UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended | |
☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from |
Commission File Number:000-19202
ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
Michigan | 38-2659066 | |
109 East Division |
| |
(616) 887-7366 |
Indicate by checkmarkcheck mark whether the Registrant: (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, and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “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. Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 |
As of October 31, 2017,April 30, 2022, the RegistrantRegistrant had outstanding 3,451,9877,493,521 shares of common stock.
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
(Dollars in thousands) | 2022 | 2021 | ||||||
(Unaudited) | (Audited) | |||||||
Assets | ||||||||
Cash and due from banks | $ | 89,626 | $ | 31,537 | ||||
Time deposits in other financial institutions | 350 | 350 | ||||||
Cash and cash equivalents | 89,976 | 31,887 | ||||||
Equity securities, at fair value (Note 2) | 8,282 | 8,492 | ||||||
Securities available for sale, at fair value (Note 2) | 641,048 | 1,098,885 | ||||||
Securities held to maturity (Note 2) | 429,918 | 0 | ||||||
Federal Home Loan Bank stock | 3,493 | 3,824 | ||||||
Federal Reserve Bank stock | 5,064 | 5,064 | ||||||
Loans held for sale | 13,450 | 9,351 | ||||||
Loans to other financial institutions | 0 | 42,632 | ||||||
Loans (Note 3) | 1,027,406 | 1,016,848 | ||||||
Allowance for loan losses (Note 3) | (7,601 | ) | (7,688 | ) | ||||
Loans, net | 1,019,805 | 1,009,160 | ||||||
Premises and equipment, net | 29,678 | 29,880 | ||||||
Other real estate owned, net | 172 | 194 | ||||||
Cash value of life insurance policies | 43,520 | 43,356 | ||||||
Goodwill | 59,946 | 59,946 | ||||||
Core deposit intangible | 3,660 | 3,962 | ||||||
Other assets | 28,766 | 20,049 | ||||||
Total assets | $ | 2,376,778 | $ | 2,366,682 | ||||
Liabilities | ||||||||
Deposits – noninterest-bearing | $ | 565,657 | $ | 560,931 | ||||
Deposits – interest-bearing | 1,579,944 | 1,491,363 | ||||||
Total deposits | 2,145,601 | 2,052,294 | ||||||
Borrowings | 0 | 50,000 | ||||||
Subordinated debentures | 35,078 | 35,017 | ||||||
Other liabilities | 4,981 | 7,702 | ||||||
Total liabilities | 2,185,660 | 2,145,013 | ||||||
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: 7,489,812 at March 31, 2022 and 7,510,379 at December 31, 2021 | 171,492 | 171,913 | ||||||
Retained earnings | 55,988 | 52,332 | ||||||
Accumulated other comprehensive loss, net | (36,362 | ) | (2,576 | ) | ||||
Total shareholders’ equity | 191,118 | 221,669 | ||||||
Total liabilities and shareholders’ equity | $ | 2,376,778 | $ | 2,366,682 |
September 30, | December 31, | |||||||
(Dollars in thousands) | 2017 | 2016 | ||||||
(Unaudited) | (Audited) | |||||||
Assets | ||||||||
Cash and due from banks | $ | 12,725 | $ | 14,809 | ||||
Securities available for sale (Note 2) | 173,306 | 174,388 | ||||||
Federal Home Loan Bank stock | 1,994 | 1,994 | ||||||
Federal Reserve Bank stock | 1,573 | 1,573 | ||||||
Loans held for sale | 2,378 | 1,974 | ||||||
Loans to other financial institutions | 13,293 | — | ||||||
Loans (Note 3) | 394,090 | 369,000 | ||||||
Allowance for loan losses (Note 3) | (4,216 | ) | (4,277 | ) | ||||
Loans, net | 389,874 | 364,723 | ||||||
Premises and equipment, net | 12,271 | 12,588 | ||||||
Cash surrender value of life insurance policies | 14,415 | 14,117 | ||||||
Goodwill | 13,728 | 13,728 | ||||||
Other assets | 6,495 | 7,477 | ||||||
Total assets | $ | 642,052 | $ | 607,371 | ||||
Liabilities | ||||||||
Deposits – noninterest-bearing | $ | 136,542 | $ | 127,611 | ||||
Deposits – interest-bearing | 389,296 | 384,775 | ||||||
Total deposits | 525,838 | 512,386 | ||||||
Federal funds purchased | 2,650 | — | ||||||
Repurchase agreements | 3,794 | 7,913 | ||||||
Advances from Federal Home Loan Bank | 30,276 | 12,301 | ||||||
Other liabilities | 3,188 | 3,073 | ||||||
Total liabilities | 565,746 | 535,673 | ||||||
Shareholders’ Equity | ||||||||
Common stock and paid in capital, no par value; shares authorized: 7,000,000; shares outstanding: 3,451,445 at September 30, 2017 and 3,277,944 at December 31, 2016 | 50,307 | 46,299 | ||||||
Retained earnings | 25,281 | 25,997 | ||||||
Accumulated other comprehensive income (loss), net | 718 | (598 | ) | |||||
Total shareholders’ equity | 76,306 | 71,698 | ||||||
Total liabilities and shareholders’ equity | $ | 642,052 | $ | 607,371 |
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended | ||||||||
(Dollars in thousands, except per share data) | March 31, | |||||||
2022 | 2021 | |||||||
Interest income | ||||||||
Loans, including fees | $ | 12,298 | $ | 12,682 | ||||
Securities: | ||||||||
Taxable | 3,507 | 1,856 | ||||||
Tax exempt | 1,655 | 1,097 | ||||||
Other | 14 | 20 | ||||||
Total interest income | 17,474 | 15,655 | ||||||
Interest expense | ||||||||
Deposits | 783 | 880 | ||||||
Advances from Federal Home Loan Bank | 1 | 1 | ||||||
Other | 369 | 86 | ||||||
Total interest expense | 1,153 | 967 | ||||||
Net interest income | 16,321 | 14,688 | ||||||
Provision for loan losses | 0 | 250 | ||||||
Net interest income after provision for loan losses | 16,321 | 14,438 | ||||||
Noninterest income | ||||||||
Customer service charges | 2,189 | 1,920 | ||||||
Insurance and investment commissions | 205 | 273 | ||||||
Gains on sales of loans | 804 | 2,146 | ||||||
Net gains on sales of securities | 0 | 1 | ||||||
Net gains on sales and write downs of other assets | 171 | 5 | ||||||
Earnings on life insurance policies | 280 | 186 | ||||||
Trust income | 178 | 172 | ||||||
Change in market value of equity securities | (356 | ) | 608 | |||||
Other | 374 | 289 | ||||||
Total noninterest income | 3,845 | 5,600 | ||||||
Noninterest expense | ||||||||
Salaries and benefits | 7,606 | 7,168 | ||||||
Occupancy and equipment | 1,625 | 1,555 | ||||||
Data processing | 1,744 | 1,429 | ||||||
Professional fees | 510 | 729 | ||||||
Supplies and postage | 191 | 100 | ||||||
Advertising and promotional | 132 | 145 | ||||||
Intangible amortization | 282 | 307 | ||||||
FDIC insurance | 225 | 152 | ||||||
Other | 1,375 | 943 | ||||||
Total noninterest expense | 13,690 | 12,528 | ||||||
Income before income tax | 6,476 | 7,510 | ||||||
Income tax expense | 948 | 1,272 | ||||||
Net income | $ | 5,528 | $ | 6,238 | ||||
Basic earnings per share (Note 4) | $ | 0.74 | $ | 0.80 | ||||
Diluted earnings per share (Note 4) | $ | 0.74 | $ | 0.80 | ||||
Dividends declared per share | $ | 0.25 | $ | 0.22 |
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three Months Ended | ||||||||
(Dollars in thousands) | March 31, | |||||||
2022 | 2021 | |||||||
Net income | $ | 5,528 | $ | 6,238 | ||||
Other comprehensive income: | ||||||||
Changes in net unrealized gains on investment securities available for sale, net of tax (benefit)/expense of ($8,981) and ($3,560) for the three months ended March 31, 2022 and March 31, 2021, respectively. | (33,786 | ) | (13,393 | ) | ||||
Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense (benefit) of $0 and $0 for the three months ended March 31, 2022 and March 31, 2021, respectively. | 0 | (1 | ) | |||||
Other comprehensive income (loss), net of tax | (33,786 | ) | (13,394 | ) | ||||
Comprehensive income (loss) | $ | (28,258 | ) | $ | (7,156 | ) |
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the three months ended March 31,
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 | 0 | 6,238 | 0 | 6,238 | ||||||||||||||||
Other comprehensive loss | 0 | 0 | (13,394 | ) | (13,394 | ) | ||||||||||||||
Shares issued | 4,732 | 175 | 0 | 0 | 175 | |||||||||||||||
Effect of employee stock purchases | 1,201 | 4 | 0 | 0 | 4 | |||||||||||||||
Stock-based compensation expense | - | 64 | 0 | 0 | 64 | |||||||||||||||
Cash dividends declared ($0.22 per share) | 0 | (1,716 | ) | 0 | (1,716 | ) | ||||||||||||||
Balance, March 31, 2021 | 7,802,285 | $ | 178,993 | $ | 42,012 | $ | (2,366 | ) | $ | 218,639 | ||||||||||
Balance, January 1, 2022 | 7,510,379 | $ | 171,913 | $ | 52,332 | $ | (2,576 | ) | $ | 221,669 | ||||||||||
Net income | 0 | 5,528 | 0 | 5,528 | ||||||||||||||||
Other comprehensive loss | 0 | 0 | (33,786 | ) | (33,786 | ) | ||||||||||||||
Shares issued | 5,332 | 133 | 0 | 0 | 133 | |||||||||||||||
Effect of employee stock purchases | 0 | 7 | 0 | 0 | 7 | |||||||||||||||
Stock-based compensation expense | 121 | 0 | 0 | 121 | ||||||||||||||||
Shares repurchased | (25,899 | ) | (682 | ) | 0 | 0 | (682 | ) | ||||||||||||
Cash dividends declared ($0.25 per share) | 0 | (1,872 | ) | 0 | (1,872 | ) | ||||||||||||||
Balance, March 31, 2022 | 7,489,812 | $ | 171,492 | $ | 55,988 | $ | (36,362 | ) | $ | 191,118 |
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | ||||||||
(Dollars in thousands) | March 31, | |||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 5,528 | $ | 6,238 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Provision for loan losses | 0 | 250 | ||||||
Depreciation | 672 | 646 | ||||||
Amortization | 2,673 | 1,949 | ||||||
Compensation expense on employee and director stock purchases, stock options, and restricted stock units | 226 | 214 | ||||||
Net gains on sales of securities | 0 | (1 | ) | |||||
Net change in market value of equity securities | 356 | (608 | ) | |||||
Gains on sales of loans | (804 | ) | (2,146 | ) | ||||
Loans originated for sale | (29,531 | ) | (72,727 | ) | ||||
Proceeds from loan sales | 25,896 | 68,637 | ||||||
Earnings on bank-owned life insurance | (280 | ) | (186 | ) | ||||
Proceeds from BOLI policy | 130 | 0 | ||||||
Earnings on death benefit from bank-owned life insurance | (14 | ) | 0 | |||||
(Gains)/losses on sales of other real estate owned | (41 | ) | (4 | ) | ||||
Proceeds from sales of other real estate owned | 235 | 270 | ||||||
Deferred federal income tax (benefit)/expense | 248 | 506 | ||||||
Net change in: | ||||||||
Other assets | 173 | (3,952 | ) | |||||
Other liabilities | (2,665 | ) | 3,124 | |||||
Net cash provided by operating activities | 2,802 | 2,210 | ||||||
Cash flows from investing activities: | ||||||||
Maturities, prepayments and calls of securities available for sale | 13,157 | 12,918 | ||||||
Maturities, prepayments and calls of securities held to maturity | 1,078 | 0 | ||||||
Purchases of securities available for sale | (28,197 | ) | (179,221 | ) | ||||
Purchases of securities held to maturity | (3,160 | ) | 0 | |||||
Proceeds from redemption of Federal Home Loan Bank stock | 331 | 0 | ||||||
Loan originations and payments, net | 31,816 | 63,084 | ||||||
Additions to premises and equipment | (526 | ) | (1,038 | ) | ||||
Net cash provided by (used in) investing activities | 14,499 | (104,257 | ) | |||||
Cash flows from financing activities: | ||||||||
Net change in deposits | 93,307 | 165,386 | ||||||
Net change in short term borrowings | (50,000 | ) | (5,843 | ) | ||||
Issuance of common stock | 35 | 29 | ||||||
Repurchase of common stock | (682 | ) | 0 | |||||
Cash dividends | (1,872 | ) | (1,716 | ) | ||||
Net cash provided by financing activities | 40,788 | 157,856 | ||||||
Net change in cash and cash equivalents | 58,089 | 55,809 | ||||||
Beginning cash and cash equivalents | 31,887 | 79,519 | ||||||
Ending cash and cash equivalents | $ | 89,976 | $ | 135,328 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 1,413 | $ | 1,021 | ||||
Cash paid for income taxes | 0 | 0 | ||||||
Loans transferred to other real estate owned | 172 | 123 |
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
(Dollars in thousands, except per share data) | September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Interest income | ||||||||||||||||
Loans, including fees | $ | 4,592 | $ | 4,210 | $ | 13,157 | $ | 12,293 | ||||||||
Securities: | ||||||||||||||||
Taxable | 651 | 594 | 1,935 | 1,731 | ||||||||||||
Tax exempt | 355 | 358 | 1,068 | 1,088 | ||||||||||||
Other | 26 | 5 | 50 | 14 | ||||||||||||
Total interest income | 5,624 | 5,167 | 16,210 | 15,126 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 320 | 190 | 860 | 599 | ||||||||||||
Advances from Federal Home Loan Bank | 62 | 44 | 169 | 119 | ||||||||||||
Other | 3 | 2 | 10 | 7 | ||||||||||||
Total interest expense | 385 | 236 | 1,039 | 725 | ||||||||||||
Net interest income | 5,239 | 4,931 | 15,171 | 14,401 | ||||||||||||
Provision for loan losses | 95 | — | 120 | — | ||||||||||||
Net interest income after provision for loan losses | 5,144 | 4,931 | 15,051 | 14,401 | ||||||||||||
Noninterest income | ||||||||||||||||
Customer service charges | 1,058 | 1,030 | 3,081 | 3,020 | ||||||||||||
Insurance and investment commissions | 260 | 290 | 760 | 740 | ||||||||||||
Gains on sales of loans | 355 | 508 | 920 | 1,345 | ||||||||||||
Gains on sales of securities | 51 | 28 | 177 | 255 | ||||||||||||
(Losses) gains on sales and write-downs of other assets | 17 | (3 | ) | 21 | (26 | ) | ||||||||||
Earnings on life insurance policies | 101 | 88 | 299 | 265 | ||||||||||||
Other | 141 | 124 | 399 | 360 | ||||||||||||
Total noninterest income | 1,983 | 2,065 | 5,657 | 5,959 | ||||||||||||
Noninterest expense | ||||||||||||||||
Salaries and benefits | 2,619 | 2,542 | 7,725 | 7,519 | ||||||||||||
Occupancy and equipment | 702 | 626 | 2,099 | 1,959 | ||||||||||||
Data processing | 551 | 556 | 1,681 | 1,654 | ||||||||||||
Professional fees | 287 | 232 | 778 | 700 | ||||||||||||
Supplies and postage | 102 | 92 | 293 | 312 | ||||||||||||
Advertising and promotional | 58 | 52 | 185 | 184 | ||||||||||||
Intangible amortization | — | 112 | — | 336 | ||||||||||||
FDIC insurance | 51 | 78 | 151 | 218 | ||||||||||||
Other | 421 | 379 | 1,327 | 1,485 | ||||||||||||
Total noninterest expense | 4,791 | 4,669 | 14,239 | 14,367 | ||||||||||||
Income before income tax | 2,336 | 2,327 | 6,470 | 5,993 | ||||||||||||
Income tax expense | 616 | 644 | 1,668 | 1,591 | ||||||||||||
Net income | $ | 1,720 | $ | 1,683 | $ | 4,801 | $ | 4,402 | ||||||||
Basic earnings per share (Note 4) * | $ | 0.50 | $ | 0.50 | $ | 1.39 | $ | 1.28 | ||||||||
Diluted earnings per share (Note 4) * | $ | 0.50 | $ | 0.50 | $ | 1.39 | $ | 1.28 | ||||||||
Dividends declared per share * | $ | 0.17 | $ | 0.16 | $ | 0.50 | $ | 0.49 |
See accompanying notes to interim consolidated financial statements.
*Note that 2016 per-share amounts have been adjusted for the 5% stock dividend paid on May 31, 2017.
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
(Dollars in thousands) | September 30, | September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 1,720 | $ | 1,683 | $ | 4,801 | $ | 4,402 | ||||||||
Other comprehensive income: | ||||||||||||||||
Changes in net unrealized gains (loss) on investment securities available for sale, net of tax expense of $(171) and $35 for the three months ended September 30, 2017 and September 30, 2016 respectively. Changes in net unrealized gains on investment securities available for sale, net of tax expense of $738 and $747 for the nine months ended September 30, 2017 and September 30, 2016 respectively. | (333 | ) | 68 | 1,433 | 1,450 | |||||||||||
Less: Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax benefit of $17 and $9 for the three months ended September 30, 2017 and September 30,2016 respectively. Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax benefit of $60 and $87 for the nine months ended September 30, 2017 and September 30, 2016 respectively. | (34 | ) | (19 | ) | (117 | ) | (168 | ) | ||||||||
Other comprehensive income, net of tax | (367 | ) | 49 | 1,316 | 1,282 | |||||||||||
Comprehensive income | $ | 1,353 | $ | 1,732 | $ | 6,117 | $ | 5,684 |
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Accumulated | ||||||||||||||||||||
Common | Other | |||||||||||||||||||
Stock and | Comprehensive | |||||||||||||||||||
Number of | Paid in | Retained | Income (Loss), | |||||||||||||||||
(Dollars in thousands) | Shares | Capital | Earnings | Net | Total | |||||||||||||||
Balance, January 1, 2016 | 3,295,228 | $ | 46,501 | $ | 22,138 | $ | 1,203 | $ | 69,842 | |||||||||||
Net income | 4,402 | 4,402 | ||||||||||||||||||
Other comprehensive income | 1,282 | 1,282 | ||||||||||||||||||
Shares issued | 11,559 | 137 | 137 | |||||||||||||||||
Shares repurchased | (35,000 | ) | (794 | ) | (794 | ) | ||||||||||||||
Change in ESOP repurchase obligation | 127 | 127 | ||||||||||||||||||
Effect of employee stock purchases | 9 | 9 | ||||||||||||||||||
Stock-based compensation | 3,414 | 248 | 248 | |||||||||||||||||
Cash dividends declared ($0.49 per share) * | (1,674 | ) | (1,674 | ) | ||||||||||||||||
Balance, September 30, 2016 | 3,275,201 | $ | 46,228 | $ | 24,866 | $ | 2,485 | $ | 73,579 | |||||||||||
Balance, January 1, 2017 | 3,277,944 | $ | 46,299 | $ | 25,997 | $ | (598 | ) | $ | 71,698 | ||||||||||
Net income | 4,801 | 4,801 | ||||||||||||||||||
Other comprehensive income | 1,316 | 1,316 | ||||||||||||||||||
Shares issued | 7,115 | 115 | 115 | |||||||||||||||||
Shares repurchased | (3,800 | ) | (88 | ) | (88 | ) | ||||||||||||||
Effect of employee stock purchases | 9 | 9 | ||||||||||||||||||
Stock options exercised | 1,000 | 13 | 13 | |||||||||||||||||
Stock-based compensation expense | 180 | 180 | ||||||||||||||||||
Restricted stock units issued | 5,197 | — | — | |||||||||||||||||
Stock dividend declared (5%) | 163,989 | 3,779 | (3,779 | ) | — | |||||||||||||||
Cash dividends declared ($0.50 per share) | (1,738 | ) | (1,738 | ) | ||||||||||||||||
Balance, September 30, 2017 | 3,451,445 | $ | 50,307 | $ | 25,281 | $ | 718 | $ | 76,306 |
See accompanying notes to interim consolidated financial statements.
*Note that 2016 per-share amounts have been adjusted for the 5% stock dividend paid on May 31, 2017.
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended | ||||||||
(Dollars in thousands) | September 30, | |||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 4,801 | $ | 4,402 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Provision for loan losses | 120 | — | ||||||
Depreciation | 944 | 757 | ||||||
Amortization | 814 | 1,199 | ||||||
Compensation expense on stock purchases and restricted stock units | 241 | 257 | ||||||
Gains on sales of securities | (177 | ) | (255 | ) | ||||
Gains on sales of loans | (920 | ) | (1,345 | ) | ||||
Loans originated for sale | (28,356 | ) | (39,173 | ) | ||||
Proceeds from loan sales | 27,922 | 42,313 | ||||||
Earnings on bank-owned life insurance | (299 | ) | (265 | ) | ||||
Gains on sales of other real estate owned | (10 | ) | 3 | |||||
Proceeds from sales of other real estate owned | 579 | 28 | ||||||
Deferred federal income tax benefit | (29 | ) | (86 | ) | ||||
Net changes in other assets | 572 | (135 | ) | |||||
Net changes in other liabilities | (532 | ) | 481 | |||||
Net cash from operating activities | 5,670 | 8,181 | ||||||
Cash flows from investing activities: | ||||||||
Securities available for sale: | ||||||||
Sales | 22,521 | 14,538 | ||||||
Maturities, prepayments and calls | 14,163 | 33,412 | ||||||
Purchases | (33,998 | ) | (63,780 | ) | ||||
Loan originations and payments, net | (38,235 | ) | (13,700 | ) | ||||
Additions to premises and equipment | (413 | ) | (1,112 | ) | ||||
Net cash from investing activities | (35,962 | ) | (30,642 | ) | ||||
Cash flows from financing activities: | ||||||||
Net change in deposits | 13,452 | 2,691 | ||||||
Net change in repurchase agreements | (4,119 | ) | (3,043 | ) | ||||
Net change in federal funds purchased | 2,650 | 624 | ||||||
Proceeds from Federal Home Loan Bank advances | 166,500 | 271,000 | ||||||
Payments on Federal Home Loan Bank advances | (148,525 | ) | (245,023 | ) | ||||
Issuance of common stock | 76 | 137 | ||||||
Repurchase of common stock | (88 | ) | (794 | ) | ||||
Cash dividends | (1,738 | ) | (1,674 | ) | ||||
Net cash from financing activities | 28,208 | 23,918 | ||||||
Net change in cash and cash equivalents | (2,084 | ) | 1,457 | |||||
Beginning cash and cash equivalents | 14,809 | 11,187 | ||||||
Ending cash and cash equivalents | $ | 12,725 | $ | 12,644 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 1,029 | $ | 726 | ||||
Cash paid for taxes | $ | 1,150 | $ | 925 | ||||
Loans transferred to other real estate owned | $ | 314 | $ | 483 |
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”("ChoiceOne") and, its wholly-owned subsidiary, ChoiceOne Bank, (the “Bank”), and theChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). Intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed financial statements have been prepared pursuant to the rules and regulationsChoiceOne owns all of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance withcommon securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles have been condensed or omitted pursuant to those rules("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and regulations, althoughChoiceOne is not the company believes that the disclosures made are adequate to make the information not misleading.primary beneficiary.
The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of September 30, 2017March 31, 2022 and December 31, 2016,2021, the Consolidated Statements of Income for the three- and nine-monththree-month periods ended September 30, 2017March 31, 2022 and September 30, 2016,March 31, 2021, the Consolidated Statements of Comprehensive Income for the three- and nine-monththree-month periods ended September 30, 2017 March 31, 2022 and September 30, 2016,March 31, 2021, the Consolidated Statements of Changes in Shareholders’ Equity for the nine-month periodsthree months ended September 30, 2017 March 31, 2022 and September 30, 2016,March 31, 2021, and the Consolidated Statements of Cash Flows for the nine-monththree-month periods ended September 30, 2017March 31, 2022 and September 30, 2016.March 31, 2021. Operating results for the ninethree months ended September 30, 2017March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022.
The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K10-K for the year ended December 31, 2016.2021.
Allowance for Loan Losses
The
Use of Estimates
To prepare financial statements in conformity with GAAP, 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, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID-19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results may differ from these estimates. Estimates associated with the allowance for loan losses is maintainedare particularly susceptible to change.
Investment Securities
Investment securities for which ChoiceOne has the intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Investment securities not classified as held to maturity are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a level believed adequate by managementseparate component of other comprehensive income. ChoiceOne determines the appropriate classification of investment securities at the time of purchase and reassesses the classification at each reporting date.
Loans to absorb probable incurred losses inherentOther Financial Institutions
ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the consolidatedparticipating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1-4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan portfolio. Management’s evaluationto the secondary market, the advance is required to be paid off, including ChoiceOne Bank’s participating interest. If the advance (in which ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. There was no participating interest as of March 31, 2022.
Credit risk associated with the adequacy ofparticipating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is an estimate based on reviews of individualoutstanding over 90 days (even if the advance and participating interest is current). Loans to other financial institutions are excluded from the loans assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. Seedescribed in Note 3 to the interim consolidated financial statements for additional information.statements.
Management believes
Goodwill
Goodwill results from business acquisitions and represents the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumesexcess of the portfolios and economic conditions and (2)purchase price over the impactfair value of recognizing an impairment or loan loss could have a material effect on ChoiceOne’s reportedthe acquired tangible assets and net income.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.
Stock Transactions
A total of 3,8813,698 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $89,000$98,000 under the terms of the Directors’ Stock Purchase Plan in the first nine months quarter of 2017.2022. A total of 1,0001,634 shares of common stock were issued upon the exercise of stock options in the first three quarters of 2017. A total of 3,234 shares of common stock were issued to employees for a cash price of $62,000$35,000 were issued under the Employee Stock Purchase Plan in the first nine months quarter of 2017. A2022. ChoiceOne repurchased 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022. This was part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total of 5,197outstanding shares of common stock were issued to employees for Restricted Stock Units that vested duringas of the first nine months of 2017.date the program was adopted.
Stock-Based Compensation
Effective July 1, 2013, ChoiceOne began granting Restricted Stock Units to
Allowance for Loan Losses
The allowance for loan losses is a select groupvaluation 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 employees undercharged off loans. Management estimates the Stock Incentive Plan of 2012. Allallowance for loan losses balance required based on past loan loss experience, the nature and volume of the Restricted Stock Units are initially unvestedloan portfolio, information about specific borrower situations and vest in three annual installments on eachestimated collateral values, economic conditions, and other factors. Allocations of the next three anniversariesallowance 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 the grant date. Certain additional vesting provisions apply. Each unit, once vested,a loan balance is settled by delivery of one share of ChoiceOne common stock.not possible.
Comprehensive Income
Comprehensive incomeThe allowance for loan losses consists of net incomegeneral and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gainsspecific components. The general component covers non-classified loans and losses on securities available for sale and changes in the funded status of post-retirement plans, net of tax, which are also recognized as a separate component of shareholders’ equity.
Revenue Recognition
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09,Revenue from Contracts with Customers (Topic 606). The ASU adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principlehistorical 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 recognizing revenue to depictmanagement's estimate of the transferallowance 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 promised goods or services to customersloans, changes in an amount that reflects the consideration to which the entity expects to be entitledunderwriting standards, trends in exchange for those goods or services. The ASU does not apply to financial instruments. The ASU is effective for public entities for reporting periods beginning after December 15, 2017 (therefore, for the year ending December 31, 2018 for the Corporation). Early implementation is not allowed for public companies. Management is completing an overall assessmentloan review findings, experience and ability of noninterest revenue streamslending staff, national and evaluating the expanded disclosure requirements.economic trends and conditions, industry conditions, trends in real estate values, and other conditions.
ReclassificationsA 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 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.
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform to the current presentation.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (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 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 expectations of the credit 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 debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting companies with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the measurement date. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.
NOTE 2 - – SECURITIES
During the three months ended March 31, 2022, ChoiceOne reassessed and transferred, at fair value $428.4 million of securities classified as available for sale to the held to maturity classification. The net unrealized pre-tax loss of $3.4 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $2.6 million after tax as of March 31, 2022.
The fair value of equity securities available for sale and the related gross unrealized gains and (losses) recognized in noninterest income were as follows:
March 31, 2022 | ||||||||||||||||
Gross | Gross | |||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Equity securities | $ | 8,100 | $ | 545 | $ | (363 | ) | $ | 8,282 |
December 31, 2021 | ||||||||||||||||
Gross | Gross | |||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Equity securities | $ | 7,953 | $ | 665 | $ | (126 | ) | $ | 8,492 |
The following tables present the amortized cost and fair value of investment securities at the dates indicated and the corresponding amounts of gross unrealized gains and losses, including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in accumulated other comprehensive income (loss) were as follows:income:
September 30, 2017 | ||||||||||||||||
(Dollars in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
U.S. Government and federal agency | $ | 51,086 | $ | 11 | $ | (444 | ) | $ | 50,653 | |||||||
U.S. Treasury | 4,025 | — | (10 | ) | 4,015 | |||||||||||
State and municipal | 94,360 | 1,459 | (224 | ) | 95,595 | |||||||||||
Mortgage-backed | 9,501 | 17 | (98 | ) | 9,420 | |||||||||||
Corporate | 5,696 | 16 | (17 | ) | 5,695 | |||||||||||
Foreign debt | 4,512 | — | (72 | ) | 4,440 | |||||||||||
Equity securities | 3,083 | 294 | — | 3,377 | ||||||||||||
Asset-backed securities | 112 | — | (1 | ) | 111 | |||||||||||
Total | $ | 172,375 | $ | 1,797 | $ | (866 | ) | $ | 173,306 |
March 31, 2022 | ||||||||||||||||
Gross | Gross | |||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Available for Sale: | Cost | Gains | Losses | Value | ||||||||||||
U.S. Government and federal agency | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
U.S. Treasury notes and bonds | 93,154 | 8 | (6,671 | ) | 86,491 | |||||||||||
State and municipal | 334,907 | 443 | (22,962 | ) | 312,388 | |||||||||||
Mortgage-backed | 240,062 | 19 | (13,412 | ) | 226,669 | |||||||||||
Corporate | 1,255 | 4 | (4 | ) | 1,255 | |||||||||||
Asset-backed securities | 14,465 | 0 | (220 | ) | 14,245 | |||||||||||
Total | $ | 683,843 | $ | 474 | $ | (43,269 | ) | $ | 641,048 | |||||||
Held to Maturity: | ||||||||||||||||
U.S. Government and federal agency | $ | 2,962 | $ | 0 | $ | (195 | ) | $ | 2,767 | |||||||
U.S. Treasury notes and bonds | 0 | 0 | 0 | 0 | ||||||||||||
State and municipal | 204,201 | 2 | (17,668 | ) | 186,535 | |||||||||||
Mortgage-backed | 204,165 | 30 | (13,533 | ) | 190,662 | |||||||||||
Corporate | 17,161 | 0 | (606 | ) | 16,555 | |||||||||||
Asset-backed securities | 1,429 | 0 | (37 | ) | 1,392 | |||||||||||
Total | $ | 429,918 | $ | 32 | $ | (32,039 | ) | $ | 397,911 |
December 31, 2016 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
U.S. Government and federal agency | $ | 59,864 | $ | 34 | $ | (846 | ) | $ | 59,052 | |||||||
U.S. Treasury | 4,111 | — | (39 | ) | 4,072 | |||||||||||
State and municipal | 89,169 | 748 | (944 | ) | 88,973 | |||||||||||
Mortgage-backed | 7,925 | 19 | (155 | ) | 7,789 | |||||||||||
Corporate | 7,069 | 12 | (40 | ) | 7,041 | |||||||||||
Foreign debt | 4,514 | — | (114 | ) | 4,400 | |||||||||||
Equity securities | 2,617 | 266 | — | 2,883 | ||||||||||||
Asset-backed securities | 182 | — | (4 | ) | 178 | |||||||||||
Total | $ | 175,451 | $ | 1,079 | $ | (2,142 | ) | $ | 174,388 |
December 31, 2021 | ||||||||||||||||
Gross | Gross | |||||||||||||||
(Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Available for Sale: | Cost | Gains | Losses | Value | ||||||||||||
U.S. Government and federal agency | $ | 2,001 | $ | 7 | $ | 0 | $ | 2,008 | ||||||||
U.S. Treasury notes and bonds | 93,267 | 23 | (1,311 | ) | 91,979 | |||||||||||
State and municipal | 528,252 | 10,704 | (4,109 | ) | 534,847 | |||||||||||
Mortgage-backed | 441,383 | 781 | (9,049 | ) | 433,115 | |||||||||||
Corporate | 20,856 | 19 | (233 | ) | 20,642 | |||||||||||
Asset-backed securities | 16,387 | 0 | (93 | ) | 16,294 | |||||||||||
Total | $ | 1,102,146 | $ | 11,534 | $ | (14,795 | ) | $ | 1,098,885 |
ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. NoNaN other-than-temporary impairment charges were recorded in the ninethree months ended September 30, 2017.March 31, 2022 or in the same period in2021. ChoiceOne believedbelieves that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.
Presented below is a schedule of maturities of securities as of September 30, 2017,March 31, 2022, the fair value of securities available for sale and the amortized cost of securities held to maturity as of September 30, 2017March 31, 2022. Callable securities in the money are presumed called and December 31, 2016, andmatured at the weighted average yields of securities as of September 30, 2017:callable date.
Available for Sale Securities maturing within: | ||||||||||||||||||||
Fair Value | ||||||||||||||||||||
Less than | 1 Year - | 5 Years - | More than | at March 31, | ||||||||||||||||
(Dollars in thousands) | 1 Year | 5 Years | 10 Years | 10 Years | 2022 | |||||||||||||||
U.S. Government and federal agency | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
U.S. Treasury notes and bonds | 2,007 | 0 | 84,484 | 0 | 86,491 | |||||||||||||||
State and municipal | 17,913 | 34,667 | 185,902 | 73,906 | 312,388 | |||||||||||||||
Corporate | 501 | 508 | 246 | 0 | 1,255 | |||||||||||||||
Asset-backed securities | 0 | 10,305 | 3,940 | 0 | 14,245 | |||||||||||||||
Total debt securities | 20,421 | 45,480 | 274,572 | 73,906 | 414,379 | |||||||||||||||
Mortgage-backed securities | 13,689 | 84,660 | 119,303 | 9,017 | 226,669 | |||||||||||||||
Equity securities | 0 | 1,000 | 0 | 7,282 | 8,282 | |||||||||||||||
Total Available for Sale | $ | 34,110 | $ | 131,140 | $ | 393,875 | $ | 90,205 | $ | 649,330 |
Held to Maturity Securities maturing within: | ||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | ||||||||||||||||||||||||||||||||||||||||||||
Securities maturing within: | Less than | 1 Year - | 5 Years - | More than | at March 31, | |||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Less than 1 Year | 1 Year - 5 Years | 5 Years - 10 Years | More than 10 Years | Fair Value at September 30, 2017 | Fair Value at Dec. 31, 2016 | 1 Year | 5 Years | 10 Years | 10 Years | 2022 | |||||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 20,250 | $ | 28,460 | $ | 1,943 | $ | — | $ | 50,653 | $ | 59,052 | $ | 0 | $ | 0 | $ | 2,962 | $ | 0 | $ | 2,962 | ||||||||||||||||||||||
U.S. Treasury notes and bonds | — | 4,015 | — | — | 4,015 | 4,072 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||
State and municipal | 8,362 | 47,395 | 36,016 | 3,822 | 95,595 | 88,973 | 2,755 | 4,608 | 97,764 | 99,074 | 204,201 | |||||||||||||||||||||||||||||||||
Corporate | 5,302 | 393 | — | — | 5,695 | 7,041 | 0 | 250 | 15,911 | 1,000 | 17,161 | |||||||||||||||||||||||||||||||||
Foreign debt securities | 1,000 | 3,440 | — | — | 4,440 | 4,400 | ||||||||||||||||||||||||||||||||||||||
Asset-backed securities | 111 | — | — | — | 111 | 178 | 0 | 1,429 | 0 | 0 | 1,429 | |||||||||||||||||||||||||||||||||
Total debt securities | 35,025 | 83,703 | 37,959 | 3,822 | 160,509 | 163,716 | 2,755 | 6,287 | 116,637 | 100,074 | 225,753 | |||||||||||||||||||||||||||||||||
Mortgage-backed securities | — | 9,330 | 90 | — | 9,420 | 7,789 | 3,511 | 44,972 | 155,682 | 0 | 204,165 | |||||||||||||||||||||||||||||||||
Equity securities (1) | — | — | 1,000 | �� | 2,377 | 3,377 | 2,883 | |||||||||||||||||||||||||||||||||||||
Total | $ | 35,025 | $ | 93,033 | $ | 39,049 | $ | 6,199 | $ | 173,306 | $ | 174,388 | ||||||||||||||||||||||||||||||||
Equity securities | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||
Total Held to Maturity | $ | 6,266 | $ | 51,259 | $ | 272,319 | $ | 100,074 | $ | 429,918 |
Following is information regarding unrealized gains and losses on equity securities for the three months ended March 31, 2022 and 2021:
(1) Equity securities are preferred and common stock that may or may not have a stated maturity.
Three Months Ended | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Net gains and (losses) recognized during the period | $ | (356 | ) | $ | 608 | |||
Less: Net gains and (losses) recognized during the period on securities sold | 0 | 0 | ||||||
Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date | $ | (356 | ) | $ | 608 |
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses and balances in the loan portfolio waswere as follows:
Commercial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Agricultural | Commercial and Industrial | Consumer | Commercial Real Estate | Construction Real Estate | Residential Real Estate | Unallocated | Total | and | Commercial | Construction | Residential | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Agricultural | Industrial | Consumer | Real Estate | Real Estate | Real Estate | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses Three Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 395 | $ | 904 | $ | 294 | $ | 1,551 | $ | 25 | $ | 748 | $ | 181 | $ | 4,098 | $ | 448 | $ | 1,454 | $ | 290 | $ | 3,705 | $ | 110 | $ | 671 | $ | 1,010 | $ | 7,688 | ||||||||||||||||||||||||||||||||
Charge-offs | — | (12 | ) | (52 | ) | — | — | (9 | ) | — | (73 | ) | 0 | (31 | ) | (112 | ) | 0 | 0 | 0 | 0 | (143 | ) | |||||||||||||||||||||||||||||||||||||||||
Recoveries | — | 4 | 16 | 65 | — | 11 | — | 96 | 0 | 2 | 52 | 1 | 0 | 1 | 0 | 56 | ||||||||||||||||||||||||||||||||||||||||||||||||
Provision | (1 | ) | (98 | ) | 1 | (152 | ) | 1 | (140 | ) | 484 | 95 | (61 | ) | 327 | 74 | (16 | ) | (73 | ) | (83 | ) | (168 | ) | 0 | |||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 394 | $ | 798 | $ | 259 | $ | 1,464 | $ | 26 | $ | 610 | $ | 665 | $ | 4,216 | $ | 387 | $ | 1,752 | $ | 304 | $ | 3,690 | $ | 37 | $ | 589 | $ | 842 | $ | 7,601 | ||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 433 | $ | 688 | $ | 305 | $ | 1,438 | $ | 62 | $ | 1,014 | $ | 337 | $ | 4,277 | ||||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs | — | (374 | ) | (189 | ) | — | — | (44 | ) | — | (607 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | — | 4 | 107 | 226 | 40 | 49 | — | 426 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision | (39 | ) | 480 | 36 | (200 | ) | (76 | ) | (409 | ) | 328 | 120 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 394 | $ | 798 | $ | 259 | $ | 1,464 | $ | 26 | $ | 610 | $ | 665 | $ | 4,216 | ||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | — | $ | 5 | $ | 4 | $ | 54 | $ | — | $ | 228 | $ | — | $ | 291 | $ | 253 | $ | 116 | $ | 3 | $ | 9 | $ | 0 | $ | 167 | $ | 0 | $ | 548 | ||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 394 | $ | 793 | $ | 255 | $ | 1,410 | $ | 26 | $ | 382 | $ | 665 | $ | 3,925 | $ | 134 | $ | 1,636 | $ | 301 | $ | 3,681 | $ | 37 | $ | 422 | $ | 842 | $ | 7,053 | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 399 | $ | 656 | $ | 279 | $ | 1,133 | $ | 44 | $ | 1,222 | $ | 563 | $ | 4,296 | ||||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs | — | — | (68 | ) | — | — | (25 | ) | — | (93 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | — | 8 | 49 | 5 | — | 11 | — | 73 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision | (11 | ) | (55 | ) | 30 | 340 | (3 | ) | (205 | ) | (96 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 388 | $ | 609 | $ | 290 | $ | 1,478 | $ | 41 | $ | 1,003 | $ | 467 | $ | 4,276 | ||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 420 | $ | 586 | $ | 297 | $ | 1,030 | $ | 46 | $ | 1,388 | $ | 427 | $ | 4,194 | ||||||||||||||||||||||||||||||||||||||||||||||||
Charge-offs | — | (33 | ) | (136 | ) | — | — | (94 | ) | — | (263 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Recoveries | — | 31 | 119 | 35 | — | 160 | — | 345 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Provision | (32 | ) | 26 | 10 | 412 | (5 | ) | (451 | ) | 40 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 388 | $ | 610 | $ | 290 | $ | 1,477 | $ | 41 | $ | 1,003 | $ | 467 | $ | 4,276 | ||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 4 | $ | 8 | $ | 1 | $ | 167 | $ | — | $ | 321 | $ | — | $ | 501 | ||||||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | $ | 384 | $ | 602 | $ | 289 | $ | 1,310 | $ | 41 | $ | 682 | $ | 467 | $ | 3,775 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 424 | $ | 192 | $ | 34 | $ | 936 | $ | — | $ | 2,472 | $ | 4,058 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for Impairment | 45,682 | 101,244 | 23,977 | 122,480 | 7,298 | 89,351 | 390,032 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 46,106 | $ | 101,436 | $ | 24,011 | $ | 123,416 | $ | 7,298 | $ | 91,823 | $ | 394,090 | ||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 526 | $ | 301 | $ | 28 | $ | 1,073 | $ | — | $ | 2,983 | $ | 4,911 | $ | 2,542 | $ | 356 | $ | 32 | $ | 157 | $ | 0 | $ | 1,853 | 0 | $ | 4,940 | |||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 44,088 | 95,787 | 21,568 | 109,689 | 6,153 | 86,804 | 364,089 | 59,076 | 194,024 | 36,108 | 527,743 | 15,669 | 174,206 | 0 | 1,006,826 | |||||||||||||||||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 0 | 4,534 | 11 | 9,352 | 0 | 1,743 | 0 | 15,640 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 44,614 | $ | 96,088 | $ | 21,596 | $ | 110,762 | $ | 6,153 | $ | 89,787 | $ | 369,000 | $ | 61,618 | $ | 198,914 | $ | 36,151 | $ | 537,252 | $ | 15,669 | $ | 177,802 | 0 | $ | 1,027,406 |
Commercial | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | and | Commercial | Construction | Residential | ||||||||||||||||||||||||||||
Agricultural | Industrial | Consumer | Real Estate | Real Estate | Real Estate | Unallocated | Total | |||||||||||||||||||||||||
Allowance for Loan Losses Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
Beginning balance | $ | 257 | $ | 1,327 | $ | 317 | $ | 4,178 | $ | 97 | $ | 1,300 | $ | 117 | $ | 7,593 | ||||||||||||||||
Charge-offs | 0 | (74 | ) | (71 | ) | (48 | ) | 0 | 0 | 0 | (193 | ) | ||||||||||||||||||||
Recoveries | 0 | 9 | 79 | 0 | 0 | 2 | 0 | 90 | ||||||||||||||||||||||||
Provision | 85 | 337 | (78 | ) | 215 | (23 | ) | (278 | ) | (8 | ) | 250 | ||||||||||||||||||||
Ending balance | $ | 342 | $ | 1,599 | $ | 247 | $ | 4,345 | $ | 74 | $ | 1,024 | $ | 109 | $ | 7,740 | ||||||||||||||||
Individually evaluated for impairment | $ | 114 | $ | 2 | $ | 0 | $ | 10 | $ | 0 | $ | 213 | $ | 0 | $ | 339 | ||||||||||||||||
Collectively evaluated for impairment | $ | 227 | $ | 1,596 | $ | 246 | $ | 4,337 | $ | 75 | $ | 811 | $ | 109 | $ | 7,401 | ||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
March 31, 2021 | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3,173 | $ | 1,626 | $ | 0 | $ | 3,001 | $ | 0 | $ | 2,589 | 0 | $ | 10,389 | |||||||||||||||||
Collectively evaluated for impairment | 43,513 | 290,140 | 32,311 | 448,261 | 15,670 | 174,562 | 0 | 1,004,457 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality | 0 | 6,284 | 19 | 11,159 | 0 | 2,775 | 0 | 20,237 | ||||||||||||||||||||||||
Ending balance | $ | 46,686 | $ | 298,050 | $ | 32,330 | $ | 462,421 | $ | 15,670 | $ | 179,926 | $ | 1,035,083 |
Commercial | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | and | Commercial | Construction | Residential | ||||||||||||||||||||||||||||
Agricultural | Industrial | Consumer | Real Estate | Real Estate | Real Estate | Unallocated | Total | |||||||||||||||||||||||||
Allowance for Loan Losses | ||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 251 | $ | 95 | $ | 2 | $ | 9 | $ | 0 | $ | 146 | $ | 0 | $ | 503 | ||||||||||||||||
Collectively evaluated for impairment | $ | 197 | $ | 1,359 | $ | 288 | $ | 3,696 | $ | 110 | $ | 525 | $ | 1,010 | $ | 7,185 | ||||||||||||||||
Loans | ||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,616 | $ | 339 | $ | 14 | $ | 273 | $ | 0 | $ | 2,191 | 0 | $ | 5,433 | |||||||||||||||||
Collectively evaluated for impairment | 62,203 | 197,656 | 35,148 | 515,528 | 19,066 | 164,647 | 0 | 994,248 | ||||||||||||||||||||||||
Acquired with deteriorated credit quality | 0 | 5,029 | 12 | 10,083 | 0 | 2,043 | 0 | 17,167 | ||||||||||||||||||||||||
Ending balance | $ | 64,819 | $ | 203,024 | $ | 35,174 | $ | 525,884 | $ | 19,066 | $ | 168,881 | 0 | $ | 1,016,848 |
The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1)(1) the risk ratings of business loans, (2)(2) the level of classified business loans, and (3)(3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 8.9. A description of the characteristics of the ratings follows:
Risk ratings Rating 1 and 2: These loans are considered pass credits. They exhibit good to exceptional credit risk and demonstrate the ability to repay the loan from normal business operations.
Risk rating 3: 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 4: These loans are considered pass credits. However, they have potential developing weaknesses that, if not corrected, may cause deterioration in the ability of the borrower to repay the loan. While a loss is possible for a loan with6 or special mention: Loans and other credit extensions bearing this rating, it is not anticipated.
Risk rating 5: These loans are considered special mention credits. Loans in this risk ratinggrade are considered to be inadequately protected by the netcurrent sound worth and debt service coveragecapacity of the borrower or of any pledged collateral. These loansobligations, even if apparently protected by collateral value, have well definedwell-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that may jeopardize the borrower’s ability to repay the loan. If the weaknesses are not corrected, losshave clearly jeopardized repayment of principal and interest could be probable.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 6: These loans are considered substandard credits. These loans7 or substandard: Loans and other credit extensions graded “7” have well definedall the weaknesses inherent in those graded “6”, with the added characteristic that the severity of whichthe weaknesses makes collection of principal and interestor liquidation in full questionable.highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this category mayclassification should be placed onevaluated for non-accrual status. All nonaccrual status.commercial and Retail loans must be at a minimum graded a risk code “7”.
Risk rating 7: These loans are considered doubtful credits. Some loss of principal8 or doubtful: Loans and interest hasother credit extensions bearing this grade have been determined to be probable. The estimatehave 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 be affected by factors such as the borrower’s ability to provideinclude merger or liquidation, additional capital injection, refinancing plans, or collateral. Loans in this category areperfection of liens on nonaccrual status.additional collateral.
Risk rating 8: These loans are considered loss credits. They9 or loss: Loans in this classification are considered uncollectible and willcannot be chargedjustified 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 againstthis loan even though partial recovery may be obtained in the allowance for loan losses.future.
Information regarding the Bank’sChoiceOne Bank's credit exposure iswas as follows:
Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category
Agricultural | Commercial and Industrial | Commercial Real Estate | ||||||||||||||||||||||
(Dollars in thousands) | September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | ||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Risk ratings 1 and 2 | $ | 12,488 | $ | 12,005 | $ | 12,691 | $ | 12,135 | $ | 8,069 | $ | 8,013 | ||||||||||||
Risk rating 3 | 23,957 | 23,852 | 64,953 | 56,714 | 72,370 | 59,343 | ||||||||||||||||||
Risk rating 4 | 8,865 | 7,505 | 23,141 | 25,895 | 39,920 | 39,641 | ||||||||||||||||||
Risk rating 5 | 373 | 726 | 484 | 1,267 | 1,530 | 1,867 | ||||||||||||||||||
Risk rating 6 | 423 | 526 | 167 | 77 | 1,527 | 1,898 | ||||||||||||||||||
Risk rating 7 | — | — | — | — | — | — | ||||||||||||||||||
$ | 46,106 | $ | 44,614 | $ | 101,436 | $ | 96,088 | $ | 123,416 | $ | 110,762 |
(Dollars in thousands) | Agricultural | Commercial and Industrial | Commercial Real Estate | |||||||||||||||||||||
March 31, | December 31, | March 31, | December 31, | March 31, | December 31, | |||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Pass | $ | 58,749 | $ | 61,864 | $ | 196,394 | $ | 201,202 | $ | 531,683 | $ | 519,537 | ||||||||||||
Special Mention | 327 | 339 | 1,190 | 300 | 749 | 778 | ||||||||||||||||||
Substandard | 2,542 | 2,616 | 1,245 | 1,266 | 4,820 | 5,569 | ||||||||||||||||||
Doubtful | 0 | 0 | 85 | 256 | 0 | 0 | ||||||||||||||||||
$ | 61,618 | $ | 64,819 | $ | 198,914 | $ | 203,024 | $ | 537,252 | $ | 525,884 |
CorporateConsumer Credit Exposure - Credit Risk Profile Based On Payment Activity
(Dollars in thousands) | Consumer | Construction Real Estate | Residential Real Estate | |||||||||||||||||||||||||||||||||||||||||||||
Consumer | Construction Real Estate | Residential Real Estate | March 31, | December 31, | March 31, | December 31, | March 31, | December 31, | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | ||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
Performing | $ | 23,995 | $ | 21,590 | $ | 7,298 | $ | 6,153 | $ | 91,252 | $ | 88,767 | $ | 36,119 | $ | 35,174 | $ | 15,669 | $ | 19,066 | $ | 177,186 | $ | 168,031 | ||||||||||||||||||||||||
Nonperforming | — | — | — | — | 132 | 229 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Nonaccrual | 16 | 6 | — | — | 439 | 791 | 32 | 0 | 0 | 0 | 616 | 850 | ||||||||||||||||||||||||||||||||||||
$ | 24,011 | $ | 21,596 | $ | 7,298 | $ | 6,153 | $ | 91,823 | $ | 89,787 | $ | 36,151 | $ | 35,174 | $ | 15,669 | $ | 19,066 | $ | 177,802 | $ | 168,881 |
There were noThe following table provides information on loans that were considered troubled debt restructurings (“TDRs”("TDRs") that were modified during the three-three months ended March 31, 2022 and nine-month periods ended September 30, 2017. The following schedule provides information on loans that were considered TDRs that were modified during the three- and nine-month periods ended September 30, 2016:March 31, 2021.
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||
Pre- | Post- | Pre- | Post- | Pre- | Post- | |||||||||||||||||||||||||||||||
Modification | Modification | Modification | Modification | Modification | Modification | |||||||||||||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Number of | Recorded | Recorded | Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||||||||||
Loans | Investment | Investment | Loans | Investment | Investment | Loans | Investment | Investment | ||||||||||||||||||||||||||||
Commercial Real estate | — | $ | — | $ | — | 1 | $ | 113 | $ | 113 | ||||||||||||||||||||||||||
Residential Real Estate | — | — | — | 2 | 156 | 156 | ||||||||||||||||||||||||||||||
Agricultural | 1 | $ | 258 | $ | 258 | |||||||||||||||||||||||||||||||
Total | — | $ | — | $ | — | 3 | $ | 269 | $ | 269 | 1 | $ | 258 | $ | 258 |
The pre-modification and post-modification outstanding recorded investment represents amounts as of the date of loan modification. If a difference exists between the pre-modification and post-modification outstanding recorded investment, it represents impairment recognized through the provision for loan losses computed based on a loan’s post-modification present value of expected future cash flows discounted at the loan’s original effective interest rate. If no difference exists, a loss is not expected to be incurred based on an assessment of the borrower’s expected cash flows.
Three Months Ended March 31, 2021 | ||||||||||||
Pre- | Post- | |||||||||||
Modification | Modification | |||||||||||
Outstanding | Outstanding | |||||||||||
(Dollars in thousands) | Number of | Recorded | Recorded | |||||||||
Loans | Investment | Investment | ||||||||||
Agricultural | 6 | $ | 2,326 | $ | 2,326 | |||||||
Commercial Real Estate | 1 | 958 | 958 | |||||||||
Total | 7 | $ | 3,284 | $ | 3,284 |
There were no0 TDRs as of September 30, 2017March 31, 2022 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months and nine months ended September 30, 2017 thatMarch 31, 2022, which loans had been modified and classified as TDRs during the year prior to the default. The following schedule provides information on TDRs as of September 30, 2016March 31,2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months and nine months ended September 30, 2016 thatMarch 31, 2021, which loans had been modified and classified as TDRs during the year prior to the default:default.
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
September 30, 2016 | September 30, 2016 | March 31, 2021 | ||||||||||||||||||||||
(Dollars in thousands) | Number | Recorded | Number | Recorded | Number | Recorded | ||||||||||||||||||
of Loans | Investment | of Loans | Investment | of Loans | Investment | |||||||||||||||||||
Commercial real estate | — | $ | — | 1 | $ | 113 | ||||||||||||||||||
Commercial and industrial | 1 | $ | 52 | |||||||||||||||||||||
Commercial Real Estate | 3 | 1,850 | ||||||||||||||||||||||
Total | 4 | $ | 1,902 |
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.
Impaired loans by loan category as of September 30, 2017 and 2016 were as follows:follow:
Unpaid | Average | Interest | Unpaid | |||||||||||||||||||||||||||||
(Dollars in thousands) | Recorded | Principal | Related | Recorded | Income | Recorded | Principal | Related | ||||||||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Investment | Balance | Allowance | |||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||
With no related allowance recorded | ||||||||||||||||||||||||||||||||
Agricultural | $ | 424 | $ | 455 | $ | — | $ | 288 | $ | — | $ | 314 | $ | 428 | $ | - | ||||||||||||||||
Commercial and industrial | 58 | 69 | — | 137 | — | 92 | 123 | - | ||||||||||||||||||||||||
Consumer | — | — | — | — | — | 0 | 0 | - | ||||||||||||||||||||||||
Construction real estate | 0 | 0 | - | |||||||||||||||||||||||||||||
Commercial real estate | 113 | 245 | — | 104 | — | 0 | 0 | - | ||||||||||||||||||||||||
Residential real estate | 136 | 147 | — | 103 | — | 0 | 0 | - | ||||||||||||||||||||||||
Subtotal | 731 | 916 | — | 632 | — | 406 | 551 | - | ||||||||||||||||||||||||
With an allowance recorded | ||||||||||||||||||||||||||||||||
Agricultural | — | — | — | 161 | — | 2,228 | 2,228 | 253 | ||||||||||||||||||||||||
Commercial and industrial | 134 | 134 | 5 | 195 | 1 | 264 | 279 | 116 | ||||||||||||||||||||||||
Consumer | 34 | 35 | 4 | 33 | 1 | 32 | 32 | 3 | ||||||||||||||||||||||||
Construction real estate | 0 | 0 | 0 | |||||||||||||||||||||||||||||
Commercial real estate | 823 | 904 | 54 | 884 | 26 | 157 | 157 | 8 | ||||||||||||||||||||||||
Residential real estate | 2,336 | 2,354 | 228 | 2,475 | 75 | 1,853 | 1,907 | 167 | ||||||||||||||||||||||||
Subtotal | 3,327 | 3,427 | 291 | 3,748 | 103 | 4,534 | 4,603 | 547 | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Agricultural | 424 | 455 | — | 449 | — | 2,542 | 2,656 | 253 | ||||||||||||||||||||||||
Commercial and industrial | 192 | 203 | 5 | 332 | 1 | 356 | 402 | 116 | ||||||||||||||||||||||||
Consumer | 34 | 35 | 4 | 33 | 1 | 32 | 32 | 3 | ||||||||||||||||||||||||
Construction real estate | 0 | 0 | 0 | |||||||||||||||||||||||||||||
Commercial real estate | 936 | 1,149 | 54 | 988 | 26 | 157 | 157 | 8 | ||||||||||||||||||||||||
Residential real estate | 2,472 | 2,501 | 228 | 2,578 | 75 | 1,853 | 1,907 | 167 | ||||||||||||||||||||||||
Total | $ | 4,058 | $ | 4,343 | $ | 291 | $ | 4,380 | $ | 103 | $ | 4,940 | $ | 5,154 | $ | 547 | ||||||||||||||||
September 30, 2016 | ||||||||||||||||||||||||||||||||
With no related allowance recorded | ||||||||||||||||||||||||||||||||
Agricultural | $ | 489 | $ | 493 | $ | — | $ | 154 | $ | (1 | ) | |||||||||||||||||||||
Commercial and industrial | 177 | 177 | — | 63 | — | |||||||||||||||||||||||||||
Consumer | 5 | 5 | — | 1 | — | |||||||||||||||||||||||||||
Commercial real estate | 230 | 351 | — | 1,071 | 33 | |||||||||||||||||||||||||||
Residential real estate | 266 | 266 | — | 134 | 46 | |||||||||||||||||||||||||||
Subtotal | 1,167 | 1,292 | — | 1,423 | 78 | |||||||||||||||||||||||||||
With an allowance recorded | ||||||||||||||||||||||||||||||||
Agricultural | 45 | 45 | 4 | 79 | 16 | |||||||||||||||||||||||||||
Commercial and industrial | 273 | 247 | 8 | 242 | 4 | |||||||||||||||||||||||||||
Consumer | 21 | 21 | 1 | 22 | 3 | |||||||||||||||||||||||||||
Commercial real estate | 1,229 | 1,799 | 167 | 1,426 | 116 | |||||||||||||||||||||||||||
Residential real estate | 2,843 | 2,859 | 321 | 2,670 | 308 | |||||||||||||||||||||||||||
Subtotal | 4,411 | 4,971 | 501 | 4,439 | 447 | |||||||||||||||||||||||||||
Agricultural | 534 | 538 | 4 | 233 | 15 | |||||||||||||||||||||||||||
Commercial and industrial | 449 | 424 | 8 | 305 | 4 | |||||||||||||||||||||||||||
Consumer | 26 | 26 | 1 | 23 | 3 | |||||||||||||||||||||||||||
Commercial real estate | 1,459 | 2,150 | 167 | 2,497 | 149 | |||||||||||||||||||||||||||
Residential real estate | 3,110 | 3,125 | 321 | 2,804 | 354 | |||||||||||||||||||||||||||
Total | $ | 5,578 | $ | 6,263 | $ | 501 | $ | 5,862 | $ | 525 |
Unpaid | ||||||||||||
(Dollars in thousands) | Recorded | Principal | Related | |||||||||
Investment | Balance | Allowance | ||||||||||
December 31, 2021 | ||||||||||||
With no related allowance recorded | ||||||||||||
Agricultural | $ | 314 | $ | 428 | $ | - | ||||||
Commercial and industrial | 0 | 0 | - | |||||||||
Consumer | 0 | 0 | - | |||||||||
Construction real estate | 0 | 0 | - | |||||||||
Commercial real estate | 94 | 94 | - | |||||||||
Residential real estate | 164 | 172 | - | |||||||||
Subtotal | 572 | 694 | - | |||||||||
With an allowance recorded | ||||||||||||
Agricultural | 2,302 | 2,302 | 251 | |||||||||
Commercial and industrial | 339 | 363 | 95 | |||||||||
Consumer | 14 | 15 | 2 | |||||||||
Construction real estate | 0 | 0 | 0 | |||||||||
Commercial real estate | 179 | 179 | 9 | |||||||||
Residential real estate | 2,027 | 2,084 | 146 | |||||||||
Subtotal | 4,861 | 4,943 | 503 | |||||||||
Total | ||||||||||||
Agricultural | 2,616 | 2,730 | 251 | |||||||||
Commercial and industrial | 339 | 363 | 95 | |||||||||
Consumer | 14 | 15 | 2 | |||||||||
Construction real estate | 0 | 0 | 0 | |||||||||
Commercial real estate | 273 | 273 | 9 | |||||||||
Residential real estate | 2,191 | 2,256 | 146 | |||||||||
Total | $ | 5,433 | $ | 5,637 | $ | 503 |
The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three months ended March 31, 2022 and March 31, 2021:
Average | Interest | |||||||
(Dollars in thousands) | Recorded | Income | ||||||
Investment | Recognized | |||||||
Three Months Ended March 31, 2022 | ||||||||
With no related allowance recorded | ||||||||
Agricultural | $ | 314 | $ | 0 | ||||
Commercial and industrial | 46 | 1 | ||||||
Consumer | 0 | 0 | ||||||
Construction real estate | 0 | 0 | ||||||
Commercial real estate | 47 | 0 | ||||||
Residential real estate | 82 | 0 | ||||||
Subtotal | 489 | 1 | ||||||
With an allowance recorded | ||||||||
Agricultural | 2,265 | 42 | ||||||
Commercial and industrial | 301 | 2 | ||||||
Consumer | 23 | 0 | ||||||
Construction real estate | 0 | 0 | ||||||
Commercial real estate | 168 | 3 | ||||||
Residential real estate | 1,940 | 17 | ||||||
Subtotal | 4,697 | 64 | ||||||
Total | ||||||||
Agricultural | 2,579 | 42 | ||||||
Commercial and industrial | 347 | 3 | ||||||
Consumer | 23 | 0 | ||||||
Construction real estate | 0 | 0 | ||||||
Commercial real estate | 215 | 3 | ||||||
Residential real estate | 2,022 | 17 | ||||||
Total | $ | 5,186 | $ | 65 |
Average | Interest | |||||||
(Dollars in thousands) | Recorded | Income | ||||||
Investment | Recognized | |||||||
Three Months Ended March 31, 2021 | ||||||||
With no related allowance recorded | ||||||||
Agricultural | $ | 348 | $ | 0 | ||||
Commercial and industrial | 1,490 | 0 | ||||||
Consumer | 0 | 0 | ||||||
Construction real estate | 40 | 0 | ||||||
Commercial real estate | 2,238 | 3 | ||||||
Residential real estate | 166 | 1 | ||||||
Subtotal | 4,282 | 4 | ||||||
With an allowance recorded | ||||||||
Agricultural | 1,413 | 0 | ||||||
Commercial and industrial | 155 | 0 | ||||||
Consumer | 4 | 0 | ||||||
Construction real estate | 0 | 0 | ||||||
Commercial real estate | 778 | 4 | ||||||
Residential real estate | 2,488 | 17 | ||||||
Subtotal | 4,838 | 21 | ||||||
Total | ||||||||
Agricultural | 1,761 | 0 | ||||||
Commercial and industrial | 1,645 | 0 | ||||||
Consumer | 4 | 0 | ||||||
Construction real estate | 40 | 0 | ||||||
Commercial real estate | 3,016 | 7 | ||||||
Residential real estate | 2,654 | 18 | ||||||
Total | $ | 9,120 | $ | 25 |
An aging analysis of loans by loan category follows:
Loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans | Loans | Past Due | Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | Due and | 30 to 59 | 60 to 89 | Than 90 | Loans Not | Total | Due and | |||||||||||||||||||||||||||||||||||||||||||||
Days | Days | Days (1) | Total | Past Due | Total Loans | Accruing | Days (1) | Days (1) | Days (1) | Total (1) | Past Due | Loans | Accruing | |||||||||||||||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Agricultural | $ | — | $ | — | $ | 83 | $ | 83 | $ | 46,023 | $ | 46,106 | $ | — | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 61,618 | $ | 61,618 | $ | 0 | ||||||||||||||||||||||||||||
Commercial and industrial | — | — | 58 | 58 | 101,378 | 101,436 | — | 0 | 93 | 85 | 178 | 198,736 | 198,914 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 132 | 1 | 11 | 144 | 23,867 | 24,011 | — | 66 | 0 | 32 | 98 | 36,053 | 36,151 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | — | — | 113 | 113 | 123,303 | 123,416 | — | 0 | 0 | 0 | 0 | 537,252 | 537,252 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Construction real estate | — | — | — | — | 7,298 | 7,298 | — | 0 | 0 | 0 | 0 | 15,669 | 15,669 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 625 | 24 | 221 | 870 | 90,953 | 91,823 | 132 | 2,032 | 28 | 0 | 2,060 | 175,742 | 177,802 | 0 | ||||||||||||||||||||||||||||||||||||||||||
$ | 757 | $ | 25 | $ | 486 | $ | 1,268 | $ | 392,822 | $ | 394,090 | $ | 132 | $ | 2,098 | $ | 121 | $ | 117 | $ | 2,336 | $ | 1,025,070 | $ | 1,027,406 | $ | 0 | |||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Agricultural | $ | — | $ | — | $ | — | $ | — | $ | 44,614 | $ | 44,614 | $ | — | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 64,819 | $ | 64,819 | $ | 0 | ||||||||||||||||||||||||||||
Commercial and industrial | — | 30 | 245 | 275 | 95,813 | 96,088 | — | 21 | 0 | 88 | 109 | 202,915 | 203,024 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 99 | 2 | 6 | 107 | �� | 21,489 | 21,596 | — | 70 | 15 | 0 | 85 | 35,089 | 35,174 | 0 | |||||||||||||||||||||||||||||||||||||||||
Commercial real estate | — | — | 260 | 260 | 110,502 | 110,762 | — | 422 | 13 | 279 | 714 | 525,170 | 525,884 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Construction real estate | — | — | — | — | 6,153 | 6,153 | — | 1,149 | 1,235 | 0 | 2,384 | 16,682 | 19,066 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Residential real estate | 1,027 | 109 | 646 | 1,782 | 88,005 | 89,787 | 229 | 1,489 | 306 | 454 | 2,249 | 166,632 | 168,881 | 0 | ||||||||||||||||||||||||||||||||||||||||||
$ | 1,126 | $ | 141 | $ | 1,157 | $ | 2,424 | $ | 366,576 | $ | 369,000 | $ | 229 | $ | 3,151 | $ | 1,569 | $ | 821 | $ | 5,541 | $ | 1,011,307 | $ | 1,016,848 | $ | 0 |
(1)(1) Includes nonaccrual loans.
Nonaccrual loans by loan category follow:
(Dollars in thousands) | September 30, | December 31, | ||||||
2017 | 2016 | |||||||
Agricultural | $ | 423 | $ | 482 | ||||
Commercial and industrial | 59 | 245 | ||||||
Consumer | 17 | 6 | ||||||
Commercial real estate | 211 | 458 | ||||||
Construction real estate | — | — | ||||||
Residential real estate | 439 | 792 | ||||||
$ | 1,149 | $ | 1,983 |
(Dollars in thousands) | March 31, | December 31, | ||||||
2022 | 2021 | |||||||
Agricultural | $ | 314 | $ | 313 | ||||
Commercial and industrial | 205 | 285 | ||||||
Consumer | 32 | 0 | ||||||
Commercial real estate | 0 | 279 | ||||||
Residential real estate | 616 | 850 | ||||||
$ | 1,167 | $ | 1,727 |
The table below details the outstanding balances of the County Bank Corp. acquired loan portfolio and the acquisition fair value adjustments at acquisition date of October 1, 2019 (dollars in thousands):
Acquired | Acquired | Acquired | ||||||||||
Impaired | Non-impaired | Total | ||||||||||
Loans acquired - contractual payments | $ | 7,729 | $ | 387,394 | $ | 395,123 | ||||||
Nonaccretable difference | (2,928 | ) | 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 the County Bank Corp. acquired loan portfolio for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 and the three months ended March 31, 2022 (dollars in thousands):
(Dollars in thousands) | Acquired | 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 January 1, 2021 | 135 | 1,524 | 1,659 | |||||||||
Accretion January 1, 2021 through December 31, 2021 | (247 | ) | (95 | ) | (342 | ) | ||||||
Transfer from non-accretable to accretable yield | 400 | 0 | 400 | |||||||||
Balance January 1, 2022 | 288 | 1,429 | 1,717 | |||||||||
Transfer from non-accretable to accretable yield | 400 | 0 | 400 | |||||||||
Accretion January 1, 2022 through March 31, 2022 | (102 | ) | (151 | ) | (253 | ) | ||||||
Balance, March 31, 2022 | $ | 586 | $ | 1,278 | $ | 1,864 |
The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date of July 1, 2020 (dollars in thousands):
Acquired | Acquired | Acquired | ||||||||||
Impaired | Non-impaired | Total | ||||||||||
Loans acquired - contractual payments | $ | 20,491 | $ | 158,495 | $ | 178,986 | ||||||
Nonaccretable difference | (2,719 | ) | 0 | (2,719 | ) | |||||||
Expected cash flows | 17,772 | 158,495 | 176,267 | |||||||||
Accretable yield | (869 | ) | (596 | ) | (1,465 | ) | ||||||
Carrying balance at acquisition date | $ | 16,903 | $ | 157,899 | $ | 174,802 |
The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2020 and December 31, 2021 and the three months ended March 31, 2022 (dollars in thousands):
Acquired | 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, January 1, 2021 | 843 | 455 | 1,298 | |||||||||
Accretion January 1, 2021 through December 31, 2021 | (321 | ) | (258 | ) | (579 | ) | ||||||
Balance January 1, 2022 | 522 | 197 | 719 | |||||||||
Transfer from non-accretable to accretable yield | 874 | 0 | 874 | |||||||||
Accretion January 1, 2022 through March 31, 2022 | (302 | ) | 0 | (302 | ) | |||||||
Balance, March 31, 2022 | $ | 1,094 | $ | 197 | $ | 1,291 |
NOTE 4 - – EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows:
(Dollars in thousands, except per share data) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Basic Earnings Per Share | ||||||||||||||||
Net income available to common shareholders | $ | 1,720 | $ | 1,683 | $ | 4,801 | $ | 4,402 | ||||||||
Weighted average common shares outstanding | 3,452,278 | 3,439,633 | 3,448,341 | 3,455,141 | ||||||||||||
Basic earnings per share | $ | 0.50 | $ | 0.50 | $ | 1.39 | $ | 1.28 | ||||||||
Diluted Earnings Per Share | ||||||||||||||||
Net income available to common shareholders | $ | 1,720 | $ | 1,683 | $ | 4,801 | $ | 4,402 | ||||||||
Weighted average common shares outstanding | 3,452,278 | 3,439,633 | 3,448,341 | 3,455,141 | ||||||||||||
Plus dilutive stock options and restricted stock units | 6,370 | 4,146 | 4,744 | 4,380 | ||||||||||||
Weighted average common shares outstanding and potentially dilutive shares | 3,458,648 | 3,443,780 | 3,453,085 | 3,459,520 | ||||||||||||
Diluted earnings per share | $ | 0.50 | $ | 0.50 | $ | 1.39 | $ | 1.28 |
Three Months Ended | ||||||||
(Dollars in thousands, except share data) | March 31, | |||||||
2022 | 2021 | |||||||
Basic | ||||||||
Net income | $ | 5,528 | $ | 6,238 | ||||
Weighted average common shares outstanding | 7,495,464 | 7,801,058 | ||||||
Basic earnings per common shares | $ | 0.74 | $ | 0.80 | ||||
Diluted | ||||||||
Net income | $ | 5,528 | $ | 6,238 | ||||
Weighted average common shares outstanding | 7,495,464 | 7,801,058 | ||||||
Plus dilutive stock options and restricted stock units | 21,461 | 9,732 | ||||||
Weighted average common shares outstanding and potentially dilutive shares | 7,516,925 | 7,810,790 | ||||||
Diluted earnings per common share | $ | 0.74 | $ | 0.80 |
NoteThere were 12,000 stock options that 2016were considered anti-dilutive to earnings per share amounts have been adjusted for the 5% stock dividend paid on Maythree months ended March 31, 2017.
2022. There were 31,5000 stock options that were considered to be anti-dilutive to earnings per share for the three months ended September 30, 2017 and 32,550 forMarch 31, 2021. There were 0 restricted stock units that were considered anti-dilutive to earnings per share during either the three months ended September 30, 2016 with an exercise price more than the average market price which have been excluded from the calculation of diluted earnings above.March 31, 2022 or March 31, 2021.
NOTE Note 5 – FINANCIAL INSTRUMENTSFinancial Instruments
Financial instruments as of the dates indicated were as follows:
(Dollars in thousands) | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
September 30, 2017 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and due from banks | $ | 12,725 | $ | 12,725 | $ | 12,725 | $ | — | $ | — | ||||||||||
Securities available for sale | 173,306 | 173,306 | 1,877 | 157,886 | 13,543 | |||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 3,567 | 3,567 | — | 3,567 | — | |||||||||||||||
Loans held for sale | 2,378 | 2,451 | — | 2,451 | — | |||||||||||||||
Loans to other financial institutions | 13,293 | 13,699 | — | — | 13,699 | |||||||||||||||
Loans, net | 389,874 | 391,408 | — | — | 391,408 | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Noninterest-bearing deposits | 136,542 | 136,542 | — | 136,542 | — | |||||||||||||||
Interest-bearing deposits | 389,296 | 388,603 | — | 388,603 | — | |||||||||||||||
Federal funds purchased | 2,650 | 2,650 | — | 2,650 | — | |||||||||||||||
Repurchase agreements | 3,794 | 3,794 | — | 3,794 | — | |||||||||||||||
Federal Home Loan Bank advances | 30,276 | 30,298 | — | 30,298 | — | |||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Assets: | ||||||||||||||||||||
Cash and due from banks | $ | 14,809 | $ | 14,809 | $ | 14,809 | $ | — | $ | — | ||||||||||
Securities available for sale | 174,388 | 174,388 | 1,383 | 157,902 | 15,103 | |||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 3,567 | 3,567 | — | 3,567 | — | |||||||||||||||
Loans held for sale | 1,974 | 2,044 | — | 2,044 | — | |||||||||||||||
Loans, net | 364,723 | 365,780 | — | — | 365,780 | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Noninterest-bearing deposits | 127,611 | 127,611 | — | 127,611 | — | |||||||||||||||
Interest-bearing deposits | 384,775 | 383,879 | — | 383,879 | — | |||||||||||||||
Repurchase agreements | 7,913 | 7,913 | — | 7,913 | — | |||||||||||||||
Federal Home Loan Bank advances | 12,301 | 12,323 | — | 12,323 | — |
Quoted Prices | ||||||||||||||||||||
In Active | Significant | |||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||
(Dollars in thousands) | Carrying | Estimated | Assets | Inputs | Inputs | |||||||||||||||
Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
March 31, 2022 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 89,976 | $ | 89,976 | $ | 89,976 | $ | 0 | $ | 0 | ||||||||||
Equity securities at fair value | 8,282 | 8,282 | 6,515 | 0 | 1,767 | |||||||||||||||
Securities available for sale | 641,048 | 641,048 | 0 | 641,048 | 0 | |||||||||||||||
Securities held to maturity | 429,918 | 397,911 | 0 | 380,447 | 17,464 | |||||||||||||||
Federal Home Loan Bank and Federal | ||||||||||||||||||||
Reserve Bank stock | 8,557 | 8,557 | 0 | 8,557 | 0 | |||||||||||||||
Loans held for sale | 13,450 | 13,853 | 0 | 13,853 | 0 | |||||||||||||||
Loans to other financial institutions | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Loans, net | 1,019,805 | 1,001,696 | 0 | 0 | 1,001,696 | |||||||||||||||
Accrued interest receivable | 9,382 | 9,382 | 0 | 9,382 | 0 | |||||||||||||||
Interest rate lock commitments | 167 | 167 | 0 | 167 | 0 | |||||||||||||||
Mortgage loan servicing rights | 4,680 | 5,537 | 0 | 5,537 | 0 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Noninterest-bearing deposits | 565,657 | 565,657 | 0 | 565,657 | 0 | |||||||||||||||
Interest-bearing deposits | 1,579,944 | 1,577,909 | 0 | 1,577,909 | 0 | |||||||||||||||
Borrowings | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Subordinated debentures | 35,078 | 31,350 | 0 | 31,350 | 0 | |||||||||||||||
Accrued interest payable | 181 | 181 | 0 | 181 | 0 | |||||||||||||||
December 31, 2021 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 31,887 | $ | 31,887 | $ | 31,887 | $ | 0 | $ | 0 | ||||||||||
Equity securities at fair value | 8,492 | 8,492 | 6,724 | 0 | 1,768 | |||||||||||||||
Securities available for sale | 1,098,885 | 1,098,885 | 0 | 1,077,835 | 21,050 | |||||||||||||||
Federal Home Loan Bank and Federal | ||||||||||||||||||||
Reserve Bank stock | 8,888 | 8,888 | 0 | 8,888 | 0 | |||||||||||||||
Loans held for sale | 9,351 | 9,632 | 0 | 9,632 | 0 | |||||||||||||||
Loans to other financial institutions | 42,632 | 42,632 | 0 | 42,632 | 0 | |||||||||||||||
Loans, net | 1,009,160 | 999,393 | 0 | 0 | 999,393 | |||||||||||||||
Accrued interest receivable | 8,211 | 8,211 | 0 | 8,211 | 0 | |||||||||||||||
Interest rate lock commitments | 172 | 172 | 0 | 172 | 0 | |||||||||||||||
Mortgage loan servicing rights | 4,666 | 5,522 | 0 | 5,522 | 0 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Noninterest-bearing deposits | 560,931 | 560,931 | 0 | 560,931 | 0 | |||||||||||||||
Interest-bearing deposits | 1,491,363 | 1,491,135 | 0 | 1,491,135 | 0 | |||||||||||||||
Borrowings | 50,000 | 50,000 | 0 | 50,000 | 0 | |||||||||||||||
Subordinated debentures | 35,017 | 33,414 | 0 | 33,414 | 0 | |||||||||||||||
Accrued interest payable | 441 | 441 | 0 | 441 | 0 |
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 6. The estimated fair value for loans is based on the rates charged at September 30, 2017 and December 31, 2016 for new loans with similar maturities, applied until the loan is assumed to reprice or be paid. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair values for time deposits and Federal Home Loan Bank (“FHLB”) advances are based on the rates paid at September 30, 2017 and December 31, 2016 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 6 – FAIR VALUE MEASUREMENTS
The following tables present information about the Bank’s assets and liabilities measured at fair value on a recurring basis and the valuation techniques used by the Bank 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 theChoiceOne Bank 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. TheChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
There were no liabilities measured at fair value as of September 30, 2017March 31, 2022 or December 31, 2016.2021. Disclosures concerning assets measured at fair value are as follows:
Assets Measured at Fair Value on a Recurring Basis
Quoted Prices | ||||||||||||||||
In Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | Balance | |||||||||||||
(Dollars in thousands) | Assets | Inputs | Inputs | at Date | ||||||||||||
(Level 1) | (Level 2) | (Level 3) | Indicated | |||||||||||||
Equity Securities Held at Fair Value - March 31, 2022 | ||||||||||||||||
Equity securities | $ | 6,515 | $ | 0 | $ | 1,767 | $ | 8,282 | ||||||||
Investment Securities, Available for Sale - March 31, 2022 | ||||||||||||||||
U. S. Government and federal agency | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
U. S. Treasury notes and bonds | 0 | 86,491 | 0 | 86,491 | ||||||||||||
State and municipal | 0 | 312,388 | 0 | 312,388 | ||||||||||||
Mortgage-backed | 0 | 226,669 | 0 | 226,669 | ||||||||||||
Corporate | 0 | 1,255 | 0 | 1,255 | ||||||||||||
Asset-backed securities | 0 | 14,245 | 0 | 14,245 | ||||||||||||
Total | $ | 0 | $ | 641,048 | $ | 0 | $ | 641,048 | ||||||||
Equity Securities Held at Fair Value - December 31, 2021 | ||||||||||||||||
Equity securities | $ | 6,724 | $ | 0 | $ | 1,768 | $ | 8,492 | ||||||||
Investment Securities, Available for Sale - December 31, 2021 | ||||||||||||||||
U. S. Government and federal agency | $ | 0 | $ | 2,008 | $ | 0 | $ | 2,008 | ||||||||
U. S. Treasury notes and bonds | 0 | 91,979 | 0 | 91,979 | ||||||||||||
State and municipal | 0 | 514,797 | 20,050 | 534,847 | ||||||||||||
Mortgage-backed | 0 | 433,115 | 0 | 433,115 | ||||||||||||
Corporate | 0 | 19,642 | 1,000 | 20,642 | ||||||||||||
Asset-backed securities | 0 | 16,294 | 0 | 16,294 | ||||||||||||
Total | $ | 0 | $ | 1,077,835 | $ | 21,050 | $ | 1,098,885 |
(Dollars in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at Date Indicated | ||||||||||||
Investment Securities, Available for Sale – September 30, 2017 | ||||||||||||||||
U.S. Treasury notes and bonds | $ | — | $ | 4,015 | $ | — | $ | 4,015 | ||||||||
U.S. Government and federal agency | — | 50,653 | — | 50,653 | ||||||||||||
State and municipal | — | 83,552 | 12,043 | 95,595 | ||||||||||||
Mortgage-backed | — | 9,420 | — | 9,420 | ||||||||||||
Corporate | — | 5,695 | — | 5,695 | ||||||||||||
Foreign debt | — | 4,440 | — | 4,440 | ||||||||||||
Equity securities | 1,877 | — | 1,500 | 3,377 | ||||||||||||
Asset backed securities | — | 111 | — | 111 | ||||||||||||
Total | $ | 1,877 | $ | 157,886 | $ | 13,543 | $ | 173,306 | ||||||||
Investment Securities, Available for Sale - December 31, 2016 | ||||||||||||||||
U.S. Treasury notes and bonds | $ | — | $ | 4,072 | $ | — | $ | 4,072 | ||||||||
U.S. Government and federal agency | — | 59,052 | — | 59,052 | ||||||||||||
State and municipal | — | 75,370 | 13,603 | 88,973 | ||||||||||||
Mortgage-backed | — | 7,789 | — | 7,789 | ||||||||||||
Corporate | — | 7,041 | — | 7,041 | ||||||||||||
Foreign debt | — | 4,400 | — | 4,400 | ||||||||||||
Equity securities | 1,383 | — | 1,500 | 2,883 | ||||||||||||
Asset backed securities | — | 178 | — | 178 | ||||||||||||
Total | $ | 1,383 | $ | 157,902 | $ | 15,103 | $ | 174,388 |
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
Three Months Ended | ||||||||||||||||
(Dollars in thousands) | March 31, | |||||||||||||||
2022 | 2021 | |||||||||||||||
Equity Securities Held at Fair Value | ||||||||||||||||
Balance, January 1 | $ | 1,768 | $ | 1,485 | ||||||||||||
Total realized and unrealized gains included in noninterest income | (1 | ) | (40 | ) | ||||||||||||
Net purchases, sales, calls, and maturities | 0 | 500 | ||||||||||||||
Net transfers into Level 3 | 0 | 0 | ||||||||||||||
Balance, March 31 | $ | 1,767 | $ | 1,945 | ||||||||||||
Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31 | $ | (1 | ) | $ | (40 | ) | ||||||||||
2017 | 2016 | |||||||||||||||
Investment Securities, Available for Sale | ||||||||||||||||
Balance, January 1 | $ | 15,103 | $ | 11,799 | $ | 21,050 | $ | 11,423 | ||||||||
Total realized and unrealized gains included in income | — | — | ||||||||||||||
Total unrealized gains (losses) included in other comprehensive income | 271 | 131 | ||||||||||||||
Total unrealized gains included in other comprehensive income | 0 | (270 | ) | |||||||||||||
Net purchases, sales, calls, and maturities | (1,831 | ) | 2,598 | 0 | 2,453 | |||||||||||
Net transfers into Level 3 | — | — | 0 | 0 | ||||||||||||
Balance, September 30 | $ | 13,543 | $ | 14,528 | ||||||||||||
Transfer to held to maturity | (21,050 | ) | 0 | |||||||||||||
Balance, March 31 | $ | 0 | $ | 13,606 | ||||||||||||
Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31 | $ | 0 | $ | (270 | ) |
Of the Level 3 assets that were held by the Bank at September 30, 2017, the net unrealized gain for the nine months ended September 30, 2017 was $271,000, which is recognized in other comprehensive income in the consolidated balance sheet.$3.2 million of Level 3 securities were purchased during the first nine months of 2017, $4.8 million of Level 3 securities matured or were called, and there were $204,000 in principal paydowns in the same period. Of the Level 3 assets that were held by the Bank at September 30, 2016, the net unrealized gain for the nine months ended September 30, 2016 was $131,000, which is recognized in other comprehensive income in the consolidated balance sheet.$5.1 million of Level 3 securities were purchased during the first nine months of 2016, $2.2 million of Level 3 securities matured or were called, and there were $267,000 in principal payments in the same period.
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities 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 securitiesSecurities categorized as Level 3 assets as of March 31, 2022 primarily consist of common and preferred equity securities of community banks. As of December 31, 2021, bonds issued by local municipalities. The Bankmunicipalities were classified as available for sale and were included as Level 3 securities. ChoiceOne estimates the fair value of these bonds and equity securities 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 BankChoiceOne 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
(Dollars in thousands) | Balance at Dates Indicated | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Impaired Loans | ||||||||||||||||
September 30, 2017 | $ | 4,058 | $ | — | $ | — | $ | 4,058 | ||||||||
December 31, 2016 | $ | 4,911 | $ | — | $ | — | $ | 4,911 | ||||||||
Other Real Estate | ||||||||||||||||
September 30, 2017 | $ | 182 | $ | — | $ | — | $ | 182 | ||||||||
December 31, 2016 | $ | 437 | $ | — | $ | — | $ | 437 |
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 | ||||||||||||||||
March 31, 2022 | $ | 4,940 | $ | 0 | $ | 0 | $ | 4,940 | ||||||||
December 31, 2021 | $ | 5,433 | $ | 0 | $ | 0 | $ | 5,433 | ||||||||
Other Real Estate | ||||||||||||||||
March 31, 2022 | $ | 172 | $ | 0 | $ | 0 | $ | 172 | ||||||||
December 31, 2021 | $ | 194 | $ | 0 | $ | 0 | $ | 194 | ||||||||
Mortgage Loan Servicing Rights | ||||||||||||||||
March 31, 2022 | $ | 4,680 | $ | 0 | $ | 4,680 | $ | 0 | ||||||||
December 31, 2021 | $ | 4,666 | $ | 0 | $ | 4,666 | $ | 0 |
Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The BankChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s 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 loan losses and write-downs of other real estate that were posted to a valuation account.
NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS
ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers. ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income. Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services.
Service Charges and Fees on Deposit Accounts
Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services. Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided. Transaction fees such as wire transfer charges are recognized when the service is provided to the customer.
Interchange Income
Revenue includes debit card interchange and network revenues. This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses.
Investment Commission Income
Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered. Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed.
Trust Fee Income
Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered.
Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics:
Three Months Ended | ||||||||
March 31, | ||||||||
(Dollars in thousands) | 2022 | 2021 | ||||||
Service charges and fees on deposit accounts | $ | 1,031 | $ | 785 | ||||
Interchange income | 1,157 | 1,135 | ||||||
Investment commission income | 205 | 236 | ||||||
Trust fee income | 178 | 173 | ||||||
Other charges and fees for customer services | 148 | 166 | ||||||
Noninterest income from contracts with customers within the scope of ASC 606 | 2,719 | 2,495 | ||||||
Noninterest income within the scope of other GAAP topics | 1,126 | 3,105 | ||||||
Total noninterest income | $ | 3,845 | $ | 5,600 |
NOTE 78 – SUBSEQUENT EVENTS
During the first quarter of 2022, the Federal Reserve increased the federal funds rate by 25 basis points in response to published inflation rates, causing interest rates generally to sharply increase. This change in interest rates increased ChoiceOne's unrealized pre-tax loss on its available for sale securities portfolio from $3.3 million at December 31, 2021 to $42.8 million at March 31, 2022. Additionally, meeting minutes from the Federal Open Market Committee indicated that additional increases in the federal funds rate are expected in order to combat inflation in the coming quarters. As such, ChoiceOne has elected to utilize interest rate derivatives in order to better manage its interest rate risk position. On October 3, 2017 April 21, 2022, ChoiceOne Insurance Agencies Inc (“the Agency”)purchased five forward-starting interest rate caps with a total notional amount of $200 million and entered into an agreement with Ridgetown Investments LLC (“Ridgetown”), to sell a portion$200 million forward-starting pay-fixed interest rate swap. ChoiceOne also entered into a $200 million receive-fixed interest rate swap, which, in the current environment, offsets the cost of the investment book of business previously managed by the Agency. Per the agreement, Ridgetown agreed to pay $908,000rising rate protection. The five forward-starting interest rate caps are tied to the Agency for future revenue generated by the bookSecured Overnight Financing Rate ("SOFR") with a strike price of business. This transaction would result2.68%, and are structured as a two-year forward eight year term. The forward-starting pay-fixed interest rate swap is also structured with a two-year forward eight year term, and ChoiceOne will pay a coupon rate of 2.75% while receiving SOFR. The receive-fixed interest rate swap has a two year term with an immediate start date and ChoiceOne is receiving a fixed coupon of 2.41% while paying SOFR. These strategies create accounting symmetry between available-for-sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases in a $908,000 gain which will be reportedinterest rates. These three strategies, in the fourth quarter of 2017.aggregate, are expected to be modestly accretive to net income in 2022 and better position ChoiceOne Bank should rates continue to rise.
Item 2. 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”) and, its wholly-owned subsidiary ChoiceOne Bank, (the “Bank”), and theChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. This discussion should be read in conjunction with the interim consolidated financial statements and related notes.
FORWARD-LOOKING STATEMENTS
This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne itself.ChoiceOne. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “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 loan losses, the carrying value of goodwill, and loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the COVID-19 pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers. 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 undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
RiskAdditional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2016.2021 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary
Net income for the thirdfirst quarter of 20172022 was $1,720,000,$5,528,000, which represented an increasea decline of $37,000$710,000 or 11% compared to the first quarter of 2021. Basic and diluted earnings per common share were $0.74 for the first quarter of 2022 compared to $0.80 for the first quarter of the prior year. The decline in net income in the first quarter of 2022 compared to the same period in 2016.the prior year resulted in part from a decline of refinancing activity within ChoiceOne's mortgage portfolio due to a rise in mortgage rates since the first quarter of the prior year. Net income for the first nine monthsalso declined as noninterest expense increased related to salaries and wages of 2017 was $4,801,000, which representednew commercial loan production staff and wealth management staff. These factors were offset by an increase of $399,000 or 9% over$1.8 million in interest income as the balance of both core loans and securities continued to grow. Core loans (defined as loans excluding loans held for sale, loans to other financial institutions, and Paycheck Protection Program (“PPP”) loans) increased $121.3 million from March 31, 2021 to March 31, 2022.
The return on average assets and return on average shareholders’ equity were 0.93% and 10.72%, respectively, for the first quarter of 2022, compared to 1.25% and 11.13%, respectively, for the same period in 2016. Growth2021.
Paycheck Protection Program ("PPP")
ChoiceOne processed over $126 million in net interest incomePPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores, and originated $89.1 million in PPP loans in 2021. 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 relatively small reductionterm of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in noninterest expensewhole 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 ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income. During the three months ended March 31, 2022, $24.7 million of PPP loans were partially offset by a higher provision for loan lossesforgiven resulting in $869,000 of fee income. $8.5 million in PPP loans and lower noninterest$351,000 in deferred PPP fee income remains outstanding as of March 31, 2022. Management expects the remaining PPP loans to be forgiven in the second quarter of 2022.
Dividends
Cash dividends of $1,872,000 or $0.25 per share were declared in the first quarter of 2022, compared to $1,716,000 or $0.22 per share declared in the first quarter of 2021. The cash dividend payout percentage was 33.9% for the first nine monthsquarter of 2017 than2022, compared to 27.5% in the same period in the prior year. Basic and diluted earnings per common share were $0.50 for the third quarter and $1.39 for the first nine months of 2017, compared to adjusted amounts of $0.50 and $1.28, respectively, for the same periods in 2016. Earnings per share amounts for the prior year have been adjusted for the 5% stock dividend paid on May 31, 2017. The return on average assets (“ROAA”) and return on average shareholders’ equity (“ROAE”) percentages were 1.02% and 8.59%, respectively, for the first nine months of 2017, compared to 1.01% and 8.15%, respectively, for the same period in 2016. ROAA and ROAE percentages are non-GAAP financial measures management believes to be useful to investors.
Dividends
Cash dividends of $585,000 or $0.17 per share were declared in the third quarter of 2017, compared to $557,000 or an adjusted $0.16 per share in the third quarter of 2016. The cash dividends declared in the first nine months of 2017 were $1,738,000 or an adjusted $0.50 per share, compared to $1,674,000 or an adjusted $0.49 per share declared in the same period in 2016. Dividends per share amounts for the prior year have been adjusted for the 5% stock dividend paid on May 31, 2017.
Interest Income and Expense
Tables 1 and 2 on the following pages provide information regarding interest income and expense for the nine-month periodsthree months ended September 30, 2017March 31, 2022 and 2016, respectively.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. These tables are referred to in the discussion of interest income, interest expense and net interest income.
Table 1 – Average Balances and Tax-Equivalent Interest Rates
Nine Months Ended September 30, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest | Rate | Average Balance | Interest | Rate | ||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Loans (1) | $ | 382,478 | 13,165 | 4.59 | % | $ | 355,281 | 12,301 | 4.62 | % | ||||||||||||||
Taxable securities (2) (3) | 126,288 | 1,935 | 2.04 | 117,635 | 1,731 | 1.96 | ||||||||||||||||||
Nontaxable securities (1) (2) | 55,229 | 1,613 | 3.89 | 53,685 | 1,643 | 4.08 | ||||||||||||||||||
Other | 6,345 | 50 | 1.06 | 3,915 | 14 | 0.18 | ||||||||||||||||||
Interest-earning assets | 570,340 | 16,763 | 3.92 | 530,516 | 15,689 | 3.94 | ||||||||||||||||||
Noninterest-earning assets | 56,682 | 53,913 | ||||||||||||||||||||||
Total assets | $ | 627,022 | $ | 584,429 | ||||||||||||||||||||
Liabilities and Shareholders’ Equity: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 207,642 | 275 | 0.18 | % | $ | 193,675 | 190 | 0.13 | % | ||||||||||||||
Savings deposits | 76,369 | 11 | 0.02 | 72,619 | 16 | 0.03 | ||||||||||||||||||
Certificates of deposit | 106,695 | 574 | 0.72 | 86,707 | 393 | 0.60 | ||||||||||||||||||
Advances from Federal Home Loan Bank | 19,963 | 169 | 1.13 | 25,127 | 119 | 0.63 | ||||||||||||||||||
Other | 5,453 | 10 | 0.24 | 8,698 | 7 | 0.11 | ||||||||||||||||||
Interest-bearing liabilities | 416,122 | 1,039 | 0.33 | 386,826 | 725 | 0.25 | ||||||||||||||||||
Noninterest-bearing demand deposits | 133,636 | 122,641 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 2,775 | 2,945 | ||||||||||||||||||||||
Total liabilities | 552,533 | 512,412 | ||||||||||||||||||||||
Shareholders’ equity | 74,489 | 72,017 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 627,022 | $ | 584,429 | ||||||||||||||||||||
Net interest income (tax-equivalent basis) - interest spread (Non-GAAP) | 15,724 | 3.59 | % | 14,964 | 3.69 | % | ||||||||||||||||||
Tax-equivalent adjustment (1) | (553 | ) | (563 | ) | ||||||||||||||||||||
Net interest income (GAAP) | $ | 15,171 | $ | 14,401 | ||||||||||||||||||||
Net interest income as a percentage of earning assets (tax-equivalent basis) (Non-GAAP) | 3.68 | % | 3.76 | % |
Three Months Ended March 31, | ||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||
(Dollars in thousands) | Average | Average | ||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Loans (1)(3)(4)(5) | $ | 1,037,646 | $ | 12,304 | 4.74 | % | $ | 1,080,181 | $ | 12,687 | 4.70 | % | ||||||||||||
Taxable securities (2) | 795,888 | 3,507 | 1.76 | 438,575 | 1,856 | 1.69 | ||||||||||||||||||
Nontaxable securities (1) | 334,793 | 2,097 | 2.50 | 201,228 | 1,390 | 2.76 | ||||||||||||||||||
Other | 36,460 | 14 | 0.15 | 84,822 | 20 | 0.09 | ||||||||||||||||||
Interest-earning assets | 2,204,787 | 17,921 | 3.25 | 1,804,806 | 15,953 | 3.54 | ||||||||||||||||||
Noninterest-earning assets | 171,077 | 184,954 | ||||||||||||||||||||||
Total assets | $ | 2,375,864 | $ | 1,989,760 | ||||||||||||||||||||
Liabilities and Shareholders' Equity: | ||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 928,437 | $ | 435 | 0.19 | % | $ | 715,868 | $ | 429 | 0.24 | % | ||||||||||||
Savings deposits | 440,873 | 146 | 0.13 | 355,395 | 114 | 0.13 | ||||||||||||||||||
Certificates of deposit | 179,375 | 202 | 0.45 | 195,093 | 337 | 0.69 | ||||||||||||||||||
Borrowings | 10,239 | 6 | 0.22 | 8,462 | 35 | 1.70 | ||||||||||||||||||
Subordinated debentures | 35,342 | 364 | 4.12 | 3,099 | 52 | 6.65 | ||||||||||||||||||
Interest-bearing liabilities | 1,594,266 | 1,153 | 0.29 | 1,277,917 | 967 | 0.30 | ||||||||||||||||||
Demand deposits | 553,267 | 479,649 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 22,051 | 7,937 | ||||||||||||||||||||||
Total liabilities | 2,169,584 | 1,765,503 | ||||||||||||||||||||||
Shareholders' equity | 206,280 | 224,257 | ||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 2,375,864 | $ | 1,989,760 | ||||||||||||||||||||
Net interest income (tax-equivalent basis) (Non-GAAP) (1) | $ | 16,768 | $ | 14,986 | ||||||||||||||||||||
Net interest margin (tax-equivalent basis) (Non-GAAP) (1) | 3.04 | % | 3.32 | % | ||||||||||||||||||||
Reconciliation to Reported Net Interest Income | ||||||||||||||||||||||||
Net interest income (tax-equivalent basis) (Non-GAAP) (1) | $ | 16,768 | $ | 14,986 | ||||||||||||||||||||
Adjustment for taxable equivalent interest | (447 | ) | (297 | ) | ||||||||||||||||||||
Net interest income (GAAP) | $ | 16,321 | $ | 14,689 | ||||||||||||||||||||
Net interest margin (GAAP) | 2.96 | % | 3.26 | % |
(1) | Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of | |
(2) | ||
Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock. | ||
(3) | Loans include both loans to other financial institutions and loans held for sale. | |
(4) | Non-accruing loan and PPP loan balances are included in the balances of average loans. Non-accruing loan average balances were $1.4 million and $5.9 million in the first quarter of 2022 and 2021, respectively. PPP loan average balances were $22.8 million and $137.7 million in the first quarter of 2022 and 2021, respectively. | |
(5) | Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $818,000 and $351,000 in the first quarter of 2022 and 2021, respectively. PPP fees were approximately $869,000 and $1.4 million in the first quarter of 2022 and 2021, respectively. |
Table 2 – Changes in Tax-Equivalent Net Interest Income
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||||||||||
(Dollars in thousands) | 2017 Over 2016 | 2022 Over 2021 | ||||||||||||||||||||||
Total | Volume | Rate | Total | Volume | Rate | |||||||||||||||||||
Increase (decrease) in interest income (1) | ||||||||||||||||||||||||
Loans (2) | $ | 864 | $ | 981 | $ | (117 | ) | $ | (383 | ) | $ | (1,063 | ) | $ | 680 | |||||||||
Taxable securities | 204 | 131 | 73 | 1,651 | 1,568 | 83 | ||||||||||||||||||
Nontaxable securities (2) | (30 | ) | 66 | (96 | ) | 707 | 1,521 | (814 | ) | |||||||||||||||
Other | 36 | 12 | 24 | (6 | ) | (50 | ) | 43 | ||||||||||||||||
Net change in tax-equivalent interest income | 1,074 | 1,190 | (116 | ) | ||||||||||||||||||||
Net change in interest income | 1,969 | 1,976 | (8 | ) | ||||||||||||||||||||
Increase (decrease) in interest expense (1) | ||||||||||||||||||||||||
Interest-bearing demand deposits | 85 | 15 | 70 | 6 | 436 | (430 | ) | |||||||||||||||||
Savings deposits | (5 | ) | 1 | (6 | ) | 32 | 30 | 2 | ||||||||||||||||
Certificates of deposit | 181 | 100 | 81 | (135 | ) | (25 | ) | (110 | ) | |||||||||||||||
Advances from Federal Home Loan Bank | 50 | (41 | ) | 91 | ||||||||||||||||||||
Other | 3 | (5 | ) | 8 | ||||||||||||||||||||
Borrowings | (30 | ) | 43 | (73 | ) | |||||||||||||||||||
Subordinated debentures | 312 | 452 | (139 | ) | ||||||||||||||||||||
Net change in interest expense | 314 | 69 | 245 | 185 | 936 | (750 | ) | |||||||||||||||||
Net change in tax-equivalent net interest income | $ | 760 | $ | 1,121 | $ | (361 | ) | $ | 1,784 | $ | 1,040 | $ | 742 |
Net Interest Income
The average balance of loans decreased $42.5 million in the first quarter of 2022 compared to the same period in 2021. The decline in average
26
Growth of $298.0 million in the average balance of interest-bearing demand deposits Provision and Allowance for Loan Losses The provision for loan losses was $0 in the first
Loans classified as impaired loans declined by $494,000 during the three months ended March 31, 2022. The specific allowance for loan losses for impaired loans increased by $44,000 during the three months ended March 31, 2022 as the loans being evaluated had a higher risk of The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the Nonperforming loans were
Charge-offs and recoveries for respective loan categories for the
Net ChoiceOne has allocated approximately $545,000 of its allowance for loan losses to
Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 10 basis points and 5 basis points, respectively. ChoiceOne has also allocated 5 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. These allocations have continued to decline, as ChoiceOne has seen improvements in customer, industry, and economic conditions related to the effects of the pandemic. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans,
Noninterest Income Total noninterest income
Noninterest Expense Total noninterest expense
Income Tax Expense Income tax expense was 27 FINANCIAL CONDITION
There were no sales of Loans Core loans, which exclude PPP loans, held for sale loans, and loans to other financial institutions, grew organically by $121.3 million from March 31, 2021 to March 31, 2022. Additions to our commercial lending staff in 2021 and investments in the automation of our commercial loan process have helped drive our pipeline of commercial loans and corresponding growth. Loans to other financial institutions decreased $7.3 million from March 31, 2021 to March 31, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and fluctuates with the national mortgage market. In the first quarter of 2022, $24.7 million of
Asset Quality Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was
As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt
The balances of these nonperforming loans were as follows:
28 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. ChoiceOne 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 million, $38.9 million and $7.3 million, respectively.
Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations 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 of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that 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 to 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 November 30, 2020 to June 30, 2021, ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2021 and impairment of goodwill was not necessary. ChoiceOne’s stock price per share was less than its book value as of March 31, 2022. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the end of the first quarter of 2022. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue in the first three months of 2022 reflected significant and continuing growth in ChoiceOne's interest income. Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2022. Deposits and Borrowings Total deposits increased In September 2021, ChoiceOne completed a private placement of $32.5 million
Shareholders' Equity Total shareholders' equity declined $30.6 million in the first three
The reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of 25,899 shares for $683,000, or a weighted average all-in cost per share of $26.35, during the first
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Regulatory Capital Requirements Following is information regarding
Management reviews the capital levels of ChoiceOne and
Liquidity Net cash provided
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PART II. OTHER INFORMATION Item 1. Legal Proceedings.
There are no material pending legal proceedings to which ChoiceOne or
Item 1A. Risk Factors.
Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, Item 2. Unregistered Sales of There were no unregistered sales of equity securities in the
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ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information regarding
(1) As of March 31, 2022, there are 54,941 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced in April 2021. There was no stated expiration date. The plan authorized the repurchase of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as part of this report:
32 SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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