statements.
Significant judgment was required by management in the selection and measurement of qualitative factor adjustments. Accordingly, performing audit procedures to evaluate the Company’s estimated ACL involved a high degree of auditor judgment and required significant effort, including the involvement of professionals with specialized skill and knowledge.
39
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the Company’s estimate of the ACL included, but were not limited to, the following:
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2006.
Grand Rapids, Michigan
March 13, 2024
40
ChoiceOne Financial Services, Inc.
Consolidated Balance Sheets
|
| December 31, |
| |||||
(Dollars in thousands) |
| 2023 |
|
| 2022 |
| ||
Assets |
|
|
|
|
|
| ||
Cash and due from banks |
| $ | 55,083 |
|
| $ | 43,593 |
|
Time deposits in other financial institutions |
|
| 350 |
|
|
| 350 |
|
Cash and cash equivalents |
|
| 55,433 |
|
|
| 43,943 |
|
|
|
|
|
|
| |||
Equity securities, at fair value (Note 2) |
|
| 7,505 |
|
|
| 8,566 |
|
Securities available for sale, at fair value (Note 2) |
|
| 514,598 |
|
|
| 529,749 |
|
Securities held to maturity, at amortized cost (Note 2) |
|
| 407,959 |
|
|
| 425,906 |
|
Federal Home Loan Bank stock |
|
| 4,449 |
|
|
| 3,517 |
|
Federal Reserve Bank stock |
|
| 5,065 |
|
|
| 5,064 |
|
Loans held for sale |
|
| 4,710 |
|
|
| 4,834 |
|
Loans to other financial institutions |
|
| 19,400 |
|
|
| - |
|
Core Loans |
|
| 1,391,253 |
|
|
| 1,189,782 |
|
Total loans (Note 3) |
|
| 1,410,653 |
|
|
| 1,189,782 |
|
Allowance for loan losses (Note 3) |
|
| (15,685 | ) |
|
| (7,619 | ) |
Loans, net |
|
| 1,394,968 |
|
|
| 1,182,163 |
|
|
|
|
|
|
| |||
Premises and equipment, net (Note 5) |
|
| 29,750 |
|
|
| 28,232 |
|
Other real estate owned, net (Note 7) |
|
| 122 |
|
|
| - |
|
Cash value of life insurance policies |
|
| 45,074 |
|
|
| 43,978 |
|
Goodwill (Note 6) |
|
| 59,946 |
|
|
| 59,946 |
|
Core deposit intangible (Note 6) |
|
| 1,854 |
|
|
| 2,809 |
|
Other assets |
|
| 45,273 |
|
|
| 47,208 |
|
Total assets |
| $ | 2,576,706 |
|
| $ | 2,385,915 |
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
| ||
Deposits – noninterest-bearing (Note 9) |
| $ | 547,625 |
|
| $ | 599,579 |
|
Deposits – interest-bearing (Note 9) |
|
| 1,550,985 |
|
|
| 1,516,681 |
|
Brokered deposits (Note 9) |
|
| 23,445 |
|
|
| 1,743 |
|
Total deposits |
|
| 2,122,055 |
|
|
| 2,118,003 |
|
|
|
|
|
|
| |||
Borrowings (Note 10) |
|
| 200,000 |
|
|
| 50,000 |
|
Subordinated debentures (Note 11) |
|
| 35,507 |
|
|
| 35,262 |
|
Other liabilities (Notes 12) |
|
| 23,510 |
|
|
| 13,776 |
|
Total liabilities |
|
| 2,381,072 |
|
|
| 2,217,041 |
|
|
|
|
|
|
| |||
Shareholders’ Equity |
|
|
|
|
|
| ||
Preferred stock; shares authorized: 100,000; shares outstanding: none |
|
| - |
|
|
| - |
|
Common stock and paid-in capital, no par value; shares authorized: 15,000,000; shares outstanding: 7,548,217 at December 31, 2023 and 7,516,098 at December 31, 2022 (Note 16) |
|
| 173,513 |
|
|
| 172,277 |
|
Retained earnings |
|
| 73,699 |
|
|
| 68,394 |
|
Accumulated other comprehensive income, net |
|
| (51,578 | ) |
|
| (71,797 | ) |
Total shareholders’ equity |
|
| 195,634 |
|
|
| 168,874 |
|
Total liabilities and shareholders’ equity |
| $ | 2,576,706 |
|
| $ | 2,385,915 |
|
See accompanying notes to consolidated financial statements.
41
ChoiceOne Financial Services, Inc.
Consolidated Statements of Income
|
| Year Ended |
| |||||||||
(Dollars in thousands, except per share data) |
| December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Interest income |
|
|
|
|
|
|
|
|
| |||
Loans, including fees |
| $ | 68,384 |
|
| $ | 52,823 |
|
| $ | 48,657 |
|
Securities: |
|
|
|
|
|
|
|
|
| |||
Taxable |
|
| 21,169 |
|
|
| 15,583 |
|
|
| 10,260 |
|
Tax exempt |
|
| 5,629 |
|
|
| 6,163 |
|
|
| 5,617 |
|
Other |
|
| 3,798 |
|
|
| 491 |
|
|
| 84 |
|
Total interest income |
|
| 98,980 |
|
|
| 75,060 |
|
|
| 64,618 |
|
|
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
|
|
|
|
|
|
|
| |||
Deposits |
|
| 23,990 |
|
|
| 5,845 |
|
|
| 3,305 |
|
Advances from Federal Home Loan Bank |
|
| 1,771 |
|
|
| 117 |
|
|
| 22 |
|
Other |
|
| 7,334 |
|
|
| 1,784 |
|
|
| 650 |
|
Total interest expense |
|
| 33,095 |
|
|
| 7,746 |
|
|
| 3,977 |
|
|
|
|
|
|
|
|
|
|
| |||
Net interest income |
|
| 65,885 |
|
|
| 67,314 |
|
|
| 60,641 |
|
Provision for (reversal of) credit losses on loans |
|
| 1,265 |
|
|
| 250 |
|
|
| 416 |
|
Provision for (reversal of) credit losses on unfunded commitments |
|
| (1,115 | ) |
|
| - |
|
|
| - |
|
Net Provision for (reversal of) credit losses expense |
|
| 150 |
|
|
| 250 |
|
|
| 416 |
|
Net interest income after provision for credit losses |
|
| 65,735 |
|
|
| 67,064 |
|
|
| 60,225 |
|
|
|
|
|
|
|
|
|
|
| |||
Noninterest income |
|
|
|
|
|
|
|
|
| |||
Customer service charges |
|
| 9,347 |
|
|
| 9,350 |
|
|
| 8,628 |
|
Insurance and investment commissions |
|
| 698 |
|
|
| 779 |
|
|
| 765 |
|
Mortgage servicing rights (Note 4) |
|
| 820 |
|
|
| 1,007 |
|
|
| 2,335 |
|
Gains on sales of loans (Note 4) |
|
| 1,134 |
|
|
| 1,336 |
|
|
| 4,441 |
|
Net (losses) gains on sales of securities (Note 2) |
|
| (71 | ) |
|
| (809 | ) |
|
| (40 | ) |
Net (losses) gains on sales and write-downs of other assets (Note 7) |
|
| 147 |
|
|
| 99 |
|
|
| 6 |
|
Earnings on life insurance policies |
|
| 1,096 |
|
|
| 1,312 |
|
|
| 809 |
|
Trust income |
|
| 771 |
|
|
| 734 |
|
|
| 790 |
|
Change in market value of equity securities |
|
| (246 | ) |
|
| (955 | ) |
|
| 479 |
|
Other |
|
| 1,210 |
|
|
| 1,219 |
|
|
| 981 |
|
Total noninterest income |
|
| 14,906 |
|
|
| 14,072 |
|
|
| 19,194 |
|
|
|
|
|
|
|
|
|
|
| |||
Noninterest expense |
|
|
|
|
|
|
|
|
| |||
Salaries and benefits (Note 13 and 14) |
|
| 31,963 |
|
|
| 30,391 |
|
|
| 29,300 |
|
Occupancy and equipment (Note 5) |
|
| 6,048 |
|
|
| 6,189 |
|
|
| 6,168 |
|
Data processing |
|
| 6,618 |
|
|
| 6,729 |
|
|
| 6,189 |
|
Professional fees |
|
| 2,198 |
|
|
| 2,175 |
|
|
| 3,009 |
|
Supplies and postage |
|
| 780 |
|
|
| 719 |
|
|
| 614 |
|
Advertising and promotional |
|
| 721 |
|
|
| 764 |
|
|
| 848 |
|
Intangible amortization (Note 6) |
|
| 955 |
|
|
| 1,153 |
|
|
| 1,307 |
|
FDIC insurance |
|
| 1,184 |
|
|
| 722 |
|
|
| 804 |
|
Other |
|
| 4,607 |
|
|
| 4,636 |
|
|
| 4,682 |
|
Total noninterest expense |
|
| 55,074 |
|
|
| 53,478 |
|
|
| 52,921 |
|
|
|
|
|
|
|
|
|
|
| |||
Income before income tax |
|
| 25,567 |
|
|
| 27,658 |
|
|
| 26,498 |
|
Income tax expense |
|
| 4,306 |
|
|
| 4,018 |
|
|
| 4,456 |
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 21,261 |
|
| $ | 23,640 |
|
| $ | 22,042 |
|
|
|
|
|
|
|
|
|
|
| |||
Basic earnings per share (Note 16) |
| $ | 2.82 |
|
| $ | 3.15 |
|
| $ | 2.87 |
|
Diluted earnings per share (Note 16) |
| $ | 2.82 |
|
| $ | 3.15 |
|
| $ | 2.86 |
|
Dividends declared per share |
| $ | 1.05 |
|
| $ | 1.01 |
|
| $ | 0.94 |
|
See accompanying notes to consolidated financial statements.
42
ChoiceOne Financial Services, Inc.
Consolidated Statements of Comprehensive Income
|
| Year Ended |
| |||||||||
(Dollars in thousands) |
| December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net income |
| $ | 21,261 |
|
| $ | 23,640 |
|
| $ | 22,042 |
|
|
|
|
|
|
|
|
|
|
| |||
Other comprehensive income: |
|
|
|
|
|
|
|
|
| |||
Change in net unrealized gain (loss) on AFS securities |
|
| 20,934 |
|
|
| (91,923 | ) |
|
| (17,261 | ) |
Income tax benefit (expense) |
|
| (4,396 | ) |
|
| 19,304 |
|
|
| 3,625 |
|
Less: reclassification adjustment for net (gain) loss included in net income |
|
| - |
|
|
| 809 |
|
|
| 39 |
|
Income tax benefit (expense) |
|
| - |
|
|
| (170 | ) |
|
| (7 | ) |
Less: reclassification adjustment for net (gain) loss for fair value hedge |
|
| (1,534 | ) |
|
| 1,930 |
|
|
| - |
|
Income tax benefit (expense) |
|
| 322 |
|
|
| (405 | ) |
|
| - |
|
Less: net unrealized (gains) losses on securities transferred from AFS to HTM |
|
| - |
|
|
| 3,404 |
|
|
| - |
|
Income tax benefit (expense) |
|
| - |
|
|
| (715 | ) |
|
| - |
|
Unrealized gain (loss) on AFS securities, net of tax |
|
| 15,326 |
|
|
| (67,766 | ) |
|
| (13,604 | ) |
|
|
|
|
|
|
|
|
|
| |||
Reclassification of unrealized gain (loss) upon transfer of securities from AFS to HTM |
|
| - |
|
|
| (3,404 | ) |
|
| - |
|
Income tax benefit (expense) |
|
| - |
|
|
| 715 |
|
|
| - |
|
Amortization of net unrealized (gains) losses on securities transferred from AFS to HTM |
|
| 333 |
|
|
| 351 |
|
|
| - |
|
Income tax benefit (expense) |
|
| (70 | ) |
|
| (74 | ) |
|
| - |
|
Unrealized loss on held to maturity securities, net of tax |
|
| 263 |
|
|
| (2,412 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
| |||
Change in net unrealized gain (loss) on cash flow hedge |
|
| 3,024 |
|
|
| (558 | ) |
|
| - |
|
Income tax benefit (expense) |
|
| (635 | ) |
|
| 117 |
|
|
| - |
|
Less: reclassification adjustment for net (gain) loss on cash flow hedge |
|
| - |
|
|
| 771 |
|
|
| - |
|
Income tax benefit (expense) |
|
| - |
|
|
| (162 | ) |
|
| - |
|
Less: amortization of net unrealized (gains) losses included in net income |
|
| 2,837 |
|
|
| 999 |
|
|
| - |
|
Income tax benefit (expense) |
|
| (596 | ) |
|
| (210 | ) |
|
| - |
|
Unrealized gain (loss) on cash flow hedge instruments, net of tax |
|
| 4,630 |
|
|
| 957 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
| |||
Other comprehensive income (loss), net of tax |
|
| 20,219 |
|
|
| (69,221 | ) |
|
| (13,604 | ) |
|
|
|
|
|
|
|
|
|
| |||
Comprehensive income (loss) |
| $ | 41,480 |
|
| $ | (45,581 | ) |
| $ | 8,438 |
|
See accompanying notes to consolidated financial statements.
43
ChoiceOne Financial Services, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| |||||
|
|
|
|
| Common |
|
|
|
|
| Other |
|
|
|
| |||||
|
|
|
|
| Stock and |
|
|
|
|
| Comprehensive |
|
|
|
| |||||
|
| Number of |
|
| Paid in |
|
| Retained |
|
| Income/(Loss), |
|
|
|
| |||||
(Dollars in thousands, except per share data) |
| Shares |
|
| Capital |
|
| Earnings |
|
| Net |
|
| Total |
| |||||
Balance, January 1, 2021 |
|
| 7,796,352 |
|
| $ | 178,750 |
|
| $ | 37,490 |
|
| $ | 11,028 |
|
| $ | 227,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
| 22,042 |
|
|
|
|
|
| 22,042 |
| |||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
| (13,604 | ) |
|
| (13,604 | ) | |||
Shares issued |
|
| 23,301 |
|
|
| 509 |
|
|
|
|
|
|
|
|
| 509 |
| ||
Effect of employee stock purchases |
|
|
|
|
| 25 |
|
|
|
|
|
|
|
|
| 25 |
| |||
Stock-based compensation expense |
|
|
|
|
| 415 |
|
|
|
|
|
|
|
|
| 415 |
| |||
Shares repurchased |
|
| (309,274 | ) |
|
| (7,786 | ) |
|
|
|
|
|
|
|
| (7,786 | ) | ||
Cash dividends declared ($0.94 per share) |
|
|
|
|
|
|
|
| (7,200 | ) |
|
|
|
|
| (7,200 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2021 |
|
| 7,510,379 |
|
| $ | 171,913 |
|
| $ | 52,332 |
|
| $ | (2,576 | ) |
| $ | 221,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
| 23,640 |
|
|
|
|
|
| 23,640 |
| |||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
| (69,221 | ) |
|
| (69,221 | ) | |||
Shares issued |
|
| 31,618 |
|
|
| 461 |
|
|
|
|
|
|
|
|
| 461 |
| ||
Effect of employee stock purchases |
|
|
|
|
| 31 |
|
|
|
|
|
|
|
|
| 31 |
| |||
Stock-based compensation expense |
|
| - |
|
|
| 554 |
|
|
|
|
|
|
|
|
| 554 |
| ||
Shares repurchased |
|
| (25,899 | ) |
|
| (682 | ) |
|
|
|
|
|
|
|
| (682 | ) | ||
Cash dividends declared ($1.01 per share) |
|
|
|
|
|
|
|
| (7,578 | ) |
|
|
|
|
| (7,578 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2022 |
|
| 7,516,098 |
|
| $ | 172,277 |
|
| $ | 68,394 |
|
| $ | (71,797 | ) |
| $ | 168,874 |
|
Adoption of ASU 2016-13 (CECL) on January 1, 2023 |
|
|
|
|
|
|
|
| (8,046 | ) |
|
|
|
|
| (8,046 | ) | |||
Balance, January 1, 2023 |
|
| 7,516,098 |
|
| $ | 172,277 |
|
| $ | 60,348 |
|
| $ | (71,797 | ) |
| $ | 160,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
| 21,261 |
|
|
|
|
|
| 21,261 |
| |||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
| 20,219 |
|
|
| 20,219 |
| |||
Shares issued |
|
| 31,472 |
|
|
| 566 |
|
|
|
|
|
|
|
|
| 566 |
| ||
Effect of employee stock purchases |
|
|
|
|
| 41 |
|
|
|
|
|
|
|
|
| 41 |
| |||
Stock-based compensation expense |
|
|
|
|
| 629 |
|
|
|
|
|
|
|
|
| 629 |
| |||
Stock options exercised and issued (1) |
|
| 647 |
|
|
|
|
|
|
|
|
|
|
|
| - |
| |||
Cash dividends declared ($1.05 per share) |
|
|
|
|
|
|
|
| (7,910 | ) |
|
|
|
|
| (7,910 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2023 |
|
| 7,548,217 |
|
| $ | 173,513 |
|
| $ | 73,699 |
|
| $ | (51,578 | ) |
| $ | 195,634 |
|
See accompanying notes to consolidated financial statements.
44
ChoiceOne Financial Services, Inc.
Consolidated Statements of Cash Flows
| Year Ended |
| |||||||||
(Dollars in thousands) | December 31, |
| |||||||||
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
| |||
Net income | $ | 21,261 |
|
| $ | 23,640 |
|
| $ | 22,042 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
| |||
(Reversal of) provision for credit losses |
| 150 |
|
|
| 250 |
|
|
| 416 |
|
Depreciation |
| 2,477 |
|
|
| 2,658 |
|
|
| 2,624 |
|
Amortization |
| 9,953 |
|
|
| 10,684 |
|
|
| 9,801 |
|
Compensation expense on employee and director stock purchases, stock options, and restricted stock units |
| 1,005 |
|
|
| 958 |
|
|
| 812 |
|
Net (gains) losses on sales of securities |
| 71 |
|
|
| 809 |
|
|
| 40 |
|
Net change in market value of equity securities |
| 246 |
|
|
| 955 |
|
|
| (479 | ) |
Gains on sales of loans and capitalized servicing rights |
| (1,954 | ) |
|
| (2,343 | ) |
|
| (6,776 | ) |
Loans originated for sale |
| (56,085 | ) |
|
| (71,829 | ) |
|
| (197,387 | ) |
Proceeds from loan sales |
| 57,342 |
|
|
| 77,681 |
|
|
| 205,398 |
|
Earnings on bank-owned life insurance |
| (1,096 | ) |
|
| (1,038 | ) |
|
| (778 | ) |
Proceeds from BOLI policy |
| - |
|
|
| 690 |
|
|
| 204 |
|
Earnings on death benefit from bank-owned life insurance |
| - |
|
|
| (274 | ) |
|
| (31 | ) |
(Gains) on sales of other real estate owned |
| (12 | ) |
|
| (41 | ) |
|
| (19 | ) |
Proceeds from sales of other real estate owned |
| 157 |
|
|
| 235 |
|
|
| 611 |
|
Deferred federal income tax (expense) benefit |
| (24 | ) |
|
| (15 | ) |
|
| 924 |
|
Net change in: |
|
|
|
|
|
|
|
| |||
Other assets |
| 5,395 |
|
|
| (4,208 | ) |
|
| (5,418 | ) |
Other liabilities |
| 7,596 |
|
|
| 6,205 |
|
|
| 5,715 |
|
Net cash provided by operating activities |
| 46,482 |
|
|
| 45,017 |
|
|
| 37,699 |
|
|
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
|
| |||
Sales of securities available for sale |
| - |
|
|
| 47,167 |
|
|
| 29,742 |
|
Sales of equity securities |
| 887 |
|
|
| - |
|
|
| - |
|
Proceeds from Federal Home Loan Bank stock redemption |
| 3,917 |
|
|
| - |
|
|
| - |
|
Maturities, prepayments and calls of securities available for sale |
| 32,289 |
|
|
| 51,570 |
|
|
| 54,202 |
|
Maturities, prepayments and calls of securities held to maturity |
| 16,572 |
|
|
| 8,091 |
|
|
| - |
|
Purchases of securities available for sale |
| (1,646 | ) |
|
| (55,053 | ) |
|
| (632,826 | ) |
Purchases of securities held to maturity |
| (597 | ) |
|
| (7,505 | ) |
|
| - |
|
Purchases of equity securities |
| - |
|
|
| (1,029 | ) |
|
| (5,117 | ) |
Purchases of Federal Home Loan Bank stock |
| (4,849 | ) |
|
| - |
|
|
| - |
|
Purchase of bank-owned life insurance policies |
| - |
|
|
| - |
|
|
| (10,000 | ) |
Loan originations and payments, net |
| (221,245 | ) |
|
| (130,620 | ) |
|
| 45,384 |
|
Additions to premises and equipment |
| (4,234 | ) |
|
| (1,164 | ) |
|
| (2,759 | ) |
Proceeds from (payments for) derivative contracts, net |
| 1,732 |
|
|
| (1,953 | ) |
|
| - |
|
Payments for derivative contracts settlements |
| (4,191 | ) |
|
| - |
|
|
| - |
|
Net cash (used in)/provided by investing activities |
| (181,365 | ) |
|
| (90,496 | ) |
|
| (521,374 | ) |
|
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
|
| |||
Net change in deposits |
| 4,052 |
|
|
| 65,709 |
|
|
| 377,716 |
|
Proceeds from borrowings |
| 420,000 |
|
|
| 726,000 |
|
|
| 87,500 |
|
Payments on borrowings |
| (270,000 | ) |
|
| (726,000 | ) |
|
| (14,326 | ) |
Issuance of common stock |
| 231 |
|
|
| 172 |
|
|
| 139 |
|
Repurchase of common stock |
| - |
|
|
| (682 | ) |
|
| (7,786 | ) |
Share based compensation withholding obligation |
| - |
|
|
| (85 | ) |
|
| - |
|
Cash dividends |
| (7,910 | ) |
|
| (7,578 | ) |
|
| (7,200 | ) |
Net cash provided by/(used in) financing activities |
| 146,373 |
|
|
| 57,536 |
|
|
| 436,043 |
|
|
|
|
|
|
|
|
|
| |||
Net change in cash and cash equivalents |
| 11,490 |
|
|
| 12,057 |
|
|
| (47,632 | ) |
Beginning cash and cash equivalents |
| 43,943 |
|
|
| 31,887 |
|
|
| 79,519 |
|
|
|
|
|
|
|
|
|
| |||
Ending cash and cash equivalents | $ | 55,433 |
|
| $ | 43,943 |
|
| $ | 31,887 |
|
|
|
|
|
|
|
|
|
| |||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
| |||
Cash paid for interest | $ | 27,481 |
|
| $ | 7,577 |
|
| $ | 3,718 |
|
Cash paid for income taxes |
| 4,450 |
|
|
| 1,989 |
|
|
| 3,251 |
|
Loans transferred to other real estate owned |
| 266 |
|
|
| - |
|
|
| 520 |
|
See accompanying notes to consolidated financial statements.
45
Note 1 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiaries, ChoiceOne Bank (the “Bank”) and 109 Technologies, LLC, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the “Insurance Agency”). Intercompany transactions and balances have been eliminated in consolidation.
ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles (“GAAP”), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary.
Nature of Operations
The Bank is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate.
109 Technologies, LLC is a wholly owned subsidiary of ChoiceOne Financial Services Inc. with the intent of selling a fintech product marketed to other banks and bank holding companies.
The Insurance Agency is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker.
Together, the Bank and ChoiceOne’s other direct and indirect subsidiaries account for substantially all of ChoiceOne’s assets, revenues and operating income.
Use of Estimates
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties. Actual results may differ from these estimates. Estimates associated with the allowance for credit losses are particularly susceptible to change.
Cash and Cash Equivalents
Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for credit losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.
Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured.
46
Purchased financial assets without credit deterioration will be recorded at the acquisition date fair value. Additionally, an allowance is recorded with a corresponding charge to credit loss expense in the reporting period in which the acquisition occurs. For assets purchased with credit deterioration, an allowance is recorded with a corresponding increase to the amortized cost basis of the financial asset as of the acquisition date. No financial assets were purchased since the initiation of CECL on January 1, 2023.
Loans to Other Financial Institutions
Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market.
Allowance for Credit Losses (“ACL”)
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the former “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ACL. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. A reasonable and supportable economic forecast is a key component of the CECL methodology.
ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the ACL of $7.2 million, which included a $5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $3.3 million, which included a $2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.
The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne identified an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible.
The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management’s adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.
The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to automatically calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects.
Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that remained underwe can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a modification agreement but are forecast that is considered reasonable and supportable becomes more difficult or may not disclosed as TDRs pursuant be possible in later periods. Subsequent to the CARES Act. Regardlessend of whetherthe forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing
47
loan loss activity and resulting historical data. As of December 31, 2023, we used a modifiedone-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.
We are not required to develop and use our own economic forecast model, and we elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.
Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with consideration of the current economic climate. Prepayment speeds and curtailment were updated during the fourth quarter of 2023; however, the effect was insignificant.
We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.
Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management’s judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan.
Allowance for Loan Losses
Prior to the adoption of CECL on January 1, 2023, management calculated the allowance for loan losses for the valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible.
The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component of management's estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions.
A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the Company continuesallowance for loan losses is allocated to apply policiesthe loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.
Securities
48
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold.
Securities Available for Sale – For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At December 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses.
Securities Held to Maturity – Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a collective basis by major security type with each type sharing similar risk rating, accruingcharacteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and classifyingpolitical subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. A discounted cash flow method will be used to determine the reserve required for any credit losses on HTM securities. At December 31, 2023, the ACL related to securities HTM is insignificant.
Troubled Loan Modifications
FASB also issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans as impaired.to borrowers experiencing financial difficulty.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment. If impaired, the assets are recorded at fair value.
Other Real Estate Owned
49
Real estate properties acquired in the collection of a loan are initially recorded at the lower of the Bank’s basis in the loans or fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a loancredit loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within noninterest income.
Bank Owned Life Insurance
Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset value are recorded as earnings in other income.
Loan Servicing Rights
Loan servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance.
Goodwill and Intangible Assets
Goodwill
Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.
Core Deposit Intangible
Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Employee Benefit Plans
ChoiceOne’s 401(k)401(k) plan allows participants to make contributions to their individual accounts under the plan in amounts up to the IRS maximum. Employer matching contributions from ChoiceOne to its 401(k)401(k) plan are discretionary.
Income Taxes
Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings Per Share
Basic earnings per common share ("EPS"(“EPS”) is based on weighted-average common shares outstanding. Diluted EPS assumes issuance of any dilutive potential common shares issuable under stock options or restricted stock units granted.
Comprehensive Income
50
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and changes in the funded status of post-retirement plans,derivative instruments, net of tax, which are also recognized as a separate component of shareholders’ equity.
Accumulated other comprehensive income was as follows:
(Dollars in thousands) | As of December 31, |
| As of December 31, |
| ||||||||||||
2020 | 2019 |
| 2023 |
| 2022 |
| ||||||||||
Unrealized gain (loss) on available for sale securities | $ | 13,959 | $ | 1,713 | ||||||||||||
Unrecognized gains on post-retirement benefits | 0 | 158 | ||||||||||||||
Unrealized gain (loss) on available-for-sale securities |
| $ | (69,641 | ) |
| $ | (89,041 | ) | ||||||||
Unrealized gain (loss) on held to maturity securities |
|
| (2,720 | ) |
|
| (3,053 | ) | ||||||||
Unrealized gain (loss) on derivative instruments |
|
| 7,072 |
|
|
| 1,212 |
| ||||||||
Tax effect | (2,931 | ) | (393 | ) |
|
| 13,711 |
|
|
| 19,085 |
| ||||
Accumulated other comprehensive income (loss) | $ | 11,028 | $ | 1,478 |
| $ | (51,578 | ) |
| $ | (71,797 | ) |
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements as of December 31, 2020.2023.
Cash Restrictions
Cash on hand or on deposit with the Federal Reserve Bank of $0was $0 at both December 31, 2023 and $13,231,000 was required2022, as the Federal Reserve revoked the reserve requirement.
Leases
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company’s right to meet regulatory reserve and clearing requirementsuse an underlying asset for the Banklease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at December 31, 2020 and 2019, respectively. The balance in excessthe lease commencement date based on the estimated present value of lease payments over the lease term.
Stock-Based Compensation
Share based restricted stock units are valued at fair value as of the amount required was interest-bearing as of December 31, 2020 and December 31, 2019.
Stock-Based Compensation
grant date. The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. Compensation costs related to stock options granted are disclosed in Note 14.15.
ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.
Dividend Restrictions
Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Bank to ChoiceOne (see Note 20)21).
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 18 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Derivatives
At the inception of a derivative contract, ChoiceOne designates the derivative as one of two types based on our intention and belief as to the likely effectiveness of the hedge. These two types are (1) a hedge of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), and (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge,
51
the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same period during which the hedged transaction affects the earnings. The changes in fair value of derivatives that do not qualify for hedge accounting are reported in current earnings, as noninterest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow statement in the same line item as the cash flows of the item being hedged.
The initial fair value of hedge components excluded from the assessment of effectiveness are recognized in the statement of financial condition under a systematic and rational method over the life of the hedging relationship and are presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings are recorded as a component of other comprehensive income.
ChoiceOne discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in fair values or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or the treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.
ChoiceOne is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. ChoiceOne anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. All the contracts to which we are a party have cash flows that settle monthly or semiannually.
Operating Segments
While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and the Insurance Agency, Lakestone Financial, and Community Shores Financial, operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”)
Investment in Equity Method and Joint Ventures
In March 2023, the FASB issued ASU 2016-01,Recognition2023-02, Investments – Equity Method and MeasurementJoint Venture (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The amendments in this ASU permit reporting entities to account for the tax equity investments, regardless of Financial Assetsthe tax credit program from which the income tax credits are received, using the proportional amortization method. This update will be effective for financial statements issued for fiscal years and Financial Liabilities. The interim periods beginning after December 15, 2023. Early adoption is permitted. This change in guidance effective on January 1, 2023, did not have a significant impact on the financial statements.
Improvements to Income Tax Disclosure
ASU covers various changes to the accounting, measurement,2023-09 enhances transparency by requiring consistent categorization, greater disaggregation, and detailed disclosure related to certainincome taxes paid. These changes aim to help users of financial instruments.statements understand factors contributing to differences between effective and statutory tax rates. The most significant change included in the updatedisclosure is the requirementeffective for certain equity investments (excluding investments that are consolidated or accounted for under the equity method of accounting) to be measuredannual reporting periods beginning after December 15, 2024.
52
Note 2 – Securities
On January 1, 2022, ChoiceOne reassessed and transferred, at fair value, with changes in fair value recognized in$428.4 million of securities classified as available for sale to the held to maturity classification. The net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost, minus impairment. When a qualitative assessmentunrealized after-tax loss of equity investments without readily determinable fair values indicates that impairment exists, an entity is required to measure the investment at fair value. The update also eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The new standard is effective for ChoiceOne for the fiscal year beginning after December 15, 2017, including interim periods within this fiscal year. Management implemented ASU 2016-01 effective January 1, 2018. A cumulative effect adjustment was recorded$2.7 million as of January 1, 2018 to reclassify $244,000 of unrealized gains on equity securities fromthe transfer date remained in accumulated other comprehensive income to retained earnings. Equitybe amortized over the remaining life of the securities, have been presented separately from available for sale securitiesoffsetting the related amortization of discount or premium on the Consolidated Balance Sheet and changes intransferred securities. No gains or losses were recognized at the market value of securities is presented on the Consolidated Statement of Income. In addition, the fair value of loans has been estimated using an exit price notion.
The FASB issued ASU No.2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles (GAAP) with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectationstime of the credittransfer. The remaining net unamortized unrealized loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debttransferred securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginningincluded in accumulated other comprehensive income was $2.1 million after December 15, 2022, and for interim periods within those years for companies considered smaller reporting filers with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting filertax as of December 31, 2020. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.
Reclassifications
Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2020 presentation.
2023.
Note 2 – Securities
The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income at December 31 were as follows:
December 31, 2020 |
| December 31, 2023 |
| |||||||||||||||||||||||||||||
Gross | Gross |
|
|
|
| Gross |
|
| Gross |
|
|
|
| |||||||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair |
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||||||||||||||
Cost | Gains | Losses | Value |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| |||||||||||||||||
Equity securities | $ | 2,836 | $ | 60 | $ | 0 | $ | 2,896 |
| $ | 7,960 |
|
| $ | 212 |
|
| $ | (667 | ) |
| $ | 7,505 |
|
December 31, 2019 |
| December 31, 2022 |
| |||||||||||||||||||||||||||||
Gross | Gross |
|
|
|
| Gross |
|
| Gross |
|
|
|
| |||||||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair |
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||||||||||||||
Cost | Gains | Losses | Value |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| |||||||||||||||||
Equity securities | $ | 2,426 | $ | 425 | $ | 0 | $ | 2,851 |
| $ | 8,982 |
|
| $ | 305 |
|
| $ | (721 | ) |
| $ | 8,566 |
|
The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
December 31, 2020 |
| December 31, 2023 |
| |||||||||||||||||||||||||||||
Gross | Gross |
|
|
|
| Gross |
|
| Gross |
|
|
|
| |||||||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair |
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||||||||||||||||||
Available for Sale: |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||||||||||||||||||
U.S. Government and federal agency | $ | 2,007 | $ | 44 | $ | 0 | $ | 2,051 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
| ||||||||
U.S. Treasury notes and bonds | 1,996 | 60 | 0 | 2,056 |
|
| 90,345 |
|
|
| - |
|
|
| (10,151 | ) |
|
| 80,194 |
| ||||||||||||
State and municipal | 307,201 | 13,191 | (24 | ) | 320,368 |
|
| 269,918 |
|
|
| - |
|
|
| (35,236 | ) |
|
| 234,682 |
| |||||||||||
Mortgage-backed | 246,085 | 1,510 | (872 | ) | 246,723 |
|
| 212,392 |
|
|
| 14 |
|
|
| (23,905 | ) |
|
| 188,501 |
| |||||||||||
Corporate | 2,539 | 51 | (1 | ) | 2,589 |
|
| 250 |
|
|
| - |
|
|
| (46 | ) |
|
| 204 |
| |||||||||||
Trust preferred securities | 1,000 | 0 | 0 | 1,000 | ||||||||||||||||||||||||||||
Asset-backed securities |
|
| 11,334 |
|
|
| - |
|
|
| (317 | ) |
|
| 11,017 |
| ||||||||||||||||
Total | $ | 560,828 | $ | 14,856 | $ | (897 | ) | $ | 574,787 |
| $ | 584,239 |
|
| $ | 14 |
|
| $ | (69,655 | ) |
| $ | 514,598 |
|
December 31, 2019 |
| December 31, 2022 |
| |||||||||||||||||||||||||||||
Gross | Gross |
|
|
|
| Gross |
|
| Gross |
|
|
|
| |||||||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair |
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||||||||||||||||||
Available for Sale: |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||||||||||||||||||
U.S. Government and federal agency | $ | 17,231 | $ | 23 | $ | (39 | ) | $ | 17,215 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
| |||||||
U.S. Treasury notes and bonds | 1,994 | 14 | 0 | 2,008 |
|
| 90,810 |
|
|
| - |
|
|
| (12,606 | ) |
|
| 78,204 |
| ||||||||||||
State and municipal | 172,487 | 2,694 | (1,257 | ) | 173,924 |
|
| 277,489 |
|
|
| - |
|
|
| (47,551 | ) |
|
| 229,938 |
| |||||||||||
Mortgage-backed | 142,504 | 585 | (329 | ) | 142,760 |
|
| 236,703 |
|
|
| - |
|
|
| (28,140 | ) |
|
| 208,563 |
| |||||||||||
Corporate | 2,649 | 24 | (1 | ) | 2,672 |
|
| 757 |
|
|
| - |
|
|
| (46 | ) |
|
| 711 |
| |||||||||||
Trust preferred securities | 1,000 | 0 | 0 | 1,000 | ||||||||||||||||||||||||||||
Asset-backed securities |
|
| 13,031 |
|
|
| - |
|
|
| (698 | ) |
|
| 12,333 |
| ||||||||||||||||
Total | $ | 337,865 | $ | 3,340 | $ | (1,626 | ) | $ | 339,579 |
| $ | 618,790 |
|
| $ | - |
|
| $ | (89,041 | ) |
| $ | 529,749 |
|
53
The amortized cost and fair value of securities held to maturity and the related gross unrealized gains and losses were as follows:
|
| December 31, 2023 |
| |||||||||||||
|
|
|
|
| Gross |
|
| Gross |
|
|
|
| ||||
(Dollars in thousands) |
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||
Held to Maturity: |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
U.S. Government and federal agency |
| $ | 2,972 |
|
| $ | - |
|
| $ | (293 | ) |
| $ | 2,679 |
|
State and municipal |
|
| 196,098 |
|
|
| 14 |
|
|
| (30,220 | ) |
|
| 165,892 |
|
Mortgage-backed |
|
| 188,329 |
|
|
| - |
|
|
| (25,796 | ) |
|
| 162,533 |
|
Corporate |
|
| 20,013 |
|
|
| 21 |
|
|
| (2,864 | ) |
|
| 17,170 |
|
Asset-backed securities |
|
| 547 |
|
|
| - |
|
|
| (30 | ) |
|
| 517 |
|
Total |
| $ | 407,959 |
|
| $ | 35 |
|
| $ | (59,203 | ) |
| $ | 348,791 |
|
|
| December 31, 2022 |
| |||||||||||||
|
|
|
|
| Gross |
|
| Gross |
|
|
|
| ||||
(Dollars in thousands) |
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||
Held to Maturity: |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
U.S. Government and federal agency |
| $ | 2,966 |
|
| $ | - |
|
| $ | (421 | ) |
| $ | 2,545 |
|
State and municipal |
|
| 201,890 |
|
|
| 1 |
|
|
| (39,355 | ) |
|
| 162,536 |
|
Mortgage-backed |
|
| 200,473 |
|
|
| - |
|
|
| (29,868 | ) |
|
| 170,605 |
|
Corporate |
|
| 19,603 |
|
|
| - |
|
|
| (2,285 | ) |
|
| 17,318 |
|
Asset-backed securities |
|
| 974 |
|
|
| - |
|
|
| (77 | ) |
|
| 897 |
|
Total |
| $ | 425,906 |
|
| $ | 1 |
|
| $ | (72,006 | ) |
| $ | 353,901 |
|
Information regarding sales of equity securities and debt securities available for sale for the year ended December 31 follows:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
| |||||||||||||||
2020 | 2019 | 2018 |
| 2023 |
|
| 2022 |
|
| 2021 |
| |||||||||||||
Proceeds from sales of securities | $ | 121,942 | $ | 178,913 | $ | 2,634 |
| $ | 887 |
|
| $ | 47,167 |
|
| $ | 29,742 |
| ||||||
Gross realized gains | 1,308 | 22 | 42 |
|
| - |
|
|
| - |
|
|
| - |
| |||||||||
Gross realized losses | 0 | 0 | 8 |
|
| (71 | ) |
|
| (809 | ) |
|
| (40 | ) |
Contractual maturities of equity securities and securities available for sale at December 31, 20202023 were as follows:
(Dollars in thousands) | Amortized | Fair |
|
|
| Amortized |
|
| Fair |
| ||||||||
Cost | Value |
|
|
| Cost |
|
| Value |
| |||||||||
Due within one year | $ | 17,050 | $ | 17,184 |
|
|
| $ | 250 |
|
| $ | 250 |
| ||||
Due after one year through five years | 59,120 | 60,900 |
|
|
|
| 99,159 |
|
|
| 90,209 |
| ||||||
Due after five years through ten years | 221,304 | 231,775 |
|
|
|
| 177,228 |
|
|
| 159,321 |
| ||||||
Due after ten years | 17,269 | 18,205 |
|
|
|
| 95,210 |
|
|
| 76,317 |
| ||||||
Total debt securities | 314,743 | 328,064 |
|
|
|
| 371,847 |
|
|
| 326,097 |
| ||||||
Mortgage-backed securities | 246,085 | 246,723 |
|
|
|
| 212,392 |
|
|
| 188,501 |
| ||||||
Equity securities | 2,836 | 2,896 | ||||||||||||||||
Total | $ | 563,664 | $ | 577,683 |
|
|
| $ | 584,239 |
|
| $ | 514,598 |
|
Contractual maturities of securities held to maturity at December 31, 2023 were as follows:
(Dollars in thousands) |
|
|
| Amortized |
|
| Fair |
| ||
|
|
|
| Cost |
|
| Value |
| ||
Due within one year |
|
|
| $ | 1,586 |
|
| $ | 1,543 |
|
Due after one year through five years |
|
|
|
| 12,379 |
|
|
| 11,376 |
|
Due after five years through ten years |
|
|
|
| 124,644 |
|
|
| 108,371 |
|
Due after ten years |
|
|
|
| 81,021 |
|
|
| 64,968 |
|
Total debt securities |
|
|
|
| 219,630 |
|
|
| 186,258 |
|
Mortgage-backed securities |
|
|
|
| 188,329 |
|
|
| 162,533 |
|
Total |
|
|
| $ | 407,959 |
|
| $ | 348,791 |
|
Certain securities were pledged as collateral for participation in a program that provided Community Reinvestment Act credits.credits and for other purposes, as required or permitted by law. ChoiceOne also pledges securities to the FHLB and the FRB. The purpose of this
54
pledging strategy is to enhance the availability of cash and other liquid assets that can be used to meet the operational needs of the organization. This strategy also allows the organization to optimize its asset allocation and diversify its funding sources. The carrying amount of the securities pledged as collateral at December 31 was as follows:
(Dollars in thousands) | 2020 | 2019 |
|
|
| 2023 |
|
| 2022 |
| ||||||||
Securities pledged to Federal Reserve Bank |
| $ | 526,413 |
|
| $ | - |
| ||||||||||
Securities pledged to Federal Home Loan Bank |
|
| 278,503 |
|
|
| - |
| ||||||||||
Securities pledged for Community Reinvestment Act credits | $ | 278 | $ | 252 |
|
| 250 |
|
|
| 250 |
| ||||||
Total Securities pledged |
|
| 805,166 |
|
|
| 250 |
|
Securities with unrealized losses at year-end 20202023 and 2019,2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:
|
| 2023 |
| |||||||||||||||||||||
|
| Less than 12 months |
|
| More than 12 months |
|
| Total |
| |||||||||||||||
(Dollars in thousands) |
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| ||||||
Available for Sale: |
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
| ||||||
U.S. Government and federal agency |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
U.S. Treasury notes and bonds |
|
| - |
|
|
| - |
|
|
| 80,194 |
|
|
| 10,151 |
|
|
| 80,194 |
|
|
| 10,151 |
|
State and municipal |
|
| 557 |
|
|
| 6 |
|
|
| 234,125 |
|
|
| 35,230 |
|
|
| 234,682 |
|
|
| 35,236 |
|
Mortgage-backed |
|
| 1,255 |
|
|
| 23 |
|
|
| 176,400 |
|
|
| 23,882 |
|
|
| 177,655 |
|
|
| 23,905 |
|
Corporate |
|
| - |
|
|
| - |
|
|
| 204 |
|
|
| 46 |
|
|
| 204 |
|
|
| 46 |
|
Asset-backed securities |
|
| - |
|
|
| - |
|
|
| 11,017 |
|
|
| 317 |
|
|
| 11,017 |
|
|
| 317 |
|
Total temporarily impaired |
| $ | 1,812 |
|
| $ | 29 |
|
| $ | 501,940 |
|
| $ | 69,626 |
|
| $ | 503,752 |
|
| $ | 69,655 |
|
|
| 2022 |
| |||||||||||||||||||||
|
| Less than 12 months |
|
| More than 12 months |
|
| Total |
| |||||||||||||||
(Dollars in thousands) |
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| ||||||
Available for Sale: |
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
| ||||||
U.S. Government and federal agency |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
U.S. Treasury notes and bonds |
|
| - |
|
|
| - |
|
|
| 78,204 |
|
|
| 12,606 |
|
|
| 78,204 |
|
|
| 12,606 |
|
State and municipal |
|
| 89,158 |
|
|
| 12,612 |
|
|
| 140,390 |
|
|
| 34,939 |
|
|
| 229,548 |
|
|
| 47,551 |
|
Mortgage-backed |
|
| 63,249 |
|
|
| 3,093 |
|
|
| 144,318 |
|
|
| 25,047 |
|
|
| 207,567 |
|
|
| 28,140 |
|
Corporate |
|
| 711 |
|
|
| 46 |
|
|
| - |
|
|
| - |
|
|
| 711 |
|
|
| 46 |
|
Asset-backed securities |
|
| - |
|
|
| - |
|
|
| 12,333 |
|
|
| 698 |
|
|
| 12,333 |
|
|
| 698 |
|
Total temporarily impaired |
| $ | 153,118 |
|
| $ | 15,751 |
|
| $ | 375,245 |
|
| $ | 73,290 |
|
| $ | 528,363 |
|
| $ | 89,041 |
|
2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 months | More than 12 months | Total | ||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||||||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||||||||||
U.S. Treasury notes and bonds | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
State and municipal | 8,950 | 24 | 0 | 0 | 8,950 | 24 | ||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed | 75,126 | 866 | 9,994 | 6 | 85,120 | 872 | ||||||||||||||||||||||||||||||||||||||||||
Corporate | 453 | 1 | 0 | 0 | 453 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Total temporarily impaired | $ | 84,529 | $ | 891 | $ | 9,994 | $ | 6 | $ | 94,523 | $ | 897 | ||||||||||||||||||||||||||||||||||||
2019 |
| 2023 |
| |||||||||||||||||||||||||||||||||||||||||||||
Less than 12 months | More than 12 months | Total |
| Less than 12 months |
|
| More than 12 months |
|
| Total |
| |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized |
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| ||||||||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||||||||||||||||||||||||||
Held to Maturity: |
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
| ||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 7,175 | $ | (39 | ) | $ | 0 | $ | 0 | $ | 7,175 | $ | (39 | ) |
| $ | - |
|
| $ | - |
|
| $ | 2,679 |
|
| $ | 293 |
|
| $ | 2,679 |
|
| $ | 293 |
| ||||||||||
U.S. Treasury notes and bonds | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
State and municipal | 75,099 | (1,256 | ) | 252 | (1 | ) | 75,351 | (1,257 | ) |
|
| 23 |
|
|
| - |
|
|
| 165,526 |
|
|
| 30,220 |
|
|
| 165,549 |
|
|
| 30,220 |
| |||||||||||||||
Mortgage-backed | 109,652 | (327 | ) | 373 | (2 | ) | 110,025 | (329 | ) |
|
| - |
|
|
| - |
|
|
| 162,533 |
|
|
| 25,796 |
|
|
| 162,533 |
|
|
| 25,796 |
| |||||||||||||||
Corporate | 0 | 0 | 300 | (1 | ) | 300 | (1 | ) |
|
| - |
|
|
| - |
|
|
| 15,509 |
|
|
| 2,864 |
|
|
| 15,509 |
|
|
| 2,864 |
| ||||||||||||||||
Asset-backed securities |
|
| - |
|
|
| - |
|
|
| 517 |
|
|
| 30 |
|
|
| 517 |
|
|
| 30 |
| ||||||||||||||||||||||||
Total temporarily impaired | $ | 191,926 | $ | (1,622 | ) | $ | 925 | $ | (4 | ) | $ | 192,851 | $ | (1,626 | ) |
| $ | 23 |
|
| $ | - |
|
| $ | 346,764 |
|
| $ | 59,203 |
|
| $ | 346,787 |
|
| $ | 59,203 |
|
55
|
| 2022 |
| |||||||||||||||||||||
|
| Less than 12 months |
|
| More than 12 months |
|
| Total |
| |||||||||||||||
(Dollars in thousands) |
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| ||||||
Held to Maturity: |
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
| ||||||
U.S. Government and federal agency |
| $ | - |
|
| $ | - |
|
| $ | 2,545 |
|
| $ | 421 |
|
| $ | 2,545 |
|
| $ | 421 |
|
State and municipal |
|
| 13,457 |
|
|
| 1,899 |
|
|
| 149,016 |
|
|
| 37,456 |
|
|
| 162,473 |
|
|
| 39,355 |
|
Mortgage-backed |
|
| 25,582 |
|
|
| 822 |
|
|
| 145,024 |
|
|
| 29,046 |
|
|
| 170,606 |
|
|
| 29,868 |
|
Corporate |
|
| 5,296 |
|
|
| 603 |
|
|
| 10,771 |
|
|
| 1,682 |
|
|
| 16,067 |
|
|
| 2,285 |
|
Asset-backed securities |
|
| - |
|
|
| - |
|
|
| 897 |
|
|
| 77 |
|
|
| 897 |
|
|
| 77 |
|
Total temporarily impaired |
| $ | 44,335 |
|
| $ | 3,324 |
|
| $ | 308,253 |
|
| $ | 68,682 |
|
| $ | 352,588 |
|
| $ | 72,006 |
|
ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary.if an ACL and corresponding impairment charge should be recorded. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. Management believedChoiceOne believes that unrealized losses as of December 31, 2020 on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. NaN other than temporary impairmentsNo ACL was recorded in the year ended December 31, 2023 and no other-than-temporary impairment charges were recorded in 2020the year ended December 31, 2022.
At December 31, 2023 and December 31, 2022, there were 569 and 611 securities with an unrealized loss, respectively. Unrealized losses have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
The majority of unrealized losses at December 31, 2023, are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100% of the notes are rated AA or 2019.better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On December 31, 2023, 86% of state and municipal bonds held are rated AA or better, 11% are A rated and 3% are not rated. Of the mortgage-backed securities held on December 31, 2023, 39% were issued by US government sponsored entities and agencies, and rated AA, 39% are AAA rated private issue and collateralized mortgage obligation, and 22% are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation.
Following is information regarding unrealized gains and losses on equity securities for the years ending December 31:
|
|
|
|
|
|
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Net gains and losses recognized during the period |
|
|
|
|
|
|
| $ | (317 | ) |
| $ | (955 | ) |
| $ | 479 |
|
Less: Net gains and losses recognized during the period on securities sold |
|
|
|
|
|
|
|
| (71 | ) |
|
| - |
|
|
| - |
|
Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date |
|
|
|
|
|
|
| $ | (246 | ) |
| $ | (955 | ) |
| $ | 479 |
|
56
2020 | 2019 | 2018 | ||||||||||
Net gains and losses recognized during the period | $ | (155 | ) | $ | 0 | $ | 71 | |||||
Less: Net gains and losses recognized during the period on securities sold | 0 | (5 | ) | 9 | ||||||||
Unrealized gains and losses recognized during the reporting period on securities still held at the reporting date | $ | (155 | ) | $ | 5 | $ | 62 |
At December 31, 2020, there were 22 securities with an unrealized loss, compared to 63 securities with an unrealized loss as of December 31, 2019.
Note 3 – Loans and Allowance for LoanCredit Losses
The Bank’s loan portfolio as of December 31 was as follows:
(Dollars in thousands) |
|
|
|
|
|
| ||||||||||
2020 | 2019 |
| 2023 |
|
| 2022 |
| |||||||||
Agricultural | $ | 53,735 | $ | 57,339 |
| $ | 49,210 |
|
| $ | 64,159 |
| ||||
Commercial and industrial | 303,527 | 148,083 |
|
| 229,915 |
|
|
| 210,210 |
| ||||||
Consumer | 34,014 | 38,854 |
|
| 36,541 |
|
|
| 39,808 |
| ||||||
Real estate - commercial | 469,247 | 326,379 |
|
| 786,921 |
|
|
| 630,953 |
| ||||||
Real estate - construction | 16,639 | 13,411 |
|
| 20,936 |
|
|
| 14,736 |
| ||||||
Real estate - residential | 192,506 | 217,982 |
|
| 267,730 |
|
|
| 229,916 |
| ||||||
Loans, gross | $ | 1,069,668 | $ | 802,048 | ||||||||||||
Allowance for Loan Losses | (7,593 | ) | (4,057 | ) | ||||||||||||
Loans to other financial institutions |
|
| 19,400 |
|
|
| - |
| ||||||||
Total Loans |
| $ | 1,410,653 |
|
| $ | 1,189,782 |
| ||||||||
Allowance for credit losses |
|
| (15,685 | ) |
|
| (7,619 | ) | ||||||||
Loans, net | $ | 1,062,075 | $ | 797,991 |
| $ | 1,394,968 |
|
| $ | 1,182,163 |
|
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 |
|
57
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 |
|
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 applicable 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 | ||||||||||
Impaired | Non-impaired | Total | ||||||||||
Loans acquired - contractual payments | $ | 7,729 | $ | 387,394 | $ | 395,123 | ||||||
Nonaccretable difference | (2,928 | ) | 0 | (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, 2020:
(Dollars in thousands) | Acquired | Acquired | ||||||||||
Impaired | Non-impaired | Total | ||||||||||
Balance, January 1, 2019 | $ | 0 | $ | 0 | $ | 0 | ||||||
Merger with County Bank Corp on October 1, 2019 | 185 | 1,894 | 2,079 | |||||||||
Accretion October 1, 2019 through December 31, 2019 | 0 | (75 | ) | (75 | ) | |||||||
Balance, January 1, 2020 | 185 | 1,819 | 2,004 | |||||||||
Accretion January 1, 2020 through December 31, 2020 | (50 | ) | (295 | ) | (345 | ) | ||||||
Balance, December 31, 2020 | $ | 135 | $ | 1,524 | $ | 1,659 |
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 | ||||||||||
Impaired | Non-impaired | Total | ||||||||||
Loans acquired - contractual payments | $ | 20,491 | $ | 158,495 | $ | 178,986 | ||||||
Nonaccretable difference | (3,547 | ) | 0 | (3,547 | ) | |||||||
Expected cash flows | 16,944 | 158,495 | 175,439 | |||||||||
Accretable yield | (869 | ) | (596 | ) | (1,465 | ) | ||||||
Carrying balance at acquisition date | $ | 16,075 | $ | 157,899 | $ | 173,974 |
The table below presents a roll-forward of the accretable yield on Community Shores Bank Corporation acquired loans for the year ended December 31, 2020:
(Dollars in thousands) | Acquired | Acquired | ||||||||||
Impaired | Non-impaired | Total | ||||||||||
Balance, January 1, 2020 | $ | 0 | $ | 0 | $ | 0 | ||||||
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, December 31, 2020 | $ | 843 | $ | 455 | $ | 1,298 |
Activity in the allowance for loancredit losses and balances in the loan portfolio was as follows:
Commercial |
|
|
| Commercial |
|
|
|
|
|
|
|
|
| Loans to Other |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | and | Commercial | Construction | Residential |
|
|
| and |
|
|
| Commercial |
| Construction |
| Residential |
| Financial |
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||
Agricultural | Industrial | Consumer | Real Estate | Real Estate | Real Estate | Unallocated | Total |
| Agricultural |
| Industrial |
| Consumer |
| Real Estate |
| Real Estate |
| Real Estate |
| Institutions |
| Unallocated |
| Total |
| ||||||||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses Year Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for Credit Losses Year Ended December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 471 | $ | 655 | $ | 270 | $ | 1,663 | $ | 76 | $ | 640 | $ | 282 | $ | 4,057 |
| $ | 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 | (15 | ) | (148 | ) | (329 | ) | (254 | ) | 0 | (8 | ) | 0 | (754 | ) |
|
| - |
|
|
| (158 | ) |
|
| (554 | ) |
|
| - |
|
|
| - |
|
|
| (27 | ) |
|
| - |
|
|
| - |
|
|
| (739 | ) | ||||||||||||||||||
Recoveries | 0 | 57 | 204 | 10 | 0 | 19 | 0 | 290 |
|
| - |
|
|
| 66 |
|
|
| 283 |
|
|
| 13 |
|
|
| - |
|
|
| 13 |
|
|
| - |
|
|
| - |
|
|
| 375 |
| ||||||||||||||||||||||||
Provision | (199 | ) | 763 | 172 | 2,759 | 21 | 649 | (165 | ) | 4,000 |
|
| (64 | ) |
|
| (640 | ) |
|
| 243 |
|
|
| 979 |
|
|
| (25 | ) |
|
| 742 |
|
|
| 30 |
|
|
| - |
|
|
| 1,265 |
| ||||||||||||||||||||||
Ending balance | $ | 257 | $ | 1,327 | $ | 317 | $ | 4,178 | $ | 97 | $ | 1,300 | $ | 117 | $ | 7,593 |
| $ | 94 |
|
| $ | 2,216 |
|
| $ | 823 |
|
| $ | 8,820 |
|
| $ | 58 |
|
| $ | 3,644 |
|
| $ | 30 |
|
| $ | - |
|
| $ | 15,685 |
| ||||||||||||||||
Individually evaluated for impairment | $ | 0 | $ | 19 | $ | 1 | $ | 157 | $ | 0 | $ | 254 | $ | 0 | $ | 431 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 257 | $ | 1,308 | $ | 316 | $ | 4,021 | $ | 97 | $ | 1,046 | $ | 117 | $ | 7,162 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated loan reserves |
| $ | 2 |
|
| $ | 6 |
|
| $ | - |
|
| $ | 1 |
|
| $ | - |
|
| $ | 51 |
|
| $ | - |
|
| $ | - |
|
| $ | 60 |
| ||||||||||||||||||||||||||||||||
Collectively evaluated loan reserves |
| $ | 92 |
|
| $ | 2,210 |
|
| $ | 823 |
|
| $ | 8,819 |
|
| $ | 58 |
|
| $ | 3,593 |
|
| $ | 30 |
|
| $ | - |
|
| $ | 15,625 |
| ||||||||||||||||||||||||||||||||
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 | 0 | 6,710 | 24 | 12,534 | 0 | 2,804 | 22,072 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Individually evaluated loans |
| $ | 54 |
|
| $ | 136 |
|
| $ | 2 |
|
| $ | 29 |
|
| $ | - |
|
| $ | 1,858 |
|
| $ | - |
|
|
|
|
| $ | 2,079 |
| |||||||||||||||||||||||||||||||||
Collectively evaluated loans |
|
| 49,156 |
|
|
| 229,779 |
|
|
| 36,539 |
|
|
| 786,892 |
|
|
| 20,936 |
|
|
| 265,872 |
|
|
| 19,400 |
|
|
|
|
|
| 1,408,574 |
| |||||||||||||||||||||||||||||||||
Ending balance | $ | 53,735 | $ | 303,527 | $ | 34,014 | $ | 469,247 | $ | 16,639 | $ | 192,506 | $ | 1,069,668 |
| $ | 49,210 |
|
| $ | 229,915 |
|
| $ | 36,541 |
|
| $ | 786,921 |
|
| $ | 20,936 |
|
| $ | 267,730 |
|
| $ | 19,400 |
|
|
|
|
| $ | 1,410,653 |
|
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, 2019 | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 481 | $ | 892 | $ | 254 | $ | 1,926 | $ | 38 | $ | 537 | $ | 545 | $ | 4,673 | ||||||||||||||||
Charge-offs | 0 | (83 | ) | (292 | ) | (589 | ) | 0 | (25 | ) | 0 | (989 | ) | |||||||||||||||||||
Recoveries | 65 | 22 | 136 | 26 | 0 | 124 | 0 | 373 | ||||||||||||||||||||||||
Provision | (75 | ) | (176 | ) | 172 | 300 | 38 | 4 | (263 | ) | 0 | |||||||||||||||||||||
Ending balance | $ | 471 | $ | 655 | $ | 270 | $ | 1,663 | $ | 76 | $ | 640 | $ | 282 | $ | 4,057 | ||||||||||||||||
Individually evaluated for impairment | $ | 103 | $ | 0 | $ | 4 | $ | 13 | $ | 0 | $ | 235 | $ | 0 | $ | 355 | ||||||||||||||||
Collectively evaluated for impairment | $ | 368 | $ | 655 | $ | 266 | $ | 1,650 | $ | 76 | $ | 405 | $ | 282 | $ | 3,702 | ||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 924 | $ | 259 | $ | 17 | $ | 2,288 | $ | 0 | $ | 2,434 | $ | 5,922 | ||||||||||||||||||
Collectively evaluated for impairment | 56,415 | 141,583 | 38,524 | 323,358 | 13,411 | 215,106 | 788,397 | |||||||||||||||||||||||||
Acquired with deteriorated credit quality | 0 | 6,241 | 313 | 733 | 0 | 442 | 7,729 | |||||||||||||||||||||||||
Ending balance | $ | 57,339 | $ | 148,083 | $ | 38,854 | $ | 326,379 | $ | 13,411 | $ | 217,982 | $ | 802,048 |
58
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, 2018 | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 506 | $ | 1,001 | $ | 262 | $ | 1,761 | $ | 35 | $ | 726 | $ | 286 | $ | 4,577 | ||||||||||||||||
Charge-offs | 0 | (58 | ) | (282 | ) | 0 | 0 | (25 | ) | 0 | (365 | ) | ||||||||||||||||||||
Recoveries | 33 | 107 | 112 | 61 | 0 | 113 | 0 | 426 | ||||||||||||||||||||||||
Provision | (58 | ) | (158 | ) | 162 | 104 | 3 | (277 | ) | 259 | 35 | |||||||||||||||||||||
Ending balance | $ | 481 | $ | 892 | $ | 254 | $ | 1,926 | $ | 38 | $ | 537 | $ | 545 | $ | 4,673 | ||||||||||||||||
Individually evaluated for impairment | $ | 94 | $ | 3 | $ | 13 | $ | 20 | $ | 0 | $ | 167 | $ | 0 | $ | 297 | ||||||||||||||||
Collectively evaluated for impairment | $ | 387 | $ | 889 | $ | 241 | $ | 1,906 | $ | 38 | $ | 370 | $ | 545 | $ | 4,376 | ||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 578 | $ | 21 | $ | 90 | $ | 623 | $ | 0 | $ | 2,712 | $ | 4,024 | ||||||||||||||||||
Collectively evaluated for impairment | 48,531 | 91,385 | 24,292 | 138,830 | 8,843 | 93,168 | 405,049 | |||||||||||||||||||||||||
Ending balance | $ | 49,109 | $ | 91,406 | $ | 24,382 | $ | 139,453 | $ | 8,843 | $ | 95,880 | $ | 409,073 |
|
|
|
|
| Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans to Other |
|
|
|
|
|
|
| |||||||||
(Dollars in thousands) |
|
|
|
| and |
|
|
|
|
| Commercial |
|
| Construction |
|
| Residential |
|
| Financial |
|
|
|
|
|
|
| |||||||||
|
| Agricultural |
|
| Industrial |
|
| Consumer |
|
| Real Estate |
|
| Real Estate |
|
| Real Estate |
|
| Institutions |
|
| 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 |
|
The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1)(1) the risk ratings of business loans (2) the level of classified business loans, and (3)(2) 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”“7” have all the weaknesses inherent in those graded “6”“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”“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 capitalinjection, 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 regardingThe following table reflects the Bank’s credit exposureamortized cost basis of loans as of December 31, was as follows:2023 based on year of origination (dollars in thousands):
59
Commercial: | 2023 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| Prior |
|
| Term Loans Total |
|
| Revolving Loans |
|
| Grand Total |
| |||||||||
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Pass | $ | 5,015 |
|
| $ | 4,088 |
|
| $ | 3,078 |
|
| $ | 1,788 |
|
| $ | 7,028 |
|
| $ | 18,476 |
|
| $ | 39,473 |
|
| $ | 9,507 |
|
| $ | 48,980 |
|
Special mention |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 176 |
|
|
| 54 |
|
|
| 230 |
|
|
| - |
|
|
| 230 |
|
Substandard |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Doubtful |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Loss |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 5,015 |
|
| $ | 4,088 |
|
| $ | 3,078 |
|
| $ | 1,788 |
|
| $ | 7,204 |
|
| $ | 18,530 |
|
| $ | 39,703 |
|
| $ | 9,507 |
|
| $ | 49,210 |
|
Current year-to-date gross write-offs | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Commercial and Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Pass | $ | 23,600 |
|
| $ | 45,489 |
|
| $ | 23,462 |
|
| $ | 10,502 |
|
| $ | 9,214 |
|
| $ | 11,882 |
|
| $ | 124,149 |
|
| $ | 105,559 |
|
| $ | 229,708 |
|
Special mention |
| - |
|
|
| - |
|
|
| 28 |
|
|
| 35 |
|
|
| 73 |
|
|
| 64 |
|
|
| 200 |
|
|
| 3 |
|
|
| 203 |
|
Substandard |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4 |
|
|
| 4 |
|
|
| - |
|
|
| 4 |
|
Doubtful |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Loss |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 23,600 |
|
| $ | 45,489 |
|
| $ | 23,490 |
|
| $ | 10,537 |
|
| $ | 9,287 |
|
| $ | 11,950 |
|
| $ | 124,353 |
|
| $ | 105,562 |
|
| $ | 229,915 |
|
Current year-to-date gross write-offs | $ | - |
|
| $ | 55 |
|
| $ | 30 |
|
| $ | 71 |
|
| $ | - |
|
| $ | 2 |
|
| $ | 158 |
|
| $ | - |
|
| $ | 158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Commercial Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Pass | $ | 149,181 |
|
| $ | 134,289 |
|
| $ | 107,033 |
|
| $ | 71,754 |
|
| $ | 43,846 |
|
| $ | 136,361 |
|
| $ | 642,464 |
|
| $ | 143,120 |
|
| $ | 785,584 |
|
Special mention |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,337 |
|
|
| 1,337 |
|
|
| - |
|
|
| 1,337 |
|
Substandard |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Doubtful |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Loss |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 149,181 |
|
| $ | 134,289 |
|
| $ | 107,033 |
|
| $ | 71,754 |
|
| $ | 43,846 |
|
| $ | 137,698 |
|
| $ | 643,801 |
|
| $ | 143,120 |
|
| $ | 786,921 |
|
Current year-to-date gross write-offs | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Total Business Loans | $ | 177,796 |
|
| $ | 183,866 |
|
| $ | 133,601 |
|
| $ | 84,079 |
|
| $ | 60,337 |
|
| $ | 168,178 |
|
| $ | 807,857 |
|
| $ | 258,189 |
|
| $ | 1,066,046 |
|
60
Retail: | 2023 |
|
| 2022 |
|
| 2021 |
|
| 2020 |
|
| 2019 |
|
| Prior |
|
| Term Loans Total |
|
| Revolving Loans |
|
| Grand Total |
| |||||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Performing | $ | 9,775 |
|
| $ | 13,876 |
|
| $ | 6,771 |
|
| $ | 2,849 |
|
| $ | 1,260 |
|
| $ | 1,202 |
|
| $ | 35,733 |
|
| $ | 808 |
|
| $ | 36,541 |
|
Nonperforming |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Nonaccrual |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 9,775 |
|
| $ | 13,876 |
|
| $ | 6,771 |
|
| $ | 2,849 |
|
| $ | 1,260 |
|
| $ | 1,202 |
|
| $ | 35,733 |
|
| $ | 808 |
|
| $ | 36,541 |
|
Current year-to-date gross write-offs | $ | 8 |
|
| $ | 24 |
|
| $ | 11 |
|
| $ | 28 |
|
| $ | - |
|
| $ | 1 |
|
| $ | 72 |
|
| $ | - |
|
| $ | 72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Construction real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Performing | $ | 2,507 |
|
| $ | 2,719 |
|
| $ | 552 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 5,778 |
|
| $ | 15,158 |
|
| $ | 20,936 |
|
Nonperforming |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Nonaccrual |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 2,507 |
|
| $ | 2,719 |
|
| $ | 552 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 5,778 |
|
| $ | 15,158 |
|
| $ | 20,936 |
|
Current year-to-date gross write-offs | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Performing | $ | 54,231 |
|
| $ | 64,768 |
|
| $ | 28,301 |
|
| $ | 16,391 |
|
| $ | 12,556 |
|
| $ | 40,270 |
|
| $ | 216,517 |
|
| $ | 49,491 |
|
| $ | 266,008 |
|
Nonperforming |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Nonaccrual |
| - |
|
|
| 380 |
|
|
| 826 |
|
|
| - |
|
|
| - |
|
|
| 486 |
|
|
| 1,692 |
|
|
| 30 |
|
|
| 1,722 |
|
Total | $ | 54,231 |
|
| $ | 65,148 |
|
| $ | 29,127 |
|
| $ | 16,391 |
|
| $ | 12,556 |
|
| $ | 40,756 |
|
| $ | 218,209 |
|
| $ | 49,521 |
|
| $ | 267,730 |
|
Current year-to-date gross write-offs | $ | - |
|
| $ | 26 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 1 |
|
| $ | 27 |
|
| $ | - |
|
| $ | 27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Loans to Other Financial Institutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Performing | $ | 19,400 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 19,400 |
|
| $ | - |
|
| $ | 19,400 |
|
Nonperforming |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Nonaccrual |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 19,400 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 19,400 |
|
| $ | - |
|
| $ | 19,400 |
|
Current year-to-date gross write-offs | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Consumer Loans | $ | 85,913 |
|
| $ | 81,743 |
|
| $ | 36,450 |
|
| $ | 19,240 |
|
| $ | 13,816 |
|
| $ | 41,958 |
|
| $ | 279,120 |
|
| $ | 65,487 |
|
| $ | 344,607 |
|
61
Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Categoryrisk profile by credit worthiness category
(Dollars in thousands) | Agricultural | Commercial and Industrial | Commercial Real Estate | Agricultural |
| Commercial and Industrial |
| Commercial Real Estate |
| ||||||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | December 31, |
|
| December 31, |
|
| December 31, |
| ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2022 |
|
| 2022 |
|
| 2022 |
| ||||||||||||||||||||||
Pass | $ | 50,185 | $ | 55,866 | $ | 294,614 | $ | 146,728 | $ | 453,080 | $ | 322,105 | $ | 63,867 |
|
| $ | 209,700 |
|
| $ | 624,555 |
| ||||||||||||
Special Mention | 3,202 | 1,094 | 4,101 | 1,081 | 6,006 | 1,332 |
| 289 |
|
|
| 400 |
|
|
| 2,048 |
| ||||||||||||||||||
Substandard | 348 | 379 | 4,812 | 274 | 8,925 | 2,942 |
| 3 |
|
|
| 110 |
|
|
| 4,350 |
| ||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 1,236 | 0 |
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||
Loss |
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||
$ | 53,735 | $ | 57,339 | $ | 303,527 | $ | 148,083 | $ | 469,247 | $ | 326,379 | $ | 64,159 |
|
| $ | 210,210 |
|
| $ | 630,953 |
|
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activityrisk profile based on payment activity
(Dollars in thousands) | Consumer | Construction Real Estate | Residential Real Estate | Consumer |
| Construction Real Estate |
| Residential Real Estate |
| ||||||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | December 31, | December 31, |
|
| December 31, |
|
| December 31, |
| ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2022 |
|
| 2022 |
|
| 2022 |
| ||||||||||||||||||||||
Performing | $ | 34,006 | $ | 38,838 | $ | 16,559 | $ | 13,411 | $ | 191,125 | $ | 216,651 | $ | 39,808 |
|
| $ | 14,736 |
|
| $ | 228,653 |
| ||||||||||||
Nonperforming | 0 | 0 | 0 | 0 | 0 | 0 |
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||
Nonaccrual | 8 | 16 | 80 | 0 | 1,381 | 1,331 |
| - |
|
|
| - |
|
|
| 1,263 |
| ||||||||||||||||||
$ | 34,014 | $ | 38,854 | $ | 16,639 | $ | 13,411 | $ | 192,506 | $ | 217,982 | $ | 39,808 |
|
| $ | 14,736 |
|
| $ | 229,916 |
|
Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2020 2023 and 2019,2022, loans in the process of foreclosure totaled $337,000$846,000 and $173,000,$1.1 million, 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 table presents the amortized cost basis as of December 31, 2023 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the reporting period.
For the period ended: | December 31, 2023 |
|
| |||||
|
|
|
|
|
|
| ||
| Term Extension |
|
| |||||
|
|
|
| % of Total |
|
| ||
|
|
|
| Class of |
|
| ||
(Dollars in thousands) | Amortized |
|
| Financing |
|
| ||
| Cost Basis |
|
| Receivable |
|
| ||
Commercial and industrial | $ | 60 |
|
|
| 0 | % |
|
Residential real estate |
| 129 |
|
|
| 0 | % |
|
Total | $ | 189 |
|
|
|
|
|
The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable.
For the period ended: | December 31, 2023 | |
Term Extension | ||
Commercial and industrial | Termed out line of credit and termed out draw note. | |
Residential real estate | Provided with new twelve month payment plan to catch up on past due balance. |
62
The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.
For the period ended: | December 31, 2023 |
| |
(Dollars in thousands) | Term extension |
| |
|
|
| |
Commercial and industrial | $ | 60 |
|
Residential real estate |
| 129 |
|
Total | $ | 189 |
|
The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable.
For the period ended: | December 31, 2023 |
| |||||||||||||
(Dollars in thousands) | Current |
|
| 30-89 days |
|
| Greater than 90 days |
|
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial and industrial | $ | 60 |
|
| $ | - |
|
| $ | - |
|
| $ | 60 |
|
Residential real estate |
| - |
|
|
| - |
|
|
| 129 |
|
|
| 129 |
|
Total | $ | 60 |
|
| $ | - |
|
| $ | 129 |
|
| $ | 189 |
|
The following schedule provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the yearyears ended December 31, 2020. 2022:
| Year Ended December 31, 2022 |
| |||||||||
|
|
|
| Pre- |
|
| Post- |
| |||
|
|
|
| Modification |
|
| Modification |
| |||
|
|
|
| Outstanding |
|
| Outstanding |
| |||
(Dollars in thousands) | Number of |
|
| Recorded |
|
| Recorded |
| |||
| Loans |
|
| Investment |
|
| Investment |
| |||
Agricultural |
| - |
|
| $ | - |
|
| $ | - |
|
Commercial and Industrial |
| 1 |
|
|
| 15 |
|
|
| 15 |
|
Commercial Real Estate |
| - |
|
|
| - |
|
|
| - |
|
Total |
| 1 |
|
| $ | 15 |
|
| $ | 15 |
|
There were 0 new TDRs in 2019.
Year Ended December 31, 2020 | ||||||||||||
Pre- | Post- | |||||||||||
Modification | Modification | |||||||||||
Outstanding | Outstanding | |||||||||||
(Dollars in thousands) | Number of | Recorded | Recorded | |||||||||
Loans | Investment | Investment | ||||||||||
Agricultural | 1 | $ | 62 | $ | 62 | |||||||
Commercial and Industrial | 1 | 53 | 53 | |||||||||
Commercial Real Estate | 3 | 1,852 | 1,852 | |||||||||
Total | 5 | $ | 1,967 | $ | 1,967 |
The following schedule provides information onno TDRs as of December 31, 2020 2022 where the borrower was past due with respect to principal and/orand interest for 30 days or more during the year ended December 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default. There were no TDRs as of December 31, 2019 where the borrower was past due with respect to principal and/or interest for 30 days or more during year ended December 31, 2019, which loans had been modified and classified as TDRs during the year prior to the default. 2022.
Year Ended | ||||||||
December 31, 2020 | ||||||||
(Dollars in thousands) | Number | Recorded | ||||||
of Loans | Investment | |||||||
Commercial Real Estate | 2 | $ | 1,666 | |||||
Total | 2 | $ | 1,666 |
The federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020 and subsequently issued a revised statement on April 7, 2020. These statements encourage financial institutions to work constructively with borrowers affected by COVID-19, and provide that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. Further, Section 4013 of the CARES Act states that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. ChoiceOne offered an initial 90 day deferment beginning in March 2020 to both commercial and retail borrowers where the borrower could defer either the principal portion of their payments or both the principal and interest portions. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferments in accordance with the CARES Act; however, significantly fewer customers requested further deferment. As of December 31, 2020, ChoiceOne had granted deferments on approximately 750 loans with loan balances totaling $148 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report. 63
Impaired loans by loan category as of December 31 were as follows:
Unpaid | Average | Interest |
|
|
| Unpaid |
|
|
|
|
| Average |
|
| Interest |
| |||||||||||||||||||||||
(Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | Recorded |
|
| Principal |
|
| Related |
|
| Recorded |
|
| Income |
| ||||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Investment |
|
| Balance |
|
| Allowance |
|
| Investment |
|
| Recognized |
| |||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
With no related allowance recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Agricultural | $ | 348 | $ | 434 | $ | - | $ | 329 | $ | 0 | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 250 |
|
| $ | - |
| ||||||||||
Commercial and industrial | 1,516 | 1,629 | - | 464 | 2 |
| - |
|
|
| - |
|
|
| - |
|
|
| 18 |
|
|
| - |
| |||||||||||||||
Consumer | 0 | 0 | - | 1 | 0 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||
Construction real estate | 80 | 80 | - | 16 | 0 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||
Commercial real estate | 1,852 | 2,664 | - | 1,495 | 14 |
| - |
|
|
| - |
|
|
| - |
|
|
| 19 |
|
|
| - |
| |||||||||||||||
Residential real estate | 162 | 162 | - | 99 | 3 |
| 550 |
|
|
| 595 |
|
|
| - |
|
|
| 231 |
|
|
| 1 |
| |||||||||||||||
Subtotal | 3,958 | 4,969 | - | 2,404 | 19 |
| 550 |
|
|
| 595 |
|
|
| - |
|
|
| 518 |
|
|
| 1 |
| |||||||||||||||
With an allowance recorded |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Agricultural | 0 | 0 | 0 | 152 | 0 |
| 23 |
|
|
| 27 |
|
|
| 2 |
|
|
| 913 |
|
|
| 2 |
| |||||||||||||||
Commercial and industrial | 147 | 147 | 19 | 111 | 12 |
| 177 |
|
|
| 177 |
|
|
| 14 |
|
|
| 209 |
|
|
| 13 |
| |||||||||||||||
Consumer | 8 | 8 | 1 | 16 | 0 |
| 7 |
|
|
| 7 |
|
|
| 1 |
|
|
| 14 |
|
|
| 1 |
| |||||||||||||||
Construction real estate | 0 | 0 | 0 | 0 | 0 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||
Commercial real estate | 1,180 | 1,180 | 157 | 897 | 35 |
| 165 |
|
|
| 165 |
|
|
| 5 |
|
|
| 158 |
|
|
| 13 |
| |||||||||||||||
Residential real estate | 2,558 | 2,651 | 254 | 2,330 | 87 |
| 1,924 |
|
|
| 1,954 |
|
|
| 131 |
|
|
| 1,897 |
|
|
| 93 |
| |||||||||||||||
Subtotal | 3,893 | 3,986 | 431 | 3,506 | 134 |
| 2,296 |
|
|
| 2,330 |
|
|
| 153 |
|
|
| 3,191 |
|
|
| 122 |
| |||||||||||||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Agricultural | 348 | 434 | 0 | 481 | 0 |
| 23 |
|
|
| 27 |
|
|
| 2 |
|
|
| 1,163 |
|
|
| 2 |
| |||||||||||||||
Commercial and industrial | 1,663 | 1,776 | 19 | 575 | 14 |
| 177 |
|
|
| 177 |
|
|
| 14 |
|
|
| 227 |
|
|
| 13 |
| |||||||||||||||
Consumer | 8 | 8 | 1 | 17 | 0 |
| 7 |
|
|
| 7 |
|
|
| 1 |
|
|
| 14 |
|
|
| 1 |
| |||||||||||||||
Construction real estate | 80 | 80 | 0 | 16 | 0 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| |||||||||||||||
Commercial real estate | 3,032 | 3,844 | 157 | 2,392 | 49 |
| 165 |
|
|
| 165 |
|
|
| 5 |
|
|
| 177 |
|
|
| 13 |
| |||||||||||||||
Residential real estate | 2,720 | 2,813 | 254 | 2,429 | 90 |
| 2,474 |
|
|
| 2,549 |
|
|
| 131 |
|
|
| 2,128 |
|
|
| 94 |
| |||||||||||||||
Total | $ | 7,851 | $ | 8,955 | $ | 431 | $ | 5,910 | $ | 153 | $ | 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, 2019 | ||||||||||||||||||||
With no related allowance recorded | ||||||||||||||||||||
Agricultural | $ | 545 | $ | 545 | $ | - | $ | 146 | $ | 10 | ||||||||||
Commercial and industrial | 259 | 340 | - | 104 | 9 | |||||||||||||||
Consumer | 0 | 0 | - | 0 | 0 | |||||||||||||||
Construction real estate | 0 | 0 | - | 0 | 0 | |||||||||||||||
Commercial real estate | 1,882 | 2,471 | - | 782 | 30 | |||||||||||||||
Residential real estate | 42 | 42 | - | 133 | 4 | |||||||||||||||
Subtotal | 2,728 | 3,398 | - | 1,165 | 53 | |||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Agricultural | 379 | 439 | 103 | 388 | 0 | |||||||||||||||
Commercial and industrial | 0 | 0 | 0 | 86 | 1 | |||||||||||||||
Consumer | 17 | 18 | 4 | 48 | 0 | |||||||||||||||
Construction real estate | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial real estate | 406 | 406 | 13 | 975 | 32 | |||||||||||||||
Residential real estate | 2,392 | 2,460 | 235 | 2,486 | 83 | |||||||||||||||
Subtotal | 3,194 | 3,323 | 355 | 3,983 | 116 | |||||||||||||||
Total | ||||||||||||||||||||
Agricultural | 924 | 984 | 103 | 534 | 10 | |||||||||||||||
Commercial and industrial | 259 | 340 | 0 | 190 | 10 | |||||||||||||||
Consumer | 17 | 18 | 4 | 48 | 0 | |||||||||||||||
Construction real estate | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial real estate | 2,288 | 2,877 | 13 | 1,757 | 62 | |||||||||||||||
Residential real estate | 2,434 | 2,502 | 235 | 2,619 | 87 | |||||||||||||||
Total | $ | 5,922 | $ | 6,721 | $ | 355 | $ | 5,148 | $ | 169 |
Unpaid | Average | Interest | ||||||||||||||||||
(Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | |||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
With no related allowance recorded | ||||||||||||||||||||
Agricultural | $ | 185 | $ | 185 | $ | - | $ | 291 | $ | 0 | ||||||||||
Commercial and industrial | 0 | 0 | - | 29 | 2 | |||||||||||||||
Consumer | 1 | 1 | - | 2 | 8 | |||||||||||||||
Construction real estate | 0 | 0 | - | 54 | 0 | |||||||||||||||
Commercial real estate | 74 | 109 | - | 78 | 30 | |||||||||||||||
Residential real estate | 250 | 261 | - | 177 | 114 | |||||||||||||||
Subtotal | 510 | 556 | - | 631 | 154 | |||||||||||||||
With an allowance recorded | ||||||||||||||||||||
Agricultural | 393 | 440 | 94 | 161 | 13 | |||||||||||||||
Commercial and industrial | 21 | 21 | 3 | 296 | 0 | |||||||||||||||
Consumer | 88 | 88 | 13 | 59 | 0 | |||||||||||||||
Construction real estate | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial real estate | 550 | 609 | 20 | 692 | 0 | |||||||||||||||
Residential real estate | 2,462 | 2,494 | 167 | 2,523 | 6 | |||||||||||||||
Subtotal | 3,514 | 3,652 | 297 | 3,731 | 19 | |||||||||||||||
Total | ||||||||||||||||||||
Agricultural | 578 | 625 | 94 | 452 | 13 | |||||||||||||||
Commercial and industrial | 21 | 21 | 3 | 325 | 2 | |||||||||||||||
Consumer | 90 | 90 | 13 | 61 | 8 | |||||||||||||||
Construction real estate | 0 | 0 | 0 | 54 | 0 | |||||||||||||||
Commercial real estate | 623 | 718 | 20 | 770 | 30 | |||||||||||||||
Residential real estate | 2,712 | 2,755 | 167 | 2,700 | 120 | |||||||||||||||
Total | $ | 4,024 | $ | 4,209 | $ | 297 | $ | 4,362 | $ | 173 |
An aging analysis of loans by loan category as of December 31 follows:
Loans |
|
|
|
|
|
| Loans |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Loans | Loans | Past Due | Loans | Loans |
|
| Loans |
|
| Past Due |
|
|
|
|
|
|
|
|
|
|
| Loans |
| ||||||||||||||||||||||||||||||||
Past Due | Past Due | Greater | 90 Days Past | Past Due |
|
| Past Due |
|
| Greater |
|
|
|
|
|
|
|
|
|
|
| 90 Days Past |
| ||||||||||||||||||||||||||||||||
(Dollars in thousands) | 30 to 59 | 60 to 89 | Than 90 | Loans Not | Total | Due and | 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 | Days (1) |
|
| Days (1) |
|
| Days (1) |
|
| Total (1) |
|
| Past Due |
|
| Loans |
|
| Accruing |
| |||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Agricultural | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 53,735 | $ | 53,735 | $ | 0 | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 49,210 |
|
| $ | 49,210 |
|
| $ | - |
| ||||||||||||||
Commercial and industrial | 0 | 109 | 515 | 624 | 302,903 | 303,527 | 0 |
| - |
|
|
| - |
|
|
| 1 |
|
|
| 1 |
|
|
| 229,914 |
|
|
| 229,915 |
|
|
| - |
| |||||||||||||||||||||
Consumer | 39 | 0 | 0 | 39 | 33,975 | 34,014 | 0 |
| 31 |
|
|
| 2 |
|
|
| - |
|
|
| 33 |
|
|
| 36,508 |
|
|
| 36,541 |
|
|
| - |
| |||||||||||||||||||||
Commercial real estate | 532 | 44 | 1,744 | 2,320 | 466,927 | 469,247 | 0 |
| 173 |
|
|
| - |
|
|
| - |
|
|
| 173 |
|
|
| 786,748 |
|
|
| 786,921 |
|
|
| - |
| |||||||||||||||||||||
Construction real estate | 1,076 | 180 | 80 | 1,336 | 15,303 | 16,639 | 0 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 20,936 |
|
|
| 20,936 |
|
|
| - |
| |||||||||||||||||||||
Residential real estate | 1,563 | 256 | 352 | 2,171 | 190,335 | 192,506 | 0 |
| 755 |
|
|
| 549 |
|
|
| 870 |
|
|
| 2,174 |
|
|
| 265,556 |
|
|
| 267,730 |
|
|
| - |
| |||||||||||||||||||||
Loans to other financial institutions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,400 |
|
|
| 19,400 |
|
|
| - |
| ||||||||||||||||||||||||||||
$ | 3,210 | $ | 589 | $ | 2,691 | $ | 6,490 | $ | 1,063,178 | $ | 1,069,668 | $ | 0 | $ | 959 |
|
| $ | 551 |
|
| $ | 871 |
|
| $ | 2,381 |
|
| $ | 1,408,272 |
|
| $ | 1,410,653 |
|
| $ | - |
| |||||||||||||||
�� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Agricultural | $ | 0 | $ | 68 | $ | 0 | $ | 68 | $ | 57,271 | $ | 57,339 | $ | 0 | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 64,159 |
|
| $ | 64,159 |
|
| $ | - |
| ||||||||||||||
Commercial and industrial | 542 | 15 | 259 | 816 | 147,267 | 148,083 | 0 |
| - |
|
|
| 171 |
|
|
| - |
|
|
| 171 |
|
|
| 210,039 |
|
|
| 210,210 |
|
|
| - |
| |||||||||||||||||||||
Consumer | 121 | 19 | 11 | 151 | 38,703 | 38,854 | 0 |
| 39 |
|
|
| 7 |
|
|
| - |
|
|
| 46 |
|
|
| 39,762 |
|
|
| 39,808 |
|
|
| - |
| |||||||||||||||||||||
Commercial real estate | 0 | 0 | 1,882 | 1,882 | 324,497 | 326,379 | 0 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 630,953 |
|
|
| 630,953 |
|
|
| - |
| |||||||||||||||||||||
Construction real estate | 0 | 0 | 0 | 0 | 13,411 | 13,411 | 0 |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 14,736 |
|
|
| 14,736 |
|
|
| - |
| |||||||||||||||||||||
Residential real estate | 2,466 | 582 | 393 | 3,441 | 214,541 | 217,982 | 0 |
| 682 |
|
|
| - |
|
|
| 842 |
|
|
| 1,524 |
|
|
| 228,392 |
|
|
| 229,916 |
|
|
| - |
| |||||||||||||||||||||
$ | 3,129 | $ | 684 | $ | 2,545 | $ | 6,358 | $ | 795,690 | $ | 802,048 | $ | 0 |
(1) 64
Loans to other financial institutions |
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| $ | 721 |
|
| $ | 178 |
|
| $ | 842 |
|
| $ | 1,741 |
|
| $ | 1,188,041 |
|
| $ | 1,189,782 |
|
| $ | - |
|
Nonaccrual loans by loan category as of December 31 as follows:
(Dollars in thousands) | ||||||||
2020 | 2019 | |||||||
Agricultural | $ | 348 | $ | 379 | ||||
Commercial and industrial | 1,802 | 776 | ||||||
Consumer | 8 | 16 | ||||||
Commercial real estate | 3,088 | 2,185 | ||||||
Construction real estate | 80 | 0 | ||||||
Residential real estate | 1,381 | 1,331 | ||||||
$ | 6,707 | $ | 4,687 |
(Dollars in thousands) |
|
|
|
|
| ||
| 2023 |
|
| 2022 |
| ||
Commercial and industrial | $ | 1 |
|
| $ | - |
|
Residential real estate |
| 1,722 |
|
|
| 1,263 |
|
Total nonaccrual loans | $ | 1,723 |
|
| $ | 1,263 |
|
(Dollars in thousands) | Nonaccrual loans with no ACL |
|
| Total nonaccrual loans |
|
| Interest income recognized during the period on nonaccrual loans |
| |||
Commercial and industrial | $ | - |
|
| $ | 1 |
|
| $ | - |
|
Residential real estate |
| 707 |
|
|
| 1,722 |
|
|
| 16 |
|
Total nonaccrual loans | $ | 707 |
| $ | 1,723 |
| $ | 16 |
|
Note 4 – Mortgage Banking
Activity in secondary market loans during the year was as follows:
(Dollars in thousands) |
|
|
|
|
|
| |||||||||||||||||
2020 | 2019 | 2018 | 2023 |
| 2022 |
| 2021 |
| |||||||||||||||
Loans originated for resale, net of principal payments | $ | 326,286 | $ | 63,920 | $ | 33,555 | $ | 56,085 |
|
| $ | 71,829 |
|
| $ | 197,387 |
| ||||||
Proceeds from loan sales | 325,306 | 62,763 | 34,872 | $ | 57,342 |
|
| $ | 77,681 |
|
| $ | 205,398 |
| |||||||||
Net gains on sales of loans held for sale | 11,313 | 1,951 | 1,003 | $ | 1,954 |
|
| $ | 2,343 |
|
| $ | 6,776 |
| |||||||||
Loan servicing fees, net of amortization | (129 | ) | 82 | 91 | $ | 211 |
|
| $ | 175 |
|
| $ | (163 | ) |
Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $404.2$495.7 million and $242.0$488.6 million at December 31, 2020 2023 and 2019,2022, respectively. The Bank maintainmaintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2020 2023 and 2019.
2022.
Activity for loan servicing rights (included in other assets) was as follows:
(Dollars in thousands) |
|
|
|
|
|
|
| ||||||||||||||||
2020 | 2019 | 2018 | 2023 |
| 2022 |
| 2021 |
| |||||||||||||||
Balance, beginning of year | $ | 2,131 | $ | 1,049 | $ | 908 | $ | 4,322 |
|
| $ | 4,667 |
|
| $ | 3,967 |
| ||||||
Capitalized | 3,554 | 822 | 441 |
| 820 |
|
|
| 1,007 |
|
|
| 1,961 |
| |||||||||
Amortization | (1,344 | ) | (453 | ) | (300 | ) |
| (1,308 | ) |
|
| (1,352 | ) |
|
| (1,635 | ) | ||||||
Market valuation allowance change | (374 | ) | 0 | 0 |
| - |
|
|
| - |
|
|
| 374 |
| ||||||||
Acquired from merger with County Bank Corp. | 0 | 713 | 0 | ||||||||||||||||||||
Balance, end of year | $ | 3,967 | $ | 2,131 | $ | 1,049 | $ | 3,834 |
|
| $ | 4,322 |
|
| $ | 4,667 |
|
The fair value of loan servicing rights was $3,967,000$5.6 million, $5.9 million and $2,304,000$5.5 million as of December 31, 2020 2023, 2022 and 2019,2021, respectively. Valuation allowances of $373,000 and $0$0 were recorded at December 31, 2020 2023, 2022 and December 31, 2019, respectively.2021. The fair value of the Bank’s servicing rights at December 31, 2020 2023 was determined using a discount rate of 7.75%9.5%-10.5% and prepayment speeds ranging from 7%5.7% to 26%7.5%. The fair value of the Bank’s servicing rights at December 31, 2019 2022 was determined using a discount rate of 5.51%8.00% and prepayment speeds ranging from 11%5.2% to 18%6.7%. The fair value of Lakestone’sthe Bank’s servicing rights at December 31, 20192021 was determined using a discount rate of 8.65%8.00% and prepayment speeds ranging from 11%5% to 13%27%.
65
Note 5 – Premises and Equipment
As of December 31, premises and equipment consisted of the following:
(Dollars in thousands) |
|
|
|
| ||||||||||||
2020 | 2019 | 2023 |
| 2022 |
| |||||||||||
Land and land improvements | $ | 8,753 | $ | 7,576 | $ | 8,415 |
|
| $ | 8,327 |
|
| ||||
Leasehold improvements | 69 | 38 |
| 81 |
|
|
| 81 |
|
| ||||||
Buildings | 25,985 | 20,251 |
| 29,635 |
|
|
| 26,823 |
|
| ||||||
Furniture and equipment | 10,687 | 11,078 |
| 12,558 |
|
|
| 11,208 |
|
| ||||||
Total cost | 45,494 | 38,943 |
| 50,689 |
|
|
| 46,439 |
|
| ||||||
Accumulated depreciation | (16,005 | ) | (14,678 | ) |
| (20,939 | ) |
|
| (18,207 | ) |
| ||||
Premises and equipment, net | $ | 29,489 | $ | 24,265 | $ | 29,750 |
|
| $ | 28,232 |
|
|
Depreciation expense was $2,721,000, $1,610,000,$2.5 million, $2.7 million, and $1,183,000 for 2020, 2019$2.6 million in 2023, 2022 and 2018,2021, respectively.
The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $83,000, $72,000,$327,000, $211,000, and $108,000$153,000 for 2020, 20192023, 2022 and 2018,2021, respectively. The associated right of use assets are included in the applicable categories of fixed assets in the above table and the net book value of such assets approximates the operating lease liability. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands):
2021 | $ | 138 | ||
2022 | 120 | |||
2023 | 75 | |||
2024 | 28 | |||
2025 | 14 | |||
Total undiscounted cash flows | 375 | |||
Less discount | 15 | |||
Total operating lease liabilities | $ | 360 |
| 2024 |
| $ | 314 |
|
| 2025 |
|
| 230 |
|
| 2026 |
|
| 168 |
|
| 2027 |
|
| 65 |
|
Total undiscounted cash flows |
|
| 777 |
| |
Less discount |
|
| 68 |
| |
Total operating lease liabilities |
| $ | 709 |
|
Note 6 - Goodwill and Acquired Intangible Assets
Goodwill
Goodwill
The change in the balance for goodwill was as follows:
(Dollars in thousands) | 2020 | 2019 | 2023 |
| 2022 |
| |||||||||
Balance, beginning of year | $ | 52,870 | $ | 13,728 | $ | 59,946 |
|
| $ | 59,946 |
| ||||
Acquired goodwill from merger with County Bank Corp. | 0 | 39,142 | |||||||||||||
Goodwill adjustment from merger with County Bank Corp. | (277 | ) | 0 | ||||||||||||
Acquired goodwill from merger with Community Shores Bank Corporation | 7,913 | 0 | |||||||||||||
Goodwill adjustment from merger with Community Shores Bank Corporation |
| - |
|
|
| - |
| ||||||||
Balance, end of year | $ | 60,506 | $ | 52,870 | $ | 59,946 |
|
| $ | 59,946 |
|
Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7$13.7 million, $38.9$38.9 million and $7.9$7.3 million, respectively.
As a result of the decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including ChoiceOne’s stock price, saw a significant decline in March 2020. These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment as of the end of the first quarter of 2020. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount. Based on the results of its qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2020.
Management performed itsChoiceOne conducted an annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations2023 and no impairment was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted ofidentified. ChoiceOne used a review of ChoiceOne’s current and expected future financial performance, the potential impact of COVID-19 on the ability of ChoiceOne’s borrowersqualitative assessment to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared todetermine goodwill was not impaired.
During the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly from December 2019 to June 2020, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, second quarter 2020 revenue reflected significant and continuing growth in ChoiceOne's residential mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans funded during the second quarter of 2020. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020.
Due to the potential impact of COVID-19 and any long term economic fallout that might occur,year, ChoiceOne engaged a third-party party valuation firm to performassist in performing a quantitative analysis of goodwill as of November 30, 2020 ("2022 ("the valuation date"). In deriving at the fair value of the reporting unit (the Bank), the third-partythird-party firm assessed general economic conditions and outlook;outlook; industry and market considerations and outlook;outlook; the impact of recent events to financial performance;performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 20252027 and growth rates prepared by management. Based on the valuation prepared, it was determined that the ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.
Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events havehad occurred that indicated impairment from the valuation date through December 31, 2020, 2023, and as a result that it is more likely than not that there was 0no goodwill impairment as of December 31, 2020.2023.
66
Acquired Intangible Assets
Information for acquired intangible assets at December 31 2020is as follows:
2020 | 2019 | 2023 |
|
| 2022 |
| |||||||||||||||||||||||||
Gross | Gross | Gross |
|
|
| Gross |
|
|
| ||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | Carrying |
| Accumulated |
| Carrying |
| Accumulated |
| ||||||||||||||||||||
(Dollars in thousands) | Amount | Amortization | Amount | Amortization | Amount |
| Amortization |
| Amount |
| Amortization |
| |||||||||||||||||||
Core deposit intangible | $ | 7,120 | $ | 1,851 | $ | 6,359 | �� | $ | 353 | $ | 7,120 |
|
| $ | 5,266 |
|
| $ | 7,120 |
|
| $ | 4,311 |
|
The core deposit intangible from the County and Community Shores mergers is being amortized on a sum-of-the-years digits basis over ten years years and eight years years,, respectively. Amortization expense was $1,498,000$955,000 in 20202023, $1,153,000 in 2022 and $353,000$1,307,000 in 2019.2021. The estimated amortization expense for the next five years ending December 31 is as follows (dollars in thousands):
2021 | $ | 1,307 | ||
2022 | 1,153 | |||
2023 | 955 | |||
2024 | 757 | |||
2025 | 560 | |||
Thereafter | 537 | |||
Total | $ | 5,269 |
2024 | $ | 757 |
|
2025 |
| 560 |
|
2026 |
| 362 |
|
2027 |
| 164 |
|
2028 |
| 11 |
|
Total | $ | 1,854 |
|
Note 7 – Other Real Estate Owned
Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows:
(Dollars in thousands) | 2020 | 2019 | 2018 | 2023 |
| 2022 |
| 2021 |
| ||||||||||||||
Balance, beginning of year | $ | 929 | $ | 102 | $ | 106 | $ | - |
|
| $ | 194 |
|
| $ | 266 |
| ||||||
Transfers from loans | 391 | 347 | 432 |
| 267 |
|
|
| - |
|
|
| 520 |
| |||||||||
Additions from merger | 346 | 1,364 | 0 |
| - |
|
|
| - |
|
|
| - |
| |||||||||
Proceeds from sales | (1,384 | ) | (938 | ) | (515 | ) |
| (157 | ) |
|
| (235 | ) |
|
| (611 | ) | ||||||
Write-downs | (80 | ) | 0 | 0 |
| - |
|
|
| - |
|
|
| - |
| ||||||||
Gains on sales | 64 | 54 | 79 |
| 12 |
|
|
| 41 |
|
|
| 19 |
| |||||||||
Balance, end of year | $ | 266 | $ | 929 | $ | 102 | $ | 122 |
|
| $ | - |
|
| $ | 194 |
|
Included in the balances above were residential real estate mortgage loans of $61,000, $175,000,$122,000, $0, and $102,000$80,000 as of December 31, 2020, 2019,2023, 2022, and 2018,2021, respectively, and $205,000$0, $0, and $754,000$114,000 of commercial real estate loans as of December 31, 20202023, 2022, and 2021, respectively.
Note 8 – Derivatives and Hedging Activities
ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.
ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.
Interest rate swaps
ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in
67
exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.
In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%. In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $4.2 million. The loss will be amortized into interest income over 13 months, which was the remaining period of the swap agreements. The remaining loss to be fully amortized in 2024 was $1.1 million.
In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75% while receiving the SOFR Rate.
In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390%. Of the total notional value, $50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015%. The remaining notional value of $49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030%. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income.
Net settlements received on these four pay-fixed/receive-floating swaps were $3.3 million for the year ended December 31, 2019, respectively.2023, which were included in interest income.
The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition:
|
| December 31, 2023 |
|
| December 31, 2022 |
| ||||||
(Dollars in thousands) |
| Balance Sheet |
| Fair Value |
|
| Balance Sheet |
| Fair Value |
| ||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
| ||
Interest rate contracts |
| Other Assets |
| $ | 8,880 |
|
| Other Assets |
| $ | 9,204 |
|
Interest rate contracts |
| Other Liabilities |
| $ | - |
|
| Other Liabilities |
| $ | 5,823 |
|
68
The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented:
|
| Location and Amount of Gain or (Loss) |
|
| Location and Amount of Gain or (Loss) |
| ||||||||||
|
| Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
|
| Recognized in Income on Fair Value and Cash Flow Hedging Relationships |
| ||||||||||
|
| Year Ended December 31, 2023 |
|
| Year Ended December 31, 2022 |
| ||||||||||
|
| Interest Income |
|
| Interest Expense |
|
| Interest Income |
|
| Interest Expense |
| ||||
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded |
| $ | (284 | ) |
| $ | - |
|
| $ | (55 | ) |
| $ | (825 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gain or (loss) on fair value hedging relationships: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Hedged items |
| $ | 1,534 |
|
| $ | - |
|
| $ | (1,930 | ) |
| $ | - |
|
Derivatives designated as hedging instruments |
| $ | (1,454 | ) |
| $ | - |
|
| $ | 2,171 |
|
| $ | - |
|
Amount excluded from effectiveness testing recognized in earnings based on amortization approach |
| $ | - |
|
| $ | - |
|
| $ | (496 | ) |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gain or (loss) on cash flow hedging relationships: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income |
| $ | (2,837 | ) |
| $ | - |
|
| $ | - |
|
| $ | - |
|
Amount excluded from effectiveness testing recognized in earnings based on amortization approach |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | (503 | ) |
The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented:
|
|
| December 31, 2023 |
| ||
|
|
| Cumulative amount of Fair |
| ||
|
|
| Value Hedging Adjustment |
| ||
Line Item in the Statement of |
|
| included in the carrying |
| ||
Financial Position in which the | Amortized cost of the |
| amount of the Hedged |
| ||
Hedged Item is included | Hedged Assets/(Liabilities) |
| Assets/(Liabilities) |
| ||
|
|
|
|
| ||
Securities available for sale | $ | 222,933 |
| $ | (396 | ) |
Note 89 – Deposits
Deposit balances as of December 31 consisted of the following:
(Dollars in thousands) | 2020 | 2019 | 2023 |
| 2022 |
| |||||||||
Noninterest-bearing demand deposits | $ | 477,654 | $ | 287,460 | $ | 547,625 |
|
| $ | 599,579 |
| ||||
Interest-bearing demand deposits | 471,346 | 236,154 |
| 599,681 |
|
|
| 638,641 |
| ||||||
Money market deposits | 191,681 | 263,666 |
| 247,602 |
|
|
| 214,026 |
| ||||||
Savings deposits | 337,332 | 206,050 |
| 336,851 |
|
|
| 427,583 |
| ||||||
Local certificates of deposit | 196,565 | 158,985 |
| 366,851 |
|
|
| 236,431 |
| ||||||
Brokered certificates of deposit | 0 | 2,287 |
| 23,445 |
|
|
| 1,743 |
| ||||||
Total deposits | $ | 1,674,578 | $ | 1,154,602 | $ | 2,122,055 |
|
| $ | 2,118,003 |
|
69
Scheduled maturities of certificates of deposit at as of December 31, 20202023 were as follows:
(Dollars in thousands) |
|
| |||||
|
| ||||||
2021 | $ | 156,612 | |||||
2022 | 22,001 | ||||||
2023 | 9,790 | ||||||
2024 | 4,181 | $ | 351,516 |
| |||
2025 | 3,656 |
| 29,857 |
| |||
2026 |
| 3,802 |
| ||||
2027 |
| 2,275 |
| ||||
2028 |
| 2,580 |
| ||||
Thereafter | 325 |
| 266 |
| |||
Total | $ | 196,565 | $ | 390,296 |
|
The Bank had certificates of deposit issued in denominations of $250,000$250,000 or greater totaling $88.2$199.7 million and $68.3$148.9 million at December 31, 2020 2023 and 2019,2022, respectively. The Bank held $0$23.4 million and $1.7 million in brokered certificates of deposit at December 31, 2020, compared to $2.3 million at December 31, 2019.2023 and 2022, respectively. In addition, the Bank had $12.7$36.2 million and $7.1$17.3 million of certificates of deposit as of December 31, 2020,2023, and December 31, 2019,2022, respectively, that had been issued through the Certificate of Deposit Account Registry Service (CDARS)(“CDARS”).
Note 910 – Borrowings
Bank Term Funding Program (“BTFP”)
At December 31, loans from the BTFP were as follows:
(Dollars in thousands) |
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
| ||
Maturity of May 2024 with fixed interest rate of 4.71% |
| $ | 160,000 |
|
| $ | - |
|
Maturity of December 2024 with fixed interest rate of 4.83% |
|
| 10,000 |
|
|
| - |
|
Total advances outstanding at year-end |
| $ | 170,000 |
|
| $ | - |
|
Federal Home Loan Bank Advances
At December 31, advances from the FHLB were as follows:
(Dollars in thousands) | 2020 | 2019 | ||||||
Maturity of November 2024 with fixed interest rate of 3.98% | $ | 161 | $ | 198 | ||||
Maturity of April 2020 with floating interest rate of 1.99% | 0 | 10,000 | ||||||
Maturity of May 2020 with fixed interest rate of 2.16% | 0 | 23,000 | ||||||
Total advances outstanding at year-end | $ | 161 | $ | 33,198 |
(Dollars in thousands) |
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
| ||
Maturity of January 2023 with fixed interest rate of 4.16% |
| $ | - |
|
| $ | 50,000 |
|
Maturity of July 2025 with fixed interest rate of 4.88% |
|
| 20,000 |
|
|
| - |
|
Maturity of December 2026 with fixed interest rate of 4.20% |
|
| 10,000 |
|
|
| - |
|
Total advances outstanding at year-end |
| $ | 30,000 |
|
| $ | 50,000 |
|
Fees are charged on fixed rate advances that are paid prior to maturity. No fixed rate advances were paid prior to maturity in 2020 or 2019. Advances from the Federal Reserve Bank were secured by agriculturalsecurities with a carrying value of approximately $526.4 million and loans with a carrying value of approximately $433.2 million at December 31, 2023. Based on this collateral, the Bank was eligible to borrow an additional $649.0 million at year end 2023.
Advances from the FHLB were secured by residential real estate loans with a carrying value of approximately $191.1 million and securities with a carrying value of approximately $278.5 million at December 31, 2023 and residential real estate loans with a carrying value of approximately $158.2 million and $200.1$169.7 million at December 31, 2020 and December 31, 2019,2022, respectively. Based on this collateral, the Bank was eligible to borrow an additional $85.6$284.3 million at year-end 2020.2023.
The scheduled maturities of advances from the FHLB at December 31, 2020 were as follows:
(Dollars in thousands) | ||||
2021 | $ | 39 | ||
2022 | 40 | |||
2023 | 42 | |||
2024 | 40 | |||
Total | $ | 161 |
In June 2021, ChoiceOne obtained a $10,000,000 term note in June 2020. Part$20 million line of the proceeds from the note were used to fund the cash portion of the consideration paid in the Community Shores merger.credit with an annual renewal. The note matures June 2023 with quarterly principal and interest payments. The noteline carries a floating rate of 2.50% over the 1-month LIBORprime rate with a floor of 3.00%. At 3.25% and current rate of 8.5% at December 31, 2020 the effective rate was 3.00%. All or part of the note can be prepaid at any time.2023. The credit agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and the requirements of achieving certain profitability thresholds.
ChoiceOne was in compliance with all covenants as of December 31, 2020.
At 2023. The line of credit balance was $0 at December 31, information regarding the holding company term loan was as follows: 2023.
(Dollars in thousands) | 2020 | 2019 | ||||||
Maturity of June 2023 with floating interest rate of 3.00% | $ | 9,167 | $ | 0 |
The scheduled maturities of the holding company term note at December 31, 2020 were as follows:
(Dollars in thousands) | ||||
2021 | $ | 3,333 | ||
2022 | 3,334 | |||
2023 | 2,500 | |||
Total | $ | 9,167 |
Note 1011 – Subordinated Debentures
The Capital Trust as discussed in Note 1,sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000$1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Capital Trust to purchase an equivalent amount of
70
subordinated debentures from Community Shores. The trust preferred securities and subordinated debentures carry a floating rate of 2.05%2.05% over the 3-month3-month LIBOR and the rate was 2.29%7.6% at December 31, 2020 2023 and 4.01%5.7% at December 31, 2019. 2022. The stated maturity is December 30, 2034. Total trust preferred securities at December 31, 2023 were $3.4 million consisting of $4.5 million in trust preferred securities less $1.1 million in merger fair value adjustments, which is being amortized over the next 10 years. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by ChoiceOne. Interest on the subordinated debentures is payable quarterly on March 30, June 30, September 30 and December 30. ChoiceOne is not considered the primary beneficiary of the Capital Trust (under the variable interest entity rules), therefore the Capital Trust is not consolidated in the consolidated financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded in the consolidated statement of income.
The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued give ChoiceOne the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities.
On April 27, 2016, Community Shores’ BoardIn September 2021, ChoiceOne completed a private placement of Directors voted$32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to defer regularly scheduled interest payments beginning with the payment scheduleda floating rate equal to a benchmark rate, which is expected to be madethe then current three-month term Secured Overnight Financing Rate (“SOFR”) plus 255 basis points until the notes’ maturity on June 30, 2016 September 3, 2031. The notes are redeemable by ChoiceOne, in orderwhole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to preserve its cashqualify as Tier 2 capital for general operationsChoiceOne for regulatory capital purposes. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and potentialsupport bank-level capital support for Community Shores Bank as it grew. The deferral of interest did not constitute an event of default. ChoiceOne paid all deferred interest due as of December 30, 2020. As a result, the accrued and unpaid interest owed on the subordinated debentures was $0 as of December 31, 2020, compared to $708,034 as of December 31, 2019. ratios.
Note 1112 – Income Taxes
Information as of December 31 and for the year follows:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
| ||||||||||||||||
2020 | 2019 | 2018 |
| 2023 |
|
| 2022 |
|
| 2021 |
|
| |||||||||||||
Provision for Income Taxes |
|
|
|
|
|
|
|
|
| ||||||||||||||||
Current federal income tax expense | $ | 3,070 | $ | 984 | $ | 946 |
| $ | 4,330 |
|
| $ | 4,033 |
|
| $ | 3,532 |
|
| ||||||
Deferred federal income tax expense/(benefit) | 202 | 310 | 209 |
|
| (24 | ) |
|
| (15 | ) |
|
| 924 |
|
| |||||||||
Income tax expense | $ | 3,272 | $ | 1,294 | $ | 1,155 |
| $ | 4,306 |
|
| $ | 4,018 |
|
| $ | 4,456 |
|
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
Reconciliation of Income Tax Provision to Statutory Rate |
|
|
|
|
|
|
|
| |||||||||||||||||
Income tax computed at statutory federal rate of 21% | $ | 3,966 | $ | 1,778 | $ | 1,783 |
| $ | 5,369 |
|
| $ | 5,808 |
|
| $ | 5,565 |
|
| ||||||
Tax exempt interest income | (574 | ) | (320 | ) | (309 | ) |
|
| (1,206 | ) |
|
| (1,323 | ) |
|
| (1,190 | ) |
| ||||||
Tax exempt earnings on bank-owned life insurance | (162 | ) | (162 | ) | (81 | ) |
|
| (230 | ) |
|
| (276 | ) |
|
| (170 | ) |
| ||||||
Tax credits | (240 | ) | (218 | ) | (154 | ) |
|
| (282 | ) |
|
| (289 | ) |
|
| (284 | ) |
| ||||||
Nondeductible merger expenses | 182 | 164 | 0 | ||||||||||||||||||||||
Disallowed interest expense |
|
| 752 |
|
|
| 179 |
|
|
| 74 |
|
| ||||||||||||
Other items | 100 | 52 | (84 | ) |
|
| (97 | ) |
|
| (81 | ) |
|
| 461 |
|
| ||||||||
Income tax expense | $ | 3,272 | $ | 1,294 | $ | 1,155 |
| $ | 4,306 |
|
| $ | 4,018 |
|
| $ | 4,456 |
|
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||||
Effective income tax rate | 17 | % | 15 | % | 14 | % |
|
| 17 | % |
|
| 15 | % |
|
| 17 | % |
|
71
(Dollars in thousands) |
|
|
|
|
|
| ||||||||||
|
|
|
|
|
| |||||||||||
Components of Deferred Tax Assets and Liabilities | 2020 | 2019 |
| 2023 |
|
| 2022 |
| ||||||||
Deferred tax assets: |
|
|
|
|
|
| ||||||||||
Purchase accounting adjustments from mergers with County | ||||||||||||||||
and Community Shores | $ | 1,953 | $ | 1,129 | ||||||||||||
Allowance for loan losses | 1,595 | 585 | ||||||||||||||
Purchase accounting adjustments from mergers with County and Community Shores |
| $ | 529 |
|
| $ | 945 |
| ||||||||
Allowance for credit losses |
|
| 3,294 |
|
|
| 1,600 |
| ||||||||
Unrealized losses on securities available for sale |
|
| 15,279 |
|
|
| 19,745 |
| ||||||||
Net operating loss carryforward | 851 | 0 |
|
| 466 |
|
|
| 505 |
| ||||||
Deferred loan fees | 466 | 301 | ||||||||||||||
Write-downs of other real estate owned | 326 | 169 | ||||||||||||||
Unfunded commitment reserve |
|
| 454 |
|
|
| - |
| ||||||||
Compensation |
|
| 347 |
|
|
| 299 |
| ||||||||
Other | 380 | 198 |
|
| 761 |
|
|
| 716 |
| ||||||
Total deferred tax assets | 5,571 | 2,382 |
|
| 21,130 |
|
|
| 23,810 |
| ||||||
|
|
|
|
| ||||||||||||
Deferred tax liabilities: |
|
|
|
|
| |||||||||||
Unrealized gains on securities available for sale | 2,931 | 360 | ||||||||||||||
Purchase accounting adjustments from mergers with County | ||||||||||||||||
and Community Shores | 1,403 | 1,285 | ||||||||||||||
Purchase accounting adjustments from mergers with County and Community Shores |
|
| 622 |
|
|
| 844 |
| ||||||||
Loan servicing rights | 833 | 447 |
|
| 805 |
|
|
| 908 |
| ||||||
Depreciation | 653 | 778 |
|
| 534 |
|
|
| 605 |
| ||||||
Interest rate lock commitments | 177 | 14 | ||||||||||||||
Interest rate derivative contracts |
|
| 1,568 |
|
|
| 660 |
| ||||||||
Deferred loan fees and costs, net |
|
| 75 |
|
|
| 15 |
| ||||||||
Other | 230 | 221 |
|
| 363 |
|
|
| 404 |
| ||||||
Total deferred tax liabilities | 6,227 | 3,105 |
|
| 3,967 |
|
|
| 3,436 |
| ||||||
Net deferred tax liability | $ | (656 | ) | $ | (723 | ) | ||||||||||
Net deferred tax asset (liability) |
| $ | 17,163 |
|
| $ | 20,374 |
|
As of December 31, 2020, 2023, deferred tax assets included federal net operating loss carryforwards of approximately $4.1$2.2 million which was acquired through the merger with Community Shores. The loss carryforwards expire at various dates from 20322031 to 2036.2035. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized. Under Internal Revenue Service limitations,Code Section 382, ChoiceOne is limited to applying approximately $185,000$185,000 of net operating losses per year.
Note 1213 – Related Party Transactions
Loans to executive officers, directors and their affiliates were as follows at December 31:
(Dollars in thousands) | 2020 | 2019 | 2023 |
| 2022 |
| |||||||||
|
|
|
|
| |||||||||||
Balance, beginning of year | $ | 10,563 | $ | 5,343 | $ | 24,036 |
|
| $ | 24,000 |
| ||||
New loans | 12,211 | 2,988 |
| 16,881 |
|
|
| 9,684 |
| ||||||
Repayments | (5,125 | ) | (3,372 | ) |
| (10,601 | ) |
|
| (9,259 | ) | ||||
Effect of changes in related parties | 0 | (4,664 | ) |
| - |
|
|
| (389 | ) | |||||
Loans acquired from merger | 3,075 | 10,268 | |||||||||||||
Balance, end of year | $ | 20,724 | $ | 10,563 | $ | 30,316 |
|
| $ | 24,036 |
|
Deposits from executive officers, directors and their affiliates were $14.7$21.1 million, $30.0 million and $9.0$16.8 million at December 31, 2020 2023, 2022 and 2019,2021, respectively.
Note 1314 – Employee Benefit Plans
401(k)401(k) Plan:
The 401(k)401(k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $465,000, $233,000,$594,000 and $207,000$650,000 in 2020,2019,2023 and 2018,2022, respectively.
Post-retirement Benefits Plan:
ChoiceOne maintains an unfunded post-retirement health care plan, which permits employees (and their dependents) the ability to participate upon retirement from ChoiceOne. ChoiceOne does not pay any portion of the health care premiums charged to its retired participants. A liability has been accrued for the obligation under this plan. Effective in December 2020, ChoiceOne curtailed the plan to the extent that it would be no longer offered to future retirees. Current retirees receiving the benefit were not affected. As a result of the curtailment, ChoiceOne realized a recovery of post-retirement benefit expense of $222,000 in 2020, compared to recoveries of $14,000 and $12,000 in 2019 and 2018, respectively. The post-retirement obligation liability was $10,000 as of December 31, 2020 and $107,000 as of December 31, 2019.
Deferred Compensation Plans:
A deferred director compensation plan covers former directors of Valley Ridge Financial Corp., which was acquired by ChoiceOne in 2006. Under the plan, ChoiceOne pays each former director the amount of director fees deferred plus interest at rates ranging from 5.50% to 5.84% over various periods as elected by each director. A liability has been accrued for the obligation under this plan. ChoiceOne incurred deferred compensation plan expense of $1,000, $3,000, and $5,000 in 2020,2019, and 2018, respectively. The deferred compensation liability was $8,000 as of December 31, 2020 and $33,000 as of December 31, 2019.
A supplemental executive retirement plan covers four former executive officers of Valley Ridge Financial Corp. Under the plan, ChoiceOne pays these individuals a specific amount of compensation over a 15-year period commencing upon early retirement age (as defined in the plan) or normal retirement age (as defined in the plan). A liability has been accrued for the obligation under this plan. The effective interest rate used for the accrual for the retirement liability is based on long-term interest rates. ChoiceOne incurred deferred compensation plan expense of $17,000, $26,000, and $6,000 in 2020,2019, and 2018, respectively. Liabilities related to the supplemental executive retirement plan of $306,000 and $368,000 were outstanding as of December 31, 2020 and December 31, 2019, respectively.
A supplemental executive retirement plan covered one former executive officer and one current executive officer of Lakestone. Under the plan, the individuals would be paid a specific amount of compensation over a 15-year period commencing upon early or normal retirement age (as defined in the plan). A liability was accrued for the obligation under this plan. The liability was paid in the first quarter of 2020. The liability related to this plan was $0 and $337,000 as of December 31, 2020 and December 31, 2019, respectively.
Note 1415 - Stock Based Compensation
Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne.ChoiceOne under the Stock Incentive Plan of 2012, which is expired. Compensation expense in connection with stock options granted was $15,000$0 in 2020, $53,0002023 and $4,000 in 2019, and $38,000 in 2018.2022. The StockEquity Incentive Plan of 20122022 was approved by the Company’s shareholders at the Annual Meeting held on AprilMay 25, 2012. 2022. The StockEquity Incentive Plan of 2012, as amended effective May 23, 2018, 2022 provides for the issuance of up to 200,000 shares of common stock. At December 31, 2020, 2023, there were 92,482142,755 shares available for future grants.
72
A summary of stock options activity during the year ended December 31, 20202023 was as follows:
Weighted | Weighted | |||||||||||||||||||||||
average | average |
|
|
| Weighted |
|
| Weighted |
| |||||||||||||||
exercise | Grant Date |
|
|
| average |
|
| average |
| |||||||||||||||
Shares | price | Fair Value |
|
|
| exercise |
| Grant Date |
| |||||||||||||||
| Shares |
| price |
| Fair Value |
| ||||||||||||||||||
Options outstanding at January 1, 2020 | 57,748 | $ | 23.39 | $ | 3.36 | |||||||||||||||||||
Options outstanding at January 1, 2023 |
|
| 20,631 |
|
| $ | 25.30 |
|
| $ | 3.46 |
| ||||||||||||
Options granted | 0 | 0 |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||
Options exercised | (35,617 | ) | 22.33 | 3.31 |
|
| (7,500 | ) |
|
| 27.25 |
|
|
| 3.64 |
| ||||||||
Options forfeited or expired | (1,500 | ) | 27.25 | 3.64 |
|
| - |
|
|
| - |
|
|
| - |
| ||||||||
Options outstanding, end of year | 20,631 | $ | 25.30 | $ | 3.46 |
|
| 13,131 |
|
| $ | 24.19 |
|
| $ | 3.36 |
| |||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Options exercisable at December 31, 2020 | 8,631 | $ | 22.60 | $ | 3.22 | |||||||||||||||||||
Options exercisable at December 31, 2023 |
|
| 13,131 |
|
| $ | 24.19 |
|
| $ | 3.36 |
|
The exercise prices for options outstanding and exercisable at the end of 20202023 ranged from $20.86$20.86 to $27.25$27.25 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 20202023 was approximately 6.4 4.07 years.
The intrinsic value of all outstanding stock options and exercisable stock options was $82,000$67,000 and $71,000$76,000 respectively, at December 31, 2020 2023 and December 31, 2019. 2022. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2020 2023 were calculated based on the closing market price of the Company’s common stock on December 31, 2020 2023 of $30.81$29.30 per share less the exercise price. The grant date fair value of stock options granted in 2019 was $49,000.
Information pertaining to options outstanding at December 31, 20202023 was as follows:
Exercise price of stock options: | Number of options outstanding at year-end | Number of options exercisable at year-end | Average remaining contractual life (in years) | |||||||||||
$ | 27.25 | 12,000 | 0 | 8.45 | ||||||||||
$ | 25.65 | 3,000 | 3,000 | 7.53 | ||||||||||
$ | 20.86 | 3,306 | 3,306 | 6.38 | ||||||||||
$ | 21.13 | 2,325 | 2,325 | 5.03 |
Exercise price of stock options: |
| Number of options outstanding at year-end |
|
| Number of options exercisable at year-end |
|
| Average remaining contractual life (in years) |
| |||
$27.25 |
|
| 4,500 |
|
|
| 4,500 |
|
|
| 5.41 |
|
$25.65 |
|
| 3,000 |
|
|
| 3,000 |
|
|
| 4.48 |
|
$20.86 |
|
| 3,306 |
|
|
| 3,306 |
|
|
| 3.34 |
|
$21.13 |
|
| 2,325 |
|
|
| 2,325 |
|
|
| 1.99 |
|
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As of December 31, 2020, 2023, there was $19,000 inno unrecognized compensation expense related to stock options.
There were 0 stock options granted in 2020.
ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Beginning with2012 and the awards granted in April 2019, restrictedEquity Incentive Plan of 2022. Restricted stock units outstanding as of December 31, 2023 vest on roughly the three year year anniversary of the grant date. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $157,000, $349,000,$548,000 and $244,000$503,000, in 2020,2019,2023 and 2018,2022, respectively, in connection with restricted stock units for current participants during these years.
A summary of the activity for restricted stock units outstanding during the year ended December 31, 20202023 is presented below:
|
|
|
| Weighted |
| |||||||||||
|
|
|
| Average Grant |
| |||||||||||
|
|
|
| Date Fair Value |
| |||||||||||
Outstanding Stock Awards | Shares | Per Share |
| Shares |
| Per Share |
| |||||||||
Outstanding at January 1, 2020 | 9,000 | $ | 27.25 | |||||||||||||
Outstanding at January 1, 2023 |
|
| 53,867 |
|
| $ | 27.48 |
| ||||||||
Granted | 10,539 | 29.00 |
|
| 23,679 |
|
|
| 24.23 |
| ||||||
Vested | (550 | ) | 28.05 |
|
| (9,051 | ) |
|
| 29.00 |
| |||||
Forfeited | 0 | 0 |
|
| (312 | ) |
|
| 24.23 |
| ||||||
Outstanding at December 31, 2020 | 18,989 | $ | 28.20 | |||||||||||||
Outstanding at December 31, 2023 |
|
| 68,183 |
|
| $ | 26.16 |
|
At December 31, 2020, 2023, there were 18,98968,183 restricted stock units outstanding with an approximate stock value of $585,000$2.0 million based on ChoiceOne’s December 31, 2020 2023 stock price.price of $29.30 per share. At December 31, 2019, 2022, there were 9,00053,867 restricted stock units outstanding with an approximate stock value of $288,000$1.6 million based on ChoiceOne’s December 31, 2019 2022 stock price. As a resultprice of the merger with County, all unvested stock awards granted prior to October 1, 2019 vested upon completion of the merger.$29.00 per share. The grant date fair value of restricted stock issuedunits granted was $306,000$574,000 and $270,000$755,000 in 20202023 and 2019,2022, respectively. The cost
73
is expected to be recognized over a weighted average period of 1.43 years. As of December 31, 2023, there was $770,000 of unrecognized compensation cost related to unvested shares granted.
ChoiceOne has granted performance stock units to a select group of employees under the Stock Incentive Plan of 2012 and the Equity Incentive Plan of 2022. Performance stock units outstanding as of December 31, 2023 vest on the three year anniversary of the grant date based on earnings per share growth rate from the date of the grant. Shares can vest at a rate of 125%, 100%, 75%, or 0% based on the growth rate achieved over the three year time frame. Certain additional vesting provisions apply. Each performance stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $81,000 and $47,000 in 2023 and 2022, respectively, in connection with performance stock units for current participants during these years.
A summary of the activity for performance stock units outstanding during the year ended December 31, 2023 is presented below:
|
|
|
|
| Weighted |
| ||
|
|
|
|
| Average Grant |
| ||
|
|
|
|
| Date Fair Value |
| ||
Outstanding Stock Awards |
| Shares |
|
| Per Share |
| ||
Outstanding at January 1, 2023 |
|
| 6,396 |
|
| $ | 26.34 |
|
Granted |
|
| 5,125 |
|
|
| 24.23 |
|
Vested |
|
| - |
|
|
| - |
|
Forfeited |
|
| - |
|
|
| - |
|
Outstanding at December 31, 2023 |
|
| 11,521 |
|
| $ | 25.40 |
|
At December 31, 2023, there were 11,521 performance stock units outstanding assuming 100% vesting with an approximate stock value of $338,000 based on ChoiceOne’s December 31, 2023 stock price of $29.30 per share. The grant date fair value of restricted stock units granted was $124,000 and $168,000 in 2023 and 2022, respectively. The cost is expected to be recognized over a weighted average period of 1.841.8 years. As of December 31, 2020, 2023, there was $337,000$165,000 of unrecognized compensation cost related to unvested shares granted.
Note 1516 - Earnings Per Share
(Dollars in thousands, except share data) |
|
|
|
|
|
|
| ||||||||||||||||
2020 | 2019 | 2018 | 2023 |
| 2022 |
| 2021 |
| |||||||||||||||
Basic |
|
|
|
|
|
|
|
| |||||||||||||||
Net income | $ | 15,613 | $ | 7,171 | $ | 7,333 | $ | 21,261 |
|
| $ | 23,640 |
|
| $ | 22,042 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted average common shares outstanding | 7,521,771 | 4,528,786 | 3,614,302 |
| 7,532,998 |
|
|
| 7,504,173 |
|
|
| 7,685,459 |
| |||||||||
|
|
|
|
|
|
|
| ||||||||||||||||
Basic earnings per common shares | $ | 2.08 | $ | 1.58 | $ | 2.03 | $ | 2.82 |
|
| $ | 3.15 |
|
| $ | 2.87 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||
Diluted |
|
|
|
|
|
|
|
| |||||||||||||||
Net income | $ | 15,613 | $ | 7,171 | $ | 7,333 | $ | 21,261 |
|
| $ | 23,640 |
|
| $ | 22,042 |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted average common shares outstanding | 7,521,771 | 4,528,786 | 3,614,302 |
| 7,532,998 |
|
|
| 7,504,173 |
|
|
| 7,685,459 |
| |||||||||
Plus dilutive stock options and restricted stock units | 9,846 | 10,489 | 13,825 |
| 39,292 |
|
|
| 23,198 |
|
|
| 17,255 |
| |||||||||
|
|
|
|
|
|
|
| ||||||||||||||||
Weighted average common shares outstanding and potentially dilutive shares | 7,531,617 | 4,539,275 | 3,628,127 |
| 7,572,290 |
|
|
| 7,527,371 |
|
|
| 7,702,714 |
| |||||||||
|
|
|
|
|
|
|
| ||||||||||||||||
Diluted earnings per common share | $ | 2.07 | $ | 1.58 | $ | 2.02 | $ | 2.82 |
|
| $ | 3.15 |
|
| $ | 2.86 |
|
Per share amounts have been adjusted for the 5% stock dividends paid on May 31, 2018.
Stock options considered anti-dilutive to earnings per share were 0,4,5000,, 15,000, and 15,000 as of December 31, 2020, 2023, December 31, 2019,2022, and December 31, 2018,2021, respectively. This calculation is based on the average stock price during the year.
74
Note 1617 – Condensed Financial Statements of Parent Company
Condensed Balance Sheets
(Dollars in thousands) | December 31, | |||||||
2020 | 2019 | |||||||
Assets | ||||||||
Cash | $ | 11,939 | $ | 991 | ||||
Equity securities at fair value | 1,884 | 1,840 | ||||||
Securities available for sale | 0 | 959 | ||||||
Other assets | 292 | 468 | ||||||
Investment in subsidiaries | 228,895 | 189,578 | ||||||
Total assets | $ | 243,010 | $ | 193,836 | ||||
Liabilities | ||||||||
Term loan | $ | 9,167 | $ | 0 | ||||
Trust preferred securities | 3,089 | 0 | ||||||
Other liabilities | 3,486 | 1,697 | ||||||
Total liabilities | 15,742 | 1,697 | ||||||
Shareholders' equity | 227,268 | 192,139 | ||||||
Total liabilities and shareholders’ equity | $ | 243,010 | $ | 193,836 |
(Dollars in thousands) |
| December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Assets |
|
|
|
|
|
|
|
|
| |||
Cash |
| $ | 12,031 |
|
| $ | 8,310 |
|
| $ | 17,622 |
|
Equity securities at fair value |
|
| 2,077 |
|
|
| 3,199 |
|
|
| 2,555 |
|
Other assets |
|
| 474 |
|
|
| 586 |
|
|
| 553 |
|
Investment in subsidiaries |
|
| 216,975 |
|
|
| 192,540 |
|
|
| 236,462 |
|
Total assets |
| $ | 231,557 |
|
| $ | 204,635 |
|
| $ | 257,192 |
|
|
|
|
|
|
|
|
|
|
| |||
Liabilities |
|
|
|
|
|
|
|
|
| |||
Subordinated debentures |
| $ | 32,115 |
|
| $ | 31,971 |
|
| $ | 31,827 |
|
Trust preferred securities |
|
| 3,392 |
|
|
| 3,291 |
|
|
| 3,190 |
|
Other liabilities |
|
| 416 |
|
|
| 499 |
|
|
| 506 |
|
Total liabilities |
|
| 35,923 |
|
|
| 35,761 |
|
|
| 35,523 |
|
|
|
|
|
|
|
|
|
|
| |||
Shareholders' equity |
|
| 195,634 |
|
|
| 168,874 |
|
|
| 221,669 |
|
Total liabilities and shareholders’ equity |
| $ | 231,557 |
|
| $ | 204,635 |
|
| $ | 257,192 |
|
Condensed Statements of Income
(Dollars in thousands) | Years Ended December 31, | |||||||||||
2020 | 2019 | 2018 | ||||||||||
Interest income | ||||||||||||
Interest and dividends from ChoiceOne Bank | $ | 12,942 | $ | 4,011 | $ | 2,800 | ||||||
Interest and dividends from other securities | 13 | 50 | 47 | |||||||||
Total interest income | 12,955 | 4,061 | 2,847 | |||||||||
Interest expense | ||||||||||||
Borrowings | 239 | 0 | 0 | |||||||||
Net interest income | 12,716 | 4,061 | 2,847 | |||||||||
Noninterest income | ||||||||||||
Gains on sales of securities | 26 | 8 | 9 | |||||||||
Change in market value of equity securities | (155 | ) | (114 | ) | 184 | |||||||
Total noninterest income | (129 | ) | (106 | ) | 193 | |||||||
Noninterest expense | ||||||||||||
Salaries and benefits | 1,201 | 339 | 0 | |||||||||
Professional fees | 1,093 | 1,517 | 0 | |||||||||
Other | 217 | 492 | 144 | |||||||||
Total noninterest expense | 2,511 | 2,348 | 144 | |||||||||
Income before income tax and equity in undistributed net income of subsidiary | 10,076 | 1,607 | 2,896 | |||||||||
Income tax (expense)/benefit | 431 | 261 | (14 | ) | ||||||||
Income before equity in undistributed net income of subsidiary | 10,507 | 1,868 | 2,882 | |||||||||
Equity in undistributed net income of subsidiary | 5,106 | 5,303 | 4,451 | |||||||||
Net income | $ | 15,613 | $ | 7,171 | $ | 7,333 |
(Dollars in thousands) |
| Years Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Interest income |
|
|
|
|
|
|
|
|
| |||
Interest and dividends from ChoiceOne Bank |
| $ | 10,813 |
|
| $ | - |
|
| $ | 6,125 |
|
Interest and dividends from other securities |
|
| 32 |
|
|
| 27 |
|
|
| 10 |
|
Total interest income |
|
| 10,845 |
|
|
| 27 |
|
|
| 6,135 |
|
|
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
|
|
|
|
|
|
|
| |||
Borrowings |
|
| 1,635 |
|
|
| 1,491 |
|
|
| 645 |
|
|
|
|
|
|
|
|
|
|
| |||
Net interest income |
|
| 9,210 |
|
|
| (1,464 | ) |
|
| 5,490 |
|
|
|
|
|
|
|
|
|
|
| |||
Noninterest income |
|
|
|
|
|
|
|
|
| |||
Gains (losses) on sales of securities |
|
| (71 | ) |
|
| - |
|
|
| - |
|
Change in market value of equity securities |
|
| (307 | ) |
|
| (385 | ) |
|
| 554 |
|
Other |
|
| - |
|
|
| 2 |
|
|
| 4 |
|
Total noninterest income |
|
| (378 | ) |
|
| (383 | ) |
|
| 558 |
|
|
|
|
|
|
|
|
|
|
| |||
Noninterest expense |
|
|
|
|
|
|
|
|
| |||
Professional fees |
|
| 47 |
|
|
| 40 |
|
|
| 15 |
|
Other |
|
| 217 |
|
|
| 174 |
|
|
| 203 |
|
Total noninterest expense |
|
| 264 |
|
|
| 214 |
|
|
| 218 |
|
|
|
|
|
|
|
|
|
|
| |||
Income before income tax and equity in undistributed net income of subsidiary |
|
| 8,568 |
|
|
| (2,061 | ) |
|
| 5,830 |
|
Income tax (expense)/benefit |
|
| 472 |
|
|
| 433 |
|
|
| 64 |
|
Income before equity in undistributed net income of subsidiary |
|
| 9,040 |
|
|
| (1,628 | ) |
|
| 5,894 |
|
Equity in undistributed net income of subsidiary |
|
| 12,221 |
|
|
| 25,268 |
|
|
| 16,148 |
|
Net income |
| $ | 21,261 |
|
| $ | 23,640 |
|
| $ | 22,042 |
|
75
Condensed Statements of Cash Flows
(Dollars in thousands) | Years Ended December 31, | |||||||||||
2020 | 2019 | 2018 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 15,613 | $ | 7,171 | $ | 7,333 | ||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Equity in undistributed net income of subsidiary | (5,106 | ) | (5,303 | ) | (4,451 | ) | ||||||
Amortization | 51 | 14 | 18 | |||||||||
Compensation expense on employee and director stock purchases, stock options, and restricted stock units | 488 | 359 | 331 | |||||||||
Net gain on sale of securities | (26 | ) | (8 | ) | (9 | ) | ||||||
Change in market value of equity securities | 155 | 114 | (184 | ) | ||||||||
Changes in other assets | 582 | (344 | ) | 66 | ||||||||
Changes in other liabilities | 551 | 1,485 | (19 | ) | ||||||||
Net cash from operating activities | 12,308 | 3,488 | 3,085 | |||||||||
Cash flows from investing activities: | ||||||||||||
Sales of securities | 958 | 1,102 | 91 | |||||||||
Purchases of securities | (200 | ) | 0 | 0 | ||||||||
Cash acquired from mergers with Community Shores Bank Corporation and County Bank Corp. | 142 | 1,038 | 0 | |||||||||
Net cash from investing activities | 900 | 2,140 | 91 | |||||||||
Cash flows from financing activities: | ||||||||||||
Issuance of common stock | 134 | 142 | 77 | |||||||||
Repurchase of common stock | 0 | (67 | ) | (523 | ) | |||||||
Proceeds from borrowings | 10,000 | 0 | 0 | |||||||||
Payments on borrowings | (833 | ) | 0 | 0 | ||||||||
Cash used as part of equity issuance for merger | (5,387 | ) | (297 | ) | 0 | |||||||
Cash dividends paid | (6,174 | ) | (5,815 | ) | (2,579 | ) | ||||||
Net cash from financing activities | (2,260 | ) | (6,037 | ) | (3,025 | ) | ||||||
Net change in cash | 10,948 | (409 | ) | 151 | ||||||||
Beginning cash | 991 | 1,400 | 1,249 | |||||||||
Ending cash | $ | 11,939 | $ | 991 | $ | 1,400 |
(Dollars in thousands) |
| Years Ended December 31, |
| |||||||||
|
| 2023 |
|
| 2022 |
|
| 2021 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |||
Net income |
| $ | 21,261 |
|
| $ | 23,640 |
|
| $ | 22,042 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
| |||
Equity in undistributed net income of subsidiary |
|
| (12,221 | ) |
|
| (25,268 | ) |
|
| (16,148 | ) |
Amortization |
|
| 245 |
|
|
| 245 |
|
|
| 101 |
|
Compensation expense on employee and director stock purchases, stock options, and restricted stock units |
|
| 964 |
|
|
| 928 |
|
|
| 787 |
|
Net loss on sale of securities |
|
| 71 |
|
|
| - |
|
|
| - |
|
Change in market value of equity securities |
|
| 307 |
|
|
| 385 |
|
|
| (554 | ) |
Changes in other assets |
|
| 113 |
|
|
| (33 | ) |
|
| (260 | ) |
Changes in other liabilities |
|
| (84 | ) |
|
| (7 | ) |
|
| (2,982 | ) |
Net cash from operating activities |
|
| 10,656 |
|
|
| (110 | ) |
|
| 2,986 |
|
|
|
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| |||
Sales of securities |
|
| 887 |
|
|
| - |
|
|
| - |
|
Purchases of securities |
|
| (143 | ) |
|
| (1,029 | ) |
|
| (117 | ) |
Investment in Subsidiary |
|
| - |
|
|
| - |
|
|
| (5,000 | ) |
Net cash from investing activities |
|
| 744 |
|
|
| (1,029 | ) |
|
| (5,117 | ) |
|
|
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |||
Issuance of common stock |
|
| 231 |
|
|
| 172 |
|
|
| 139 |
|
Repurchase of common stock |
|
| - |
|
|
| (767 | ) |
|
| (7,786 | ) |
Proceeds from borrowings |
|
| - |
|
|
| - |
|
|
| 36,827 |
|
Payments on borrowings |
|
| - |
|
|
| - |
|
|
| (14,166 | ) |
Cash dividends paid |
|
| (7,910 | ) |
|
| (7,578 | ) |
|
| (7,200 | ) |
Net cash from financing activities |
|
| (7,679 | ) |
|
| (8,173 | ) |
|
| 7,814 |
|
|
|
|
|
|
|
|
|
|
| |||
Net change in cash |
|
| 3,721 |
|
|
| (9,312 | ) |
|
| 5,683 |
|
Beginning cash |
|
| 8,310 |
|
|
| 17,622 |
|
|
| 11,939 |
|
Ending cash |
| $ | 12,031 |
|
| $ | 8,310 |
|
| $ | 17,622 |
|
76
Note 1718 – Financial Instruments
Financial instruments as of the dates indicated were as follows:
Quoted Prices |
|
|
|
|
| Quoted Prices |
|
|
|
|
| |||||||||||||||||||||||||||||
In Active | Significant |
|
|
|
|
| In Active |
| Significant |
|
|
| ||||||||||||||||||||||||||||
Markets for | Other | Significant |
|
|
|
|
| Markets for |
| Other |
| Significant |
| |||||||||||||||||||||||||||
Identical | Observable | Unobservable |
|
|
|
|
| Identical |
| Observable |
| Unobservable |
| |||||||||||||||||||||||||||
(Dollars in thousands) | Carrying | Estimated | Assets | Inputs | Inputs |
| Carrying |
| Estimated |
| Assets |
| Inputs |
| Inputs |
| ||||||||||||||||||||||||
Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) |
| Amount |
| Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 79,519 | $ | 79,519 | $ | 79,519 | $ | 0 | $ | 0 |
| $ | 55,433 |
|
| $ | 55,433 |
|
| $ | 55,433 |
|
| $ | - |
|
| $ | - |
| ||||||||||
Equity securities at fair value | 2,896 | 2,896 | 1,411 | 0 | 1,485 |
|
| 7,505 |
|
|
| 7,505 |
|
|
| 4,749 |
|
|
| - |
|
|
| 2,756 |
| |||||||||||||||
Securities available for sale | 574,787 | 574,787 | 0 | 563,364 | 11,423 |
|
| 514,598 |
|
|
| 514,598 |
|
|
| 80,194 |
|
|
| 434,404 |
|
|
| - |
| |||||||||||||||
Securities held to maturity |
|
| 407,959 |
|
|
| 348,791 |
|
|
| - |
|
|
| 335,493 |
|
|
| 13,298 |
| ||||||||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 8,004 | 8,004 | 0 | 8,004 | 0 |
|
| 9,514 |
|
|
| 9,514 |
|
|
| - |
|
|
| 9,514 |
|
|
| - |
| |||||||||||||||
Loans held for sale | 12,921 | 13,350 | 0 | 13,350 | 0 |
|
| 4,710 |
|
|
| 4,851 |
|
|
| - |
|
|
| 4,851 |
|
|
| - |
| |||||||||||||||
Loans to other financial institutions | 35,209 | 35,209 | 0 | 35,209 | 0 | |||||||||||||||||||||||||||||||||||
Loans, net | 1,062,075 | 1,057,786 | 0 | 0 | 1,057,786 |
|
| 1,394,968 |
|
|
| 1,362,920 |
|
|
| - |
|
|
| - |
|
|
| 1,362,920 |
| |||||||||||||||
Accrued interest receivable | 6,521 | 6,521 | 0 | 6,521 | 0 |
|
| 10,066 |
|
|
| 10,066 |
|
|
| - |
|
|
| 10,066 |
|
|
| - |
| |||||||||||||||
Interest rate lock commitments | 842 | 842 | 0 | 842 | 0 |
|
| 64 |
|
|
| 64 |
|
|
| - |
|
|
| 64 |
|
|
| - |
| |||||||||||||||
Interest rate derivative contracts |
|
| 8,880 |
|
|
| 8,880 |
|
|
| - |
|
|
| 8,880 |
|
|
| - |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Noninterest-bearing deposits |
|
| 547,625 |
|
|
| 547,625 |
|
|
| 547,625 |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||
Interest-bearing deposits |
|
| 1,550,985 |
|
|
| 1,549,386 |
|
|
| - |
|
|
| 1,549,386 |
|
|
| - |
| ||||||||||||||||||||
Brokered deposits |
|
| 23,445 |
|
|
| 23,435 |
|
|
| - |
|
|
| 23,435 |
|
|
| - |
| ||||||||||||||||||||
Borrowings |
|
| 200,000 |
|
|
| 199,743 |
|
|
| - |
|
|
| 199,743 |
|
|
| - |
| ||||||||||||||||||||
Subordinated debentures |
|
| 35,507 |
|
|
| 31,748 |
|
|
| - |
|
|
| 31,748 |
|
|
| - |
| ||||||||||||||||||||
Accrued interest payable |
|
| 6,223 |
|
|
| 6,223 |
|
|
| - |
|
|
| 6,223 |
|
|
| - |
| ||||||||||||||||||||
Interest rate derivative contracts |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Cash and cash equivalents |
| $ | 43,943 |
|
| $ | 43,943 |
|
| $ | 43,943 |
|
| $ | - |
|
| $ | - |
| ||||||||||||||||||||
Equity securities at fair value |
|
| 8,566 |
|
|
| 8,566 |
|
|
| 6,024 |
|
|
| - |
|
|
| 2,542 |
| ||||||||||||||||||||
Securities available for sale |
|
| 529,749 |
|
|
| 529,749 |
|
|
| 78,204 |
|
|
| 451,545 |
|
|
| - |
| ||||||||||||||||||||
Securities held to maturity |
|
| 425,906 |
|
|
| 353,901 |
|
|
| - |
|
|
| 338,583 |
|
|
| 15,318 |
| ||||||||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock |
|
| 8,581 |
|
|
| 8,581 |
|
|
| - |
|
|
| 8,581 |
|
|
| - |
| ||||||||||||||||||||
Loans held for sale |
|
| 4,834 |
|
|
| 4,979 |
|
|
| - |
|
|
| 4,979 |
|
|
| - |
| ||||||||||||||||||||
Loans, net |
|
| 1,182,163 |
|
|
| 1,123,198 |
|
|
| - |
|
|
| - |
|
|
| 1,123,198 |
| ||||||||||||||||||||
Accrued interest receivable |
|
| 8,949 |
|
|
| 8,949 |
|
|
| - |
|
|
| 8,949 |
|
|
| - |
| ||||||||||||||||||||
Interest rate lock commitments |
|
| 28 |
|
|
| 28 |
|
|
| - |
|
|
| 28 |
|
|
| - |
| ||||||||||||||||||||
Interest rate derivative contracts |
|
| 9,204 |
|
|
| 9,204 |
|
|
| - |
|
|
| 9,204 |
|
|
| - |
| ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Noninterest-bearing deposits | 477,654 | 477,654 | 0 | 477,654 | 0 |
|
| 599,579 |
|
|
| 599,579 |
|
|
| 599,579 |
|
|
| - |
|
|
| - |
| |||||||||||||||
Interest-bearing deposits | 1,196,924 | 1,197,964 | 0 | 1,197,964 | 0 |
|
| 1,518,424 |
|
|
| 1,514,294 |
|
|
| - |
|
|
| 1,514,294 |
|
|
| - |
| |||||||||||||||
Borrowings | 9,327 | 9,143 | 0 | 9,143 | 0 |
|
| 50,000 |
|
|
| 50,000 |
|
|
| - |
|
|
| 50,000 |
|
|
| - |
| |||||||||||||||
Subordinated debentures | 3,089 | 3,089 | 0 | 3,089 | 0 |
|
| 35,262 |
|
|
| 30,304 |
|
|
| - |
|
|
| 30,304 |
|
|
| - |
| |||||||||||||||
Accrued interest payable | 183 | 183 | 0 | 183 | 0 |
|
| 610 |
|
|
| 610 |
|
|
| - |
|
|
| 610 |
|
|
| - |
| |||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||
Cash and due from banks | $ | 59,558 | $ | 59,558 | $ | 59,558 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||||
Equity securities at fair value | 2,851 | 2,851 | 1,379 | 0 | 1,472 | |||||||||||||||||||||||||||||||||||
Securities available for sale | 339,579 | 339,579 | 0 | 327,212 | 12,367 | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 6,458 | 6,458 | 0 | 6,458 | 0 | |||||||||||||||||||||||||||||||||||
Loans held for sale | 3,095 | 3,134 | 0 | 3,134 | 0 | |||||||||||||||||||||||||||||||||||
Loans to other financial institutions | 51,048 | 51,048 | 0 | 51,048 | 0 | |||||||||||||||||||||||||||||||||||
Loans, net | 797,991 | 793,270 | 0 | 0 | 793,270 | |||||||||||||||||||||||||||||||||||
Accrued interest receivable | 3,965 | 3,965 | 0 | 3,965 | 0 | |||||||||||||||||||||||||||||||||||
Interest rate lock commitments | 68 | 68 | 0 | 68 | 0 | |||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 287,460 | 287,460 | 0 | 287,460 | 0 | |||||||||||||||||||||||||||||||||||
Interest-bearing deposits | 867,142 | 867,154 | 0 | 867,154 | 0 | |||||||||||||||||||||||||||||||||||
Borrowings | 33,198 | 33,243 | 0 | 33,243 | 0 | |||||||||||||||||||||||||||||||||||
Accrued interest payable | 411 | 411 | 0 | 411 | 0 | |||||||||||||||||||||||||||||||||||
Interest rate derivative contracts |
|
| 5,823 |
|
|
| 5,823 |
|
|
| - |
|
|
| 5,823 |
|
|
| - |
|
The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 18. The estimated fair
77
value of loans involves discounting forecasted cash flows. The discounting is executed using the Treasury curve, incorporating a spread adjustment to account for loans follows the guidance in ASU 2016-01 which prescribes an “exit price” approach, which incorporates discounts for credit,factors such as liquidity, marketability, and marketability.related risks. The allowance for loancredit losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of loans also included the mark to market adjustments related to the Company’s mergermergers.
The valuation of liabilities, encompassing deposits, borrowings, and others, is derived by aligning forecasted cash flows with County.
The estimated fair value of deposits is basedrelevant points on comparing the average rate paid on deposits compared to the three month LIBOR rate which is assumed to be the replacement value of these deposits.SOFR Swap curve. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal.
Note 1819 – Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 20202023 and December 31, 2019,2022, and the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
78
There were noDisclosures concerning assets and liabilities measured at fair value as of December 31, 20192023 or December 31, 2020. Disclosures concerning assets measured at fair value2022 are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Quoted Prices |
| Quoted Prices |
|
|
|
|
|
|
| |||||||||||||||||||||||
In Active | Significant |
| In Active |
| Significant |
|
|
|
|
| ||||||||||||||||||||||
Markets for | Other | Significant |
| Markets for |
| Other |
| Significant |
|
|
| |||||||||||||||||||||
Identical | Observable | Unobservable |
| Identical |
| Observable |
| Unobservable |
|
|
| |||||||||||||||||||||
(Dollars in thousands) | Assets | Inputs | Inputs | Balance at |
| Assets |
| Inputs |
| Inputs |
| Balance at |
| |||||||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Date Indicated |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Date Indicated |
| ||||||||||||||||||||
Equity Securities Held at Fair Value - December 31, 2020 | ||||||||||||||||||||||||||||||||
Equity Securities Held at Fair Value - December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Equity securities | $ | 1,411 | $ | 0 | $ | 1,485 | $ | 2,896 |
| $ | 4,749 |
|
| $ | - |
|
| $ | 2,756 |
|
| $ | 7,505 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Investment Securities, Available for Sale - December 31, 2020 | ||||||||||||||||||||||||||||||||
Investment Securities, Available for Sale -December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
U. S. Government and federal agency | $ | 0 | $ | 2,051 | $ | 0 | $ | 2,051 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
| ||||||||
U. S. Treasury notes and bonds | 0 | 2,056 | 0 | 2,056 |
|
| 80,194 |
|
|
| - |
|
|
| - |
|
|
| 80,194 |
| ||||||||||||
State and municipal | 0 | 309,945 | 10,423 | 320,368 |
|
| - |
|
|
| 234,682 |
|
|
| - |
|
|
| 234,682 |
| ||||||||||||
Mortgage-backed | 0 | 246,723 | 0 | 246,723 |
|
| - |
|
|
| 188,501 |
|
|
| - |
|
|
| 188,501 |
| ||||||||||||
Corporate | 0 | 2,589 | 0 | 2,589 |
|
| - |
|
|
| 204 |
|
|
| - |
|
|
| 204 |
| ||||||||||||
Trust preferred securities | 0 | 0 | 1,000 | 1,000 | ||||||||||||||||||||||||||||
Asset-backed Securities |
|
| - |
|
|
| 11,017 |
|
|
| - |
|
|
| 11,017 |
| ||||||||||||||||
Total | $ | 0 | $ | 563,364 | $ | 11,423 | $ | 574,787 |
| $ | 80,194 |
|
| $ | 434,404 |
|
| $ | - |
|
| $ | 514,598 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Equity Securities Held at Fair Value - December 31, 2019 | ||||||||||||||||||||||||||||||||
Derivative Instruments -December 31, 2023 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Interest rate derivative contracts - assets |
| $ | - |
|
| $ | 8,880 |
|
| $ | - |
|
| $ | 8,880 |
| ||||||||||||||||
Interest rate derivative contracts - liabilities |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Equity Securities Held at Fair Value -December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Equity securities | $ | 1,379 | $ | 0 | $ | 1,472 | $ | 2,851 |
| $ | 6,024 |
|
| $ | - |
|
| $ | 2,542 |
|
| $ | 8,566 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Investment Securities, Available for Sale - December 31, 2019 | ||||||||||||||||||||||||||||||||
Investment Securities, Available for Sale -December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
U. S. Government and federal agency | $ | 0 | $ | 17,215 | $ | 0 | $ | 17,215 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
| ||||||||
U. S. Treasury notes and bonds | 0 | 2,008 | 0 | 2,008 |
|
| 78,204 |
|
|
| - |
|
|
| - |
|
|
| 78,204 |
| ||||||||||||
State and municipal | 0 | 162,557 | 11,367 | 173,924 |
|
| - |
|
|
| 229,938 |
|
|
| - |
|
|
| 229,938 |
| ||||||||||||
Mortgage-backed | 0 | 142,760 | 0 | 142,760 |
|
| - |
|
|
| 208,563 |
|
|
| - |
|
|
| 208,563 |
| ||||||||||||
Corporate | 0 | 2,672 | 0 | 2,672 |
|
| - |
|
|
| 711 |
|
|
| - |
|
|
| 711 |
| ||||||||||||
Trust preferred securities | 0 | 0 | 1,000 | 1,000 | ||||||||||||||||||||||||||||
Asset-backed Securities |
|
| - |
|
|
| 12,333 |
|
|
| - |
|
|
| 12,333 |
| ||||||||||||||||
Total | $ | 0 | $ | 327,212 | $ | 12,367 | $ | 339,579 |
| $ | 78,204 |
|
| $ | 451,545 |
|
| $ | - |
|
| $ | 529,749 |
| ||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Derivative Instruments -December 31, 2022 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Interest rate derivative contracts - assets |
| $ | - |
|
| $ | 9,204 |
|
| $ | - |
|
| $ | 9,204 |
| ||||||||||||||||
Interest rate derivative contracts - liabilities |
| $ | - |
|
| $ | 5,823 |
|
| $ | - |
|
| $ | 5,823 |
|
Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, U.S. Treasury notes and bonds, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.
79
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in thousands) |
|
|
|
|
|
| |||||||||||
2020 | 2019 |
|
|
|
|
| 2023 |
| 2022 |
| |||||||
Equity Securities Held at Fair Value |
|
|
|
|
|
|
|
|
| ||||||||
Balance, January 1 | $ | 1,472 | $ | 886 |
|
|
|
|
| $ | 2,542 |
|
| $ | 1,768 |
| |
Total realized and unrealized gains included in noninterest income | 13 | 114 |
|
|
|
|
|
| 71 |
|
|
| 161 |
| |||
Net purchases, sales, calls, and maturities | 0 | 0 |
|
|
|
|
|
| 143 |
|
|
| 613 |
| |||
Net transfers into Level 3 | 0 | 0 | |||||||||||||||
Acquired from merger with County Bank Corp. | 0 | 472 | |||||||||||||||
Balance, December 31 | $ | 1,485 | $ | 1,472 |
|
| $ | 2,756 |
|
| $ | 2,542 |
| ||||
Amount of total losses for the period included in earning attributable to the change in |
|
|
| $ | 5 |
|
| $ | 9 |
| |||||||
|
|
|
|
|
|
|
|
| |||||||||
Investment Securities, Available for Sale |
|
|
|
|
|
| |||||||||||
Balance, January 1 | $ | 12,367 | $ | 8,498 |
|
|
| $ | - |
|
| $ | 21,050 |
| |||
Total realized and unrealized gains included in income | 0 | 0 |
|
|
| - |
|
|
| - |
| ||||||
Total unrealized gains/(losses) included in other comprehensive income | 512 | 210 |
|
|
| - |
|
|
| - |
| ||||||
Net purchases, sales, calls, and maturities | (1,456) | 1,375 |
|
|
|
| - |
|
|
| - |
| |||||
Net transfers into Level 3 | 0 | 0 |
|
|
|
| - |
|
|
| - |
| |||||
Acquired from merger with County Bank Corp. | 0 | 2,284 | |||||||||||||||
Transfer to held to maturity |
|
|
|
| - |
|
|
| (21,050 | ) | |||||||
Balance, December 31 | $ | 11,423 | $ | 12,367 |
|
| $ | - |
|
| $ | - |
| ||||
Amount of total losses for the period included in earning attributable to the change in |
|
|
| $ | - |
|
| $ | - |
|
Of the Level 3 assets that were still held by the Company at December 31, 2020, 2023, the net unrealized gain as of December 31,2020 2023 was $889,000,$71,000, compared to $324,000$161,000 as of December 31,2019. 2022. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities based on ASU 2016-01, which was implemented by ChoiceOne effective January 1, 2018. securities. A total of $1,642,000$143,000 and $2,091,000$613,000 of Level 3 securities were purchased in 20202023 and 2019,2022, respectively. In addition, Level 3 securities totaling $2,756,000 were obtained in 2019 from the merger with County.
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.
Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:
Assets Measured at Fair Value on a Non-recurring Basis
Quoted Prices | ||||||||||||||||
In Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Balances at | Identical | Observable | Unobservable | |||||||||||||
(Dollars in thousands) | Dates | Assets | Inputs | Inputs | ||||||||||||
Indicated | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired Loans | ||||||||||||||||
December 31, 2020 | $ | 7,851 | $ | 0 | $ | 0 | $ | 7,851 | ||||||||
December 31, 2019 | $ | 5,922 | $ | 0 | $ | 0 | $ | 5,922 | ||||||||
Other Real Estate | ||||||||||||||||
December 31, 2020 | $ | 266 | $ | 0 | $ | 0 | $ | 266 | ||||||||
December 31, 2019 | $ | 929 | $ | 0 | $ | 0 | $ | 929 | ||||||||
Mortgage Loan Servicing Rights | ||||||||||||||||
December 31, 2020 | $ | 3,967 | $ | 0 | $ | 3,967 | $ | 0 | ||||||||
December 31, 2019 | $ | 2,131 | $ | 0 | $ | 2,131 | $ | 0 | ||||||||
80
|
|
|
|
| Quoted Prices |
|
|
|
|
|
|
| ||||
|
|
|
|
| In Active |
|
| Significant |
|
|
|
| ||||
|
|
|
|
| Markets for |
|
| Other |
|
| Significant |
| ||||
|
| Balances at |
|
| Identical |
|
| Observable |
|
| Unobservable |
| ||||
(Dollars in thousands) |
| Dates |
|
| Assets |
|
| Inputs |
|
| Inputs |
| ||||
|
| Indicated |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
Collateral Dependent Loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2023 |
| $ | 387 |
|
| $ | - |
|
| $ | - |
|
| $ | 387 |
|
Impaired Loans |
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2022 |
| $ | 2,846 |
|
| $ | - |
|
| $ | - |
|
| $ | 2,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other Real Estate |
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2023 |
| $ | 122 |
|
| $ | - |
|
| $ | - |
|
| $ | 122 |
|
December 31, 2022 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Collateral dependent loans classified as Level 3 are loans for which the repayment is expected to be provided substantially through the sale or operation of the collateral when the borrower is experiencing financial difficulty. The fair value of the collateral should be adjusted for estimated costs to sell if the repayment depends on the sale of the collateral. The net carrying amount of the loan should not exceed the fair value of the collateral (less costs to sell, if applicable). Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.classified as non-accrual, TDR, or past due. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loancredit losses and write-downs of other real estate owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell.
Note 1920 – Off-Balance Sheet Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31:
2020 | 2019 |
| 2023 |
| 2022 | ||||||||||||||||||||||||||||
Fixed | Variable | Fixed | Variable |
| Fixed |
| Variable |
| Fixed |
| Variable |
| |||||||||||||||||||||
(Dollars in thousands) | Rate | Rate | Rate | Rate |
| Rate |
| Rate |
| Rate |
| Rate |
| ||||||||||||||||||||
Unused lines of credit and letters of credit | $ | 48,622 | $ | 231,667 | $ | 38,064 | $ | 177,447 |
| $ | 57,781 |
|
| $ | 141,522 |
|
| $ | 54,523 |
|
| $ | 148,497 |
|
| ||||||||
Commitments to fund loans (at market rates) | 10,691 | 3,954 | 18,216 | 4,580 |
|
| 90,178 |
|
|
| 27,939 |
|
|
| 35,789 |
|
|
| 12,565 |
|
|
Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 2.25%6.25% to 6.50%9.50% and maturities ranging from 1 year to 30 years.
Note 2021 – Regulatory Capital
ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year-end 20202023 and 2019,2022, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action.
81
Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows:
Minimum Required |
|
|
|
|
|
|
|
|
|
|
| Minimum Required |
|
| |||||||||||||||||||||||||
to be Well |
|
|
|
|
|
|
|
|
|
|
| to be Well |
|
| |||||||||||||||||||||||||
Minimum Required | Capitalized Under |
|
|
|
|
|
| Minimum Required |
|
| Capitalized Under |
|
| ||||||||||||||||||||||||||
for Capital | Prompt Corrective |
|
|
|
|
|
| for Capital |
|
| Prompt Corrective |
|
| ||||||||||||||||||||||||||
(Dollars in thousands) | Actual | Adequacy Purposes | Action Regulations |
| Actual |
|
| Adequacy Purposes |
|
| Action Regulations |
|
| ||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio |
| Amount |
| Ratio |
|
| Amount |
| Ratio |
|
| Amount |
| Ratio |
|
| ||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||
December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
ChoiceOne Financial Services Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Total capital (to risk weighted assets) | $ 162,558 | 13.2 | % | $ 98,835 | 8.0 | % | N/A | N/A |
| $ | 233,840 |
|
|
| 13.0 |
| % |
| $ | 144,441 |
|
|
| 8.0 |
| % |
| N/A |
|
| N/A |
|
| ||||||
Common equity Tier 1 capital (to risk weighted assets) | 150,465 | 12.2 | 55,595 | 4.5 | N/A | N/A |
|
| 185,412 |
|
|
| 10.3 |
|
|
| 81,248 |
|
|
| 4.5 |
|
| N/A |
| N/A |
|
| |||||||||||
Tier 1 capital (to risk weighted assets) | 150,465 | 12.2 | 74,126 | 6.0 | N/A | N/A |
|
| 189,912 |
|
|
| 10.5 |
|
|
| 108,331 |
|
|
| 6.0 |
|
| N/A |
|
| N/A |
|
| ||||||||||
Tier 1 capital (to average assets) | 150,465 | 8.3 | 72,281 | 4.0 | N/A | N/A |
|
| 189,912 |
|
|
| 7.5 |
|
|
| 101,337 |
|
|
| 4.0 |
|
| N/A |
|
| N/A |
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
ChoiceOne Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total capital (to risk weighted assets) | $ 159,684 | 12.9 | % | $ 98,683 | 8.0 | % | $ 123,353 | 10.0 | % |
| $ | 224,095 |
|
|
| 12.4 |
| % |
| $ | 144,274 |
|
|
| 8.0 |
| % |
| $ | 180,342 |
|
|
| 10.0 |
| % | |||
Common equity Tier 1 capital (to risk weighted assets) | 152,091 | 12.3 | 55,509 | 4.5 | 80,180 | 6.5 |
|
| 212,283 |
|
|
| 11.8 |
|
|
| 81,154 |
|
|
| 4.5 |
|
|
| 117,223 |
|
|
| 6.5 |
|
| ||||||||
Tier 1 capital (to risk weighted assets) | 152,091 | 12.3 | 74,012 | 6.0 | 98,683 | 8.0 |
|
| 212,283 |
|
|
| 11.8 |
|
|
| 108,205 |
|
|
| 6.0 |
|
|
| 144,274 |
|
|
| 8.0 |
|
| ||||||||
Tier 1 capital (to average assets) | 152,091 | 8.4 | 72,208 | 4.0 | 90,259 | 5.0 |
|
| 212,283 |
|
|
| 8.4 |
|
|
| 101,244 |
|
|
| 4.0 |
|
|
| 126,555 |
|
|
| 5.0 |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
ChoiceOne Financial Services Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total capital (to risk weighted assets) | $ 135,836 | 14.2 | % | $ 76,288 | 8.0 | % | N/A | N/A |
| $ | 222,006 |
|
|
| 13.8 |
| % |
| $ | 128,545 |
|
|
| 8.0 |
| % |
| N/A |
|
| N/A |
|
| ||||||
Common equity Tier 1 capital (to risk weighted assets) | 131,785 | 13.8 | 42,912 | 4.5 | N/A | N/A |
|
| 177,916 |
|
|
| 11.1 |
|
|
| 72,307 |
|
|
| 4.5 |
|
| N/A |
|
| N/A |
|
| ||||||||||
Tier 1 capital (to risk weighted assets) | 131,785 | 13.8 | 57,216 | 6.0 | N/A | N/A |
|
| 182,416 |
|
|
| 11.4 |
|
|
| 96,409 |
|
|
| 6.0 |
|
| N/A |
|
| N/A |
|
| ||||||||||
Tier 1 capital (to average assets) | 131,785 | 9.6 | 54,646 | 4.0 | N/A | N/A |
|
| 182,416 |
|
|
| 7.9 |
|
|
| 92,558 |
|
|
| 4.0 |
|
| N/A |
|
| N/A |
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
ChoiceOne Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total capital (to risk weighted assets) | $ 69,412 | 13.2 | % | $ 42,039 | 8.0 | % | $ 52,549 | 10.0 | % |
| $ | 208,696 |
|
|
| 13.0 |
| % |
| $ | 128,294 |
|
|
| 8.0 |
| % |
| $ | 160,367 |
|
|
| 10.0 |
| % | |||
Common equity Tier 1 capital (to risk weighted assets) | 65,362 | 12.4 | 23,647 | 4.5 | 34,157 | 6.5 |
|
| 201,077 |
|
|
| 12.5 |
|
|
| 72,165 |
|
|
| 4.5 |
|
|
| 104,239 |
|
|
| 6.5 |
|
| ||||||||
Tier 1 capital (to risk weighted assets) | 65,362 | 12.4 | 31,530 | 6.0 | 42,039 | 8.0 |
|
| 201,077 |
|
|
| 12.5 |
|
|
| 96,220 |
|
|
| 6.0 |
|
|
| 128,294 |
|
|
| 8.0 |
|
| ||||||||
Tier 1 capital (to average assets) | 65,362 | 10.0 | 26,179 | 4.0 | 32,724 | 5.0 |
|
| 201,077 |
|
|
| 8.7 |
|
|
|
| 92,449 |
|
|
| 4.0 |
|
|
|
| 115,562 |
|
|
| 5.0 |
|
| ||||||
Lakestone Bank & Trust | |||||||||||||||||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ 63,885 | 15.0 | % | $ 34,056 | 8.0 | % | $ 42,570 | 10.0 | % | ||||||||||||||||||||||||||||||
Common equity Tier 1 capital (to risk weighted assets) | 63,885 | 15.0 | 19,156 | 4.5 | 27,670 | 6.5 | |||||||||||||||||||||||||||||||||
Tier 1 capital (to risk weighted assets) | 63,885 | 15.0 | 25,542 | 6.0 | 34,056 | 8.0 | |||||||||||||||||||||||||||||||||
Tier 1 capital (to average assets) | 63,885 | 9.0 | 28,338 | 4.0 | 35,423 | 5.0 |
Banking laws and regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2020,2023, approximately $14.9$53.3 million was available for the banksBank to pay dividends to ChoiceOne.ChoiceOne assuming regulatory approval of any amount in excess of the applicable capital conservation buffer. ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the Bank, which is restricted by state law and regulations.
82
Note 21 – Business Combination
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Community Shores Bank CorporationNone.
ChoiceOne completedItem 9A. Controls and Procedures
An evaluation was performed under the acquisitionsupervision and with the participation of Community Shores Bank Corporation (“Community Shores”) effectivethe Company’s management, including the Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on July 1, 2020. Community Shores had 4 branch officesand as of the datetime of that evaluation, the Company’s management, including the Chief Executive Officer and principal financial officer, concluded that the Company’s disclosure controls and procedures were effective as of the merger. Total assetsend of Community Shoresthe period covered by this report to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.
Management assessed the effectiveness of the Company’s system of internal control over financial reporting as of July 1,2020 were $244.0 million, including total loansDecember 31, 2023, as required by Section 404 of $174.0 million. Deposits acquiredthe Sarbanes-Oxley Act of 2002. Management’s assessment is based on the criteria for effective internal control over financial reporting as described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2023, its system of internal control over financial reporting was effective and meets the criteria of the “Internal Control – Integrated Framework."
There was no change in the merger,Company’s internal control over financial reporting that occurred during the majoritythree months ended December 31, 2023 that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
83
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under the captions “ChoiceOne's Board of Directors and Executive Officers and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 29, 2024, is incorporated herein by reference.
The Company has adopted a Code of Ethics for Executive Officers and Senior Financial Officers, which were core deposits, totaled $227.8 million.applies to the Chief Executive Officer and the Chief Financial Officer, as well as all other senior financial and accounting officers. The impactCode of Ethics is posted on the Company’s website at “www.choiceone.bank.” The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of the merger has been included in ChoiceOne’s resultsCode of operations sinceEthics by posting such information on its website at “www.choiceone.bank.”
Item 11. Executive Compensation
The information under the effective date of the merger. As considerationcaptions “Executive Compensation” in the merger, ChoiceOne issued 524,055 sharesCompany's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 29, 2024, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the caption "Ownership of ChoiceOne common stock and paid cashCommon Stock" in the amount of $5,390,000, with an approximate aggregate value of $20.9 million. The initial accountingCompany's Definitive Proxy Statement for the business combination has been determined provisionally for the fair valueAnnual Meeting of certain assets and liabilities, including loans, core deposit intangible, and deferred taxes. Management expectsShareholders to finalize calculations supporting the fair value of these assets and liabilities during the measurement period. Subsequent to the effective date of the merger, Community Shores Bank was consolidated into ChoiceOne Bank in October 2020.be held May 29, 2024, is incorporated herein by reference.
Acquisition costs related to the merger amounted to $3.2 million, all of which was expensed. The transaction created $7.9 million of goodwill, none of which is deductible for tax purposes.
As the transaction became effective on July 1, 2020, only earnings related to the period from July 1, 2020 through December 31, 2020 were included in ChoiceOne’s income for the year ended December 31, 2020. These earnings amounted to $1,041,000 for the year ended December 31, 2020.
The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands):
Purchase Price | ||||
Consideration | $ | 20,881 | ||
Net assets acquired: | ||||
Cash and cash equivalents | 41,023 | |||
Securities available for sale | 20,023 | |||
Federal Home Loan Bank and Federal Reserve Bank stock | 300 | |||
Originated loans | 173,974 | |||
Premises and equipment | 6,204 | |||
Other real estate owned | 346 | |||
Deposit based intangible | 760 | |||
Other assets | 1,345 | |||
Total assets | 243,975 | |||
Non-interest bearing deposits | 65,499 | |||
Interest bearing deposits | 162,333 | |||
Total deposits | 227,832 | |||
Trust preferred securities | 3,039 | |||
Other liabilities | 136 | |||
Total liabilities | 231,007 | |||
Net assets acquired | 12,968 | |||
Goodwill | $ | 7,913 |
The following table providespresents information regarding the unaudited pro forma information for the results of operations for the twelve months ended equity compensation plans both approved and not approved by shareholders at December 31, 2020 2023:
|
|
|
|
|
|
|
| Number of securities |
| |||
|
|
|
|
|
|
|
| remaining available for |
| |||
|
| Number of securities to |
|
| Weighted-average |
|
| future issuance under |
| |||
|
| be issued upon exercise |
|
| exercise price of |
|
| equity compensation plans |
| |||
|
| of outstanding options, |
|
| outstanding options, |
|
| (excluding securities |
| |||
|
| warrants and rights |
|
| warrants and rights |
|
| reflected in column (a)) |
| |||
|
| (a) |
|
| (b) |
|
| (c) |
| |||
Equity compensation plans approved by security holders |
|
| 81,314 |
|
| $ | 3.91 |
|
|
| 324,481 |
|
Equity compensation plans not approved by security holders |
|
| — |
|
|
| — |
|
|
| 152,967 |
|
Total |
|
| 81,314 |
|
| $ | 3.91 |
|
|
| 477,448 |
|
Equity compensation plans approved by security holders include the Stock Incentive Plan of 2012, the Equity Incentive Plan of 2022, and 2019, as if the merger with Community Shores had occurred on January 1, 2019. These adjustments reflect2022 Employee Stock Purchase Plan. As of December 31, 2023, 142,755 shares remained available for future issuance under the impactEquity Incentive Plan of certain purchase accounting fair value measurements, primarily on2022 and 181,726 shares remained available for future issuance under the loan2022 Employee Stock Purchase Plan, in each case other than upon the exercise of outstanding stock options. The Stock Incentive Plan of 2012 has expired and deposit portfoliosno further issuance of Community. In addition, merger-related costsshares is permitted under the plan other than upon the exercise or vesting of outstanding awards.
The Directors’ Stock Purchase Plan and the Directors’ Equity Compensation Plan are excluded from the amounts below, for comparative purposes. Further operating cost savings are expected along with additional business synergies as a resultonly equity compensation plans not approved by security holders. The Directors’ Stock Purchase Plan is designed to provide directors of the merger which are not presentedCompany the option of receiving their fees in the pro forma amounts. These unaudited pro forma results are presented for illustrative purposes onlyCompany’s common stock. Directors who elect to participate in the plan may elect to contribute to the plan twenty-five, fifty, seventy-five or one hundred percent of their board of director fees and are not intended to represent or be indicativeone hundred percent of the actual results of operations of the combined banking organization that would have been achieved had the merger occurred at the beginning of the period, nor are they intended to represent or be indicative of the future resultstheir director committee fees earned as directors of the Company.
(Dollars in thousands, except per share data) | ||||||||
2020 | 2019 | |||||||
Net interest income | $ | 54,357 | $ | 51,266 | ||||
Noninterest income | 23,462 | 14,722 | ||||||
Noninterest expense | 55,182 | 49,865 | ||||||
Net income | 15,257 | 14,250 | ||||||
Net income per diluted share | 1.96 | 1.83 |
County Bank Corp.
ChoiceOne completedContributions to the mergerplan are made by the Company on behalf of County Bank Corp. (“County”) witheach electing participant. Plan participants may terminate their participation in the plan at any time by written notice of withdrawal to the Company. The Directors’ Equity Compensation Plan provides for the grant and into ChoiceOne on October 1, 2019. County had 14 branch officesaward of stock options, restricted stock, restricted stock units, stock awards, and 1 loan production officeother stock-based and stock-related awards as part of director compensation. Participants will cease to be eligible to participate in both plans when they cease to serve as directors of the dateCompany. Shares are distributed to participants on a quarterly basis. The Directors' Equity Compensation Plan provides for the issuance of a maximum of 100,000 shares of the merger. Total assetsCompany's common stock thereunder and the Directors' Stock Purchase Plan provides for issuance of County asa maximum of October 1, 2019 were $673 million, including total loans of $424 million. Deposits garnered100,000 shares thereunder, in each case subject to adjustments for certain changes in the merger, the majority of which were core deposits, totaled $574 million. The results of operations as a resultcapital structure of the merger have been included in ChoiceOne’s results sinceCompany. As of December 31, 2023, 79,926 shares remained available for issuance
84
under the effective date ofDirectors' Equity Compensation Plan and 73,041 shares remained available for issuance under the merger. As consideration in the merger, ChoiceOne issued 3,603,872 shares of ChoiceOne common stock with an approximate value of $108 million. ChoiceOne recorded a preliminary deposit based intangible of $6.4 millionDirectors' Stock Purchase Plan.
Item 13.Certain Relationships and goodwill of $39.1 million. Subsequent to the preliminary fair value accounting, management finalized accounting for acquired loansRelated Transactions, and deferred taxes. As a result, the acquisition date fair value of loans was decreased by approximately $200,000, other liabilities were decreased by approximately $500,000, and goodwill was decreased by approximately $300,000. Adjusted goodwill related to the merger with County was $38.9 million. Subsequent to the effective date of the merger, Lakestone Bank & Trust was consolidated into ChoiceOne Bank in May 2020.
Acquisition costs related to the merger amounted to $2.4 million, of which $2.1 million was expensed and $297,000 was netted against stock issuance costs. The transaction created $38.9 million of goodwill, none of which is deductible for tax purposes.Director Independence
The table below highlights the allocation of purchase price for the merger with County (dollars in thousands):
Purchase Price | ||||
Consideration | $ | 107,945 | ||
Net assets acquired: | ||||
Cash and cash equivalents | 20,638 | |||
Equity securities at fair value | 474 | |||
Securities available for sale | 187,230 | |||
Federal Home Loan Bank and Federal Reserve Bank stock | 2,915 | |||
Loans to other financial institutions | 33,481 | |||
Originated loans | 390,116 | |||
Premises and equipment | 9,271 | |||
Other real estate owned | 1,364 | |||
Deposit based intangible | 6,359 | |||
Bank owned life insurance | 16,912 | |||
Other assets | 4,002 | |||
Total assets | 672,762 | |||
Non-interest bearing deposits | 124,113 | |||
Interest bearing deposits | 449,488 | |||
Total deposits | 573,601 | |||
Federal funds purchased | 3,800 | |||
Advances from Federal Home Loan Bank | 23,000 | |||
Other liabilities | 3,282 | |||
Total liabilities | 603,683 | |||
Net assets acquired | 69,079 | |||
Goodwill | $ | 38,866 |
In most instances, determining the fair value of the acquired assets and assumed liabilities required ChoiceOne to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations is related to the valuation of acquired loans. For such loans, the excess cash flows expected at the effective time of the merger over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at the effective time of the merger and the cash flows expected to be collected at the effective time of the merger reflects the impact of estimated credit losses, interest rate changes, and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of County’s or Community Shores' previously established allowance for loan losses.
Note 22 – Quarterly Financial Data (Unaudited)
Net | Earnings Per Share | |||||||||||||||||||
(Dollars in thousands, except per share data) | Interest | Interest | Net | Fully | ||||||||||||||||
Income | Income | Income | Basic | Diluted | ||||||||||||||||
2020 | ||||||||||||||||||||
First Quarter | $ | 12,662 | $ | 11,138 | $ | 3,254 | $ | 0.45 | $ | 0.45 | ||||||||||
Second Quarter | 12,863 | 11,879 | 4,430 | 0.61 | 0.61 | |||||||||||||||
Third Quarter | 15,150 | 14,062 | 3,829 | 0.49 | 0.49 | |||||||||||||||
Fourth Quarter | 15,040 | 13,992 | 4,100 | 0.53 | 0.52 | |||||||||||||||
2019 | ||||||||||||||||||||
First Quarter | $ | 6,477 | $ | 5,496 | $ | 1,637 | $ | 0.45 | $ | 0.45 | ||||||||||
Second Quarter | 6,554 | 5,501 | 1,486 | 0.41 | 0.41 | |||||||||||||||
Third Quarter | 6,561 | 5,570 | 1,021 | 0.28 | 0.28 | |||||||||||||||
Fourth Quarter | 12,881 | 11,206 | 3,027 | 0.44 | 0.44 |
The growth in interest income and net interest income in the firsttwo quarters of 2020 was primarily due to growth in earning assets, which was partially offset by a tightening of ChoiceOne’s net interest spread. The increase in the third and fourth quarters of 2020 resulted primarily from the merger with County. The increase that occurred during 2019 in interest income and net interest income was due to growth in earning assets and a widening of ChoiceOne’s net interest spread resulting from rising general market interest rates.
PART III
|
The information under the captions “Related Matters - Transactions with Related Persons” and “Corporate Governance” in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2021,29, 2024, is incorporated herein by reference.
|
Item 14. Principal Accountant Fees and Services
The information under the caption "Related Matters - Independent Certified Public Accountants" in the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 27, 2021,29, 2024, is incorporated herein by reference.
Independent Registered Public Accounting Firm:
Location: Southfield, Michigan
PCAOB ID: 166
85
PART IV
Item 15. Exhibits and Financial Statement Schedules
|
| (1) | Financial Statements. The following financial statements and independent auditors' reports are filed as part of this report: | ||||
Consolidated Balance Sheets at December 31, | ||||||
Report of Independent Registered Public Accounting Firm dated March | ||||||
(2) | Financial Statement Schedules. None. |
Exhibit | Document | |||
| ||||
3.1 | ||||
3.2 | ||||
4.1 | ||||
4.2 | ||||
4.3 | ||||
4.4 | ||||
10.1 | ||||
10.2 | ||||
10.3 | ||||
10.4 | ||||
10.5 | ||||
86
10.6 | |
10.7 | |
10.8 | |
10.9 | |
19 | |
21 | |
23 | |
| |
31.1 | |
31.2 | |
32 |
| |
97 | |
101.INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Copies of any exhibits will be furnished to shareholders upon written request. Requests should be directed to: Thomas L. Lampen,Adom J. Greenland, Secretary, Chief Financial Officer and Treasurer, ChoiceOne Financial Services, Inc., 109 East Division, Sparta, Michigan, 49345.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendmentreport to be signed on its behalf by the undersigned, thereunto duly authorized.
ChoiceOne Financial Services, Inc. | |||
| |||
By: | /s/ Kelly J. Potes | March 13, 2024 | |
Kelly J. Potes |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Kelly J. Potes | Chief Executive Officer and | March 13, 2024 | ||
Kelly J. Potes | Director (Principal Executive Officer) | |||
/s/ Adom J. Greenland | Chief Financial Officer and Treasurer (Principal Financial and | March 13, 2024 | ||
Adom J. Greenland | Accounting Officer) | |||
*/s/ Jack G. Hendon | Chairman of the Board and Director | March 13, 2024 | ||
Jack G. Hendon | ||||
*/s/ Greg L. Armock | Director | March 13, 2024 | ||
Greg L. Armock | ||||
*/s/ Keith Brophy | Director | March 13, 2024 | ||
Keith Brophy | ||||
*/s/ Michael J. Burke, Jr. | President and Director | March 13, 2024 | ||
Michael J. Burke, Jr. | ||||
*/s/ Harold J. Burns | Director | March 13, 2024 | ||
Harold J. Burns | ||||
*/s/ Eric E. Burrough | Director | March 13, 2024 | ||
Eric E. Burrough | ||||
*/s/ Curt E. Coulter | Director | March 13, 2024 | ||
Curt E. Coulter | ||||
*/s/ Bruce John Essex, Jr. | Director | March 13, 2024 | ||
Bruce John Essex, Jr. | ||||
*/s/ Gregory A. McConnell | Director | March 13, 2024 | ||
Gregory A. McConnell | ||||
*/s/ Bradley F. McGinnis | Director | March 13, 2024 | ||
Bradley F. McGinnis | ||||
*/s/ Roxanne M. Page | Director | March 13, 2024 | ||
Roxanne M. Page | ||||
*/s/ Michelle M. Wendling | Director | March 13, 2024 | ||
Michelle M. Wendling | ||||
*By /s/ Adom J. Greenland | ||||
Attorney-in-Fact |
88