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 SeptemberJune 30, 20222023

☐

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from  to to

Commission File Number: 000-19202

ChoiceOne Financial Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

Michigan
(State or Other Jurisdiction of
Incorporation or Organization)

38-2659066
(I.R.S. Employer Identification No.)

109 East Division
Sparta, Michigan
(Address of Principal Executive Offices)


49345
(Zip Code)

(616) (616) 887-7366
(Registrant’s Telephone Number, including Area Code)

Indicate by check 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer☒

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant 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 OctoberJuly 31, 2022,2023, the Registrant had outstanding 7,514,0767,537,998 shares of common stock.stock outstanding.

Table of Contents

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

Consolidated Balance Sheets

3

Consolidated Statements Of Income

4

Consolidated Statements Of Comprehensive Income (Loss)

5

Consolidated Statements Of Changes In Shareholders’ Equity

6

Consolidated Statements Of Cash Flows

8

Notes To Interim Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 4.

Controls and Procedures

50

PART II.

OTHER INFORMATION

51

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 5.

Other Information

51

Item 6.

Exhibits

52

Signatures

53

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

 

September 30,

 

December 31,

 

(Dollars in thousands, except per share data)

 

2022

 

2021

 

June 30,

 

December 31,

 

(Dollars in thousands, except share data)

2023

 

2022

 

 

(Unaudited)

 

(Audited)

 

(Unaudited)

 

(Audited)

 

Assets

      

 

 

 

 

Cash and due from banks

 $51,144  $31,537 

$

76,460

 

 

$

43,593

 

Time deposits in other financial institutions

  350  350 

 

350

 

 

 

350

 

Cash and cash equivalents

 51,494  31,887 

 

76,810

 

 

 

43,943

 

 

 

 

 

 

 

Equity securities, at fair value (Note 2)

 7,977  8,492 

 

8,299

 

 

 

8,566

 

Securities available for sale, at fair value (Note 2)

 530,093  1,098,885 

 

521,202

 

 

 

529,749

 

Securities held to maturity, at amortized cost (Note 2)

 428,205 - 

Securities held to maturity, at amortized cost net of credit losses (Note 2)

 

420,549

 

 

 

425,906

 

Federal Home Loan Bank stock

 3,493  3,824 

 

8,366

 

 

 

3,517

 

Federal Reserve Bank stock

 5,064  5,064 

 

5,065

 

 

 

5,064

 

Loans held for sale

 8,848  9,351 

 

8,924

 

 

 

4,834

 

Loans to other financial institutions

 70  42,632 

Loans (Note 3)

 1,132,401  1,016,848 

Allowance for loan losses (Note 3)

  (7,457) (7,688)

Loans to other financial institutions (Note 3)

 

38,838

 

 

 

—

 

Core loans (Note 3)

 

1,225,390

 

 

 

1,189,782

 

Total loans (Note 3)

 

1,264,228

 

 

 

1,189,782

 

Allowance for credit losses (Note 3)

 

(14,582

)

 

 

(7,619

)

Loans, net

 1,124,944  1,009,160 

 

1,249,646

 

 

 

1,182,163

 

 

 

 

 

 

 

Premises and equipment, net

 28,947  29,880 

 

29,085

 

 

 

28,232

 

Other real estate owned, net

 -  194 

 

266

 

 

 

—

 

Cash value of life insurance policies

 44,033  43,356 

 

44,510

 

 

 

43,978

 

Goodwill

 59,946  59,946 

 

59,946

 

 

 

59,946

 

Core deposit intangible

 3,062  3,962 

 

2,304

 

 

 

2,809

 

Other assets

  67,353  20,049 

 

48,754

 

 

 

47,208

 

Total assets

 $2,363,529  $2,366,682 

$

2,483,726

 

 

$

2,385,915

 

 

 

 

 

 

 

Liabilities

      

 

 

 

 

 

Deposits – noninterest-bearing

 $599,360  $560,931 

$

544,925

 

 

$

599,579

 

Deposits – interest-bearing

  1,557,294  1,491,363 

 

1,490,093

 

 

 

1,518,424

 

Brokered deposits

 

51,370

 

 

 

-

 

Total deposits

 2,156,654  2,052,294 

 

2,086,388

 

 

 

2,118,003

 

 

 

 

 

 

Borrowings

 -  50,000 

 

160,000

 

 

 

50,000

 

Subordinated debentures

 35,201 35,017 

 

35,385

 

 

 

35,262

 

Other liabilities

  15,017  7,702 

 

22,713

 

 

 

13,776

 

Total liabilities

 2,206,872  2,145,013 

 

2,304,486

 

 

 

2,217,041

 

 

 

 

 

 

 

Shareholders' Equity

      

 

 

 

 

 

Preferred stock; shares authorized: 100,000; shares outstanding: none

 -  - 

 

—

 

 

 

—

 

Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,510,036 at September 30, 2022 and 7,510,379 at December 31, 2021

 171,975  171,913 

Common stock and paid-in capital, no par value; shares authorized: 15,000,000; shares outstanding: 7,534,658 at June 30, 2023 and 7,516,098 at December 31, 2022

 

172,880

 

 

 

172,277

 

Retained earnings

 63,664  52,332 

 

67,281

 

 

 

68,394

 

Accumulated other comprehensive loss, net

  (78,982) (2,576)

 

(60,921

)

 

 

(71,797

)

Total shareholders’ equity

  156,657  221,669 

 

179,240

 

 

 

168,874

 

Total liabilities and shareholders’ equity

 $2,363,529  $2,366,682 

$

2,483,726

 

 

$

2,385,915

 

See accompanying notes to interim consolidated financial statements.

2

3

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,

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands, except share data)

June 30,

 

June 30,

 

 

2022

 

2021

 

2022

 

2021

 

2023

 

2022

 

2023

 

2022

 

Interest income

         

 

 

 

 

 

 

 

 

 

Loans, including fees

 $13,611  $12,408  $38,432  $36,655 

$

15,978

 

 

$

12,523

 

 

$

30,851

 

 

$

24,821

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 3,972  2,821  11,001  7,073 

 

5,378

 

 

 

3,522

 

 

 

10,291

 

 

 

7,029

 

Tax exempt

 1,464  1,459  4,678  4,002 

 

1,389

 

 

 

1,559

 

 

 

2,824

 

 

 

3,214

 

Other

  238  38  314  70 

 

571

 

 

 

62

 

 

 

748

 

 

 

76

 

Total interest income

  19,285  16,726  54,425  47,800 

 

23,316

 

 

 

17,666

 

 

 

44,714

 

 

 

35,140

 

 

 

 

 

 

 

 

 

 

Interest expense

         

 

 

 

 

 

 

 

 

 

Deposits

 1,563  837  3,342  2,556 

 

5,056

 

 

 

996

 

 

 

8,332

 

 

 

1,779

 

Advances from Federal Home Loan Bank

 5  18  8  21 

 

621

 

 

 

2

 

 

 

1,226

 

 

 

3

 

Other

  379  171  1,127  327 

 

1,548

 

 

 

379

 

 

 

2,053

 

 

 

748

 

Total interest expense

  1,947  1,026  4,477  2,904 

 

7,225

 

 

 

1,377

 

 

 

11,611

 

 

 

2,530

 

 

 

 

 

 

 

 

 

 

Net interest income

 17,338  15,700  49,948  44,896 

 

16,091

 

 

 

16,289

 

 

 

33,103

 

 

 

32,610

 

Provision for loan losses

  100  -  100  416 

Net interest income after provision for loan losses

 17,238  15,700  49,848  44,480 

Provision for (reversal of) credit losses on loans

 

(415

)

 

 

—

 

 

 

(106

)

 

 

—

 

Provision for (reversal of) credit losses on unfunded commitments

 

165

 

 

 

—

 

 

 

(119

)

 

 

—

 

Net Provision for (reversal of) credit losses expense

 

(250

)

 

 

—

 

 

 

(225

)

 

 

—

 

Net interest income after provision

 

16,341

 

 

 

16,289

 

 

 

33,328

 

 

 

32,610

 

 

 

 

 

 

 

 

 

 

Noninterest income

         

 

 

 

 

 

 

 

 

 

Customer service charges

 2,458  2,255  7,000  6,309 

 

2,271

 

 

 

2,353

 

 

 

4,538

 

 

 

4,542

 

Insurance and investment commissions

 158  153  596  624 

 

172

 

 

 

233

 

 

 

368

 

 

 

438

 

Gains on sales of loans

 432  1,798  2,123  5,715 

 

540

 

 

 

887

 

 

 

943

 

 

 

1,691

 

Net gains (losses) on sales of securities

 (378) —  (805) 3 

 

—

 

 

 

(427

)

 

 

—

 

 

 

(427

)

Net gains on sales and write downs of other assets

 —  —  172  — 

 

133

 

 

 

1

 

 

 

136

 

 

 

172

 

Earnings on life insurance policies

 259  194  793  570 

 

269

 

 

 

254

 

 

 

532

 

 

 

534

 

Trust income

 174  187  528  612 

 

196

 

 

 

176

 

 

 

380

 

 

 

354

 

Change in market value of equity securities

 (323) (28) (1,006) 461 

 

(385

)

 

 

(327

)

 

 

(322

)

 

 

(683

)

Other

  267  159  922  756 

 

289

 

 

 

280

 

 

 

581

 

 

 

655

 

Total noninterest income

 3,047  4,718  10,323  15,050 

 

3,485

 

 

 

3,430

 

 

 

7,156

 

 

 

7,276

 

 

 

 

 

 

 

 

 

 

Noninterest expense

         

 

 

 

 

 

 

 

 

 

Salaries and benefits

 7,668  7,552  22,811  21,719 

 

7,837

 

 

 

7,537

 

 

 

15,920

 

 

 

15,143

 

Occupancy and equipment

 1,545  1,538  4,688  4,591 

 

1,507

 

 

 

1,518

 

 

 

3,150

 

 

 

3,143

 

Data processing

 1,734  1,471  5,056  4,573 

 

1,681

 

 

 

1,578

 

 

 

3,363

 

 

 

3,322

 

Professional fees

 559  754  1,628  2,426 

 

619

 

 

 

559

 

 

 

1,240

 

 

 

1,069

 

Supplies and postage

 184  171  541  395 

 

197

 

 

 

166

 

 

 

388

 

 

 

357

 

Advertising and promotional

 199  183  478  535 

 

155

 

 

 

147

 

 

 

304

 

 

 

279

 

Intangible amortization

 297  346  901  1,005 

 

253

 

 

 

322

 

 

 

505

 

 

 

604

 

FDIC insurance

 195  225  645  533 

 

220

 

 

 

225

 

 

 

520

 

 

 

450

 

Other

  1,035  1,266  3,515  3,386 

 

1,104

 

 

 

1,105

 

 

 

2,178

 

 

 

2,480

 

Total noninterest expense

  13,416  13,506  40,263  39,163 

 

13,573

 

 

 

13,157

 

 

 

27,568

 

 

 

26,847

 

 

 

 

 

 

 

 

 

 

Income before income tax

 6,869  6,912  19,908  20,367 

 

6,253

 

 

 

6,562

 

 

 

12,916

 

 

 

13,039

 

Income tax expense

  1,056  1,163  2,952  3,337 

 

1,040

 

 

 

947

 

 

 

2,070

 

 

 

1,896

 

 

 

 

 

 

 

 

 

 

Net income

 $5,813 $5,749 $16,956 $17,029 

$

5,213

 

 

$

5,615

 

 

$

10,846

 

 

$

11,143

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share (Note 4)

 $0.77  $0.75  $2.26  $2.20 

$

0.69

 

 

$

0.75

 

 

$

1.44

 

 

$

1.49

 

Diluted earnings per share (Note 4)

 $0.77  $0.75  $2.26  $2.20 

$

0.69

 

 

$

0.75

 

 

$

1.44

 

 

$

1.49

 

Dividends declared per share

 $0.25  $0.25  $0.75  $0.69 

$

0.26

 

 

$

0.25

 

 

$

0.52

 

 

$

0.50

 

See accompanying notes to interim consolidated financial statements.

3

4

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

September 30,

 

September 30,

 

June 30,

 

June 30,

 

 

2022

 

2021

 

2022

 

2021

 

2023

 

2022

 

2023

 

2022

 

Net income

 $5,813  $5,749  $16,956  $17,029 

$

5,213

 

 

$

5,615

 

 

$

10,846

 

 

$

11,143

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

         

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on available-for-sale securities

 (25,073) (6,173) (99,584) (11,464)

 

(5,018

)

 

 

(31,574

)

 

 

8,676

 

 

 

(74,512

)

Income tax benefit (expense)

 5,265 1,296 20,913 2,407 

 

1,054

 

 

 

6,631

 

 

 

(1,822

)

 

 

15,648

 

Less: reclassification adjustment for net (gain) loss included in net income

 378 - 805 (3)

 

-

 

 

 

427

 

 

 

-

 

 

 

427

 

Income tax benefit (expense)

 (79) - (169) 1 

 

-

 

 

 

(90

)

 

 

-

 

 

 

(90

)

Less: reclassification adjustment for net (gain) loss for fair value hedge

 

6,752

 

 

 

-

 

 

 

731

 

 

 

-

 

Income tax benefit (expense)

 

(1,417

)

 

 

-

 

 

 

(153

)

 

 

-

 

Less: net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity

 - - 3,404 - 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,404

 

Income tax benefit (expense)

  -  -  (715)  - 

 

-

 

 

 

-

 

 

 

-

 

 

 

(715

)

Unrealized gain (loss) on available-for-sale securities, net of tax

 (19,509) (4,877) (75,346) (9,059)

 

1,371

 

 

 

(24,606

)

 

 

7,432

 

 

 

(55,838

)

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity

 - - (3,404) - 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,404

)

Income tax benefit (expense)

 - - 715 - 

 

-

 

 

 

-

 

 

 

-

 

 

 

715

 

Less: amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity

 53  -  297  - 

Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity

 

165

 

 

 

74

 

 

 

194

 

 

 

244

 

Income tax benefit (expense)

  (11)  -  (62)  - 

 

(35

)

 

 

(16

)

 

 

(41

)

 

 

(51

)

Unrealized loss on held to maturity securities, net of tax

 42 - (2,454) - 

 

130

 

 

 

58

 

 

 

153

 

 

 

(2,496

)

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on derivatives

 6,618 - 1,042 - 

Change in net unrealized gain (loss) on cash flow hedge

 

6,019

 

 

 

(5,576

)

 

 

3,123

 

 

 

(5,576

)

Income tax benefit (expense)

 

(1,264

)

 

 

1,171

 

 

 

(656

)

 

 

1,171

 

Less: reclassification adjustment for net (gain) loss on cash flow hedge

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Income tax benefit (expense)

 (1,390) - (219) - 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Less: amortization of net unrealized (gains) losses included in net income

 416 - 723 - 

 

887

 

 

 

307

 

 

 

1,043

 

 

 

307

 

Income tax benefit (expense)

  (87)  -  (152)  - 

 

(186

)

 

 

(64

)

 

 

(219

)

 

 

(64

)

Unrealized gain (loss) on derivative instruments, net of tax

 5,557 - 1,394 - 

Unrealized gain (loss) on cash flow hedge instruments, net of tax

 

5,456

 

 

 

(4,162

)

 

 

3,291

 

 

 

(4,162

)

         

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 (13,910) (4,877) (76,406) (9,059)

 

6,957

 

 

 

(28,710

)

 

 

10,876

 

 

 

(62,496

)

         

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 $(8,097) $872 $(59,450) $7,970 

$

12,170

 

 

$

(23,095

)

 

$

21,722

 

 

$

(51,353

)

See accompanying notes to interim consolidated financial statements.

4

5

ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the three months ended SeptemberJune 30,

       

Accumulated

   

 

 

 

 

 

 

 

Accumulated

 

 

 

   

Common

   

Other

   

 

 

 

Common

 

 

 

Other

 

 

 

   

Stock and

   

Comprehensive

   

 

 

 

Stock and

 

 

 

Comprehensive

 

 

 

 

Number of

 

Paid in

 

Retained

 

Income/(Loss),

   

 

Number of

 

Paid in

 

Retained

 

Income/(Loss),

 

 

 

(Dollars in thousands, except per share data)

 

Shares

  

Capital

  

Earnings

  

Net

  

Total

 

 

Shares

 

Capital

 

Earnings

 

Net

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2021

 7,692,537  $176,323  $45,352  $6,846  $228,521 

Balance, April 1, 2022

 

 

7,489,812

 

 

$

171,492

 

 

$

55,988

 

 

$

(36,362

)

 

$

191,118

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

     5,749    5,749 

 

 

 

 

 

 

5,615

 

 

 

 

 

5,615

 

Other comprehensive income

      (4,877) (4,877)

 

 

 

 

 

 

 

 

(28,710

)

 

 

(28,710

)

Shares issued

 5,924  139     139 

 

 

13,260

 

 

 

139

 

 

 

 

 

 

 

139

 

Effect of employee stock purchases

    6     6 

 

 

 

 

6

 

 

 

 

 

 

 

6

 

Stock-based compensation expense

    84     84 

 

 

 

 

167

 

 

 

 

 

 

 

167

 

Shares repurchased

 (107,240) (2,664)    (2,664)

Cash dividends declared ($0.25 per share)

         (1,903)     (1,903)

Cash dividends declared ($0.25 per share)

 

 

 

 

 

 

(1,875

)

 

 

 

 

(1,875

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2021

  7,591,221  $173,888  $49,198  $1,969  $225,055 

Balance, June 30, 2022

 

 

7,503,072

 

 

$

171,804

 

 

$

59,728

 

 

$

(65,072

)

 

$

166,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2022

 7,503,072  $171,804  $59,728  $(65,072) $166,460 

Balance, April 1, 2023

 

 

7,521,749

 

 

$

172,564

 

 

$

64,026

 

 

$

(67,878

)

 

$

168,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

     5,813    5,813 

 

 

 

 

 

 

 

5,213

 

 

 

 

 

 

5,213

 

Other comprehensive income (loss)

      (13,910) (13,910)

 

 

 

 

 

 

 

 

 

6,957

 

 

 

6,957

 

Shares issued

 6,964  32     32 

 

 

12,909

 

 

 

150

 

 

 

 

 

 

 

 

 

150

 

Effect of employee stock purchases

   6     6 

 

 

 

 

7

 

 

 

 

 

 

 

 

7

 

Stock-based compensation expense

    133     133 

 

 

 

 

159

 

 

 

 

 

 

 

 

159

 

Cash dividends declared ($0.25 per share)

         (1,877)     (1,877)

Cash dividends declared ($0.26 per share)

 

 

 

 

 

 

 

(1,958

)

 

 

 

 

 

(1,958

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2022

  7,510,036  $171,975  $63,664  $(78,982) $156,657 

Balance, June 30, 2023

 

 

7,534,658

 

 

$

172,880

 

 

$

67,281

 

 

$

(60,921

)

 

$

179,240

 

5

6

ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the ninesix months ended SeptemberJune 30,

       

Accumulated

   

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

   

Common

   

Other

   

 

 

 

 

Common

 

 

 

 

 

Other

 

 

 

 

   

Stock and

   

Comprehensive

   

 

 

 

 

Stock and

 

 

 

 

 

Comprehensive

 

 

 

 

 

Number of

 

Paid in

 

Retained

 

Income/(Loss),

   

 

Number of

 

 

Paid in

 

 

Retained

 

 

Income/(Loss),

 

 

 

 

(Dollars in thousands, except per share data)

 

Shares

  

Capital

  

Earnings

  

Net

  

Total

 

 

Shares

 

 

Capital

 

 

Earnings

 

 

Net

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2021

 7,796,352  $178,750  $37,490  $11,028  $227,268 

Balance, January 1, 2022

 

 

7,510,379

 

 

$

171,913

 

 

$

52,332

 

 

$

(2,576

)

 

$

221,669

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

     17,029    17,029 

 

 

 

 

 

 

11,143

 

 

 

 

 

11,143

 

Other comprehensive loss

      (9,059) (9,059)

 

 

 

 

 

 

 

 

(62,496

)

 

 

(62,496

)

Shares issued

 17,810  420     420 

 

 

18,592

 

 

 

272

 

 

 

 

 

 

 

272

 

Effect of employee stock purchases

    19     19 

 

 

 

 

13

 

 

 

 

 

 

 

13

 

Stock-based compensation expense

    260     260 

Stock options exercised and issued

 

 

 

 

288

 

 

 

 

 

 

 

288

 

Shares repurchased

 (222,941) (5,561)    (5,561)

 

 

(25,899

)

 

 

(682

)

 

 

 

 

 

 

(682

)

Cash dividends declared ($0.69 per share)

  -  -  (5,322)    (5,322)

Cash dividends declared ($0.50 per share)

 

 

 

 

 

 

(3,747

)

 

 

 

 

(3,747

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2021

  7,591,221  $173,888  $49,198  $1,969  $225,055 

Balance, June 30, 2022

 

 

7,503,072

 

 

$

171,804

 

 

$

59,728

 

 

$

(65,072

)

 

$

166,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2022

 7,510,379  $171,913  $52,332  $(2,576) $221,669 

Balance, January 1, 2023

 

 

7,516,098

 

 

$

172,277

 

 

$

68,394

 

 

$

(71,797

)

 

$

168,874

 

Adoption of ASU 2016-13 (CECL) on January 1, 2023

 

 

 

 

 

 

 

(8,046

)

 

 

 

 

 

(8,046

)

Balance, January 1, 2023

 

 

7,516,098

 

 

$

172,277

 

 

$

60,348

 

 

$

(71,797

)

 

$

160,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

     16,956    16,956 

 

 

 

 

 

 

 

10,846

 

 

 

 

 

 

10,846

 

Other comprehensive income (loss)

      (76,406) (76,406)

 

 

 

 

 

 

 

 

 

10,876

 

 

 

10,876

 

Shares issued

 25,556  304     304 

 

 

18,560

 

 

 

297

 

 

 

 

 

 

 

 

 

297

 

Effect of employee stock purchases

    19     19 

 

 

 

 

14

 

 

 

 

 

 

 

 

14

 

Stock-based compensation expense

    421     421 

 

 

 

 

292

 

 

 

 

 

 

 

 

292

 

Shares repurchased

 (25,899) (682)    (682)

Cash dividends declared ($0.75 per share)

         (5,624)     (5,624)

Cash dividends declared ($0.52 per share)

 

 

 

 

 

 

 

(3,913

)

 

 

 

 

 

(3,913

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2022

  7,510,036  $171,975  $63,664  $(78,982) $156,657 

Balance, June 30, 2023

 

 

7,534,658

 

 

$

172,880

 

 

$

67,281

 

 

$

(60,921

)

 

$

179,240

 

7

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

Six Months Ended

 

(Dollars in thousands)

June 30,

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

Net income

$

10,846

 

 

$

11,143

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Provision for credit losses

 

(225

)

 

 

-

 

Depreciation

 

1,230

 

 

 

1,356

 

Amortization

 

4,970

 

 

 

5,506

 

Compensation expense on employee and director stock purchases, stock options, and restricted stock units

 

487

 

 

 

493

 

Net losses (gains) on sales of available for sale securities

 

-

 

 

 

427

 

Net change in market value of equity securities

 

322

 

 

 

683

 

Gains on sales of loans

 

(943

)

 

 

(1,691

)

Loans originated for sale

 

(29,192

)

 

 

(53,750

)

Proceeds from loan sales

 

25,684

 

 

 

53,480

 

Earnings on bank-owned life insurance

 

(532

)

 

 

(534

)

Proceeds from BOLI policy

 

-

 

 

 

130

 

Earnings on death benefit from bank-owned life insurance

 

-

 

 

 

(14

)

(Gains)/losses on sales of other real estate owned

 

-

 

 

 

(41

)

Proceeds from sales of other real estate owned

 

-

 

 

 

235

 

Deferred federal income tax (benefit)/expense

 

59

 

 

 

169

 

Net change in:

 

 

 

 

 

Other assets

 

6,649

 

 

 

(768

)

Other liabilities

 

5,856

 

 

 

5,480

 

Net cash provided by operating activities

 

25,211

 

 

 

22,304

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Sales of securities available for sale

 

-

 

 

 

31,828

 

Sales of equity securities

 

42

 

 

 

-

 

Maturities, prepayments and calls of securities available for sale

 

15,159

 

 

 

27,404

 

Maturities, prepayments and calls of securities held to maturity

 

5,091

 

 

 

3,485

 

Purchases of securities available for sale

 

(774

)

 

 

(32,676

)

Purchases of securities held to maturity

 

(597

)

 

 

(5,748

)

Purchase of Federal Home Loan Bank stock

 

(4,849

)

 

 

-

 

Loan originations and payments, net

 

(74,553

)

 

 

(59,602

)

Additions to premises and equipment

 

(2,212

)

 

 

(701

)

Proceeds from (payments for) derivative contracts, net

 

(48

)

 

 

(16,745

)

Payments for derivative contracts settlements

 

(4,191

)

 

 

-

 

Net cash provided by (used in) investing activities

 

(66,932

)

 

 

(52,755

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in deposits

 

(31,615

)

 

 

86,210

 

Net change in short term borrowings

 

110,000

 

 

 

(43,000

)

Issuance of common stock

 

116

 

 

 

80

 

Repurchase of common stock

 

-

 

 

 

(682

)

Cash dividends

 

(3,913

)

 

 

(3,747

)

Net cash provided by financing activities

 

74,588

 

 

 

38,861

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

32,867

 

 

 

8,409

 

Beginning cash and cash equivalents

 

43,943

 

 

 

31,887

 

 

 

 

 

 

 

Ending cash and cash equivalents

$

76,810

 

 

$

40,296

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

10,269

 

 

$

2,182

 

Cash paid for income taxes

 

2,900

 

 

 

-

 

Loans transferred to other real estate owned

 

266

 

 

 

-

 

See accompanying notes to interim consolidated financial statements.

6

8

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

  

Nine Months Ended

 

(Dollars in thousands)

 

September 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net income

 $16,956  $17,029 

Adjustments to reconcile net income to net cash from operating activities:

        

Provision for loan losses

  100   416 

Depreciation

  2,041   1,949 

Amortization

  8,145   6,989 

Compensation expense on employee and director stock purchases, stock options, and restricted stock units

  726   596 

Net losses (gains) on sales of available for sale securities

  805   (3)

Net change in market value of equity securities

  1,006   (461)

Gains on sales of loans

  (2,123)  (5,715)

Loans originated for sale

  (68,434)  (162,579)

Proceeds from loan sales

  70,155   171,882 

Earnings on bank-owned life insurance

  (793)  (570)

Proceeds from BOLI policy

  130   - 

Earnings on death benefit from bank-owned life insurance

  (14)  - 

(Gains)/losses on sales of other real estate owned

  (41)  (4)

Proceeds from sales of other real estate owned

  235   407 

Deferred federal income tax (benefit)/expense

  169   634 

Net change in:

        

Other assets

  (4,461)  (2,805)

Other liabilities

  7,423   1,797 

Net cash provided by operating activities

  32,025   29,562 
         

Cash flows from investing activities:

        

Sales of securities available for sale

  47,167   - 

Maturities, prepayments and calls of securities available for sale

  39,024   39,772 

Maturities, prepayments and calls of securities held to maturity

  6,277   - 

Purchases of securities available for sale

  (54,347)  (514,204)

Purchases of securities held to maturity

  (7,505)  - 

Loan originations and payments, net

  (73,321)  78,067 

Additions to premises and equipment

  (1,238)  (2,193)

Proceeds from (payments for) derivative contracts, net

  (16,547)  - 

Net cash provided by (used in) investing activities

  (60,490)  (398,558)
         

Cash flows from financing activities:

        

Net change in deposits

  104,360   337,572 

Net change in short term borrowings

  (50,000)  22,464 

Issuance of common stock

  80   104 

Repurchase of common stock

  (682)  (5,561)

Share based compensation withholding obligation

  (62)  - 

Cash dividends

  (5,624)  (5,322)

Net cash provided by financing activities

  48,072   349,257 
         

Net change in cash and cash equivalents

  19,607   (19,739)

Beginning cash and cash equivalents

  31,887   79,519 
         

Ending cash and cash equivalents

 $51,494  $59,780 
         

Supplemental disclosures of cash flow information:

        

Cash paid for interest

 $4,738  $2,885 

Cash paid for income taxes

  200   2,501 

Loans transferred to other real estate owned

  -   298 

See accompanying notes to interim consolidated financial statements.

7

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"), its wholly-owned subsidiary, ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. Intercompany transactions and balances have been eliminated in consolidation.

ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary.

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 such financial statements. Operating results for the ninesix months ended SeptemberJune 30, 2022,2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023.

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, 2021.2022.

Use of Estimates

To prepare financial statements in conformity with GAAP,accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, 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. Actualactual results may differ from these estimates. Estimates associated with the allowance for loancredit losses and the unrealized gains and losses on securities available for sale and held to maturity are 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 separate 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 Additions to Other Financial Institutions securities held to maturity consist mostly of local issue municipals.

Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Loans to other financial institutions are excluded from Note 3. Management has elected to suspend the warehouse line of credit program as of the end of the third quarter of 2022.  A small balance of loans remains in the pipeline from prior to the suspension; however, these are expected to be paid off quickly, with no losses, and are immaterial.  

Goodwill

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase or 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.

8

Stock Transactions

A total of 12,1043,477 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $286,000$88,000 under the terms of the Directors’ Stock Purchase Plan in the firstnine monthssecond quarter of 2022.2023. A total of 6,5243,266 shares for a cash price of $80,000$64,000 were issued under the Employee Stock Purchase Plan in the firstnine months of 2022.  ChoiceOne repurchased 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the firstsecond quarter of 2022. This was part of the2023. ChoiceOne's common stock repurchase program announced in April 2021 which authorizedand amended in 2022, authorizes repurchases of up to 390,114375,388 shares, representing 5%5% of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the second or third quarter of 2022.2023.


Reclassifications

Certain amounts presented in prior periods have been reclassified to conform to the current presentation.

9

Recently Issued Accounting Pronouncements

Allowance for LoanCredit Losses ("ACL")

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU (as subsequently amended by ASU 2018-19) significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The allowancestandard replaced the current “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. The standard also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for loan lossesestimating the ACL. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. A reasonable and supportable economic forecast is a key component of the CECL methodology.

ChoiceOne adopted CECL effective January 1, 2023 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss accounting standards. The transition adjustment of the CECL adoption included an increase in the ACL of $7.2 million, which included a $5.5 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $1.5 million tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet. The transition adjustment of the CECL adoption included an additional ACL on unfunded commitments of $3.3 million, which included a $2.6 million decrease to the retained earnings account to reflect the cumulative effect of adopting CECL on our Consolidated Balance Sheet, with the $688,000 tax impact portion being recorded as part of the deferred tax asset in other assets on our Consolidated Balance Sheet.

The ACL is a valuation allowance for probable incurredexpected credit losses. The allowance for loan lossesACL is increased by the provision for loancredit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne worked with a third party advisory firm to identify an appropriate peer group for each loan cohort which shared similar characteristics. Management estimates the allowance for loan lossesACL required based on pastthe selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic conditions,forecast, and other factors. Allocations of the allowance for loan losses ACL may be made for specific loans, but the entire allowance for loan lossesACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan lossesACL when management believes that collection of a loan balance is not possible.

The allowance for loan lossesACL consists of general and specific components. The general component covers non-impaired loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, national and a reasonable and supportable economic trendsforecast described further below.

The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and conditions, industry conditions, trendsallows management to automatically calculate contractual life by factoring in real estate values,all cash flows and other conditions.adjusting them for behavioral and credit-related aspects.

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The specific component relates to loansforecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are individually classifiedexpected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as impaired.well as any developing loan loss activity and resulting historical data. As of June 30, 2023, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.

A loanWe are not required to develop and use our own economic forecast model, and elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.

Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is impaired when full payment underperformed at the loan termslevel by a third party. Curtailment is not expected. Troubled debt restructuringupdated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with consideration of loansthe current economic climate. Prepayment speeds and curtailment were updated during the second quarter of 2023; however, the effect was insignificant.

10

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is undertaken to improveunconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the loansame aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

Securities Available for Sale - For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be repaidrequired to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in full underfair value is due to credit loss factors. In making this assessment, management considers any changes to the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whetherrating of the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when ChoiceOne Bank, for economic or legal reasonssecurity by rating agencies and adverse conditions specifically related to the borrower’s financial difficulties, grantsissuer of the security, among other factors. If this assessment indicates that a concessioncredit loss exists, the present value of cash flows expected to be collected from the security are compared to the borroweramortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by modifying a loan. To make this determination, ChoiceOne Bank must determine whether (a) the borroweramount that the fair value is experiencing financial difficulties and (b) ChoiceOne Bank grantedless than the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general declineamortized cost basis. Changes in the economyACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a debt security AFS is confirmed or some deteriorationwhen either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At June 30, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities AFS. Accrued interest receivable on debt securities was excluded from the estimate of credit losses.

Securities Held to Maturity - Since the adoption of CECL, ChoiceOne measures credit losses on HTM securities on a borrower’scollective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of HTM securities to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on HTM securities is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition does not automatically meanof the borrowerissuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. At June 30, 2023, the ACL related to securities HTM is experiencing financial difficulties. Commercial loansinsignificant.

Loans that do not share risk characteristics are evaluated for impairment on an individual loan basis. Ifbasis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a loan is considered impairedrisk rating of 6 or if a loan has been classified as a TDR, a portion of the allowancehigher, and loans past due more than 60 days will be assessed individually for loan losses is allocatedevaluation. Management's judgment will be used to determine if the loan so that it is reported, at the net present valueshould be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment issecuring these loans, adjusted for selling costs as appropriate or based on the present value of the expected solelycash flows 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.

that loan.

Reclassifications Troubled Loan Modifications

Certain amounts presented in prior periods have been reclassified to conform to the current presentation.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB)FASB also issued ASU No.2016-13,2022-02, Financial Instruments— - Credit Losses (Topic 326)326): MeasurementTroubled Debt Restructurings and Vintage Disclosures. This standard eliminated the previous accounting guidance for troubled debt restructurings and added additional disclosure requirements for gross chargeoffs by year of origination. It also prescribes guidance for reporting modifications of loans to borrowers experiencing financial difficulty.

Investment in Equity Method and Joint Ventures

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Venture (Topic 323): Accounting for Investments in Tax Credit Losses on Financial Instruments. ThisStructures Using the Proportional Amortization Method. The amendments in this ASU provides financial statement users with more decision-useful information aboutpermit reporting entities to account for 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 expectationstax equity investments, regardless of the tax credit loss estimate. Although an entity may still use its current systems and methodsprogram from which the income tax credits are received, using the proportional amortization method. This update will be effective 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 effectivefinancial statements issued for fiscal years and interim periods beginning after December 15, 2022, and for interim periods within those years for companies considered smaller reporting companies with the Securities and Exchange Commission.2023. Early adoption is permitted. ChoiceOne was classified as a smaller reporting company as of the measurement date. Management is currently evaluating the impact of this new ASUstandard on itsthe consolidated financial statements which may be significant.  Management has selected representative peer groups for each loan type and determined economic factors which have a strong correlation with our historical loss data. statements.

9

11

NOTE 2 – SECURITIES

On January 1, 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 after-tax loss of $2.7 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 $2.5 million after tax as of September 30, 2022.

The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows:

 

September 30, 2022

 

June 30, 2023

 

   

Gross

 

Gross

   

 

 

Gross

 

Gross

 

 

 

(Dollars in thousands)

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gains

 

Losses

 

Value

 

Equity securities

 $8,445  $272  $(740) $7,977 

$

9,037

 

 

$

201

 

 

$

(939

)

 

$

8,299

 

 

December 31, 2021

 

December 31, 2022

 

   

Gross

 

Gross

   

 

 

Gross

 

Gross

 

 

 

(Dollars in thousands)

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gains

 

Losses

 

Value

 

Equity securities

 $7,953  $665  $(126) $8,492 

$

8,982

 

 

$

305

 

 

$

(721

)

 

$

8,566

 

The following tables present the amortized cost and fair value of investment securities at the dates indicatedavailable for sale 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:income (loss) and the amortized cost and fair value of securities held to maturity and the related gross unrealized gains and losses:

 

September 30, 2022

 

June 30, 2023

 

    

Gross

 

Gross

   

 

 

Gross

 

Gross

 

 

 

(Dollars in thousands)

 

Amortized

  

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Available for Sale:

 Cost  Gains Losses Value 

Cost

 

Gains

 

Losses

 

Value

 

U.S. Treasury notes and bonds

 $90,926  $-  $(13,372) $77,554 

$

90,579

 

 

$

-

 

 

$

(12,184

)

 

$

78,395

 

State and municipal

 281,298  -  (57,311) 223,987 

 

271,940

 

 

 

-

 

 

 

(39,143

)

 

 

232,797

 

Mortgage-backed

 242,095  -  (27,404) 214,691 

 

225,413

 

 

 

-

 

 

 

(27,764

)

 

 

197,649

 

Corporate

 757  -  (41) 716 

 

759

 

 

 

-

 

 

 

(54

)

 

 

705

 

Asset-backed securities

  13,653  - (508) 13,145 

 

12,144

 

 

 

-

 

 

 

(488

)

 

 

11,656

 

Total

 $628,729  $- $(98,636) $530,093 

$

600,835

 

 

$

-

 

 

$

(79,633

)

 

$

521,202

 

          

 

 

 

 

 

 

 

 

 

Held to Maturity:

          

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency

 $2,965  $- $(415) $2,550 

$

2,969

 

 

$

-

 

 

$

(384

)

 

$

2,585

 

State and municipal

 202,406  - (42,485) 159,921 

 

197,746

 

 

 

9

 

 

 

(34,551

)

 

 

163,204

 

Mortgage-backed

 202,131  - (31,296) 170,835 

 

199,093

 

 

 

-

 

 

 

(30,552

)

 

 

168,541

 

Corporate

 19,597  - (2,068) 17,529 

 

19,998

 

 

 

17

 

 

 

(3,204

)

 

 

16,811

 

Asset-backed securities

  1,106  - (83) 1,023 

 

743

 

 

 

-

 

 

 

(59

)

 

 

684

 

Total

 $428,205  $- $(76,347) $351,858 

$

420,549

 

 

$

26

 

 

$

(68,750

)

 

$

351,825

 

 

December 31, 2021

 

December 31, 2022

 

   

Gross

 

Gross

   

 

 

Gross

 

Gross

 

 

 

(Dollars in thousands)

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Available for Sale:

 Cost Gains Losses Value 

Cost

 

Gains

 

Losses

 

Value

 

U.S. Government and federal agency

 $2,001  $7  $-  $2,008 

U.S. Treasury notes and bonds

 93,267  23  (1,311) 91,979 

$

90,810

 

 

$

-

 

 

$

(12,606

)

 

$

78,204

 

State and municipal

 528,252  10,704  (4,109) 534,847 

 

277,489

 

 

 

-

 

 

 

(47,551

)

 

 

229,938

 

Mortgage-backed

 441,383  781  (9,049) 433,115 

 

236,703

 

 

 

-

 

 

 

(28,140

)

 

 

208,563

 

Corporate

 20,856  19  (233) 20,642 

 

757

 

 

 

-

 

 

 

(46

)

 

 

711

 

Asset-backed securities

  16,387 - (93) 16,294 

 

13,031

 

 

 

-

 

 

 

(698

)

 

 

12,333

 

Total

 $1,102,146  $11,534  $(14,795) $1,098,885 

$

618,790

 

 

$

-

 

 

$

(89,041

)

 

$

529,749

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency

$

2,966

 

 

$

-

 

 

$

(421

)

 

$

2,545

 

State and municipal

 

201,890

 

 

 

1

 

 

 

(39,355

)

 

 

162,536

 

Mortgage-backed

 

200,473

 

 

 

-

 

 

 

(29,868

)

 

 

170,605

 

Corporate

 

19,603

 

 

 

-

 

 

 

(2,285

)

 

 

17,318

 

Asset-backed securities

 

974

 

 

 

-

 

 

 

(77

)

 

 

897

 

Total

$

425,906

 

 

$

1

 

 

$

(72,006

)

 

$

353,901

 

10

12

Available for sale securities with unrealizeunrealized losses as of SeptemberJune 30, 2022 2023 and 2021,December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:

 

June 30, 2023

 

 

Less than 12 months

 

 

More than 12 months

 

 

Total

 

(Dollars in thousands)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

Available for Sale:

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Treasury notes and bonds

$

-

 

$

-

 

$

78,395

 

$

12,184

 

$

78,395

 

$

12,184

 

State and municipal

 

1,311

 

 

31

 

 

231,235

 

 

39,112

 

 

232,546

 

 

39,143

 

Mortgage-backed

 

21,083

 

 

1,502

 

 

176,566

 

 

26,262

 

 

197,649

 

 

27,764

 

Corporate

 

-

 

 

-

 

 

705

 

 

54

 

 

705

 

 

54

 

Asset-backed securities

 

-

 

 

-

 

 

11,656

 

 

488

 

 

11,656

 

 

488

 

     Total temporarily impaired

$

22,394

 

 

$

1,533

 

 

$

498,557

 

 

$

78,100

 

 

$

520,951

 

 

$

79,633

 

 

December 31, 2022

 

 

Less than 12 months

 

 

More than 12 months

 

 

Total

 

(Dollars in thousands)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

Available for Sale:

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Treasury notes and bonds

$

-

 

$

-

 

$

78,204

 

$

12,606

 

$

78,204

 

$

12,606

 

State and municipal

 

89,158

 

 

12,612

 

 

140,390

 

 

34,939

 

 

229,548

 

 

47,551

 

Mortgage-backed

 

63,249

 

 

3,093

 

 

144,318

 

 

25,047

 

 

207,567

 

 

28,140

 

Corporate

 

711

 

 

46

 

 

-

 

 

-

 

 

711

 

 

46

 

Asset-backed securities

 

-

 

 

-

 

 

12,333

 

 

698

 

 

12,333

 

 

698

 

     Total temporarily impaired

$

153,118

 

$

15,751

 

$

375,245

 

$

73,290

 

$

528,363

 

$

89,041

 

  

September 30, 2022

 
  

Less than 12 months

  

More than 12 months

  

Total

 

(Dollars in thousands)

 

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

Available for Sale:

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

U.S. Government and federal agency

 $-  $-  $-  $-  $-  $- 

U.S. Treasury notes and bonds

  -   -   77,554   13,372   77,554   13,372 

State and municipal

  181,857   44,576   40,756   12,735   222,613   57,311 

Mortgage-backed

  86,499   4,410   125,765   22,994   212,264   27,404 

Corporate

  716   41   -   -   716   41 

Asset-backed securities

  -   -   13,145   508   13,145   508 

Total temporarily impaired

 $269,072  $49,027  $257,220  $49,609  $526,292  $98,636 

  

December 31, 2021

 
  

Less than 12 months

  

More than 12 months

  

Total

 

(Dollars in thousands)

 

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

Available for Sale:

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

U.S. Government and federal agency

 $-  $-  $-  $-  $-  $- 

U.S. Treasury notes and bonds

  89,958   1,311   -   -   89,958   1,311 

State and municipal

  130,001   3,253   15,237   856   145,238   4,109 

Mortgage-backed

  261,560   5,709   86,974   3,340   348,534   9,049 

Corporate

  17,369   233   -   -   17,369   233 

Asset-backed securities

  16,294   93   -   -   16,294   93 

Total temporarily impaired

 $515,182  $10,599  $102,211  $4,196  $617,393  $14,795 

13

Held to maturity securities with unrealizeunrealized losses as of SeptemberJune 30, 2023 and December 31, 2022, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, in the table below.  There were no held to maturityas follows:

 

June 30, 2023

 

 

Less than 12 months

 

 

More than 12 months

 

 

Total

 

(Dollars in thousands)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

Held to Maturity:

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Government and federal agency

$

-

 

$

-

 

$

2,585

 

$

384

 

$

2,585

 

$

384

 

State and municipal

 

768

 

 

4

 

 

162,252

 

 

34,547

 

 

163,020

 

 

34,551

 

Mortgage-backed

 

404

 

 

34

 

 

168,137

 

 

30,518

 

 

168,541

 

 

30,552

 

Corporate

 

-

 

 

-

 

 

15,159

 

 

3,204

 

 

15,159

 

 

3,204

 

Asset-backed securities

 

-

 

 

-

 

 

684

 

 

59

 

 

684

 

 

59

 

     Total temporarily impaired

$

1,172

 

$

38

 

$

348,817

 

$

68,712

 

$

349,989

 

$

68,750

 

 

December 31, 2022

 

 

Less than 12 months

 

 

More than 12 months

 

 

Total

 

(Dollars in thousands)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

Held to Maturity:

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

U.S. Government and federal agency

$

-

 

 

$

-

 

 

$

2,545

 

 

$

421

 

 

$

2,545

 

$

421

 

State and municipal

 

13,457

 

 

 

1,899

 

 

 

149,016

 

 

 

37,456

 

 

 

162,473

 

 

39,355

 

Mortgage-backed

 

25,582

 

 

 

822

 

 

 

145,024

 

 

 

29,046

 

 

 

170,606

 

 

29,868

 

Corporate

 

5,296

 

 

 

603

 

 

 

10,771

 

 

 

1,682

 

 

 

16,067

 

 

2,285

 

Asset-backed securities

 

-

 

 

 

-

 

 

 

897

 

 

 

77

 

 

 

897

 

 

77

 

     Total temporarily impaired

$

44,335

 

$

3,324

 

$

308,253

 

$

68,682

 

$

352,588

 

$

72,006

 

14

ChoiceOne evaluates all securities as of December 31, 2021.

  

September 30, 2022

 
  

Less than 12 months

  

More than 12 months

  

Total

 

(Dollars in thousands)

 

Fair

  

Unrealized

  

Fair

  

Unrealized

  

Fair

  

Unrealized

 

Held to Maturity:

 

Value

  

Losses

  

Value

  

Losses

  

Value

  

Losses

 

U.S. Government and federal agency

 $-  $-  $2,550  $415  $2,550  $415 

U.S. Treasury notes and bonds

  -   -   -   -   -   - 

State and municipal

  105,390   25,177   54,531   17,308   159,921   42,485 

Mortgage-backed

  59,007   6,495   111,828   24,801   170,835   31,296 

Corporate

  11,371   1,512   4,909   556   16,280   2,068 

Asset-backed securities

  -   -   1,023   83   1,023   83 

Total temporarily impaired

 $175,768  $33,184  $174,841  $43,163  $350,609  $76,347 

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are consideredif an ACL and corresponding impairment charge should be recorded. Consideration is given to be temporary or other-than-temporary. No other-than-temporary impairment charges were recordedthe extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the three and nine months ended September 30, 2022, orissuer for a period of time sufficient to allow for any anticipated recovery in the same periods in 2021.fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No ACL was recorded in the three and six months ended June 30, 2023, and no other-than-temporary impairment charges were recorded in the same periods in 2022.

At June 30, 2023 and December 31, 2022, there were 601 and 611 securities with an unrealized loss, respectively. Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and reducedother market liquidityconditions. The issuers continue to make timely principal and notinterest payments on the bonds. The fair value is expected to recover as a resultthe bonds approach maturity.

The majority of unrealized losses at June 30, 2023, are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100% of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On June 30, 2023, 86% of state and municipal bonds held are rated AA or better, 11% are A rated and 3% are not rated. Of the mortgage-backed securities held on June 30, 2023, 38% were issued by US government sponsored entities and agencies, and rated AA, 37% are AAA rated private issue and collateralized mortgage obligation, and 25% are unrated privately issued mortgage-backed securities with structured credit quality issues.enhancement and collateralized mortgage obligation.

11

15

Presented below is a schedule of maturities of securities as of SeptemberJune 30, 2022, and the2023. Available for sale securities are reported at fair value of securities available for sale and the amortized cost of securities held to maturity as of September 30, 2022.securities are reported at amortized cost. Callable securities in the money are presumed called and matured at the callable date.

 

Available for Sale Securities maturing within:

    

Available for Sale Securities maturing within:

 

 

 

 

         

Fair Value

 

 

 

 

 

 

 

 

 

Fair Value

 

 

Less than

 

1 Year -

 

5 Years -

 

More than

 

at September 30,

 

Less than

 

1 Year -

 

5 Years -

 

More than

 

at June 30,

 

(Dollars in thousands)

 

1 Year

 

5 Years

 

10 Years

 

10 Years

 

2022

 

1 Year

 

5 Years

 

10 Years

 

10 Years

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

U.S. Treasury notes and bonds

 $-  $-  $77,554  $-  $77,554 

 

-

 

 

 

40,530

 

 

 

37,865

 

 

 

-

 

 

 

78,395

 

State and municipal

 9,609  7,929  38,202  168,247  223,987 

 

2,717

 

 

 

7,031

 

 

 

86,525

 

 

 

136,524

 

 

 

232,797

 

Corporate

 -  497  219  -  716 

 

504

 

 

 

-

 

 

 

201

 

 

 

—

 

 

 

705

 

Asset-backed securities

  -  9,481  3,664  -  13,145 

 

—

 

 

 

8,473

 

 

 

3,183

 

 

 

—

 

 

 

11,656

 

Total debt securities

 9,609  17,907  119,639  168,247  315,402 

 

3,221

 

 

 

56,034

 

 

 

127,774

 

 

 

136,524

 

 

 

323,553

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

  19,362  98,970  90,161  6,198  214,691 

 

9,856

 

 

 

71,075

 

 

 

95,439

 

 

 

21,279

 

 

 

197,649

 

Total Available for Sale

 $28,971  $116,877  $209,800  $174,445  $530,093 

$

13,077

 

 

$

127,109

 

 

$

223,213

 

 

$

157,803

 

 

$

521,202

 

 

Held to Maturity Securities maturing within:

    

Held to Maturity Securities maturing within:

 

 

 

 

         

Amortized Cost

 

 

 

 

 

 

 

 

 

Amortized Cost

 

 

Less than

 

1 Year -

 

5 Years -

 

More than

 

at September 30,

 

Less than

 

1 Year -

 

5 Years -

 

More than

 

at June 30,

 

(Dollars in thousands)

 

1 Year

 

5 Years

 

10 Years

 

10 Years

 

2022

 

1 Year

 

5 Years

 

10 Years

 

10 Years

 

2023

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency

 $-  $-  $2,965  $-  $2,965 

$

—

 

 

$

—

 

 

$

2,969

 

 

$

—

 

 

$

2,969

 

State and municipal

 2,348  5,180  68,447  126,431  202,406 

 

1,633

 

 

 

9,469

 

 

 

93,041

 

 

 

93,603

 

 

 

197,746

 

Corporate

 -  250  18,347  1,000  19,597 

 

—

 

 

 

-

 

 

 

19,998

 

 

 

-

 

 

 

19,998

 

Asset-backed securities

  -  1,106  -  -  1,106 

 

—

 

 

 

743

 

 

 

—

 

 

 

—

 

 

 

743

 

Total debt securities

 2,348  6,536  89,759  127,431  226,074 

 

1,633

 

 

 

10,212

 

 

 

116,008

 

 

 

93,603

 

 

 

221,456

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

  -  56,033  146,098  -  202,131 

 

18,743

 

 

 

34,838

 

 

 

145,512

 

 

 

—

 

 

 

199,093

 

Total Held to Maturity

 $2,348  $62,569  $235,857  $127,431  $428,205 

$

20,376

 

 

$

45,050

 

 

$

261,520

 

 

$

93,603

 

 

$

420,549

 

Following is information regarding unrealized gains and losses on equity securities for the three and ninesix months ended September June 30,2022 2023 and 2021:2022:

 

Three Months Ended

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

September 30,

 

September 30,

 

 

June 30,

 

 

June 30,

 

 

2022

 

2021

 

2022

 

2021

 

 

2023

 

2022

 

2023

 

2022

 

 

 

 

 

 

 

 

 

 

 

 

Net gains and (losses) recognized during the period

 $(323) $(28) $(1,006) $461 

 

$

(385

)

 

$

(327

)

 

$

(322

)

 

$

(683

)

Less: Net gains and (losses) recognized during the period on securities sold

  —  —  —  — 

 

—

 

—

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date

 $(323) $(28) $(1,006) $461 

 

$

(385

)

$

(327

)

$

(322

)

$

(683

)

16

12

NOTE 3 – LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES

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

 

June 30, 2023

 

 

December 31, 2022

 

 

 

 

 

(Dollars in thousands)

 Balance

 

%

 

 

 Balance

 

%

 

 

Percent Increase (Decrease)

Agricultural

$

40,684

 

 

3.22

%

 

 

64,159

 

 

5.39

%

 

 

(36.59

)

%

Commercial and Industrial

 

224,191

 

 

17.73

%

 

 

210,210

 

 

17.67

%

 

 

6.65

 

%

Commercial Real Estate

 

657,549

 

 

52.01

%

 

 

630,953

 

 

53.03

%

 

 

4.22

 

%

Consumer

 

38,614

 

 

3.05

%

 

 

39,808

 

 

3.35

%

 

 

(3.00

)

%

Construction Real Estate

 

16,734

 

 

1.32

%

 

 

14,736

 

 

1.24

%

 

 

13.56

 

%

Residential Real Estate

 

247,618

 

 

19.59

%

 

 

229,916

 

 

19.32

%

 

 

7.70

 

%

Loans to Other Financial Institutions

 

38,838

 

 

3.07

%

 

 

-

 

 

0.00

%

 

 

100.00

 

%

Gross Loans

$

1,264,228

 

 

 

 

$

1,189,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

14,582

 

 

1.15

%

 

 

7,619

 

 

0.64

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

$

1,249,646

 

 

 

 

$

1,182,163

 

 

 

 

 

 

 

17

Activity in the allowance for loancredit losses and balances in the loan portfolio were as follows:

   

Commercial

             

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Loans to Other

 

 

 

 

 

(Dollars in thousands)

   

and

   

Commercial

 

Construction

 

Residential

     

 

 

 

and

 

 

 

Commercial

 

Construction

 

Residential

 

Financial

 

 

 

 

 

 

Agricultural

 

Industrial

 

Consumer

 

Real Estate

 

Real Estate

 

Real Estate

 

Unallocated

 

Total

 

 

Agricultural

 

Industrial

 

Consumer

 

Real Estate

 

Real Estate

 

Real Estate

 

Institutions

 

Unallocated

 

Total

 

Allowance for Loan Losses Three Months Ended September 30, 2022

                 

Allowance for Credit Losses Three Months Ended June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 $132  $1,613  $309  $4,224  $45  $691  $402  $7,416 

 

$

136

 

 

$

3,020

 

 

$

913

 

 

$

7,837

 

 

$

72

 

 

$

3,087

 

 

$

—

 

 

$

—

 

 

$

15,065

 

Charge-offs

 —  (47) (128) -  —  —  —  (175)

 

 

—

 

 

 

—

 

 

 

(131

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(131

)

Recoveries

 —  59  56  1  —  ��—  —  116 

 

 

—

 

 

 

2

 

 

 

59

 

 

 

—

 

 

 

—

 

 

 

2

 

 

 

—

 

 

 

—

 

 

 

63

 

Provision

  8  (252) 66  384  14  178  (298) 100 

 

 

(58

)

 

 

(126

)

 

 

44

 

 

 

(600

)

 

 

(2

)

 

 

287

 

 

 

40

 

 

 

—

 

 

 

(415

)

Ending balance

 $140  $1,373  $303  $4,609  $59  $869  $104  $7,457 

 

$

78

 

 

$

2,896

 

 

$

885

 

 

$

7,237

 

 

$

70

 

 

$

3,376

 

 

$

—

 

 

$

—

 

 

$

14,582

 

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses Nine Months Ended September 30, 2022

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses Six Months Ended June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 $448 $1,454 $290 $3,705 $110 $671 $1,010 $7,688 

 

$

144

 

 

$

1,361

 

 

$

310

 

 

$

4,822

 

 

$

63

 

 

$

906

 

 

$

—

 

 

$

13

 

 

$

7,619

 

Cumulative effect of change in accounting principle

 

 

14

 

 

 

1,587

 

 

 

541

 

 

 

3,006

 

 

 

20

 

 

 

2,010

 

 

 

—

 

 

 

(13

)

 

 

7,165

 

Charge-offs

 — (177) (383) — — — — (560)

 

 

—

 

 

 

—

 

 

 

(271

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(271

)

Recoveries

 — 62 162 3 — 2 — 229 

 

 

—

 

 

 

29

 

 

 

129

 

 

 

13

 

 

 

—

 

 

 

5

 

 

 

—

 

 

 

—

 

 

 

176

 

Provision

 (308) 34 234 901 (51) 196 (906) 100 

 

 

(80

)

 

 

(81

)

 

 

176

 

 

 

(604

)

 

 

(13

)

 

 

455

 

 

 

40

 

 

 

—

 

 

 

(106

)

Ending balance

 $140 $1,373 $303 $4,609 $59 $869 $104 $7,457 

 

$

78

 

 

$

2,896

 

 

$

885

 

 

$

7,237

 

 

$

70

 

 

$

3,376

 

 

$

40

 

 

$

—

 

 

$

14,582

 

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 $1  $6  $1  $6  $—  $143  $—  $157 

Individually evaluated for credit loss

 

$

1

 

 

$

34

 

 

$

—

 

 

$

1

 

 

$

—

 

 

$

36

 

 

$

—

 

 

$

—

 

 

$

72

 

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 $139  $1,367  $302  $4,603  $59  $726  $104  $7,300 

Collectively evaluated for credit loss

 

$

77

 

 

$

2,862

 

 

$

885

 

 

$

7,236

 

 

$

70

 

 

$

3,340

 

 

$

40

 

 

$

—

 

 

$

14,510

 

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

                 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

                 

Individually evaluated for impairment

 $312 $108 $7 $140 $— $2,070 $— $2,637 

Collectively evaluated for impairment

 63,035 204,686 38,340 584,274 14,299 210,867 — 1,115,501 

Acquired with deteriorated credit quality

 — 3,796 9 8,781 — 1,677 — 14,263 

June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for credit loss

 

$

17

 

 

$

318

 

 

$

—

 

 

$

32

 

 

$

—

 

 

$

1,756

 

 

$

—

 

 

 

 

$

2,123

 

Collectively evaluated for credit loss

 

 

40,667

 

 

 

223,873

 

 

 

38,614

 

 

 

657,517

 

 

 

16,734

 

 

 

245,862

 

 

 

38,838

 

 

 

 

 

1,262,105

 

Ending balance

 $63,347  $208,590  $38,356  $593,195  $14,299  $214,614    $1,132,401 

 

$

40,684

 

 

$

224,191

 

 

$

38,614

 

 

$

657,549

 

 

$

16,734

 

 

$

247,618

 

 

$

38,838

 

 

 

 

$

1,264,228

 

      

Commercial

                         

(Dollars in thousands)

     

and

      

Commercial

  

Construction

  

Residential

         
  

Agricultural

  

Industrial

  

Consumer

  

Real Estate

  

Real Estate

  

Real Estate

  

Unallocated

  

Total

 

Allowance for Loan Losses Three Months Ended September 30, 2021

                                

Beginning balance

 $374  $1,523  $243  $4,377  $74  $860  $499  $7,950 

Charge-offs

  —   (96)  (98)  (63)  —   -   —   (257)

Recoveries

  —   7   54   —   —   1   —   62 

Provision

  144   168   33   (154)  39   80   (310)  - 

Ending balance

 $518  $1,602  $232  $4,160  $113  $941  $189  $7,755 
                                 

Allowance for Loan Losses Nine Months Ended September 30, 2021

                                

Beginning balance

 $257  $1,327  $317  $4,178  $97  $1,300  $117  $7,593 

Charge-offs

  —   (195)  (244)  (111)  —   —   —   (550)

Recoveries

  —   80   168   43   —   5   —   296 

Provision

  261   390   (9)  50   16   (364)  72   416 

Ending balance

 $518  $1,602  $232  $4,160  $113  $941  $189  $7,755 
                                 

Individually evaluated for impairment

 $124  $174  $-  $8  $-  $177  $-  $483 
                                 

Collectively evaluated for impairment

 $394  $1,428  $232  $4,152  $113  $764  $189  $7,272 
                                 
                                 

Loans

                                

September 30, 2021

                                

Individually evaluated for impairment

 $3,051  $296  $-  $418  $-  $2,191     $5,956 

Collectively evaluated for impairment

  60,394   211,695   33,793   474,425   18,238   165,913      964,458 

Acquired with deteriorated credit quality

  —   5,251   13   10,489   —   2,190      17,943 

Ending balance

 $63,445  $217,242  $33,806  $485,332  $18,238  $170,294     $988,357 

13
 
      

Commercial

                         

(Dollars in thousands)

     

and

      

Commercial

  

Construction

  

Residential

         
  

Agricultural

  

Industrial

  

Consumer

  

Real Estate

  

Real Estate

  

Real Estate

  

Unallocated

  

Total

 

Allowance for Loan Losses

                                

December 31, 2021

                                

Individually evaluated for impairment

 $251  $95  $2  $9  $-  $146  $-  $503 
                                 

Collectively evaluated for impairment

 $197  $1,359  $288  $3,696  $110  $525  $1,010  $7,185 
                                 
                                 

Loans

                                

December 31, 2021

                                

Individually evaluated for impairment

 $2,616  $339  $14  $273  $-  $2,191     $5,433 

Collectively evaluated for impairment

  62,203   197,656   35,148   515,528   19,066   164,647      994,248 

Acquired with deteriorated credit quality

  -   5,029   12   10,083   -   2,043      17,167 

Ending balance

 $64,819  $203,024  $35,174  $525,884  $19,066  $168,881     $1,016,848 

18

 

 

 

 

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 June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

387

 

 

$

1,752

 

 

$

304

 

 

$

3,690

 

 

$

37

 

 

$

589

 

 

$

842

 

 

$

7,601

 

Charge-offs

 

-

 

 

 

(100

)

 

 

(144

)

 

 

—

 

 

 

-

 

 

 

—

 

 

 

-

 

 

 

(244

)

Recoveries

 

-

 

 

 

2

 

 

 

55

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

59

 

Provision

 

(255

)

 

 

(41

)

 

 

94

 

 

 

533

 

 

 

8

 

 

 

101

 

 

 

(440

)

 

 

—

 

Ending balance

$

132

 

 

$

1,613

 

 

$

309

 

 

$

4,224

 

 

$

45

 

 

$

691

 

 

$

402

 

 

$

7,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses Six Months Ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

448

 

 

$

1,454

 

 

$

290

 

 

$

3,705

 

 

$

110

 

 

$

671

 

 

$

1,010

 

 

$

7,688

 

Charge-offs

 

 

 

 

(131

)

 

 

(255

)

 

 

-

 

 

 

-

 

 

 

—

 

 

 

-

 

 

 

(386

)

Recoveries

 

 

 

 

4

 

 

 

106

 

 

 

2

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

114

 

Provision

 

(316

)

 

 

286

 

 

 

168

 

 

 

517

 

 

 

(65

)

 

 

18

 

 

 

(608

)

 

 

-

 

Ending balance

$

132

 

 

$

1,613

 

 

$

309

 

 

$

4,224

 

 

$

45

 

 

$

691

 

 

$

402

 

 

$

7,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

1

 

 

$

52

 

 

$

1

 

 

$

7

 

 

$

—

 

 

$

154

 

 

$

—

 

 

$

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

$

131

 

 

$

1,561

 

 

$

308

 

 

$

4,217

 

 

$

45

 

 

$

537

 

 

$

402

 

 

$

7,201

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

and

 

 

 

 

 

Commercial

 

 

Construction

 

 

Residential

 

 

 

 

 

 

 

 

Agricultural

 

 

Industrial

 

 

Consumer

 

 

Real Estate

 

 

Real Estate

 

 

Real Estate

 

 

Unallocated

 

 

Total

 

Allowance for Loan Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

2

 

 

$

14

 

 

$

1

 

 

$

5

 

 

$

—

 

 

$

131

 

 

$

—

 

 

$

153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

$

142

 

 

$

1,347

 

 

$

309

 

 

$

4,817

 

 

$

63

 

 

$

775

 

 

$

13

 

 

$

7,466

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

$

23

 

 

$

177

 

 

$

7

 

 

$

165

 

 

$—

 

 

$

2,474

 

 

 

 

 

$

2,846

 

Collectively evaluated for impairment

 

64,136

 

 

 

206,074

 

 

 

39,793

 

 

 

622,131

 

 

 

14,736

 

 

 

225,792

 

 

 

 

 

 

1,172,662

 

Acquired with deteriorated credit quality

—

 

 

 

3,959

 

 

 

8

 

 

 

8,657

 

 

—

 

 

 

1,650

 

 

 

 

 

 

14,274

 

Ending balance

$

64,159

 

 

$

210,210

 

 

$

39,808

 

 

$

630,953

 

 

$

14,736

 

 

$

229,916

 

 

 

 

 

$

1,189,782

 

19

The provision for credit losses on loans was a benefit of $415,000 and a benefit of $106,000 in the second quarter and first half of 2023 respectively, compared to $0 in the same periods in the prior year. The provision benefit was deemed necessary due to the impact of improvements in the Federal Open Market Committee ("FOMC") forecast for unemployment and Gross Domestic Product ("GDP") growth exceeding the provision required for loan growth in the second quarter and first half of 2023. The FOMC forecast for change in real GDP improved from 0.4% in March to 1.0% in June while the unemployment rate forecast improved from 4.5% in March to 4.1% in June.

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 9. A description of the characteristics of the ratings follows:

Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations.

Risk rating 6 or special mention: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assetsasset classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move.

Risk rating 7 or substandard: Loans and other credit extensions graded “7”“7” have all the weaknesses inherent in those graded “6”“6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”“7”.

Risk rating 8 or doubtful: Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.

Risk rating 9 or loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

14

20

Information regarding ChoiceOne Bank's credit exposure wasThe following table reflects the amortized cost basis of loans as follows:of June 30, 2023 based on year of origination (dollars in thousands):

Commercial:

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Term Loans Total

 

 

Revolving Loans

 

 

Grand Total

 

 Agricultural

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Pass

$

1,168

 

 

$

4,940

 

 

$

3,197

 

 

$

1,827

 

 

$

7,427

 

 

$

17,414

 

 

$

35,973

 

 

$

4,455

 

 

$

40,428

 

 Special mention

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

182

 

 

 

74

 

 

 

256

 

 

 

-

 

 

 

256

 

 Substandard

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Doubtful

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Total

$

1,168

 

 

$

4,940

 

 

$

3,197

 

 

$

1,827

 

 

$

7,609

 

 

$

17,488

 

 

$

36,229

 

 

$

4,455

 

 

$

40,684

 

Current year-to-date gross write-offs

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Pass

$

19,124

 

 

$

45,260

 

 

$

26,555

 

 

$

12,437

 

 

$

14,795

 

 

$

14,162

 

 

$

132,333

 

 

$

91,514

 

 

$

223,847

 

 Special mention

 

-

 

 

 

-

 

 

 

34

 

 

 

113

 

 

 

87

 

 

 

97

 

 

 

331

 

 

 

9

 

 

 

340

 

 Substandard

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

4

 

 

 

-

 

 

 

4

 

 Doubtful

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Total

$

19,124

 

 

$

45,260

 

 

$

26,589

 

 

$

12,550

 

 

$

14,882

 

 

$

14,263

 

 

$

132,668

 

 

$

91,523

 

 

$

224,191

 

Current year-to-date gross write-offs

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Pass

$

29,461

 

 

$

137,786

 

 

$

110,926

 

 

$

74,413

 

 

$

46,365

 

 

$

150,104

 

 

$

549,055

 

 

$

107,383

 

 

$

656,438

 

 Special mention

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

586

 

 

 

586

 

 

 

-

 

 

 

586

 

 Substandard

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

525

 

 

 

525

 

 

 

-

 

 

 

525

 

 Doubtful

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 Total

$

29,461

 

 

$

137,786

 

 

$

110,926

 

 

$

74,413

 

 

$

46,365

 

 

$

151,215

 

 

$

550,166

 

 

$

107,383

 

 

$

657,549

 

 Retail:

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Term Loans Total

 

 

Revolving Loans

 

 

Grand Total

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$

5,938

 

 

$

16,228

 

 

$

8,648

 

 

$

3,820

 

 

$

1,764

 

 

$

1,682

 

 

$

38,080

 

 

$

534

 

 

$

38,614

 

Nonperforming

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonaccrual

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

$

5,938

 

 

$

16,228

 

 

$

8,648

 

 

$

3,820

 

 

$

1,764

 

 

$

1,682

 

 

$

38,080

 

 

$

534

 

 

$

38,614

 

Current year-to-date gross write-offs

$

-

 

 

$

12

 

 

$

9

 

 

$

28

 

 

$

-

 

 

$

1

 

 

$

50

 

 

$

-

 

 

$

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$

1,313

 

 

$

1,770

 

 

$

565

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

3,648

 

 

$

13,086

 

 

$

16,734

 

Nonperforming

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonaccrual

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

$

1,313

 

 

$

1,770

 

 

$

565

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

3,648

 

 

$

13,086

 

 

$

16,734

 

Current year-to-date gross write-offs

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$

25,538

 

 

$

67,935

 

 

$

30,068

 

 

$

17,783

 

 

$

13,699

 

 

$

43,496

 

 

$

198,519

 

 

$

47,517

 

 

$

246,036

 

Nonperforming

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonaccrual

 

-

 

 

 

436

 

 

 

347

 

 

 

-

 

 

 

-

 

 

 

799

 

 

 

1,582

 

 

 

-

 

 

 

1,582

 

Total

$

25,538

 

 

$

68,371

 

 

$

30,415

 

 

$

17,783

 

 

$

13,699

 

 

$

44,295

 

 

$

200,101

 

 

$

47,517

 

 

$

247,618

 

21

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Categoryrisk profile by credit worthiness category

(Dollars in thousands)

 

Agricultural

 

Commercial and Industrial

 

Commercial Real Estate

 

Agricultural

 

Commercial and Industrial

 

Commercial Real Estate

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

2022

 

2021

 

2022

 

2021

 

2022

 

2021

 

2022

 

2022

 

2022

 

Pass

 $62,733  $61,864  $208,087  $201,202  $588,066  $519,537 

$

63,867

 

 

$

209,700

 

 

$

624,555

 

Special Mention

 302  339  344  300  729  778 

 

289

 

 

 

400

 

 

 

2,048

 

Substandard

 312  2,616  159  1,266  4,400  5,569 

 

3

 

 

 

110

 

 

 

4,350

 

Doubtful

  -  -  -  256  -  - 

 

—

 

 

 

-

 

 

 

—

 

Loss

 

-

 

 

 

-

 

 

 

-

 

 $63,347  $64,819  $208,590  $203,024  $593,195  $525,884 

$

64,159

 

 

$

210,210

 

 

$

630,953

 

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activityrisk profile based on payment activity

(Dollars in thousands)

 

Consumer

 

Construction Real Estate

 

Residential Real Estate

 

Consumer

 

Construction Real Estate

 

Residential Real Estate

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

 

2022

 

2021

 

2022

 

2021

 

2022

 

2021

 

2022

 

2022

 

2022

 

Performing

 $38,349  $35,174  $14,299  $19,066  $213,777  $168,031 

$

39,808

 

 

$

14,736

 

 

$

228,653

 

Nonperforming

 -  -  -  -  -  - 

 

—

 

 

 

—

 

 

 

—

 

Nonaccrual

  7  -  -  -  837  850 

 

—

 

 

 

—

 

 

 

1,263

 

 $38,356  $35,174  $14,299  $19,066  $214,614  $168,881 

$

39,808

 

 

$

14,736

 

 

$

229,916

 

The following table provides information on loans that were considered troubled loan modification ("TLMs") that were modified during the three and six months ended June 30, 2023

 

Three Months Ended June 30, 2023

 

 

 

 

 

 

 

 

 

 

Term Extension

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

Class of

 

 

(Dollars in thousands)

Amortized

 

 

Financing

 

 

 

Cost Basis

 

 

Receivable

 

 

Commercial and industrial

$

67

 

 

 

0

%

 

Total

 

67

 

 

 

 

 

 

Six Months Ended June 30, 2023

 

 

 

 

 

 

 

 

 

 

Term Extension

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

Class of

 

 

(Dollars in thousands)

Amortized

 

 

Financing

 

 

 

Cost Basis

 

 

Receivable

 

 

Commercial and industrial

 

67

 

 

 

0

%

 

Residential real estate

$

129

 

 

 

0

%

 

Total

 

196

 

 

 

 

 

22

The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable.

Three Months Ended June 30, 2023

Term Extension

Commercial and industrial

Termed out line of Credit

Six Months Ended June 30, 2023

Term Extension

Commercial and industrial

Termed Out Line of Credit

Residential real estate

Provided twelve month payment plan to catch up past due amount through our standard program.

The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.

 

Three Months Ended June 30, 2023

 

(Dollars in thousands)

Term extension

 

 

 

 

Commercial and industrial

 

67

 

Total

$

67

 

 

Six Months Ended June 30, 2023

 

(Dollars in thousands)

Term extension

 

 

 

 

Commercial and industrial

 

67

 

Residential real estate

$

129

 

Total

$

196

 

The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable.

 

Three Months Ended June 30, 2023

 

(Dollars in thousands)

Current

 

 

30-89 days

 

 

Greater than 90 days

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

67

 

 

 

—

 

 

 

—

 

 

 

67

 

Total

$

67

 

 

$

-

 

 

$

-

 

 

$

67

 

 

Six Months Ended June 30, 2023

 

(Dollars in thousands)

Current

 

 

30-89 days

 

 

Greater than 90 days

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

67

 

 

 

—

 

 

 

—

 

 

 

67

 

Residential real estate

 

—

 

 

 

—

 

 

 

129

 

 

 

129

 

Total

$

67

 

 

$

-

 

 

$

129

 

 

$

196

 

23

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and ninesix months ended SeptemberJune 30, 2022 and September 30, 2021.2022.

  

Three Months Ended September 30, 2022

  

Nine Months Ended September 30, 2022

 
      

Pre-

  

Post-

      

Pre-

  

Post-

 
      

Modification

  

Modification

      

Modification

  

Modification

 
      

Outstanding

  

Outstanding

      

Outstanding

  

Outstanding

 

(Dollars in thousands)

 

Number of

  

Recorded

  

Recorded

  

Number of

  

Recorded

  

Recorded

 
  

Loans

  

Investment

  

Investment

  

Loans

  

Investment

  

Investment

 

Agricultural

  -  $-  $-   1  $253  $253 

Commercial and industrial

  -   -   -   1   18   18 

Total

  -  $-  $-   2  $271  $271 

  

Three Months Ended September 30, 2021

  

Nine Months Ended September 30, 2021

 
      

Pre-

  

Post-

      

Pre-

  

Post-

 
      

Modification

  

Modification

      

Modification

  

Modification

 
      

Outstanding

  

Outstanding

      

Outstanding

  

Outstanding

 

(Dollars in thousands)

 

Number of

  

Recorded

  

Recorded

  

Number of

  

Recorded

  

Recorded

 
  

Loans

  

Investment

  

Investment

  

Loans

  

Investment

  

Investment

 

Agricultural

  -  $-  $-   6  $2,210  $2,210 

Commercial Real Estate

  1   493   493   2   931   931 

Total

  1  $493  $493   8  $3,141  $3,141 

 

Three Months Ended June 30, 2022

 

 

Six Months Ended June 30, 2022

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

Outstanding

 

(Dollars in thousands)

Number of

 

 

Recorded

 

 

Recorded

 

 

Number of

 

 

Recorded

 

 

Recorded

 

 

Loans

 

 

Investment

 

 

Investment

 

 

Loans

 

 

Investment

 

 

Investment

 

Agricultural

 

—

 

 

$

—

 

 

$

—

 

 

 

1

 

 

$

258

 

 

$

258

 

Commercial and industrial

 

1

 

 

 

19

 

 

 

19

 

 

 

1

 

 

 

19

 

 

 

19

 

Total

 

1

 

 

$

19

 

 

$

19

 

 

 

2

 

 

$

277

 

 

$

277

 

There were no TDRs where the borrower was past due with respect to principal and/or interest for 30 days or more during the three and nine months ended SeptemberJune 30, 2022,, or September 30, 2021, which loans had been modified and classified as TDRs during the year prior to the default.

15

ImpairedNonaccrual loans by loan category follow:as of June 30, 2023 were as follows:

      

Unpaid

     

(Dollars in thousands)

 

Recorded

  

Principal

  

Related

 
  

Investment

  

Balance

  

Allowance

 

September 30, 2022

            

With no related allowance recorded

            

Agricultural

 $307  $428  $- 

Commercial and industrial

  -   -   - 

Consumer

  -   -   - 

Construction real estate

  -   -   - 

Commercial real estate

  -   -   - 

Residential real estate

  -   -   - 

Subtotal

  307   428   - 

With an allowance recorded

            

Agricultural

  5   5   1 

Commercial and industrial

  108   185   6 

Consumer

  7   7   1 

Construction real estate

  -   -   - 

Commercial real estate

  140   140   6 

Residential real estate

  2,070   2,149   143 

Subtotal

  2,330   2,486   157 

Total

            

Agricultural

  312   433   1 

Commercial and industrial

  108   185   6 

Consumer

  7   7   1 

Construction real estate

  -   -   - 

Commercial real estate

  140   140   6 

Residential real estate

  2,070   2,149   143 

Total

 $2,637  $2,914  $157 

(Dollars in thousands)

Nonaccrual loans with no ACL

 

 

Total nonaccrual loans

 

 

Interest income recognized during the period on nonaccrual loans

 

 

Interest income recognized during the period on nonaccrual loans

 

 

Residential real estate

$

676

 

 

$

1,581

 

 

$

—

 

 

$

—

 

 

Total nonaccrual loans

$

676

 

 

$

1,581

 

 

$

—

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      

Unpaid

     

(Dollars in thousands)

 

Recorded

  

Principal

  

Related

 
  

Investment

  

Balance

  

Allowance

 

December 31, 2021

            

With no related allowance recorded

            

Agricultural

 $314  $428  $- 

Commercial and industrial

  -   -   - 

Consumer

  -   -   - 

Construction real estate

  -   -   - 

Commercial real estate

  94   94   - 

Residential real estate

  164   172   - 

Subtotal

  572   694   - 

With an allowance recorded

            

Agricultural

  2,302   2,302   251 

Commercial and industrial

  339   363   95 

Consumer

  14   15   2 

Construction real estate

  -   -   - 

Commercial real estate

  179   179   9 

Residential real estate

  2,027   2,084   146 

Subtotal

  4,861   4,943   503 

Total

            

Agricultural

  2,616   2,730   251 

Commercial and industrial

  339   363   95 

Consumer

  14   15   2 

Construction real estate

  -   -   - 

Commercial real estate

  273   273   9 

Residential real estate

  2,191   2,256   146 

Total

 $5,433  $5,637  $503 

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

16

(Dollars in thousands)

Total nonaccrual loans

 

Residential real estate

$

1,263

 

 

$

1,263

 

24

The following schedule provides information regarding average balances of impaired loans evaluated for impairment and interest recognized on
impaired loans for the three months and ninesix months ended SeptemberDecember 31, 2022 and June 30, 2022 and September 30, 2021:2022:

 

Average

 

Interest

 

 

 

Unpaid

 

 

 

(Dollars in thousands)

 

Recorded

 

Income

 

Recorded

 

Principal

 

Related

 

 

Investment

 

Recognized

 

Investment

 

Balance

 

Allowance

 

Three Months Ended September 30, 2022

     

December 31, 2022

 

 

 

 

 

 

With no related allowance recorded

     

 

 

 

 

 

 

Agricultural

 $310  $- 

$

—

 

 

$

—

 

 

$

—

 

 

Commercial and industrial

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Consumer

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Construction real estate

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Commercial real estate

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Residential real estate

  220  - 

 

550

 

 

 

595

 

 

 

—

 

 

Subtotal

  530  - 

 

550

 

 

 

595

 

 

 

—

 

 

With an allowance recorded

     

 

 

 

 

 

 

 

Agricultural

 6  - 

 

23

 

 

 

27

 

 

 

2

 

 

Commercial and industrial

 134  1 

 

177

 

 

 

177

 

 

 

14

 

 

Consumer

 7  - 

 

7

 

 

 

7

 

 

 

1

 

 

Construction real estate

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Commercial real estate

 145  2 

 

165

 

 

 

165

 

 

 

5

 

 

Residential real estate

  1,842  16 

 

1,924

 

 

 

1,954

 

 

 

131

 

 

Subtotal

  2,134  19 

 

2,296

 

 

 

2,330

 

 

 

153

 

 

Total

     

 

 

 

 

 

 

 

Agricultural

 316  - 

 

23

 

 

 

27

 

 

 

2

 

 

Commercial and industrial

 134  1 

 

177

 

 

 

177

 

 

 

14

 

 

Consumer

 7  - 

 

7

 

 

 

7

 

 

 

1

 

 

Construction real estate

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Commercial real estate

 145  2 

 

165

 

 

 

165

 

 

 

5

 

 

Residential real estate

  2,062  16 

 

2,474

 

 

 

2,549

 

 

 

131

 

 

Total

 $2,664  $19 

$

2,846

 

 

$

2,925

 

 

$

153

 

 

 

Average

 

Interest

 

 

 

Unpaid

 

 

 

(Dollars in thousands)

 

Recorded

 

Income

 

Recorded

 

Principal

 

Related

 

 

Investment

 

Recognized

 

Investment

 

Balance

 

Allowance

 

Three Months Ended September 30, 2021

     

June 30, 2022

 

 

 

 

 

 

With no related allowance recorded

     

 

 

 

 

 

 

Agricultural

 $989  $- 

$

314

 

 

$

428

 

 

$

—

 

 

Commercial and industrial

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Consumer

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Construction real estate

 -  - 

 

—

 

 

 

—

 

 

 

—

 

 

Commercial real estate

 507  2 

 

—

 

 

 

—

 

 

 

—

 

 

Residential real estate

  320  - 

 

439

 

 

 

469

 

 

 

—

 

 

Subtotal

  1,816  2 

 

753

 

 

 

897

 

 

 

—

 

 

With an allowance recorded

     

 

 

 

 

 

 

 

Agricultural

 2,119  36 

 

6

 

 

 

7

 

 

 

1

 

 

Commercial and industrial

 240  2 

 

159

 

 

 

190

 

 

 

52

 

 

Consumer

 -  - 

 

7

 

 

 

8

 

 

 

1

 

 

Construction real estate

 -  - 

 

149

 

 

 

149

 

 

 

—

 

 

Commercial real estate

 272  2 

 

—

 

 

 

—

 

 

 

7

 

 

Residential real estate

  1,943  14 

 

1,613

 

 

 

1,644

 

 

 

154

 

 

Subtotal

  4,574  54 

 

1,934

 

 

 

1,998

 

 

 

215

 

 

Total

     

 

 

 

 

 

 

 

Agricultural

 3,108  36 

 

320

 

 

 

435

 

 

 

1

 

 

Commercial and industrial

 240  2 

 

159

 

 

 

190

 

 

 

52

 

 

Consumer

 -  - 

 

7

 

 

 

8

 

 

 

1

 

 

Construction real estate

 -  - 

 

149

 

 

 

149

 

 

 

—

 

 

Commercial real estate

 779  4 

 

—

 

 

 

—

 

 

 

7

 

 

Residential real estate

  2,263  14 

 

2,052

 

 

 

2,113

 

 

 

154

 

 

Total

 $6,390  $56 

$

2,687

 

 

$

2,895

 

 

$

215

 

 

25

 

Average

 

 

Interest

 

(Dollars in thousands)

Recorded

 

 

Income

 

 

Investment

 

 

Recognized

 

Three Months Ended June 30, 2022

 

 

 

 

 

With no related allowance recorded

 

 

 

 

 

Agricultural

$

314

 

 

$

—

 

Commercial and industrial

 

46

 

 

 

—

 

Consumer

 

—

 

 

 

—

 

Construction real estate

 

—

 

 

 

—

 

Commercial real estate

 

—

 

 

 

—

 

Residential real estate

 

220

 

 

 

—

 

Subtotal

 

580

 

 

 

—

 

With an allowance recorded

 

 

 

 

 

Agricultural

 

1,117

 

 

 

-

 

Commercial and industrial

 

211

 

 

 

1

 

Consumer

 

20

 

 

 

—

 

Construction real estate

 

—

 

 

 

—

 

Commercial real estate

 

153

 

 

 

2

 

Residential real estate

 

1,733

 

 

 

12

 

Subtotal

 

3,234

 

 

 

15

 

Total

 

 

 

 

 

Agricultural

 

1,431

 

 

 

—

 

Commercial and industrial

 

257

 

 

 

1

 

Consumer

 

20

 

 

 

—

 

Construction real estate

 

—

 

 

 

—

 

Commercial real estate

 

153

 

 

 

2

 

Residential real estate

 

1,953

 

 

 

12

 

Total

$

3,814

 

 

$

15

 

 

Average

 

 

Interest

 

(Dollars in thousands)

Recorded

 

 

Income

 

 

Investment

 

 

Recognized

 

Six Months Ended June 30, 2022

 

 

 

 

 

With no related allowance recorded

 

 

 

 

 

Agricultural

$

314

 

 

$

—

 

Commercial and industrial

 

31

 

 

 

—

 

Consumer

 

—

 

 

 

—

 

Construction real estate

 

—

 

 

 

—

 

Commercial real estate

 

31

 

 

 

—

 

Residential real estate

 

201

 

 

 

—

 

Subtotal

 

577

 

 

 

—

 

With an allowance recorded

 

 

 

 

 

Agricultural

 

1,512

 

 

 

—

 

Commercial and industrial

 

254

 

 

 

2

 

Consumer

 

18

 

 

 

—

 

Construction real estate

 

—

 

 

 

—

 

Commercial real estate

 

162

 

 

 

5

 

Residential real estate

 

1,831

 

 

 

29

 

Subtotal

 

3,777

 

 

 

36

 

Total

 

 

 

 

 

Agricultural

 

1,826

 

 

 

—

 

Commercial and industrial

 

285

 

 

 

2

 

Consumer

 

18

 

 

 

—

 

Construction real estate

 

—

 

 

 

—

 

Commercial real estate

 

193

 

 

 

5

 

Residential real estate

 

2,032

 

 

 

29

 

Total

$

4,354

 

 

$

36

 

26

17
 
  

Average

  

Interest

 

(Dollars in thousands)

 

Recorded

  

Income

 
  

Investment

  

Recognized

 

Nine Months Ended September 30, 2022

        

With no related allowance recorded

        

Agricultural

 $312  $- 

Commercial and industrial

  23   - 

Consumer

  -   - 

Construction real estate

  -   - 

Commercial real estate

  23   - 

Residential real estate

  151   - 

Subtotal

  509   - 

With an allowance recorded

        

Agricultural

  1,136   - 

Commercial and industrial

  217   3 

Consumer

  15   - 

Construction real estate

  -   - 

Commercial real estate

  156   7 

Residential real estate

  1,891   49 

Subtotal

  3,415   59 

Total

        

Agricultural

  1,448   - 

Commercial and industrial

  240   3 

Consumer

  15   - 

Construction real estate

  -   - 

Commercial real estate

  179   7 

Residential real estate

  2,042   49 

Total

 $3,924  $59 

  

Average

  

Interest

 

(Dollars in thousands)

 

Recorded

  

Income

 
  

Investment

  

Recognized

 

Nine Months Ended September 30, 2021

        

With no related allowance recorded

        

Agricultural

 $669  $52 

Commercial and industrial

  745   - 

Consumer

  -   - 

Construction real estate

  20   - 

Commercial real estate

  1,372   34 

Residential real estate

  243   - 

Subtotal

  3,049   86 

With an allowance recorded

        

Agricultural

  1,766   71 

Commercial and industrial

  198   3 

Consumer

  2   - 

Construction real estate

  -   - 

Commercial real estate

  525   8 

Residential real estate

  2,215   47 

Subtotal

  4,706   129 

Total

        

Agricultural

  2,435   123 

Commercial and industrial

  943   3 

Consumer

  2   - 

Construction real estate

  20   - 

Commercial real estate

  1,897   42 

Residential real estate

  2,458   47 

Total

 $7,755  $215 

18

An aging analysis of loans by loan category follows:

     

Loans

         

 

 

 

 

Loans

 

 

 

 

 

 

 

Loans

 

 

Loans

 

Loans

 

Past Due

       

Loans

 

Loans

 

Loans

 

Past Due

 

 

 

 

 

 

 

90 Days

 

 

Past Due

 

Past Due

 

Greater

       

90 Days Past

 

Past Due

 

Past Due

 

Greater

 

 

 

 

 

 

 

Past

 

(Dollars in thousands)

 30 to 59  60 to 89  

Than 90

   

Loans Not

 

Total

 

Due and

 

30 to 59

 

60 to 89

 

Than 90

 

 

 

Loans Not

 

Total

 

Due and

 

 

Days (1)

 

Days (1)

 

Days (1)

 

Total (1)

 

Past Due

 

Loans

 

Accruing

 

Days (1)

 

Days (1)

 

Days (1)

 

Total (1)

 

Past Due

 

Loans

 

Accruing

 

September 30, 2022

               

June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 $-  $-  $-  $-  $63,347  $63,347  $- 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

40,684

 

 

$

40,684

 

 

$

—

 

Commercial and industrial

 1,065  -  46  1,111  207,479  208,590  - 

 

61

 

 

 

132

 

 

 

—

 

 

 

193

 

 

 

223,998

 

 

 

224,191

 

 

 

—

 

Consumer

 17  -  -  17  38,339  38,356  - 

 

5

 

 

 

—

 

 

 

—

 

 

 

5

 

 

 

38,609

 

 

 

38,614

 

 

 

—

 

Commercial real estate

 -  -  -  -  593,195  593,195  - 

 

1,059

 

 

 

—

 

 

 

—

 

 

 

1,059

 

 

 

656,490

 

 

 

657,549

 

 

 

—

 

Construction real estate

 -  -  -  -  14,299  14,299  - 

 

—

 

 

 

128

 

 

 

—

 

 

 

128

 

 

 

16,606

 

 

 

16,734

 

 

 

—

 

Residential real estate

  48  615  31  694  213,920  214,614   

 

224

 

 

 

653

 

 

 

560

 

 

 

1,437

 

 

 

246,181

 

 

 

247,618

 

 

 

 

Loans to Other Financial Institutions

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

38,838

 

 

 

38,838

 

 

 

 

 $1,130  $615  $77  $1,822  $1,130,579  $1,132,401  $- 

$

1,349

 

 

$

913

 

 

$

560

 

 

$

2,822

 

 

$

1,261,406

 

 

$

1,264,228

 

 

$

—

 

 

December 31, 2021

               

Agricultural

 $-  $-  $-  $-  $64,819  $64,819  $- 

Commercial and industrial

 21  -  88  109  202,915  203,024  - 

Consumer

 70  15  -  85  35,089  35,174  - 

Commercial real estate

 422  13  279  714  525,170  525,884  - 

Construction real estate

 1,149  1,235  -  2,384  16,682  19,066  - 

Residential real estate

  1,489  306  454  2,249  166,632  168,881  - 
 $3,151  $1,569  $821  $5,541  $1,011,307  $1,016,848  $- 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

64,159

 

 

$

64,159

 

 

$

—

 

Commercial and industrial

 

—

 

 

 

171

 

 

 

—

 

 

 

171

 

 

 

210,039

 

 

 

210,210

 

 

 

—

 

Consumer

 

39

 

 

 

7

 

 

 

—

 

 

 

46

 

 

 

39,762

 

 

 

39,808

 

 

 

—

 

Commercial real estate

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

630,953

 

 

 

630,953

 

 

 

—

 

Construction real estate

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14,736

 

 

 

14,736

 

 

 

—

 

Residential real estate

 

682

 

 

 

—

 

 

 

842

 

 

 

1,524

 

 

 

228,392

 

 

 

229,916

 

 

 

—

 

 

$

721

 

 

$

178

 

 

$

842

 

 

$

1,741

 

 

$

1,188,041

 

 

$

1,189,782

 

 

$

—

 

(1)(1) Includes nonaccrual loans.

Nonaccrual loans by loan category follow:

(Dollars in thousands)

 

September 30,

  

December 31,

 
  

2022

  

2021

 

Agricultural

 $307  $313 

Commercial and industrial

  46   285 

Consumer

  7   - 

Commercial real estate

  -   279 

Residential real estate

  837   850 
  $1,197  $1,727 

19

The table below details the outstanding balances of the County Bank Corp. acquired loan portfolio and the acquisition fair value adjustments at acquisition date of October 1, 2019 (dollars in thousands):

  Acquired  Acquired  Acquired 
  

Impaired

  

Non-impaired

  

Total

 

Loans acquired - contractual payments

 $7,729  $387,394  $395,123 

Nonaccretable difference

  (2,928)  -   (2,928)

Expected cash flows

  4,801   387,394   392,195 

Accretable yield

  (185)  (1,894)  (2,079)

Carrying balance at acquisition date

 $4,616  $385,500  $390,116 

The table below presents a roll forward of the accretable yield on the County Bank Corp. acquired loan portfolio for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 2022 and the ninesix months ended SeptemberJune 30, 20222023 (dollars in thousands):

(Dollars in thousands)

 

Acquired

  

Acquired

  

Acquired

 
  

Impaired

  

Non-impaired

  

Total

 

Balance, January 1, 2019

 $-  $-  $- 

Merger with County Bank Corp. on October 1, 2019

  185   1,894   2,079 

Accretion October 1, 2019 through December 31, 2019

  -   (75)  (75)

Balance January 1, 2020

  185   1,819   2,004 

Accretion January 1, 2020 through December 31, 2020

  (50)  (295)  (345)

Balance January 1, 2021

  135   1,524   1,659 

Accretion January 1, 2021 through December 31, 2021

  (247)  (348)  (595)

Transfer from non-accretable to accretable yield

  400   -   400 

Balance January 1, 2022

  288   1,176   1,464 

Transfer from non-accretable to accretable yield

  2,192   -   2,192 

Accretion January 1, 2022 through September 30, 2022

  (396)  (32)  (428)

Balance, September 30, 2022

 $2,084  $1,144  $3,228 

(Dollars in thousands)

 

Purchased with credit deterioration

 

 

Purchased without credit deterioration

 

 

Acquired

 

 

 

 

 

 

 

 

 

Total

 

Balance January 1, 2022

 

$

288

 

 

$

1,176

 

 

$

1,464

 

Transfer from non-accretable to accretable yield

 

 

2,192

 

 

 

—

 

 

 

2,192

 

Accretion January 1, 2022 through December 31, 2022

 

 

(553

)

 

 

(98

)

 

 

(651

)

Balance January 1, 2023

 

 

1,927

 

 

 

1,078

 

 

 

3,005

 

Transfer from non-accretable to accretable yield

 

 

 

 

 

 

 

 

-

 

Accretion January 1, 2023 through June 30, 2023

 

 

(269

)

 

 

(270

)

 

 

(539

)

Balance, June 30, 2023

 

$

1,658

 

 

$

808

 

 

$

2,466

 

The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date of July 1, 2020 (dollars in thousands):

  

Acquired

  

Acquired

  

Acquired

 
  

Impaired

  

Non-impaired

  

Total

 

Loans acquired - contractual payments

 $20,491  $158,495  $178,986 

Nonaccretable difference

  (2,719)  -   (2,719)

Expected cash flows

  17,772   158,495   176,267 

Accretable yield

  (869)  (596)  (1,465)

Carrying balance at acquisition date

 $16,903  $157,899  $174,802 

The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the years ended December 31, 2020 and December 31, 2021 2022 and the ninesix months ended SeptemberJune 30, 20222023 (dollars in thousands):

  

Acquired

  

Acquired

  

Acquired

 
  

Impaired

  

Non-impaired

  

Total

 

Balance January 1, 2020

 $-  $-  $- 

Merger with Community Shores Bank Corporation on July 1, 2020

  869   596   1,465 

Accretion July 1, 2020 through December 31, 2020

  (26)  (141)  (167)

Balance, January 1, 2021

  843   455   1,298 

Accretion January 1, 2021 through December 31, 2021

  (321)  (258)  (579)

Balance January 1, 2022

  522   197   719 

Transfer from non-accretable to accretable yield

  1,086   -   1,086 

Accretion January 1, 2022 through September 30, 2022

  (837)  (197)  (1,034)

Balance, September 30, 2022

 $771  $-  $771 

20

 

 

Purchased with credit deterioration

 

 

Purchased without credit deterioration

 

 

Acquired

 

 

 

 

 

 

 

 

 

Total

 

Balance January 1, 2022

 

$

522

 

 

$

197

 

 

$

719

 

Transfer from non-accretable to accretable yield

 

 

1,086

 

 

 

—

 

 

 

1,086

 

Accretion January 1, 2022 through December 31, 2022

 

 

(993

)

 

 

(197

)

 

 

(1,190

)

Balance January 1, 2023

 

 

615

 

 

 

-

 

 

 

615

 

Transfer from non-accretable to accretable yield

 

 

622

 

 

 

 

 

 

622

 

Accretion January 1, 2023 through June 30, 2023

 

 

(376

)

 

 

 

 

 

(376

)

Balance, June 30, 2023

 

$

861

 

 

$

-

 

 

$

861

 

27

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:

 

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Six Months Ended

 

(Dollars in thousands, except share data)

 

September 30,

 

September 30,

 

June 30,

 

June 30,

 

 

2022

 

2021

 

2022

 

2021

 

2023

 

2022

 

2023

 

2022

 

Basic

 

 

 

 

 

 

 

 

 

Net income

 $5,813  $5,749  $16,956  $17,029 

$

5,213

 

 

$

5,615

 

 

$

10,846

 

 

$

11,143

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

  7,507,538  7,621,423  7,500,877  7,730,135 

 

7,529,177

 

 

 

7,499,497

 

 

 

7,524,257

 

 

 

7,497,492

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common shares

 $0.77  $0.75  $2.26  $2.20 

$

0.69

 

 

$

0.75

 

 

$

1.44

 

 

$

1.49

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 $5,813  $5,749  $16,956  $17,029 

$

5,213

 

 

$

5,615

 

 

$

10,846

 

 

$

11,143

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 7,507,538  7,621,423  7,500,877  7,730,135 

 

7,529,177

 

 

 

7,499,497

 

 

 

7,524,257

 

 

 

7,497,492

 

Plus dilutive stock options and restricted stock units

  12,820  12,644  17,279  13,766 

 

22,720

 

 

 

11,027

 

 

 

28,335

 

 

 

13,766

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding and potentially dilutive shares

  7,520,358  7,634,067  7,518,156  7,743,901 

 

7,551,897

 

 

 

7,510,524

 

 

 

7,552,592

 

 

 

7,511,258

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 $0.77  $0.75  $2.26  $2.20 

$

0.69

 

 

$

0.75

 

 

$

1.44

 

 

$

1.49

 

There were 15,000 stock options and 5,125 performance awards that were considered anti-dilutive to earnings per share for the three and nine months ended SeptemberJune 30, 2022 and September 30, 2021.  2023. There were no15,000 stock options and 5,125 performance awards orthat were considered anti-dilutive to earnings per share for the six months ended June 30, 2023. There were 15,000 stock options, 28,660 restricted stock units, and 6,396 performance awards that were considered anti-dilutive to earnings per share for the three months ended June 30,2022. There were 15,000 stock options, 28,660 restricted stock units, and 6,396 performance awards that were considered anti-dilutive for the three and ninesix months ended SeptemberJune 30, 2022 and September 30, 2021. 2022.

28

21

Note 5 – Financial Instruments

Financial instruments as of the dates indicated were as follows:

 

 

 

 

 

 

 

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)

 

June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

76,810

 

 

$

76,810

 

 

$

76,810

 

 

$

-

 

 

$

-

 

Equity securities at fair value

 

8,299

 

 

 

8,299

 

 

 

5,599

 

 

 

-

 

 

 

2,700

 

Securities available for sale

 

521,202

 

 

 

521,202

 

 

 

78,395

 

 

 

442,807

 

 

 

-

 

Securities held to maturity

 

420,549

 

 

 

351,825

 

 

 

-

 

 

 

337,944

 

 

 

13,881

 

Federal Home Loan Bank and Federal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve Bank stock

 

13,431

 

 

 

13,431

 

 

 

-

 

 

 

13,431

 

 

 

-

 

Loans held for sale

 

8,924

 

 

 

9,192

 

 

 

-

 

 

 

9,192

 

 

 

-

 

Loans to other financial institutions

 

38,838

 

 

 

38,838

 

 

 

-

 

 

 

38,838

 

 

 

-

 

Loans, net

 

1,249,646

 

 

 

1,195,843

 

 

 

-

 

 

 

-

 

 

 

1,195,843

 

Accrued interest receivable

 

8,650

 

 

 

8,650

 

 

 

-

 

 

 

8,650

 

 

 

-

 

Interest rate lock commitments

 

126

 

 

 

126

 

 

 

-

 

 

 

126

 

 

 

-

 

Mortgage loan servicing rights

 

4,030

 

 

 

5,769

 

 

 

-

 

 

 

5,769

 

 

 

-

 

Interest rate derivative contracts

 

11,177

 

 

 

11,177

 

 

 

-

 

 

 

11,177

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

544,925

 

 

 

544,925

 

 

 

544,925

 

 

 

-

 

 

 

-

 

Interest-bearing deposits

 

1,490,093

 

 

 

1,486,941

 

 

 

-

 

 

 

1,486,941

 

 

 

-

 

Brokered deposits

 

51,370

 

 

 

51,292

 

 

 

-

 

 

 

51,292

 

 

 

-

 

Borrowings

 

160,000

 

 

 

159,122

 

 

 

-

 

 

 

159,122

 

 

 

-

 

Subordinated debentures

 

35,385

 

 

 

30,613

 

 

 

-

 

 

 

30,613

 

 

 

-

 

Accrued interest payable

 

1,952

 

 

 

1,952

 

 

 

-

 

 

 

1,952

 

 

 

-

 

Interest rate derivative contracts

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

43,943

 

 

$

43,943

 

 

$

43,943

 

 

$

-

 

 

$

-

 

Equity securities at fair value

 

8,566

 

 

 

8,566

 

 

 

6,024

 

 

 

-

 

 

 

2,542

 

Securities available for sale

 

529,749

 

 

 

529,749

 

 

 

78,204

 

 

 

451,545

 

 

 

-

 

Securities held to maturity

 

425,906

 

 

 

353,901

 

 

 

-

 

 

 

338,583

 

 

 

15,318

 

Federal Home Loan Bank and Federal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserve Bank stock

 

8,581

 

 

 

8,581

 

 

 

-

 

 

 

8,581

 

 

 

-

 

Loans held for sale

 

4,834

 

 

 

4,979

 

 

 

-

 

 

 

4,979

 

 

 

-

 

Loans to other financial institutions

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Loans, net

 

1,182,163

 

 

 

1,123,198

 

 

 

-

 

 

 

-

 

 

 

1,123,198

 

Accrued interest receivable

 

8,949

 

 

 

8,949

 

 

 

-

 

 

 

8,949

 

 

 

-

 

Interest rate lock commitments

 

28

 

 

 

28

 

 

 

-

 

 

 

28

 

 

 

-

 

Mortgage loan servicing rights

 

4,322

 

 

 

5,855

 

 

 

-

 

 

 

5,855

 

 

 

-

 

Interest rate derivative contracts

 

9,204

 

 

 

9,204

 

 

 

-

 

 

 

9,204

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

599,579

 

 

 

599,579

 

 

 

599,579

 

 

 

-

 

 

 

-

 

Interest-bearing deposits

 

1,518,424

 

 

 

1,514,294

 

 

 

-

 

 

 

1,514,294

 

 

 

-

 

Borrowings

 

50,000

 

 

 

50,000

 

 

 

-

 

 

 

50,000

 

 

 

-

 

Subordinated debentures

 

35,262

 

 

 

30,304

 

 

 

-

 

 

 

30,304

 

 

 

-

 

Accrued interest payable

 

610

 

 

 

610

 

 

 

-

 

 

 

610

 

 

 

-

 

Interest rate derivative contracts

 

5,823

 

 

 

5,823

 

 

 

-

 

 

 

5,823

 

 

 

-

 

          

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)

 

September 30, 2022

                    

Assets

                    

Cash and cash equivalents

 $51,494  $51,494  $51,494  $-  $- 

Equity securities at fair value

  7,977   7,977   6,116   -   1,861 

Securities available for sale

  530,093   530,093   -   530,093   - 

Securities held to maturity

  428,205   351,858   -   336,795   15,063 

Federal Home Loan Bank and Federal

                    

Reserve Bank stock

  8,557   8,557   -   8,557   - 

Loans held for sale

  8,848   9,113   -   9,113   - 

Loans to other financial institutions

  70   70   -   70   - 

Loans, net

  1,124,944   1,063,833   -   -   1,063,833 

Accrued interest receivable

  9,273   9,273   -   9,273   - 

Interest rate lock commitments

  51   51   -   51   - 

Mortgage loan servicing rights

  4,537   5,853   -   5,853   - 

Interest rate derivative contracts

  28,185   28,185   -   28,185   - 
                     

Liabilities

                    

Noninterest-bearing deposits

  599,360   599,360   -   599,360   - 

Interest-bearing deposits

  1,557,294   1,553,133   -   1,553,133   - 

Borrowings

  -   -   -   -   - 

Subordinated debentures

  35,201   29,836   -   29,836   - 

Accrued interest payable

  180   180   -   180   - 

Interest rate derivative contracts

  5,524   5,524   -   5,524   - 
                     

December 31, 2021

                    

Assets

                    

Cash and cash equivalents

 $31,887  $31,887  $31,887  $-  $- 

Equity securities at fair value

  8,492   8,492   6,724   -   1,768 

Securities available for sale

  1,098,885   1,098,885   -   1,077,835   21,050 

Federal Home Loan Bank and Federal

                    

Reserve Bank stock

  8,888   8,888   -   8,888   - 

Loans held for sale

  9,351   9,632   -   9,632   - 

Loans to other financial institutions

  42,632   42,632   -   42,632   - 

Loans, net

  1,009,160   999,393   -   -   999,393 

Accrued interest receivable

  8,211   8,211   -   8,211   - 

Interest rate lock commitments

  172   172   -   172   - 

Mortgage loan servicing rights

  4,666   5,522   -   5,522   - 
                     

Liabilities

                    

Noninterest-bearing deposits

  560,931   560,931   -   560,931   - 

Interest-bearing deposits

  1,491,363   1,491,135   -   1,491,135   - 

Borrowings

  50,000   50,000   -   50,000   - 

Subordinated debentures

  35,017   33,414   -   33,414   - 

Accrued interest payable

  441   441   -   441   - 

29

22

NOTE 6 – FAIR VALUE MEASUREMENTS

The following tables present information about assets and liabilities measured at fair value on a recurring basis and the valuation techniques used 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 ChoiceOne 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. ChoiceOne 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.

30

Disclosures concerning assets and liabilities measured at fair value are as follows:

Assets and Liabilities 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 - September 30, 2022

                

Equity securities

 $6,116  $-  $1,861  $7,977 
                 

Investment Securities, Available for Sale - September 30, 2022

                

U. S. Treasury notes and bonds

 $-  $77,554  $-  $77,554 

State and municipal

  -   223,987   -   223,987 

Mortgage-backed

  -   214,691   -   214,691 

Corporate

  -   716   -   716 

Asset-backed securities

  -   13,145   -   13,145 

Total

 $-  $530,093  $-  $530,093 
                 

Derivative Instruments - September 30, 2022

                

Interest rate derivative contracts - assets

 $-  $28,185  $-  $28,185 

Interest rate derivative contracts - liabilities

 $-  $5,524  $-  $5,524 
                 

Equity Securities Held at Fair Value - December 31, 2021

                

Equity securities

 $6,724  $-  $1,768  $8,492 
                 

Investment Securities, Available for Sale - December 31, 2021

                

U. S. Government and federal agency

 $-  $2,008  $-  $2,008 

U. S. Treasury notes and bonds

  -   91,979   -   91,979 

State and municipal

  -   514,797   20,050   534,847 

Mortgage-backed

  -   433,115   -   433,115 

Corporate

  -   19,642   1,000   20,642 

Asset-backed securities

  -   16,294   -   16,294 

Total

 $-  $1,077,835  $21,050  $1,098,885 

 

23

 

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 - June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

Equity securities

$

5,599

 

 

$

-

 

 

$

2,700

 

 

$

8,299

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities, Available for Sale - June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes and bonds

$

78,395

 

 

$

-

 

 

$

-

 

 

$

78,395

 

State and municipal

 

-

 

 

 

232,797

 

 

 

-

 

 

 

232,797

 

Mortgage-backed

 

-

 

 

 

197,649

 

 

 

-

 

 

 

197,649

 

Corporate

 

-

 

 

 

705

 

 

 

-

 

 

 

705

 

Asset-backed securities

 

-

 

 

 

11,656

 

 

 

-

 

 

 

11,656

 

Total

$

78,395

 

 

$

442,807

 

 

$

-

 

 

$

521,202

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Instruments - June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivative contracts - assets

$

-

 

 

$

11,177

 

 

$

-

 

 

$

11,177

 

Interest rate derivative contracts - liabilities

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities Held at Fair Value - December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

Equity securities

$

6,024

 

 

$

-

 

 

$

2,542

 

 

$

8,566

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities, Available for Sale - December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

U. S. Government and federal agency

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

U. S. Treasury notes and bonds

 

78,204

 

 

 

-

 

 

 

-

 

 

 

78,204

 

State and municipal

 

-

 

 

 

229,938

 

 

 

-

 

 

 

229,938

 

Mortgage-backed

 

-

 

 

 

208,563

 

 

 

-

 

 

 

208,563

 

Corporate

 

-

 

 

 

711

 

 

 

-

 

 

 

711

 

Asset-backed securities

 

-

 

 

 

12,333

 

 

 

-

 

 

 

12,333

 

Total

$

78,204

 

 

$

451,545

 

 

$

-

 

 

$

529,749

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Instruments - December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivative contracts - assets

$

-

 

 

$

9,204

 

 

$

-

 

 

$

9,204

 

Interest rate derivative contracts - liabilities

$

-

 

 

$

5,823

 

 

$

-

 

 

$

5,823

 

 

 

 

 

 

 

 

 

 

 

 

 

31

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis

 

 

Nine Months Ended

 

Six Months Ended

 

(Dollars in thousands)

 

September 30,

 

June 30,

 

 

2022

 

2021

 

2023

 

2022

 

Equity Securities Held at Fair Value

 

 

 

 

 

 

Balance, January 1

 $1,768  $1,485 

$

2,542

 

 

$

1,768

 

Total realized and unrealized gains included in noninterest income

 18  (51)

 

60

 

 

 

(5

)

Net purchases, sales, calls, and maturities

 75  262 

 

98

 

 

 

63

 

Net transfers into Level 3

  -  - 

 

-

 

 

 

-

 

Balance, September 30,

 $1,861  $1,696 

Balance, June 30,

$

2,700

 

 

$

1,826

 

 

 

 

 

 

 

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 September 30,

 $18  $(51)

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 June 30,

$

60

 

 

$

(5

)

 

 

 

 

 

 

Investment Securities, Available for Sale

 

 

 

 

 

 

Balance, January 1

 $21,050  $11,423 

$

-

 

 

$

21,050

 

Total unrealized gains included in other comprehensive income

 -  (369)

 

-

 

 

 

-

 

Net purchases, sales, calls, and maturities

 -  7,979 

 

-

 

 

 

-

 

Net transfers into Level 3

 -  - 

 

-

 

 

 

-

 

Transfer to held to maturity

  (21,050) - 

 

-

 

 

 

(21,050

)

Balance, September 30,

 $-  $19,033 

Balance, June 30,

$

-

 

 

$

-

 

 

 

 

 

 

 

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 September 30,

 $-  $(366)

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 June 30,

$

-

 

 

$

-

 

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.

Securities categorized as Level 3 assets as of SeptemberJune 30, 2023 and December 31, 2022 primarily consist of common and preferred equity securities of community banks. As of December 31, 2021, bonds issued by local municipalities and corporate issuers 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.

ChoiceOne 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:

32

Assets Measured at Fair Value on a Non-recurring Basis

 

      

Quoted Prices

         
      

In Active

  

Significant

     
      

Markets for

  

Other

  

Significant

 
  

Balances at

  

Identical

  

Observable

  

Unobservable

 

(Dollars in thousands)

 

Dates

  

Assets

  

Inputs

  

Inputs

 
  

Indicated

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Impaired Loans

                

September 30, 2022

 $2,637  $-  $-  $2,637 

December 31, 2021

 $5,433  $-  $-  $5,433 
                 

Other Real Estate

                

September 30, 2022

 $-  $-  $-  $- 

December 31, 2021

 $194  $-  $-  $194 
                 

Mortgage Loan Servicing Rights

                

September 30, 2022

 $4,537  $-  $4,537  $- 

December 31, 2021

 $4,666  $-  $4,666  $- 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

In Active

 

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

 

Other

 

 

Significant

 

 

Balances at

 

 

Identical

 

 

Observable

 

 

Unobservable

 

(Dollars in thousands)

Dates

 

 

Assets

 

 

Inputs

 

 

Inputs

 

 

Indicated

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Collateral Dependent Loans

 

 

 

 

 

 

 

 

 

 

 

June 30, 2023

$

676

 

 

$

-

 

 

$

-

 

 

$

676

 

December 31, 2022

$

2,846

 

 

$

-

 

 

$

-

 

 

$

2,846

 

 

 

 

 

 

 

 

 

 

 

 

Other Real Estate

 

 

 

 

 

 

 

 

 

 

 

June 30, 2023

$

266

 

 

$

-

 

 

$

-

 

 

$

266

 

December 31, 2022

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

ImpairedCollateral dependent loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.non-accrual or higher risk. ChoiceOne 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 impairedcollateral dependent loans that were posted to the allowance for loancredit losses and write-downs of other real estate that were posted to a valuation account.

33

24

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.

34

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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(Dollars in thousands)

 

2022

  

2021

  

2022

  

2021

 
                 

Service charges and fees on deposit accounts

 $1,152  $977  $3,218  $2,585 

Interchange income

  1,306   1,278   3,782   3,724 

Investment commission income

  158   153   596   624 

Trust fee income

  174   187   528   612 

Other charges and fees for customer services

  113   153   387   458 

Noninterest income from contracts with customers within the scope of ASC 606

  2,903   2,748   8,511   8,003 

Noninterest income within the scope of other GAAP topics

  144   1,970   1,812   7,047 

Total noninterest income

 $3,047  $4,718  $10,323  $15,050 

25

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

(Dollars in thousands)

2023

 

 

2022

 

 

2023

 

 

2022

 

Service charges and fees on deposit accounts

$

1,105

 

 

$

1,036

 

 

$

2,132

 

 

$

2,067

 

Interchange income

 

1,166

 

 

 

1,317

 

 

 

2,406

 

 

 

2,475

 

Investment commission income

 

172

 

 

 

233

 

 

 

368

 

 

 

438

 

Trust fee income

 

196

 

 

 

176

 

 

 

380

 

 

 

354

 

Other charges and fees for customer services

 

155

 

 

 

125

 

 

 

292

 

 

 

274

 

Noninterest income from contracts with customers
within the scope of ASC 606

 

2,794

 

 

 

2,887

 

 

 

5,578

 

 

 

5,608

 

Noninterest income within the scope of other GAAP topics

 

691

 

 

 

543

 

 

 

1,578

 

 

 

1,668

 

Total noninterest income

$

3,485

 

 

$

3,430

 

 

$

7,156

 

 

$

7,276

 

35

NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES

ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.

ChoiceOne currently uses interest rate swaps and interest rate caps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities.

ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.

ChoiceOne currently uses interest rate swaps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities.

Interest rate swaps

ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.

In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $200.0$200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements will pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%2.41%. NetIn March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash settlements received YTD on pay-floating/ received-fixed swaps were $773,000 aspayment of September 30, 2022, $4.2 million. The loss will be amortized into interest income over 13 months, which were included in interest income.was the remaining period of the swap agreements.

In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0$200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eighteight-year-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75%2.75% while receiving the SOFR Rate.

Interest rate caps

ChoiceOne also uses interest rate caps to provide stability to net interest income and to manage its exposure to interest rate movements. Interest rate caps designated as hedges involve the payment of a fixed premium by ChoiceOne who will then receive payment equivalent to the spread between the current rate and the strike rate until the conclusion of the term from the counterparty.

In the secondfourth quarter of 2022, ChoiceOne entered into four forward starting pay-fixed/receive-floating interest rate cap agreementsswaps, with payments starting in April 2024, for a total notional amount of $200.0$201.0 million (“that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR Cap Agreements”). Threebenchmark interest rate component of the SOFR Cap Agreements with afixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional amountvalue, $101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of $100.0the fixed rate bonds equal to 3.390%. Of the total notional value, $50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015%. The remaining notional value of $49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030%. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income.

Net cash settlements received on these four pay-fixed/receive-floating swaps were $798,000 and $1.4 million for the three and six months ended June 30, 2023, which were included in interest income.

36

The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition:

 

June 30, 2023

 

 

December 31, 2022

 

(Dollars in thousands)

Balance Sheet Location

Fair Value

 

 

Balance Sheet Location

Fair Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Interest rate contracts

Other Assets

$

11,177

 

 

Other Assets

$

9,204

 

Interest rate contracts

Other Liabilities

$

—

 

 

Other Liabilities

$

5,823

 

The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented:

 

Location and Amount of Gain or (Loss)

 

 

Location and Amount of Gain or (Loss)

 

 

Recognized in Income on Fair Value and Cash Flow Hedging Relationships

 

 

Recognized in Income on Fair Value and Cash Flow Hedging Relationships

 

 

Three months ended June 30, 2023

 

 

Three months ended June 30, 2022

 

 

Six months ended June 30, 2023

 

 

Six months ended June 30, 2022

 

 

Interest Income

 

Interest Expense

 

 

Interest Income

 

Interest Expense

 

 

Interest Income

 

Interest Expense

 

 

Interest Income

 

Interest Expense

 

Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded

$

(137

)

$

-

 

 

$

422

 

$

(155

)

 

$

(504

)

$

-

 

 

$

422

 

$

(155

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on fair value hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedged items

$

(6,753

)

$

-

 

 

$

(71

)

$

-

 

 

$

(731

)

$

-

 

 

$

-

 

$

-

 

Derivatives designated as hedging instruments

$

6,705

 

$

-

 

 

$

71

 

$

-

 

 

$

745

 

$

-

 

 

$

-

 

$

-

 

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

$

-

 

$

-

 

 

$

(153

)

$

-

 

 

$

-

 

$

-

 

 

$

(153

)

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain or (loss) on cash flow hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income

$

(887

)

$

-

 

 

$

-

 

$

-

 

 

$

(1,043

)

$

-

 

 

$

-

 

$

-

 

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

$

-

 

$

-

 

 

$

-

 

$

(155

)

 

$

-

 

$

-

 

 

$

-

 

$

(155

)

The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and hedge against changes in the fair valuerelated amortized cost of certain fixed rate tax-exempt municipal bonds. ChoiceOne utilizes the interest rate capsthose items as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the SOFR rate above 2.68%, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The remaining SOFR Cap Agreement with a notional amount of $100.0 million is designated as a cash flow hedge and hedges against the risk of variability in cash flows attributable to fluctuations in the SOFR rate above 2.68% for forecasted payments on future deposits or borrowings indexed to the SOFR Rate.  All of the SOFR Cap Agreements are two-year forward starting with an eightperiods presented:-year term set to expire in 2032.  The initial amount excluded from hedge effectiveness testing and amortized into earnings over the life of the interest rate cap derivatives is $16.5 million. 

 

September 30, 2022

 

December 31, 2021

 

(Dollars in thousands)

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging instruments

          

Interest rate contracts

Other Assets

 $28,185 

Other Assets

 $- 

Interest rate contracts

Other Liabilities

 $5,524 

Other Liabilities

 $- 

 

26

 

 

 

June 30, 2023

 

 

 

 

Cumulative amount of Fair

 

 

 

 

Value Hedging Adjustment

 

Line Item in the Statement of

 

 

included in the carrying

 

Financial Position in which the

Amortized cost of the

 

amount of the Hedged

 

Hedged Item is included

Hedged Assets/(Liabilities)

 

Assets/(Liabilities)

 

 

 

 

 

 

Securities available for sale

$

224,399

 

$

2,662

 

37

 
  

Location and Amount of Gain or (Loss)

  

Location and Amount of Gain or (Loss)

 
  

Recognized in Income on Fair Value and Cash Flow Hedging Relationships

  

Recognized in Income on Fair Value and Cash Flow Hedging Relationships

 
  

Three months ended September 30, 2022

  

Nine months ended September 30, 2022

 
  

Interest Income

  

Interest Expense

  

Interest Income

  

Interest Expense

 

Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded

 $(8) $(209) $414  $(364)
                 

Gain or (loss) on fair value hedging relationships:

                

Interest rate contracts:

                

Hedged items

 $(4,229) $-  $(4,300) $- 

Derivatives designated as hedging instruments

 $4,229  $-  $4,300  $- 

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

 $(206) $-  $(359) $- 
                 

Gain or (loss) on cash flow hedging relationships:

                

Interest rate contracts:

                

Amount of gain or (loss) reclassified from accumulated other comprehensive income into income

 $-  $-  $-  $- 

Amount excluded from effectiveness testing recognized in earnings based on amortization approach

 $-  $(209) $-  $(364)

27

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”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne 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. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”,“continue,” “future,” “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision for credit losses and allowance for loan losses,ACL, the carrying value of goodwill, 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 post-retirement benefit plans involve judgments that are inherently forward-looking. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

Additional 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, 20212022 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.

28

RESULTS OF OPERATIONS

NetChoiceOne reported net income of $5,213,000 and $10,846,000 for the third quarter of 2022 was $5,813,000, which represented an increase of $64,000 or 1%three and six months ended June 30, 2023, compared to $5,615,000 and $11,143,000 for the third quarter of 2021.  Basic and dilutedsame periods in 2022. Diluted earnings per common share were $0.77 for$0.69 and $1.44 in the third quarter of 2022three and six months ended June 30, 2023, compared to $0.75 forand $1.49 per share in the third quarter ofsame periods in the prior year. The increase in deposit costs during the thirdfirst half of 2023 has negatively impacted earnings, offset by higher interest income from higher interest rates on loans and organic loan growth.

Total assets as of June 30, 2023, increased $73.8 million as compared to March 31, 2023. The asset growth during the second quarter of 20222023 is largely relateddue to thean increase in interest income due to strong loan growth. Net income for the first nine monthscash of 2022 was $16,956,000, which represented a decline of $74,000 or less than 1% compared to the first three quarters of 2021.  Basic and diluted earnings per common share were $2.26 for the first three quarters of 2022 compared to $2.20 for the first three quarters of the prior year.  The modest decline in net income in the first nine months of 2022 compared to the same period in 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 also declined as interest expense increased mostly due to expense from a private placement of $32.5$21.6 million, of fixed-to-floating rate subordinated notes late in the third quarter of the prior year and organic deposit interest expense.  These factors were largely offset by an increase of $6.6 million in interest income as the balance of both core loans and securities continued to grow.  Core loans (defined as loans excluding loans(which excludes held for sale loans, loans to other financial institutions, and Paycheck Protection ProgramPPP loans (“PPP”core loans”)) loans) increased by $52.8of $14.8 million or 19.6% on4.9% annualized, and an annualized basisincrease in loans to other financial institutions of $38.8 million. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations, and interest rates fluctuate with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the thirdcurrent rate environment. Asset growth from June 30, 2022 to June 30, 2023 of $123.5 million is due to an increase in cash of $36.5 million and an increase in core loans of $145.8 million or 13.5%.

Deposits, excluding brokered deposits, decreased by $103.5 million or 4.8% as of June 30, 2023 compared to June 30, 2022 and decreased $33.1 million or 1.6% compared to March 31, 2023. The decrease in deposits since June 30, 2022 was largely concentrated in the first quarter of 20222023 as a result of a combination of customers using cash on hand for debt payoffs, seasonal tax and $205.2municipal bond payments, and customers seeking higher rates via money market securities or other investments. Deposit outflows have stabilized in the second quarter of 2023 with monthly growth of deposits, excluding brokered deposits, in May and June of 2023. In the last 12 months ended June 30, 2023, approximately $39 million or 22.1% since the end38% of the thirdtrailing 12-month deposit runoff has been transferred from bank deposits to the ChoiceOne Wealth department. During the second quarter in 2021.of 2023, ChoiceOne borrowed $160 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. The interest rate on the BTFP borrowings as of June 30, 2023 is 4.71% and fixed through May of 2024. Management elected to use the BTFP over other funding options due to the favorable interest rate and terms offered.

38

The return on average assets and return on average shareholders’ equity were 0.98%0.86% and 12.67%12.13%, respectively, for the thirdsecond quarter of 2022,2023, compared to 1.03%0.95% and 10.03%12.68%, respectively, for the same period in 2021.2022. The return on average assets and return on average shareholders’ equity were 0.97%0.90% and 14.11%12.75%, respectively, for the first ninesix months of 2022,2023, compared to 1.08%0.94% and 10.01%11.62%, respectively, for the same period in 2021.2022. The increasedecrease in the return on average shareholders' equity isin the three months ended June 30, 2023, was caused by an increase in shareholders’ equity related to a decrease in unrealized losses on available for sale securities and an increase in the fair value of derivatives. The increase in return on average shareholders' equity in the six months ended June 30, 2023 was caused by a decline in shareholders equity caused byrelated to the increase in unrealized losses on available-for-sale securities during the first nine months of 2022.

securities.Paycheck Protection Program

ChoiceOne processed over $126 million in PPP loans in 2020, acquired an additional $37 million in PPP loans in the merger with Community Shores Bank Corporation ("Community Shores"), and originated $89.1 million in PPP loans in 2021.  In the third quarter of 2022, the remaining $1.8 million of PPP loans were forgiven resulting in $68,000 of fee income.  For the nine months ended September 30, 2022, $33.1 million of PPP loans were forgiven resulting in $1.2 million of fee income. At September 30, 2022, no PPP loans remain in ChoiceOne’s loan portfolio.

Dividends

Cash dividends of $2.0 million or $0.26 per share were declared in the second quarter of 2023, compared to $1.9 million or $0.25 per share were declared in the thirdsecond quarter of 2022, and the third quarter of 2021.2022. Cash dividends declared in the first ninesix months of 20222023 were $5.6$3.9 million or $0.75$0.52 per share, compared to $5.3$3.7 million or $0.69$0.50 per share in the same period during the prior year. The cash dividend payout percentage was 33.2%36.1% for the first nine monthshalf of 2022,2023, compared to 31.3%33.6% in the same period in the prior year.

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three-three and nine-month periodssix months ended SeptemberJune 30, 20222023 and 2021.2022. 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.

29

39

Table 1 – Average Balances and Tax-Equivalent Interest Rates

  

Three Months Ended September 30,

 
  

2022

  

2021

 

(Dollars in thousands)

 

Average

          

Average

         
  

Balance

  

Interest

  

Rate

  

Balance

  

Interest

  

Rate

 

Assets:

                        

Loans (1)(3)(4)(5)

 $1,128,679  $13,622   4.83

%

 $1,021,326  $12,412   4.86

%

Taxable securities (2)

  774,040   3,943   2.04   641,430   2,821   1.76 

Nontaxable securities (1)

  305,661   1,853   2.43   281,223   1,850   2.63 

Other

  43,418   238   2.19   106,831   38   0.14 

Interest-earning assets

  2,251,798   19,656   3.49   2,050,810   17,121   3.34 

Noninterest-earning assets

  137,752           183,418         

Total assets

 $2,389,550          $2,234,228         
                         

Liabilities and Shareholders' Equity:

                        

Interest-bearing demand deposits

 $915,698  $972   0.42

%

 $850,963  $485   0.23

%

Savings deposits

  464,382   182   0.16   407,765   144   0.14 

Certificates of deposit

  196,160   410   0.84   183,103   208   0.45 

Borrowings

  2,414   8   1.40   2,667   38   5.70 

Subordinated debentures

  35,168   375   4.27   9,154   151   6.60 

Interest-bearing liabilities

  1,613,822   1,947   0.48   1,453,652   1,026   0.28 

Demand deposits

  593,793           545,251         

Other noninterest-bearing liabilities

  17,177           5,956         

Total liabilities

  2,224,792           2,004,859         

Shareholders' equity

  164,758           229,369         

Total liabilities and shareholders' equity

 $2,389,550          $2,234,228         
                         

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

     $17,709          $16,095     
                         

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)

          3.15

%

          3.14

%

                         

Reconciliation to Reported Net Interest Income

                        

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

     $17,709          $16,095     

Adjustment for taxable equivalent interest

      (371)          (395)    

Net interest income (GAAP)

     $17,338          $15,700     

Net interest margin (GAAP)

          3.08

%

          3.06

%

(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 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry.  These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

(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 $1.2 million and $1.5 million in the third quarter of 2022 and 2021, respectively.  PPP loan average balances were $879,000 and $85.5 million in the third quarter of 2022 and 2021, respectively. At September 30, 2022 no PPP loans remain in ChoiceOne’s loan portfolio.
(5)Interest on loans included net origination fees, accretion income, and PPP fees.  Accretion income was $440,000 and $253,000 in the third quarter of 2022 and 2021, respectively. PPP fees were approximately $68,000 and $1.6 million in the third quarter of 2022 and 2021, respectively.

 

Three Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

(Dollars in thousands)

Average

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)(3)(4)(5)(6)

$

1,218,860

 

 

$

15,986

 

 

 

5.26

 

%

$

1,076,934

 

 

$

12,529

 

 

 

4.65

 

%

Taxable securities (2)(6)

 

756,239

 

 

 

5,378

 

 

 

2.85

 

 

 

780,689

 

 

 

3,522

 

 

 

1.80

 

 

Nontaxable securities (1)

 

296,952

 

 

 

1,758

 

 

 

2.38

 

 

 

317,730

 

 

 

1,973

 

 

 

2.48

 

 

Other

 

41,075

 

 

 

571

 

 

 

5.57

 

 

 

40,728

 

 

 

63

 

 

 

0.61

 

 

Interest-earning assets

 

2,313,126

 

 

 

23,693

 

 

 

4.11

 

 

 

2,216,081

 

 

 

18,087

 

 

 

3.26

 

 

Noninterest-earning assets

 

109,441

 

 

 

 

 

 

 

 

 

145,398

 

 

 

 

 

 

 

 

Total assets

$

2,422,567

 

 

 

 

 

 

 

 

$

2,361,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

$

815,179

 

 

$

1,905

 

 

 

0.94

 

%

$

911,936

 

 

$

627

 

 

 

0.27

 

%

Savings deposits

 

372,651

 

 

 

345

 

 

 

0.37

 

 

 

461,934

 

 

 

157

 

 

 

0.14

 

 

Certificates of deposit

 

285,160

 

 

 

2,225

 

 

 

3.13

 

 

 

181,851

 

 

 

211

 

 

 

0.47

 

 

Brokered deposit

 

49,679

 

 

 

581

 

 

 

4.69

 

 

 

-

 

 

 

-

 

 

 

0.00

 

 

Borrowings

 

144,231

 

 

 

1,717

 

 

 

4.78

 

 

 

5,765

 

 

 

21

 

 

 

1.44

 

 

Subordinated debentures

 

35,352

 

 

 

407

 

 

 

4.62

 

 

 

35,095

 

 

 

361

 

 

 

4.11

 

 

Other

 

3,763

 

 

 

45

 

 

 

4.81

 

 

 

-

 

 

 

-

 

 

 

0.00

 

 

Interest-bearing liabilities

 

1,706,015

 

 

 

7,225

 

 

 

1.70

 

 

 

1,596,581

 

 

 

1,377

 

 

 

0.34

 

 

Demand deposits

 

534,106

 

 

 

 

 

 

 

 

 

578,943

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

10,534

 

 

 

 

 

 

 

 

 

8,870

 

 

 

 

 

 

 

 

Total liabilities

 

2,250,655

 

 

 

 

 

 

 

 

 

2,184,394

 

 

 

 

 

 

 

 

Shareholders' equity

 

171,912

 

 

 

 

 

 

 

 

 

177,085

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

2,422,567

 

 

 

 

 

 

 

 

$

2,361,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

 

 

 

$

16,468

 

 

 

 

 

 

 

 

$

16,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)

 

 

 

 

 

 

 

2.86

 

%

 

 

 

 

 

 

 

3.02

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to Reported Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

 

 

 

$

16,468

 

 

 

 

 

 

 

 

$

16,710

 

 

 

 

 

Adjustment for taxable equivalent interest

 

 

 

 

(377

)

 

 

 

 

 

 

 

 

(422

)

 

 

 

 

Net interest income (GAAP)

 

 

 

$

16,091

 

 

 

 

 

 

 

 

$

16,288

 

 

 

 

 

Net interest margin (GAAP)

 

 

 

 

 

 

 

2.79

 

%

 

 

 

 

 

 

 

2.94

 

%

(1)
30Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.
(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 $1.6 million and $1.3 million in the second quarter of 2023 and 2022, respectively. PPP loan average balances were $0 and $5.1 million in the second quarter of 2023 and 2022, respectively.
(5)
Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $444,000 and $408,000 in the second quarter of 2023 and 2022, respectively. PPP fees were approximately $0 and $283,000 in the second quarter of 2023 and 2022, respectively.
(6)
Interest on loans and securities included derivative income and expense. Derivative income in securities was $523,000 and derivative expense in securities was $9,000 in the second quarter of 2023 and 2022, respectively. Derivative expense in loan interest income was $665,000 and derivative income in loan interest was $430,000 in the second quarter of 2023 and 2022, respectively.

  

Nine Months Ended September 30,

 
  

2022

  

2021

 

(Dollars in thousands)

 

Average

          

Average

         
  

Balance

  

Interest

  

Rate

  

Balance

  

Interest

  

Rate

 

Assets:

                        

Loans (1)(3)

 $1,081,943  $38,454   4.74

%

 $1,047,326  $36,666   4.67

%

Taxable securities (2)

  782,378   11,001   1.87   542,216   7,073   1.74 

Nontaxable securities (1)

  319,381   5,921   2.47   253,565   5,070   2.67 

Other

  40,217   314   1.04   81,912   70   0.11 

Interest-earning assets

  2,223,919   55,691   3.34   1,925,019   48,879   3.39 

Noninterest-earning assets

  149,813           180,522         

Total assets

 $2,373,732          $2,105,541         
                         

Liabilities and Shareholders' Equity:

                        

Interest-bearing demand deposits

 $918,644  $2,034   0.30

%

 $772,950  $1,379   0.24

%

Savings deposits

  455,816   485   0.14   385,160   391   0.14 

Certificates of deposit

  185,857   823   0.59   187,873   786   0.56 

Borrowings

  5,708   35   0.83   4,608   95   2.76 

Subordinated debentures

  35,205   1,099   4.16   5,147   253   6.55 

Interest-bearing liabilities

  1,601,230   4,477   0.37   1,355,738   2,904   0.29 

Demand deposits

  575,483           518,327         

Other noninterest-bearing liabilities

  13,528           4,745         

Total liabilities

  2,190,241           1,878,810         

Shareholders' equity

  183,491           226,731         

Total liabilities and shareholders' equity

 $2,373,732          $2,105,541         
                         

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

     $51,214          $45,975     
                         

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)

          3.07

%

          3.18

%

                         

Reconciliation to Reported Net Interest Income

                        

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

     $51,214          $45,975     

Adjustment for taxable equivalent interest

      (1,265)          (1079)    

Net interest income (GAAP)

     $49,948          $44,896     

Net interest margin (GAAP)

          2.99

%

          3.11

%

                         

(1)

40

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

 

(Dollars in thousands)

Average

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Balance

 

 

Interest

 

 

Rate

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)(3)(4)(5)(6)

$

1,210,611

 

 

$

30,876

 

 

 

5.10

 

%

$

1,056,155

 

 

$

24,832

 

 

 

4.70

 

%

Taxable securities (2)(6)

 

756,967

 

 

 

10,291

 

 

 

2.72

 

 

 

786,620

 

 

 

7,029

 

 

 

1.79

 

 

Nontaxable securities (1)

 

296,969

 

 

 

3,575

 

 

 

2.41

 

 

 

326,687

 

 

 

4,068

 

 

 

2.49

 

 

Other

 

30,325

 

 

 

748

 

 

 

4.93

 

 

 

38,521

 

 

 

76

 

 

 

0.39

 

 

Interest-earning assets

 

2,294,872

 

 

 

45,490

 

 

 

3.96

 

 

 

2,207,983

 

 

 

36,005

 

 

 

3.26

 

 

Noninterest-earning assets

 

112,160

 

 

 

 

 

 

 

 

 

155,796

 

 

 

 

 

 

 

 

Total assets

$

2,407,032

 

 

 

 

 

 

 

 

$

2,363,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

$

845,140

 

 

$

3,477

 

 

 

0.82

 

%

$

920,141

 

 

$

1,062

 

 

 

0.23

 

 %

Savings deposits

 

389,742

 

 

 

618

 

 

 

0.32

 

 

 

451,462

 

 

 

303

 

 

 

0.13

 

 

Certificates of deposit

 

266,611

 

 

 

3,504

 

 

 

2.63

 

 

 

180,620

 

 

 

413

 

 

 

0.46

 

 

Brokered deposit

 

31,322

 

 

 

733

 

 

 

4.68

 

 

 

-

 

 

 

-

 

 

 

0.00

 

 

Borrowings

 

103,900

 

 

 

2,425

 

 

 

4.67

 

 

 

1,872

 

 

 

27

 

 

 

2.85

 

 

Subordinated debentures

 

35,321

 

 

 

809

 

 

 

4.58

 

 

 

36,509

 

 

 

725

 

 

 

3.97

 

 

Other

 

1,888

 

 

 

45

 

 

 

4.78

 

 

 

-

 

 

 

-

 

 

 

0.00

 

 

Interest-bearing liabilities

 

1,673,924

 

 

 

11,611

 

 

 

1.39

 

 

 

1,590,604

 

 

 

2,530

 

 

 

0.32

 

 

Demand deposits

 

550,281

 

 

 

 

 

 

 

 

 

566,177

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

12,721

 

 

 

 

 

 

 

 

 

15,235

 

 

 

 

 

 

 

 

Total liabilities

 

2,236,926

 

 

 

 

 

 

 

 

 

2,172,016

 

 

 

 

 

 

 

 

Shareholders' equity

 

170,106

 

 

 

 

 

 

 

 

 

191,763

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

2,407,032

 

 

 

 

 

 

 

 

$

2,363,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

 

 

 

$

33,879

 

 

 

 

 

 

 

 

$

33,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin (tax-equivalent basis) (Non-GAAP) (1)

 

 

 

 

 

 

 

2.95

 

%

 

 

 

 

 

 

 

3.03

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to Reported Net Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent basis) (Non-GAAP) (1)

 

 

 

$

33,879

 

 

 

 

 

 

 

 

$

33,475

 

 

 

 

 

Adjustment for taxable equivalent interest

 

 

 

 

(776

)

 

 

 

 

 

 

 

 

(866

)

 

 

 

 

Net interest income (GAAP)

 

 

 

$

33,103

 

 

 

 

 

 

 

 

$

32,609

 

 

 

 

 

Net interest margin (GAAP)

 

 

 

 

 

 

 

2.88

 

%

 

 

 

 

 

 

 

2.95

 

%

(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 21%. The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry. These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

(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 $1.3 million and $3.7 million in the first nine months of 2022 and 2021, respectively.  PPP loan average balances were $10.8 million and $111.6 million in the first nine months of 2022 and 2021, respectively. At September 30, 2022 no PPP loans remain in ChoiceOne’s loan portfolio.
(5)Interest on loans included net origination fees, accretion income, and PPP fees.  Accretion income was $1.7 million and $924,000 in the first nine months of 2022 and 2021, respectively. PPP fees were approximately $1.2 million and $4.0 million in the first nine months of 2022 and 2021, respectively.

31
(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 $1.5 million and $1.4 million in the six months ended June 30, 2023 and 2022, respectively. PPP loan average balances were $0 and $14.5 million in the six months ended June 30, 2023 and 2022, respectively.
(5)
Interest on loans included net origination fees, accretion income, and PPP fees. Accretion income was $916,000 and $1.2 million in the six months ended June 30, 2023 and 2022, respectively. PPP fees were approximately $0 and $1.2 million in the six months ended June 30, 2023 and 2022, respectively.
(6)
Interest on loans and securities included derivative income and expense. Derivative income in securities was $896,000 and derivative expense in securities was $9,000 in the six months ended June 30, 2023 and 2022, respectively. Derivative expense in loan interest income was $1.4 million and derivative income in loan interest was $430,000 in the six months ended June 30, 2023and 2022, respectively.

41

Table 2 – Changes in Tax-Equivalent Net Interest Income

 

Three Months Ended September 30,

 

Three Months Ended June 30,

 

(Dollars in thousands)

 

2022 Over 2021

 

2023 Over 2022

 

 

Total

 

Volume

 

Rate

 

Total

 

 

Volume

 

 

Rate

 

Increase (decrease) in interest income (1)

 

 

 

 

 

 

 

Loans (2)

 $1,210  $1,354  $(144)

$

3,457

 

 

$

1,732

 

 

$

1,725

 

Taxable securities

 1,122  942  $180 

 

1,856

 

 

 

(741

)

 

 

2,597

 

Nontaxable securities (2)

 3  238  $(235)

 

(215

)

 

 

(130

)

 

 

(85

)

Other

  200  (125) $325 

 

508

 

 

 

1

 

 

 

507

 

Net change in interest income

  2,535  2,409  126 

 

5,606

 

 

 

862

 

 

 

4,744

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in interest expense (1)

 

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 487  129  358 

 

1,278

 

 

 

(448

)

 

 

1,726

 

Savings deposits

 38  31  7 

 

188

 

 

 

(204

)

 

 

392

 

Certificates of deposit

 202  50  152 

 

2,014

 

 

 

184

 

 

 

1,830

 

Brokered deposit

 

581

 

 

 

581

 

 

 

-

 

Borrowings

 (30) (10) (20)

 

1,696

 

 

 

1,547

 

 

 

149

 

Subordinated debentures

  224   321   (97)

 

46

 

 

 

3

 

 

 

43

 

Other

 

45

 

 

 

45

 

 

 

-

 

Net change in interest expense

  921  521  400 

 

5,848

 

 

 

1,708

 

 

 

4,140

 

Net change in tax-equivalent net interest income

 $1,614  $1,888  $(274)

$

(242

)

 

$

(846

)

 

$

604

 

  

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2022 Over 2021

 
  

Total

  

Volume

  

Rate

 

Increase (decrease) in interest income (1)

            

Loans (2)

 $1,789  $1,329  $460 

Taxable securities

  3,928   3,470   458 

Nontaxable securities (2)

  851   1,313   (462)

Other

  244   (69)  313 

Net change in interest income

  6,812   6,043   769 
             

Increase (decrease) in interest expense (1)

            

Interest-bearing demand deposits

  655   334   321 

Savings deposits

  94   79   15 

Certificates of deposit

  37   (11)  48 

Borrowings

  (60)  23   (83)

Subordinated debentures

  847   985   (138)

Net change in interest expense

  1,573   1,410   163 

Net change in tax-equivalent net interest income

 $5,239  $4,633  $606 

(1)

The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate.  The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance).  The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

(2)

Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.

 

Six Months Ended June 30,

 

(Dollars in thousands)

2023 Over 2022

 

 

Total

 

 

Volume

 

 

Rate

 

Increase (decrease) in interest income (1)

 

 

 

 

 

 

 

 

Loans (2)

$

6,044

 

 

$

4,679

 

 

$

1,365

 

Taxable securities

 

3,262

 

 

 

(513

)

 

 

3,775

 

Nontaxable securities (2)

 

(493

)

 

 

(417

)

 

 

(76

)

Other

 

672

 

 

 

(38

)

 

 

710

 

Net change in interest income

 

9,485

 

 

 

3,711

 

 

 

5,774

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in interest expense (1)

 

 

 

 

 

 

 

 

Interest-bearing demand deposits

 

2,415

 

 

 

(181

)

 

 

2,596

 

Savings deposits

 

315

 

 

 

(85

)

 

 

400

 

Certificates of deposit

 

3,091

 

 

 

519

 

 

 

2,572

 

Brokered deposit

 

733

 

 

 

733

 

 

 

0

 

Borrowings

 

2,398

 

 

 

2,384

 

 

 

14

 

Subordinated debentures

 

84

 

 

 

(41

)

 

 

125

 

Other

 

45

 

 

 

45

 

 

 

0

 

Net change in interest expense

 

9,081

 

 

 

3,374

 

 

 

5,707

 

Net change in tax-equivalent net interest income

$

404

 

 

$

337

 

 

$

67

 

(1)
The volume variance is computed as the change in volume (average balance) multiplied by the previous year’s interest rate. The rate variance is computed as the change in interest rate multiplied by the previous year’s volume (average balance). The change in interest due to both volume and rate has been allocated to the volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
(2)
Interest on nontaxable investment securities and loans has been adjusted to a fully tax-equivalent basis using an incremental tax rate of 21%.

42

Net Interest Income

Tax-equivalent net interest income decreased $242,000 and increased $1.6 million and $5.2 million$404,000 in the thirdsecond quarter and first ninesix months of 2022,2023, respectively, compared to the same periods in 2021.  Growth2022. The Federal Reserve increased the federal funds rate by 5.00% from March 31, 2022 to June 30, 2023 in response to published inflation rates. This increased rates on newly originated loans and increased rates paid on deposits. Tax equivalent net interest margin decreased 16 basis points and 8 basis points in the threesecond quarter and first six months endedof 2023 to 2.86% and nine months ended September 30, 20222.95%, respectively, compared to the same time periods in 2021 were affected by an increased average balance2022. GAAP based net interest margin decreased 15 basis points and 7 basis points in the second quarter and first six months of securities as ChoiceOne deployed excess deposit dollars into securities with2023 to 2.79% and 2.88%, respectively, compared to the intent to transition to loans as good credits become available.  same periods in 2022. GAAP Net interest margin during the month of June 2023 was 2.75%.

The following table presents the cost of deposits and the cost of funds for the three and six months ended June 30, 2023 and 2022.

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2023

 

2022

 

 

2023

 

2022

 

Cost of deposits

 

0.98

%

 

0.19

%

 

 

0.80

%

 

0.17

%

Cost of funds

 

1.29

%

 

0.25

%

 

 

2.09

%

 

0.47

%

ChoiceOne has also experienced substantial core loan growth duringfrom June 30, 2022 to June 30, 2023, leading to growthan increase in interest income from loans of $1.2$3.5 million and $1.8$6.0 million duringin the three and ninesix months ended SeptemberJune 30, 2023, respectively, compared to the same periods in the prior year. Average core loans grew $168.7 million and $181.2 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in the prior year. CoreIn addition, the average rate earned on loans exclude PPP loans, loans held for sale, and loans to other financial institutions.  Net interest margin on a tax-equivalent basis increased by 161 basis points and declined by 1140 basis points infor the third quarterthree and first ninesix months of 2022,ended June 30, 2023, respectively, compared to the same periods in 2021.the prior year. The Federal Reserve increasedincrease in interest income from loans and the federal fundsaverage rate by 3.00% during the first nine months of 2022 in response to published inflation rates, causing interest rates to increase on all new loan originations.  This led to the modestloans was muted by a decline in PPP fees and an increase in net interest marginderivative expense in the third quarter of 2022 compared to the third quarter of 2021.  The decline in net interest margin on a tax-equivalent basis for the ninethree and six months ended SeptemberJune 30, 2022 compared to the same time period in the prior year, is due the asset mix as ChoiceOne grew securities faster than it grew loans.  

The average balance of loans increased $107.4 million in the third quarter of 2022 and $34.6 million in the first nine months of 20222023 compared to the same periods in 2021, as core loans grew offset by a decline2022. PPP fee income in PPP loans.  Average core loans increased $195.1the first six months of 2023 was $0 compared to $283,000 and $1.2 million in the third quarter of 2022three and $140.9six months ended June 30, 2022. Derivative expense was $665,000 and $1.4 million during the three and six months ended June 30, 2023, respectively, compared to derivative income in the first nineprior year of $431,000 during the three and six months ended June 30, 2022.

The average balance of 2022total securities decreased $45.2 million and $59.4 million for the three and six months ended June 30, 2023, respectively, compared to the same periods in 2021.  Average PPP loans declined $84.7the prior year. The decrease is due to the liquidation of $31.8 million in securities during the third quarterfirst six months of 2022, with the remainder attributed to paydowns and $100.8 milliona decline in the first ninefair value of available for sale securities. The average rate earned on securities increased 71 basis points and 64 basis points for the three and six months of 2022ended June 30, 2023, respectively, compared to the same periods in 2021.  The rate earned on loans in the third quarterprior year, which was aided by $523,000 and $896,000 of 2022 declined slightly dueincome related to a reduction in PPP fees which declined $1.6 million inderivative instruments for the third quarter of 2022 compared to the third quarter of 2021.  The rate earned on loans increased by 7 basis points during the ninethree and six months ended SeptemberJune 30, 20222023, respectively, compared to the same time periodperiods in 2021 as new loan originations have been at higher rates due to market conditions offset by a $2.8the prior year.

Interest expense increased $5.8 million declineand $9.1 million in PPP fees earned during ninethe three and six months ended SeptemberJune 30, 20222023, respectively, compared to the same periodperiods in 2021.

the prior year. The average balance of total securitiesrate paid on interest bearing-demand deposits and savings deposits increased $157.0 million,53 basis points and the average rate earned increased 1246 basis points in the third quarter of 2022three and six months ended June 30, 2023, respectively, compared to the same period in 2021.  The average balance of total securities increased $306.0 million and the average rate earned increased 1 basis pointperiods in the first nine months of 2022 compared toprior year. This was offset by the same period in 2021.  

32

Growth of $121.4 milliondecline in the average balance of interest-bearing demandinterest bearing-demand deposits and savings deposits, of $186.0 million and a combined 13 basis point$136.7 million during the respective time periods. The increase in the average rate paid, caused interest expense to increase $525,000 in the third quarter of 2022 compared to the third quarter of the prior year.  Growth of $216.4 million in the average balance of interest-bearing demand deposits and savings deposits and a combined 4 basis point increase in the average rate paid, caused interest expense to increase $749,000 in the first nine months of 2022 compared to the first nine months of the prior year. The average balance of certificates of deposit increased $13.1of $103.3 million and declined $2.0$86.0 million, in the third quartercombined with a 266 basis point and first nine months of 2022, respectively, compared to the same period in 2021. The217 basis point increase in balances and a 39 basis points increase in the average rate paid on certificates of deposit caused interest expense to increase $202,000deposits in the third quarter 2022,three and six months ended June 30, 2023, respectively, compared to the same periods in 2021.  The decline in balances offset by a 3 basis pointsthe prior year, led to an increase in the average rate paid on certificates of deposit caused interest expense of $2.0 million and $3.1 million during the respective time periods.

In order to bolster liquidity, ChoiceOne borrowed $160.0 million from the Bank Term Funding Program ("BTFP") and obtained $51.4 million in brokered deposits at the end of the second quarter of 2023. The net effect of these additional borrowed funds and brokered CDs was an increase $37,000 in interest expense of $2.3 million and $3.1 million for the first ninethree and six months of 2022,ended June 30, 2023, respectively, compared to the same periods in 2021.  2022.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. These increased theThe average balance of subordinated debentures by $26.0 million and $30.0 millionwas relatively flat in the thirdsecond quarter and first nine months of 2022, respectively,2023 compared to the same period in the prior year and caused interest expense to increase by $224,000 and $847,000 in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021. year.

43

Provision and Allowance for LoanCredit Losses

The provision for loan losses was $100,000On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the first nine monthsACL of 2022, compared to $416,000 in the same period in the prior year.  Provision expense was deemed necessary to reserve for core loan growth of $52.8 million in the third quarter of 2022.  Based on our assessment of the probable estimated losses inherent in the loan portfolio no additional provision was necessary for existing loans. Our methodology for measuring the appropriate level of allowance for loan losses and related provision for loan losses involves specific allocations for loans considered impaired, and general allocations for homogeneous loans based on historical loss experience. 

Loans classified as impaired loans declined by $2.8 million during the nine months ended September 30, 2022.$7.2 million. The specific allowance for loan losses for impaired loans decreased by $346,000 during the nine months ended September 30, 2022 largelylarge increase is partially due to the current economic environment and the nature of the CECL calculation. Approximately 20% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne also booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL guidance. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the allowance and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.

The ACL consists of impairedgeneral and specific components. The general component covers loans compared to December 31, 2021.collectively evaluated for credit loss and is based on peer historical loss experience adjusted for current and forecasted factors. Management's adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

The determination of our loss factors is based, in part, upon our actualbenchmark peer loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne uses a rolling 20 quarter actualChoiceOne's lookback period of benchmark peer net charge-off history aswas from January 1, 2004 through December 31, 2019 for this analysis.

Loans individually evaluated for credit losses decreased by $723,000 to $2.1 million during the basis forsix months ended June 30, 2023, and the computation. ACL related to these individually evaluated loans decreased by $81,000 during the six months ended June 30, 2023 largely due to the loan balances being fully collateralized compared to December 31, 2022.

Nonperforming loans, which includes Other Real Estate Owned (OREO) but excludes performing TLM and TDR loans, were $2.6$1.8 million as of SeptemberJune 30, 2022,2023, compared to $5.5$2.7 million as of December 31, 2021.2022. The allowance for loan lossesACL was 0.66%1.15% of total loans at SeptemberJune 30, 2022,2023, compared to 0.76%1.24% as of January 1, 2023 (the CECL adoption date) and 0.64% at December 31, 2021.  Loans acquired in the mergers with County Bank Corp.2022. The liability for expected credit losses on unfunded loans and Community Shores were recorded at fair valueother commitments was $3.2 million on June 30, 2023, compared to $3.3 million as of January 1, 2023 (the CECL adoption date) and as a result dodid not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition.  ChoiceOne has $1.8 million in credit mark remainingexist on loans acquired in the mergers. December 31, 2022.

Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2022 and 2021 were as follows:

(Dollars in thousands)

 

2022

  

2021

 
  

Charge-offs

  

Recoveries

  

Charge-offs

  

Recoveries

 

Agricultural

 $-  $-  $-  $- 

Commercial and industrial

  177   62   195   80 

Consumer

  383   162   244   168 

Commercial real estate

  -   3   111   43 

Construction real estate

  -   -   -   - 

Residential real estate

  -   2   -   5 
  $560  $229  $550  $296 

Net charge-offs were $331,000$95,000 in the first ninesix months of 2022,2023, compared to net charge-offs of $254,000$272,000 during the same period in 2021.2022. Checking account charge-off and recovery activity is included in the consumer charge-off activity above.below. Net charge-offs for checking accounts for the thirdsecond quarter and first nine months of 20222023 were $73,000 and $186,000, respectively,$100,000 compared to $49,000 and $90,000$113,000 for the same periodsperiod in the prior year. Net charge-offs on an annualized basis as a percentage of average loans were 0.04%0.03% in the first ninesix months of 20222023 compared to annualized net charge-offs of 0.03%0.05% of average loans in the same period in the prior year. Management is aware that

44

Charge-offs and recoveries for respective loan categories for the economic climate in Michigan will continue to affect businessessix months ended June 30, 2023 and individual borrowers.  Management has worked2022 were as follows:

(Dollars in thousands)

2023

 

 

2022

 

 

Charge-offs

 

 

Recoveries

 

 

Charge-offs

 

 

Recoveries

 

Agricultural

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Commercial and industrial

 

-

 

 

 

29

 

 

 

131

 

 

 

4

 

Consumer

 

271

 

 

 

129

 

 

 

255

 

 

 

106

 

Commercial real estate

 

—

 

 

 

13

 

 

 

—

 

 

 

2

 

Construction real estate

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Residential real estate

 

—

 

 

 

5

 

 

 

—

 

 

 

2

 

 

$

271

 

 

$

176

 

 

$

386

 

 

$

114

 

The provision for credit losses benefit was $415,000 and intends to continue to work with delinquent borrowers in an attempt to lessen the negative impact to ChoiceOne. As charge-offs, changes$106,000 in the levelsecond quarter of nonperforming loans, and changes within the composition of the loan portfolio occur throughout 2022, the provision and allowance for loan losses will be reviewed by ChoiceOne’s management and adjusted as determined to be necessary.

33

Noninterest Income

Total noninterest income declined $1.7 million and $4.7 million in the third quarter2023 and first ninesix months of 20222023, respectively, compared to $0 in the same periods in the prior year. The provision benefit was deemed necessary due to the impact of improvements in the FOMC forecast for unemployment and GDP growth exceeding the provision required for loan growth in the second quarter and first half of 2023. The FOMC forecast for change in real GDP improved from 0.4% in March to 1.0% in June while the unemployment rate forecast improved from 4.5% in March to 4.1% in June.

The loan provision benefit was offset by the increase in unfunded commitments provision of $165,000 in the second quarter of 2023 as ChoiceOne saw increases in the pipeline for new loans approved but not funded. The total unfunded commitments increased $50.1 million in the second quarter of 2023 compared to March 31, 2023 and $40.0 million compared to January 1, 2023.

The net provision benefit of $250,000 and $225,000 was recorded in the second quarter and first six months of 2023, respectively, compared to zero for the same periods in 2022.

Noninterest Income

Total noninterest income in 2021 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $1.4 millionincreased $55,000 or 1.59% and $3.6 million larger thandecreased $120,000 or 1.7% in the thirdsecond quarter and first nine monthshalf of 2022.  Customer service charges increased $203,000 and $691,000 in the third quarter and first nine months of 20222023, respectively, compared to the same periods in 2022. This was largely due to a decline of $748,000 in gains on sales of loans for the six months ended June 30, 2023 compared to the same period in the prior year. Service charges were depressedWith the rapid rise in interest rates, refinancing activity has slowed and the rate environment for mortgage loans has become increasingly competitive. This decline was offset by reduced losses on the effectssale of securities and a smaller decline in the COVID 19 pandemic.  The change in the market value of equity securities declined $295,000 and $1.5 million during the third quarter and first nine months of 2022 compared to the same periods in the prior year consistent with general market conditions.securities. Equity securitiesinvestments include local community bank stocks and Community Reinvestment Act bond mutual funds.  During the third quarter and first nine months of 2022, ChoiceOne has liquidated $15.3 million and $47.2 million in securities respectively, resulting in $378,000 and $805,000 of realized loss, respectively, in order to redeploy the funds into higher yielding loans and reduce the risk of extension on certain fixed income securities which include a call option.

Noninterest Expense

Total noninterest expense decreased $90,000increased $416,000 or 3.2% and increased $1.1 million$721,000 or 2.7% in the thirdsecond quarter and first nine monthshalf of 2022,2023, respectively, compared to the same time periods in 2021.2022. The increase during the first nine months of 2022 isin total noninterest expense was related to aninflationary pressures on employee wages and benefits. This increase was offset by decreases in salariesother categories including intangible amortization and wages due to annual wage increases and the addition of new commercial loan production and wealth management staff.  This investment in people will increase expenses in the short term but is expected to drive long term value to ChoiceOne through the building of new relationships.  Other expenses have also increased in the first nine months of 2022 compared to the same period in the prior year due to an increase to our FDIC insurance related expenses, business travel expenses which were still being affected by the pandemic last year.fraud losses. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools.

ChoiceOne launched an enhanced treasury services online platform for business clients during the first quarter of 2023. This new platform targets mid-sized businesses and municipalities who require enhanced reporting, security, and payment capabilities. Management believes that continuing to invest in our technology and people is the right way to maintain sustainable growth.

Income Tax Expense

Income tax expense was $3.0$2.1 million in the first ninesix months of 20222023 compared to $3.3$1.9 million for the same period in 2021.  The decrease was due to a higher level of income before income tax in 2021 and a $65.8 million dollar increase in the average balance of nontaxable securities in the first nine months of 2022 compared to the same period in 2021.2022. The effective tax rate was 14.8%16.0% for the first ninesix months of 20222023 compared to 16.4%14.5% for the same period in 2022. In the six months ended June 30, 2023, non taxable municipal interest decreased and disallowed interest expense increased compared to the first ninesix months of 2021. 2022.

34

45

FINANCIAL CONDITION

Securities

In the last two years ChoiceOne has grown its securities portfolio substantially.  Total available for sale securities on June 30, 2023, were $521.2 million compared to $529.7 on December 31, 2020, amounted to $577.72022, with the small decrease caused by $15.2 million and grew steadily toof principal repayments, calls or maturities, which was offset by an increase in the fair value of the underlying securities. The unrealized loss on securities available for sale balance on December 31, 2021, of $1.1 billion.  Many of the securities making up this balance include local municipals and other securities ChoiceOne has no intent to sell prior to maturity.  Duringdeclined by $9.4 million in the first quartersix months of 2022, ChoiceOne elected to move $428.4 million of the portfolio into a2023. ChoiceOne's held to maturity status.  Management believessecurities declined slightly during the $530.1 million in available for sale securities at September 30, 2022 to be sufficient for any future liquidity needs.

$47.2 millionfirst half of securities were sold in the nine months ended September 30, 2022 to be replaced with higher yielding assets. $13.72023, as $3.2 million of securities were called or matured during that same period. Principaland principal repayments on securities totaled $31.6 million in the nine months ended September 30, 2022.

Loans

Core loans, which exclude PPP loans, held for sale loans, and loans$1.9 million. The securities portfolio is projected to other financial institutions, grew organically by $205.2 million from September 30, 2021 to September 30, 2022.  Excluding PPP loans, ChoiceOne saw growth of $160.2 million in commercial loans and $40.4 million in retail loans from September 30, 2021 to September 30, 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.  ChoiceOne has ample on balance sheet liquidity to fund future loan growth, including an expected $183.1produce approximately $179 million of cash flow from securitiescashflows over the next two years.  years as lower yielding assets mature.

At June 30, 2023, ChoiceOne had $148.4 million in unrealized losses on its investment securities, including $79.6 million in unrealized losses on available for sale securities and $68.8 in unrealized losses on held to maturity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers’ are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.

ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds four interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in shareholders' equity due to unrealized losses on securities available for sale. Refer to footnote 8 for more discussion on ChoiceOne’s derivative position.

Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $7.3 million as of June 30, 2023. As of December 31, 2022, equity securities included an MMP of $1.0 million and common stock of $7.6 million.

Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet in accumulated other comprehensive income (loss).

Loans

Core loans grew organically by $14.8 million or 4.9% on an annualized basis during the second quarter of 2023 and $145.8 million or 13.5% since June 30, 2022. Loans to other financial institutions declinedincreased to $38.8 million as of June 30, 2023, compared to $37.4 million as of June 30, 2022. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest income increased $3.5 million in the second quarter of 2023 compared to the same period in 2022, despite being offset by a decline in PPP fees and an increase in derivative expense in the three and six months ended June 30, 2023 compared to the same periods in 2022. PPP fee income in 2023 was $0 compared to $283,000 and $1.2 million in the three and six months ended June 30, 2022. Derivative expense was $665,000 and $1.4 million during the three and six months ended June 30, 2023, respectively, compared to derivative income in the prior year of $431,000 during the three and six months ended June 30, 2022.

Loan growth was concentrated in commercial real estate loans which grew $91.1 million in the trailing twelve months from SeptemberJune 30, 2021 to September 30, 2022 as management chose to suspend2023. Much of this growth in commercial real estate loans is directly the program at the endresult of the third quarter 2022.  new loan production offices in both the city of Wyoming and Macomb County as well as the newly hired experienced lenders in these locations. Approximately 12% of this commercial real estate loan growth is a single land development loan which consists of high end single family homes currently under construction, 85% of which are pre-sold. Another 19% of this growth is owner-occupied and mainly consists of current customers who are expanding businesses that are performing well in the current environment. Residential real estate loans also grew $52.7 million in the trailing twelve months from June 30, 2023 as the 5/1 ARM product became popular as a mortgage option and it is less salable than more traditional fixed-rate mortgage products. These large increases were offset by declines in agricultural loans of $18.6 million and construction real estate loans of $1.2 million during the period beginning on July 1, 2022 through June 30, 2023.

During the nine months ended September 30, 2022, the remaining $33.1 millionsecond quarter and first half of PPP loans were forgiven resulting in $1.2 million of fee income.  At September 30, 2022 all PPP loans have been fully forgiven, and the associated fee income has been recognized.

During the first nine months of 2022,2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $1.7 million.  The remaining$444,000 and $916,000, respectively. Remaining credit and yield mark on acquired loans from the recentmergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $1.8$3.3 million as of SeptemberJune 30, 2022.  2023.

46

Asset Quality

Information regarding impairedindividually evaluated loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of individually evaluated loans classified as impaired was $2.6$2.1 million on SeptemberJune 30, 2022,2023, compared to $5.5$2.8 million of impaired loans as of December 31, 2021.2022. The change in the first ninesix months of 20222023 was primarily comprised of a decrease of $2.3 milliondue to the decline in impaired agriculturalnon-accrual residential mortgage loans.

As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of: (1)of loans accounted for on a nonaccrual basis; (2)basis and 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 restructurings ("TDRs").payments.

The balances of these nonperforming loans were as follows:

(Dollars in thousands)

 

September 30,

 

December 31,

 

June 30,

 

December 31,

 

 

2022

 

2021

 

2023

 

2022

 

Loans accounted for on a nonaccrual basis

 $1,197  $1,727 

$

1,581

 

 

$

1,263

 

Accruing loans which are contractually past due 90 days or more as to principal or interest payments

 -  - 

 

—

 

 

 

—

 

Loans defined as "troubled debt restructurings " which are not included above

  1,431  3,816 

Loans past due defined as "troubled loan modifications" or "troubled debt restructurings " which are not included above

 

129

 

 

 

—

 

Total

 $2,628  $5,543 

$

1,710

 

 

$

1,263

 

The reductionsmall increase in the balance of nonaccrual loans in the first nine monthssecond quarter of 20222023 was primarily due to loans that were paid off.  It is also noted that 82% of loans considered TDRs were performing according to their restructured terms as of September 30, 2022.the increase in residential mortgage loans. Management believes the allowance for loan lossesACL allocated to its nonperforming loans iswas sufficient at SeptemberJune 30, 2022.

35

2023.

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 Bank Corp. in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.

ChoiceOne management performsconducted an annual qualitative assessment and periodically performs a quantitative assessment.  Management will perform a quantitative assessment of goodwill duringas of June 30, 2023 and no impairment was identified. ChoiceOne used a qualitative assessment to determine goodwill was not impaired.

During the fourth quarterprior year, ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of 2022.

goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.

Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were no material changes and that no triggering events had occurred that indicated impairment from the valuation date through June 30, 2023, and as a result that it is more likely than not that there was no goodwill impairment.

47

Deposits and Borrowings

DepositsChoiceOne saw deposits, excluding brokered deposits, decline $83.0 million or 3.9% in the thirdfirst six months of 2023 compared to December 31, 2022. The decrease in deposits was largely concentrated in the first quarter of 2022 continue to hold strong with an increase2023 as a result of $18.1 million compared toa combination of customers using cash on hand for debt payoffs, seasonal tax and municipal bond payments, and customers seeking higher rates via money market securities or other investments. Deposit outflows have stabilized in the second quarter of 2022,2023 with monthly growth of deposits in May and June of 2023. In the last 12 months ended June 30, 2023, approximately $39 million or 38% of the trailing 12-month deposit runoff has been transferred from bank deposits to the ChoiceOne Wealth department, which is attributedoff balance sheet. The cost of deposits has increased to organic growth of new relationships, seasonal fluctuations in our municipal clients0.98% during the three months ended June 30, 2023 compared to 0.62% and some modest deposit runoff0.19% for the three months ended March 31, 2023 and June 30, 2022, respectively, due to rising short term interest rates and is expected to continue to increase as ChoiceOne has held deposit rates.  Despite the rapidly rising rate environment, deposit costs have only increased 12 basis points since the third quarter of 2021, asdeposits reprice. ChoiceOne is actively managing these costs and willexpects rates paid on deposits to continue to lag the expected increases in the federal fundsfund rate.

Uninsured deposits total $700.3 million or 34.4% of deposits at June 30, 2023 compared to $751.4.million, or 36% of total deposits and $823.2 million, or 39% of total deposits at March 31, 2023 and December 31, 2022, respectively. At June 30, 2023, total available borrowing capacity from all sources was $791.7 million, which exceeds uninsured deposits.

In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne also holds $3.2 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment.

During the second quarter of 2023, ChoiceOne mayborrowed $160 million from the Federal Reserve’s Bank Term Funding Program (BTFP). This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of June 30, 2023 is 4.71% and fixed through May of 2024. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. The interest rate on the BTFP borrowings as of June 30, 2023 is 4.71% and fixed through May of 2024. During the first six months of 2023 ChoiceOne also obtained $51.4 million in short term brokered deposits, which were fixed at below market rates prior to the latest increase to the federal funds rate by the Federal Reserve. Brokered deposits allow us to preserve borrowing capacity at more accessible funding options. ChoiceOne will continue to use brokered deposits, Federal Home Loan Bank advances, and advances from the Federal Reserve Bank Discount Window, and the Bank Term Funding Program to meet short-term funding needs in the remainder of 2022.

2023.

Shareholders' Equity

Total shareholders'Shareholders’ equity declined $65.0totaled $179.2 million as of June 30, 2023, a $10.4 million increase compared to December 31, 2022. The increase is primarily due to a decrease in the first nine months of 2022.  As previously referenced the Federal Reserve increased the federal funds rate by 3.00% during the first nine months of 2022 in response to published inflation rates, causing interest rates to increase.  This change in interest rates increased ChoiceOne'safter-tax net unrealized pre-tax loss on thesecurities available for sale securities portfolioresulting from $3.3 million on December 31, 2021 to $102.9 million on September 30, 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 elected to utilize interest rate derivatives in order to better manage its interest rate risk position.  On April 21, 2022, ChoiceOne purchased four 2-year forward-starting interest rate caps with a total notional amount of $200.0 million and entered into a $200.0 million 2-year forward-starting pay-fixed interest rate swap.  All forward starting instruments have an 8-year term expiring in 2032.  These strategies provide $400 million of notional value protection and also create accounting symmetry between available for sale securities and other comprehensive income (equity), thus protecting tangible capital from further increases inhigher market interest rates. ChoiceOne also entered into multiple received-fixeduses interest rate swaps to manage interest rate exposure to certain fixed assets and variable rate liabilities. On June 30, 2023 ChoiceOne has pay-fixed interest rate swaps with a total notional amountvalue of $200.0 million with a 2-year term,$401.0 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale.

On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the current environment, offsetsACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million related to the adoption of CECL guidance. The increase in the allowance and the cost of the rising rate protection. These three strategies,liability resulted in a decrease in the aggregate, are expectedretained earnings account on our Consolidated Balance Sheet equal to be neutral to net incomethe after-tax impact, with the tax impact portion being recorded in 2022deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. This reduction in retained earnings was offset by first quarter 2023 earnings and better position ChoiceOne Bank should rates continue to rise and remain elevated.  Importantly, the transactions were structured to qualify for hedge accounting, which means that changes in the fair valuerecovery of certain instruments flow throughaccumulated other comprehensive income (equity).  Refer to further details in Note 8 to the consolidated financial statements included in this report. loss.

A reduction in common stock and paid in capital resulted from ChoiceOne's repurchase of 25,899 shares for $682,000, or a weighted average all-in cost per share of $26.35, during the first quarter of 2022.  No shares of common stock were repurchased during the second or third quarters of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions.

48

36

Regulatory Capital Requirements

Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements:

         

Minimum Required

 

 

 

 

 

 

 

 

 

Minimum Required

 

         

to be Well

 

 

 

 

 

 

 

 

 

to be Well

 

     

Minimum Required

 

Capitalized Under

 

 

 

 

 

Minimum Required

 

Capitalized Under

 

     

for Capital

 

Prompt Corrective

 

 

 

 

 

for Capital

 

Prompt Corrective

 

(Dollars in thousands)

 

Actual

  

Adequacy Purposes

  

Action Regulations

 

Actual

 

Adequacy Purposes

 

Action Regulations

 

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

September 30, 2022

             

June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ChoiceOne Financial Services Inc.

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 $216,524  13.7

%

 $126,267  8.0

%

 N/A  N/A 

$

223,004

 

 

 

13.2

 

%

$

135,279

 

 

 

8.0

 

%

N/A

 

 

N/A

 

 

Common equity Tier 1 capital (to risk weighted assets)

 172,632  10.9  71,025  4.5  N/A  N/A 

 

177,911

 

 

 

10.5

 

 

 

76,094

 

 

 

4.5

 

 

N/A

 

N/A

 

 

Tier 1 capital (to risk weighted assets)

 177,132  11.2  94,700  6.0  N/A  N/A 

 

182,411

 

 

 

10.8

 

 

 

101,459

 

 

 

6.0

 

 

N/A

 

 

N/A

 

 

Tier 1 capital (to average assets)

 177,132  7.6  93,179  4.0  N/A  N/A 

 

182,411

 

 

 

7.7

 

 

 

94,633

 

 

 

4.0

 

 

N/A

 

 

N/A

 

 

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ChoiceOne Bank

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 $201,500  12.8

%

 $126,071  8.0

%

 $157,589  10.0

%

$

214,046

 

 

 

12.7

 

%

$

135,044

 

 

 

8.0

 

%

$

168,805

 

 

 

10.0

 

%

Common equity Tier 1 capital (to risk weighted assets)

 194,043  12.3  70,915  4.5  102,433  6.5 

 

205,497

 

 

 

12.2

 

 

 

75,962

 

 

 

4.5

 

 

 

109,723

 

 

 

6.5

 

 

Tier 1 capital (to risk weighted assets)

 194,043  12.3  94,553  6.0  126,071  8.0 

 

205,497

 

 

 

12.2

 

 

 

101,283

 

 

 

6.0

 

 

 

135,044

 

 

 

8.0

 

 

Tier 1 capital (to average assets)

 194,043  8.3  93,081  4.0  116,351  5.0 

 

205,497

 

 

 

8.7

 

 

 

94,500

 

 

 

4.0

 

 

 

118,125

 

 

 

5.0

 

 

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

             

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ChoiceOne Financial Services Inc.

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 $204,353  14.4

%

 $113,604  8.0

%

 N/A  N/A 

$

222,006

 

 

 

13.8

 

%

$

128,545

 

 

 

8.0

 

%

N/A

 

 

N/A

 

 

Common equity Tier 1 capital (to risk weighted assets)

 160,338  11.3  63,902  4.5  N/A  N/A 

 

177,916

 

 

 

11.1

 

 

 

72,307

 

 

 

4.5

 

 

N/A

 

 

N/A

 

 

Tier 1 capital (to risk weighted assets)

 164,838  11.6  85,203  6.0  N/A  N/A 

 

182,416

 

 

 

11.4

 

 

 

96,409

 

 

 

6.0

 

 

N/A

 

 

N/A

 

 

Tier 1 capital (to average assets)

 164,838  7.4  89,415  4.0  N/A  N/A 

 

182,416

 

 

 

7.9

 

 

 

92,558

 

 

 

4.0

 

 

N/A

 

 

N/A

 

 

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ChoiceOne Bank

             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 $182,275  12.9

%

 $113,444  8.0

%

 $141,806  10.0

%

$

208,696

 

 

 

13.0

 

%

$

128,294

 

 

 

8.0

 

%

$

160,367

 

 

 

10.0

 

%

Common equity Tier 1 capital (to risk weighted assets)

 174,587  12.3  63,813  4.5  92,174  6.5 

 

201,077

 

 

 

12.5

 

 

 

72,165

 

 

 

4.5

 

 

 

104,239

 

 

 

6.5

 

 

Tier 1 capital (to risk weighted assets)

 174,587  12.3  85,083  6.0  113,444  8.0 

 

201,077

 

 

 

12.5

 

 

 

96,220

 

 

 

6.0

 

 

 

128,294

 

 

 

8.0

 

 

Tier 1 capital (to average assets)

 174,587  7.8  89,289  4.0  111,611  5.0 

 

201,077

 

 

 

8.7

 

 

 

92,449

 

 

 

4.0

 

 

 

115,562

 

 

 

5.0

 

 

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of SeptemberJune 30, 20222023 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

49

Liquidity

Net cash provided by operating activities was $32.0$25.2 million for the ninesix months ended SeptemberJune 30, 20222023 compared to $29.6$22.3 million in the same period a year ago.in 2022. The change was due to lower net proceeds from loan sales in 20222023 compared to 2021,2022, which was offset by the change in other assets and liabilities.assets. Net cash used in investing activities was $60.5$66.9 million for the ninesix months ended SeptemberJune 30, 20222023 compared to $398.6$52.8 million used in the same period in 2021.2022. ChoiceOne purchased $61.9$6.2 million of securities and had maturities, principal paydowns or sales of securities of $92.5$20.3 million in the first ninesix months of 20222023 compared to $514.2$38.4 million of purchases and $39.8$62.7 million of maturities, principal paydowns or sales in the same periodsperiod in 2021, respectively.2022. An increase in net loan originations led to cash used of $73.3$74.6 million in the first ninesix months of 20222023 compared to cash provided of $78.1$59.6 million used in the same period during the prior year. Net cash provided by financing activities was $48.1$74.6 million for the first ninesix months of 2022,ended June 30, 2023, compared to $349.3$38.9 million in the same period in the prior year. ChoiceOne experienced growtha decline of $104.4$31.6 million in deposits in the first ninesix months of 20222023 compared to $337.6$86.2 million of growth in the same period in 2022. ChoiceOne increased borrowing by $110.0 million in 2021, while also seeingthe first six months of 2023 compared to a $72.5decrease of $43.0 million decrease in borrowings, which led to the change.same period during the prior year.

ChoiceOneChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that the current level of liquidityChoiceOne's exposure to changes in commodity prices is sufficientinsignificant.

Liquidity risk deals with ChoiceOne's ability to meet ChoiceOne Bank's normal operating needs. This belief is based upon the availabilityits cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of depositsand cash flows from both the local and national markets, maturities ofinvestment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention, federal funds purchased from correspondent banks, advances availableretention. ChoiceOne had $160.0 million in outstanding borrowings from the Federal Home LoanReserve’s Bank and secured linesTerm Funding Program (BTFP) as of creditJune 30, 2023. ChoiceOne had no outstanding borrowings at the FHLB as of June 30, 2023. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At June 30, 2023, total available borrowing capacity from the FHLB and the Federal Reserve Bank.Bank was $791.7 million.

37

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

There are no material pending legal proceedingsChoiceOne continues to which ChoiceOne or ChoiceOne Bank is a party orreview its liquidity management and has taken steps in an effort to which any of their properties are subject, except for proceedings that aroseensure adequacy. These steps include limiting bond purchases in the ordinary coursefirst six months of business. In2023, pledging securities to FHLB and the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne.Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.

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, 2021.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of equity securities in the third quarter of 2022.

38

ISSUER PURCHASES OF EQUITY SECURITIES

There were no issuer purchases of equity securities during the third quarter of 2022.

Item 4. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and PrincipalChief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of SeptemberJune 30, 2022.2023. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and PrincipalChief Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure.

There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended SeptemberJune 30, 20222023 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

50

PART II. OTHER INFORMATION

There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business.

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, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of equity securities in the second quarter of 2023.

There were no issuer purchases of equity securities during the second quarter of 2023.

Item 5. Other Information

None.

51

Item 6. Exhibits

The following exhibits are filed or incorporated by reference as part of this report:

Exhibit
Number


Document

Exhibit
Number

Document

3.1

Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020.10-K Annual Report for the year ended December 31, 2022. Here incorporated by reference.

3.2

Bylaws of ChoiceOne as currently in effect and any amendments thereto. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed April 21, 2021. Here incorporated by reference.

4.1

Advances, Pledge and Security Agreement between ChoiceOne Bank and the Federal Home Loan Bank of Indianapolis. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.’s Form 10-K Annual Report for the year ended December 31, 2013. Here incorporated by reference.

4.2

Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.

4.3

Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.

31.1

Certification of Chief Executive Officer

31.2

Certification of TreasurerChief Financial Officer

32.1

Certification pursuant to 18 U.S.C. § 1350.

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

39

SIGNATURES

52

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.

CHOICEONE FINANCIAL SERVICES, INC.

Date: November 10, 2022August 14, 2023

/s/ Kelly J. Potes

Kelly J. Potes
Chief Executive Officer
(Principal Executive Officer)

Date: November 10, 2022August 14, 2023

/s/ Adom J. Greenland

Adom J. Greenland
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

40

53